How Traditional Planning Systems Failed Microsoft, and Its Board

Last week Bloomberg broke a story about how Microsoft’s Chairman, John Thompson, was pushing company management for a faster transition to cloud products and services.  He even recommended changes in spending might be in order.

Really?  This is news?

Let’s see, how long has the move to mobile been around?  It’s over a decade since Blackberry’s started the conversion to mobile.  It was 10 years ago Amazon launched AWS.  Heck, end of this month it will be 9 years since the iPhone was released – and CEO Steve Ballmer infamously laughed it would be a failure (due to lacking a keyboard.)  It’s now been 2 years since Microsoft closed the Nokia acquisition, and just about a year since admitting failure on that one and writing off $7.5B  And having failed to achieve even 3% market share with Windows phones, not a single analyst expects Microsoft to be a market player going forward.

So just now, after all this time, the Board is waking up to the need to change the resource allocation?  That does seem a bit like looking into barn lock acquisition long after the horses are gone, doesn’t it?

The problem is that historically Boards receive almost all their information from management.  Meetings are tightly scheduled affairs, and there isn’t a lot of time set aside for brainstorming new ideas.  Or even for arguing with management assumptions.  The work of governance has a lot of procedures related to compliance reporting, compensation, financial filings, senior executive hiring and firing – there’s a lot of rote stuff.  And in many cases, surprisingly to many non-Directors, the company’s strategy may only be a topic once a year.  And that is usually the result of a year long management controlled planning process, where results are reviewed and few challenges are expected.  Board reviews of resource allocation are at the very, very tail end of management’s process, and commitments have often already been made – making it very, very hard for the Board to change anything.

And these planning processes are backward-oriented tools, designed to defend and extend existing products and services, not predict changes in markets.  These processes originated out of financial planning, which used almost exclusively historical accounting information.  In later years these programs were expanded via ERP (Enterprise Resource Planning) systems (such as SAP and Oracle) to include other information from sales, logistics, manufacturing and procurement.  But, again, these numbers are almost wholly historical data.  Because all the data is historical, the process is fixated on projecting, and thus defending, the old core of historical products sold to historical customers.

Copyright Adam Hartung

Copyright Adam Hartung

Efforts to enhance the process by including extensions to new products or new customers are very, very difficult to implement.  The “owners” of the planning processes are inherent skeptics, inclined to base all forecasts on past performance.  They have little interest in unproven ideas.  Trying to plan for products not yet sold, or for sales to customers not yet in the fold, is considered far dicier – and therefore not worthy of planning.  Those extensions are considered speculation – unable to be forecasted with any precision – and therefore completely ignored or deeply discounted.

And the more they are discounted, the less likely they receive any resource funding.  If you can’t plan on it, you can’t forecast it, and therefore, you can’t really fund it.  And heaven help some employee has a really novel idea for a new product sold to entirely new customers.  This is so “white space” oriented that it is completely outside the system, and impossible to build into any future model for revenue, cost or – therefore – investing.

Take for example Microsoft’s recent deal to sell a bunch of patent rights to Xiaomi in order to have Xiaomi load Office and Skype on all their phones.  It is a classic example of taking known products, and extending them to very nearby customers.  Basically, a deal to sell current software to customers in new markets via a 3rd party.  Rather than develop these markets on their own, Microsoft is retrenching out of phones and limiting its investments in China in order to have Xiaomi build the markets – and keeping Microsoft in its safe zone of existing products to known customers.

The result is companies consistently over-investment in their “core” business of current products to current customers.  There is a wealth of information on those two groups, and the historical info is unassailable.  So it is considered good practice, and prudent business, to invest in defending that core.  A few small bets on extensions might be OK – but not many.  And as a result the company investment portfolio becomes entirely skewed toward defending the old business rather than reaching out for future growth opportunities.

This can be disastrous if the market shifts, collapsing the old core business as customers move to different solutions.  Such as, say, customers buying fewer PCs as they shift to mobile devices, and fewer servers as they shift to cloud services.  These planning systems have no way to integrate trend analysis, and therefore no way to forecast major market changes – especially negative ones.  And they lack any mechanism for planning on big changes to the product or customer portfolio.   All future scenarios are based on business as it has been – a continuation of the status quo primarily – rather than honest scenarios based on trends.

