Sorry Meg, Your Hockey Stick Forecast for HP Won’t Happen – Sell

by | Oct 4, 2012 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Web/Tech

If you're still an investor in Hewlett Packard you must be new to this blog.  But for those who remain optimistic, it is worth reveiwing why Ms. Whitman's forecast for HP yesterday won't happen.  There are sound reasons why the company has lost 35% of its value since she took over as CEO, over 75% since just 2010 – and over $90B of value from its peak. 

HP was dying before Whitman arrived

I recall my father pointing to a large elm tree when I was a boy and saying "that tree will be dead in under 2 years, we might as well cut it down now."  "But it's huge, and has leaves" I said. "It doesn't look dead."  "It's not dead yet, but the environmental wind damage has cost it too many branches,  the changing creek direction created standing water rotting its roots, and neighboring trees have grown taking away its sunshine.  That tree simply won't survive.  I know it's more than 3 stories tall, with a giant trunk, and you can't tell it now – but it is already dead." 

To teach me the lesson, he decided not to cut the tree.  And the following spring it barely leafed out.  By fall, it was clearly losing bark, and well into demise.  We cut it for firewood.

Such is the situation at HP.  Before she became CEO (but while she was a Director – so she doesn't escape culpability for the situation) previous leaders made bad decisions that pushed HP in the wrong direction:

  • Carly Fiorina, alone, probably killed HP with the single decision to buy Compaq and gut the HP R&D budget to implement a cost-based, generic strategy for competing in Windows-based PCs.  She sucked most of the money out of the wildly profitable printer business to subsidize the transition, and destroy any long-term HP value.
  • Mark Hurd furthered this disaster by further investing in cost-cutting to promote "scale efficiencies" and price reductions in PCs.  Instead of converting software products and data centers into profitable support products for clients shifting to software-as-a-service (SAAS) or cloud services he closed them – to "focus" on the stagnating, profit-eroding PC business.
  • His ill-conceived notion of buying EDS to compete in traditional IT services long after the market had demonstrated a major shift offshore, and declining margins, created an $8B write-off last year; almost 60% of the purchase price.  Giving HP another big, uncompetitive business unit in a lousy market.
  • His purchase of Palm for $1.2B was a ridiculous price for a business that was once an early leader, but had nothing left to offer customers (sort of like RIM today.)  HP used Palm to  bring out a Touchpad tablet, but it was so late and lacking apps that the product was recalled from retailers after only 49 days. Another write-off.
  • Leo Apotheker bought a small Enterprise Resource Planning (ERP) software company – only more than a decade after monster competitors Oracle, SAP and IBM had encircled the market.  Further, customers are now looking past ERP for alternatives to the inflexible "enterprise apps" which hinder their ability to adjust quickly in today's rapidly changing marektplace.  The ERP business is sure to shrink, not grow.

Whitman's "Turnaround Plan" simply won't work

Meg is projecting a classic "hockey stick" performance.  She plans for revenues and profits to decline for another year or two, then magically start growing again in 3  years.  There's a reason "hockey stick" projections don't happen.  They imply the company is going to get a lot better, and competitors won't.  And that's not how the world works.

Let's see, what will likely happen over the next 3 years from technology advances by industry leaders Apple, Android and others?  They aren't standing still, and there's no reason to believe HP will suddenly develop some fantastic mojo to become a new product innovator, leapfrogging them for new markets. 

  1. Meg's first action is cost cutting – to "fix" HP.  Cutting 29,000 additional jobs won't fix anything.  It just eliminates a bunch of potentially good idea generators who would like to grow the company.  When Meg says this is sure to reduce the number of products, revenues and profits in 2013 we can believe that projection fully.
  2. Adding features like scanning and copying to printers will make no difference to sales.  The proliferation of smart devices increasingly means people don't print.  Just like we don't carry newspapers or magazines, we don't want to carry memos or presentations.  The world is going digital (duh) and printing demand is not going to grow as we read things on smartphones and tablets instead of paper.
  3. HP is not going to chase the smartphone business.  Although it is growing rapidly.  Given how late HP is to market, this is probably not a bad idea.  But it begs the question of how HP plans to grow.
  4. HP is going not going to exit PCs.  Too bad.  Maybe Lenovo or Dell would pay up for this dying business.  Holding onto it will do HP no good, costing even more money when HP tries to remain competitive as sales fall and margins evaporate due to overcapacity leading to price wars.
  5. HP will launch a Windows8 tablet in January targeted at "enterprises."  Given the success of the iPad, Samsung Galaxy and Amazon Kindle products exactly how HP will differentiate for enterprise success is far from clear.  And entering the market so late, with an unproven operating system platform is betting the market on Microsoft making it a success.  That is far, far from a low-risk bet.  We could well see this new tablet about as successful as the ill-fated Touchpad.
  6. Ms. Whitman is betting HP's future (remember, 3 years from now) on "cloud" computing.  Oh boy.  That is sort of like when WalMart told us their future growth would be "China."  She did not describe what HP was going to do differently, or far superior, to unseat companies already providing a raft of successful, growing, profitable cloud services.  "Cloud" is not an untapped market, with companies like Oracle, IBM, VMWare, Salesforce.com, NetApp and EMC (not to mention Apple and Amazon) already well entrenched, investing heavily, launching new products and gathering customers.