How can you avoid falling into this dilemma, and avoiding the Microsoft trap?  To break this cycle, reverse the inputs.  Rather than basing resource allocation on financial planning and historical performance, resource allocation should be based on trend analysis, scenario planning and forecasts built from the future backward.  If more time were spent on these plans, and engaging external experts like Board Directors in discussions about the future, then companies would be less likely to become so overly-invested in outdated products and tired customers. Less likely to “stay at the party too long” before finding another market to develop.

If your planning is future-oriented, rather than historically driven, you are far more likely to identify risks to your base business, and reduce investments earlier.  Simultaneously you will identify new opportunities worthy of more resources, thus dramatically improving the balance in your investment portfolio.  And you will be far less likely to end up like the Chairman of a huge, formerly market leading company who sounds like he slept through the last decade before recognizing that his company’s resource allocation just might need some change.

Why a Bad CEO is a Company Killer – Sell Hewlett Packard


“You’ve got to be kidding me” was the line tennis great John McEnroe made famous.  He would yell it at officials when he thought they made a bad decision.  I can’t think of a better line to yell at Leo Apotheker after last week’s announcements to shut down the tablet/WebOS business, spin-off (or sell) the PC business and buy Autonomy for $10.2B.  Really.  You’ve got to be kidding me.

HP has suffered mightily from a string of 3 really lousy CEOs.  And, in a real way, they all have the same failing.  They were wedded to their history and old-fashioned business notions, drove the company looking in the rear view mirror and were unable to direct HP along major trends toward future markets where the company could profitably grow! 

Being fair, Mr. Apotheker inherited a bad situation at HP.  His predecessors did a pretty good job of screwing up the company before he arrived.  He’s just managing to follow the new HP tradition, and make the company worse.

HP was once an excellent market sensing company that invested in R&D and new product development, creating highly profitable market leading products.  HP was one of the first “Silicon Valley” companies, creating enormous  shareholder value by making and selling equipment (oscilliscopes for example) for the soon-to-explode computer industry.  It was a leader in patent applications, new product launches and being first with products that engineers needed, and wanted.

Then Carly Fiorina decided the smart move in 2001 was to buy Compaq for $25B.  Compaq was getting creamed by Dell, so Carly hoped to merge it with HP’s retail PC business and let “scale” create profits.  Only, the PC business had long been a commodity industry with competitors competing on cost, and the profits largely going to Intel and Microsoft!  The “synergistic” profits didn’t happen, and Carly got fired.

But she paved the way for HPs downfall.  She was the first to cut R&D and new product development in favor of seeking market share in largely undifferentiated products.  Why file 3,500 patents a year – especially when you were largely becoming a piece-assembly company of other people’s technology?  To get the cash for acquisitions, supply chain investments and retail discounts Carly started a whole new tradition of doing less innovation, and spending a lot being a copy-cat.  

But in an information economy, where almost all competitors have market access and can achieve highly efficient supply chains at low cost, there was no profit to the volume Carly sought.  HP became HPQ – but the price paid was an internal shift away from investing in new markets and innovation, and heading straight toward commoditization and volume!  The most valuable liquid in all creation – HP ink – was able to fund a lot of the company’s efforts, but it was rapidly becoming the “golden goose” receiving a paltry amount of feed.  And itself entirely off the trend as people kept moving away from printed documents!

Mark Hurd replaced Carly,  And he was willing to go her one better.  If she was willing to reduce R&D and product development – well he was ready to outright slash it!  And all the better, so he could buy other worn out companies with limited profits, declining share and management mis-aligned with market trends – like his 2008 $13.9B acquisition of EDS!  Once a great services company, offshore outsourcing and rabid price competition had driven EDS nearly to the point of bankruptcy.  It had gone through its own cost slashing, and was a break-even company with almost no growth prospects – leading many analysts to pan the acquisition idea.  But Mr. Hurd believed in the old success formula of selling services (gee, it worked 20 years before for IBM, could it work again?) and volume.  He simply believed that if he kept adding revenue and cutting cost, surely somewhere in there he’d find a pony!

And patent applications just kept falling.  By the end of his cost-cutting reign, the once great R&D department at HP was a ghost of its former self.  From 9%+ of revenues on new products, expenditures were down to under 2%! And patent applications had fallen by 2/3rds

HP_Patent_Applications_Per_Year
Chart Source: AllThingsD.comIs Innovation Dead at HP?

The patent decline continued under Mr. Apotheker.  The latest CEO intent on implementing an outdated, industrial success formula.  But wait, he has committed to going even further!  Now, HP will completely evacuate the PC business.  Seems the easy answer is to say that consumer businesses simply aren’t profitable (MediaPost.comLow Margin Consumers Do It Again, This Time to HP“) so HP has to shift its business entirely into the B-2-B realm.  Wow, that worked so well for Sun Microsystems.

I guess somebody forgot to tell consumer produccts lacked profits to Apple, Amazon and NetFlix. 

There’s no doubt Palm was a dumb acquisition by Mr. Hurd (pay attention Google.)  Palm was a leader in PDAs (personal digital assistants,) at one time having over 80% market share!  Palm was once as prevalent as RIM Blackberries (ahem.)   But Palm did not invest sufficiently in the market shifts to smartphones, and even though it had technology and patents the market shifted away from its “core” and left Palm with outdated technology, products and limited market growth.  By the time HP bought Palm it had lost its user base, its techology lead and its relevancy.  Mr. Hurd’s ideas that somehow the technology had value without market relevance was another out-of-date industrial thought. 

The only mistake Mr. Apotheker made regarding Palm was allowing  the Touchpad to go to market at all – he wasted a lot of money and the HP brand by not killing it immediately!

It is pretty clear that the PC business is a waning giant.  The remaining question is whether HP can find a buyer!  As an investor, who would want a huge business that has marginal profits, declining sales, an extraordinarily dim future, expensive and lethargic suppliers and robust competitors rapidly obsoleting the entire technology? Getting out of PCs isn’t escaping the “consumer” business, because the consumer business is shifting to smartphones and tablets.  Those who maintain hope for PCs all think it is the B-2-B market that will keep it alive.  Getting out is simply because HP finally realized there just isn’t any profit there.

But, is the answer is to beef up the low-profit “services” business, and move into ERP software sales with a third-tier competitor?

I called Apotheker’s selection as CEO bad in this blog on 5 October, 2010 (HP and Nokia’s Bad CEO Selections).  Because it was clear his history as CEO of SAP was not the right background to turn around HP.  Today ERP (enterprise resource planning) applications like SAP are being seen for the locked-in, monolithic, buraucracy creating, innovation killing systems they really are.  Their intent has always been, and remains, to force companies, functions and employees to replicate previous decisions.  Not to learn and do anything new.  They are designed to create rigidity, and assist cost cutting – and are antithetical to flexibility, market responsiveness and growth.

But following in the new HP tradition, Mr. Apotheker is reshuffling assets – closing the WebOS business, getting rid of all “consumer” businesses, and buying an ERP company!  Imagine that!  The former head of SAP is buying an SAP application! Regardless of what creates value in highly dynamic, global markets Mr. Apotheker is implementing what he knows how to do – operate an ERP company that sells “business solutions” while leaving everything else.  He just can’t wait to get into the gladiator battle of pitting HP against SAP, Oracle, J.D. Edwards and the slew of other ERP competitors!  Even if that market is over-supplied by extremely well funded competitors that have massive investments and enormously large installed client bases!

What HP desperately needs is to connect to the evolving marketplace.  Quit looking at the past, and give customers solutions that fit where the market is headed.    Customers aren’t moving toward where Apotheker is taking the company. 

All 3 of HP’s CEOs have been a testament to just how bad things can go when the CEO is more convinced it is important to do what worked in the past, rather than doing what the market needs.  When the CEO is locked-in to old thinking, old market dynamics and old solutions – rather than fixated on understanding trends, future scenarios and the solutions people want and need bad things happen.

There are a raft of unmet needs in the marketplace.  For a decade HP has ignored them.  Its CEOs have spent their time trying to figure out how to make old solutions work better, faster and cheaper.  And in the process they have built large, but not very profitable businesses that are now uninteresting at best and largely at the precipice of failure.  They have ignored market shifts in favor of doing more of the same. And the value of HP keeps declining – down 50% this year.  For HP to change direction, to increase value, it needs a CEO and leadership team that can understand important trends, fulfill unmet needs and migrate customers to new solutions.  HP needs to rediscover innovation. 