HPs problems are far deeper than who is CEO

Ms. Whitman said that the biggest problem at HP has been executive turnover.  That is not quite right.  The problem is HP has had a string of really TERRIBLE CEOs that have moved the company in the wrong direction, invested horribly in outdated strategies, ignored market shifts and assumed that size alone would keep HP successful.  In a bygone era all of them – from Carly Fiorina to Mark Hurd to Leo Apotheker – would have been flogged in the Palo Alto public center then placed in stocks so employees (former and current) could hurl fruit and vegetables, or shout obscenities, at them!

Unfortately, Ms. Whitman is sure to join this ignominious list.  Her hockey stick projection will not occur; cannot given her strategy. 

HP's only hope is to sell the PC business, radically de-invest in printers and move rapidly into entirely new markets.  Like Steve Jobs did a dozen years ago when he cut Mac spending to invest in mobile technologies and transform Apple.  Meg's faith in operational improvement, commitment to existing "enterprise" markets and Microsoft technology assures HP, and its investors, a decidedly unpleasant future.

The Myth of “Maturity” – AT&T and Microsoft

by | Oct 27, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Web/Tech


Summary:

  • We like to think of "mature" businesses as good
  • AT&T was a "mature" business, yet it failed
  • "Maturity" leads to inward focus, and an unwillingness to adjust to market shifts
  • Microsoft is trying to reposition itself as a "mature" company
  • Despite its historical strengths, Microsoft has astonishing parallels to AT&T
  • Growth is less risky than "maturity" for investors, employees and customers

Why doesn't your business grow like Apple or Google?  Is it because you think of your business, or the marketplace you serve, as "mature?" Quite a euphanism, maturity.  It sounds so good.  How could being "mature" be bad?  As children we strive to be "mature." The leader is usually the most "mature" person in the group.  Those who like good art have "mature" taste. Surely, we should want to be "mature." And we should want our businesses to reach "maturity" and have "mature" leaders who don't take unnecessary risks.  Once "mature" the business should be safe for investors, employees, suppliers and customers.

That was probably what the folks at AT&T thought.  When judge Greene broke up AT&T in 1984 the company had a near monopoly on long-distance.  AT&T was a "mature" company in a "mature" telephone industry.  It appeared as though all AT&T had to do was keep serving its customers, making regular improvements to its offering, to perpetually maintain its revenue, jobs and profitability.  A very "mature" company, AT&T's "mature" management knew everything there was to know about long distance – about everything related to communications.  And due to its previous ownership of Bell Labs and Western Union, it had deep knowledge about emerging technologies and manufacturing costs allowing AT*T to make "mature" decisions about investing in future markets and products.  This "mature" company would be able to pay out dividends forever!  It seemed ridiculous to think that AT&T would go anywhere but up!

Unfortunately, things didn't work out so well.  The "mature" AT&T saw its market share attacked by upstarts MCI and Sprint.  As a few "early adopters" switched services – largely residential and other very small customers – AT&T was unworried.  It still had most of the market and fat profits.  As these relatively insignificant small users switched, AT&T reinforced its world's largest billing system as an incomparable strength, and reminded everyone that its "enterprise" (corporate) offerings were still #1 (anybody remember AT&T long distance cards issued by your employer for use at pay phones?). 

But unfortunately, what looked like an unassailable market position in 1984 was eventually diminished dramatically as not only homeowners but corporations started shifting to new offerings from competitors.  New pricing plans, "bundled" products and ease of use encouraged people to try a new provider.  And that AT&T had become hard to work with, full of rules and procedures that were impossible for the customer to comprehend, further encouraged people to try an alternative.  Customers simply got fed up with rigid service, outdated products and high prices.

Unexpectedly, for AT&T, new markets started to grow much faster and become more profitable than long distance voice.  Data services started using a lot more capacity, and even residential customers started wanting to log onto the internet.  Even though AT&T had been the leader (and onetime monopolist – did you know broadcast television was distributed over an AT&T network?) with these services, this "mature" company continued to focus on its traditional voice business – and was woefully late to offer commercial or residential customers new products.  Not only were dial-up offerings delayed, but higher speed ISDN and DSL services went almost entirely to competitors.

And, much to the chagrin of AT&T leaders, customers started using their mobile phones a lot more.  Initially viewed as expensive toys, AT&T did not believe that the infrastructure would be built quickly, nor be robust enough, to support a large base of cellular phone users.  Further, AT&T anticipated pricing would keep most people from using these new products.  Not to mention the fact that these new phones simply weren't very good – as compared to land-line services according to the metrics used by AT&T.  The connection quality was wildly inferior to traditional long distance, and frequently calls were completely dropped!  So AT&T was slow to enter this market, half-hearted in its effort, and failed to make any profits.

Along the way a lot of other "non-core" business efforts failed.  There was the acquisition of Paradyne, an early leader in modems, that did not evolve with fast changing technology.  New products made Paradyne's early products obsolete and the division disappeared.  And the acquisition of computer maker NCR failed horribly after AT&T attempted to "improve" management and "synergize" it with the AT&T customer base and offerings. 

AT&T had piles and piles of cash from its early monopoly.  But most of that money was spent trying to defend the long distance business. That didn't work.  Then there was money lost by wheelbarrow loads trying to enter the data and mobile businesses too late, and with little new to offer.  And of course the money spent on acquisitions that AT&T really didn't know how to manage was all down the proverbial drain. 

Despite its early monopoly, high cash flow, technology understanding, access to almost every customer and piles of cash, AT&T failed.  Today the company named AT&T is a renamed original regional Bell operatiing company (RBOC) created in the 1984 break-up — Southwestern Bell.  This classically "mature" company, a stock originally considered "safe" for investing in the "widow's and orphan's fund" used up its money and became obsolete.  "Mature" was a misnomer used to allow AT&T to hide within itself; to focus on its past, instead of its future.  By being satisfied with saying it was "mature" and competing in "mature" markets, AT&T allowed itself to ignore important market shifts.  In just 25 years the company that ushered in mass communications, that had an incredibly important history, disappeared.

I was struck today when a Reuters story appeared with the headline "Sleepy in Seattle: Microsoft Learns to Mature."  There's that magic word – "mature."  While the article lays out concerns with Microsoft, there were still analysts quoted as saying that investors didn't need to worry about Microsoft's future.  Investors simply need to change their thinking.  Instead of a "growth" company, they should start thinking of Microsoft as a "mature" company.  It sounds so reassuring.  After all:

  • Microsoft has a near monopoly in its historical business
  • Microsoft has a huge R&D budget, and is familiar with all the technologies
  • Microsoft has piles and piles of cash
  • Microsoft has huge margins in its traditional business – in fact profits in operating systems and office automation exceed 100% of the total because it loses billions of dollars in other things like Bing, MSN and its incredibly expensive foray into gaming systems (xBox)
  • Markets won't shift any time soon – say to this new "cloud computing" – and Microsoft will surely have products when they are needed if there is a market shift
  • While home users may buy these new smartphones, tablets and some Macs, enterprise customers will keep using the technology they've long purchased
  • Microsoft is smart to move slowly into new markets, it shouldn't cannibalize its existing business by encouraging customers to change platforms. Going slow and being late is a good thing for profits
  • Although Microsoft has been late to smartphones and tablets, with all their money and size surely when they do get to market they will beat these upstarts Apple and Google, et. al.

Sure made me think about AT&T.  And the fact that Apple is now worth more than Microsoft.  Made me wonder just how comfortable investors should be with a "mature" Microsoft. Made me wonder how much investors, employees and customers should trust a "mature" CEO Ballmer.

Looking at the last 10 years, it seems like there's a lot more risk in "mature" companies than in "growth" ones.  We can be almost certain that Apple and Google, which have produced huge returns for investors, will grow for the next 3 years, improving cash flow and profitability just by remaining in existing new markets.  But of course both have ample new products pioneering yet more new markets.  And companies like NetApp look pretty safe, building a fast-growing base of customers who are already switching to cloud computing – and producing healthy cash flow in the emerging marketplace. 

Meanwhile, the track record for "mature" companies would leave something to be desired. One could compare Amazon to Circuit City or Sears.  Or just list some names: AT&T, General Motors, Chrysler, Xerox, Kodak, AIG,  Citibank, Dell,  EDS,  Sun Microsystems.  Of course each of these is unique, with its own story.  Yet….