 

 

From the Frying Pan into the Fire – Google’s Motorola Problem


The business world was surprised this week when Google announced it was acquiring Motorola Mobility for $12.5B – a 63% premium to its trading price (Crain’s Chicago Business).  Surprised for 3 reasons:

  1. because few software companies move into hardware
  2. effectively Google will now compete with its customers like Samsung and HTC that offer Android-based phones and tablets,  and
  3. because Motorola Mobility had pretty much been written off as a viable long-term competitor in the mobile marketplace.  With less than 9% share, Motorola is the last place finisher – behind even crashing RIM.

Truth is, Google had a hard choice.  Android doesn’t make much money.  Android was launched, and priced for free, as a way for Google to try holding onto search revenues as people migrated from PCs to cloud devices.  Android was envisioned as a way to defend the search business, rather than as a profitable growth opportunity.  Unfortunately, Google didn’t really think through the ramifications of the product, or its business model, before taking it to market.  Sort of like Sun Microsystems giving away Java as a way to defend its Unix server business. Oops.

In early August, Google was slammed when the German courts held that the Samsung Galaxy Tab 10.1 could not be sold – putting a stop to all sales in Europe (Phandroid.comSamsung Galaxy Tab 10.1 Sales Now Blocked in Europe Thanks to Apple.”) Clearly, Android’s future in Europe was now in serious jeapardy – and the same could be true in the USA.

This wasn’t really a surprise.  The legal battles had been on for some time, and Tab had already been blocked in Australia.  Apple has a well established patent thicket, and after losing its initial Macintosh Graphical User Interface lead to Windows 25 years ago Apple plans on better defending its busiensses these days.  It was also well known that Microsoft was on the prowl to buy a set of patents, or licenses, to protect its new Windows Phone O/S planned for launch soon. 

Google had to either acquire some patents, or licenses, or serously consider dropping Android (as it did Wave, Google PowerMeter and a number of other products.)  It was clear Google had severe intellectual property problems, and would incur big legal expenses trying to keep Android in the market.  And it still might well fail if it did not come up with a patent portfolio – and before Microsoft!

So, Google leadership clearly decided “in for penny, in for a pound” and bought Motorola. The acquisition now gives Google some 16-17,000 patents.  With that kind of I.P. war chest, it is able to defend Android in the internicine wars of intellectual property courts – where license trading dominates resolutions between behemoth competitors.

Only, what is Google going to do with Motorola (and Android) now?  This acquisition doesn’t really fix the business model problem.  Android still isn’t making any money for Google.  And Motorola’s flat Android product sales don’t make any money either. 

Motorola rev and profits thru Q2 11
Source: Business Insider.com

In fact, the Android manufacturers as a group don’t make much money – especially compared to industry leader Apple:

IOS v Android operating profit mobile companies july-2011
Source: Business Insider.com

There was a lot of speculation that Google would sell the manufacturing business and keep the patents.  Only – who would want it?  Nobody needs to buy the industry laggard.  Regardless of what the McKinsey-styled strategists might like to offer as options, Google really has no choice but to try running Motorola, and figuring out how to make both Android and Motorola profitable.

And that’s where the big problem happens for Google.  Already locked into battles to maintain search revenue against Bing and others, Google recently launched Google+ in an all-out war to take on the market-leading Facebook.  In cloud computing it has to support Chrome, where it is up against Microsoft, and again Apple.  Oh my, but Google is now in some enormously large competitive situations, on multiple fronts, against very well-heeled competitors.

As mentioned before, what will Samsung and HTC do now that Google is making its own phones?  Will this push them toward Microsoft’s Windows offering?  That would dampen enthusiasm for Android, while breathing life into a currently non-competitor in Microsoft.  Late to the game, Microsoft has ample resources to pour into the market, making competition very, very expensive for Google.  It shows all the signs of two gladiators willing to fight to the loss-amassing death.

And Google will be going into this battle with less-than-stellar resources.  Motorola is the market also ran.  Its products are not as good as competitors, and its years of turmoil – and near failure – leading to the split-up of Motorola has left its talent ranks decimated – even though it still has 19,000 employees Google must figure out how to manage (“Motorola Bought a Dysfunctional Company and the Worst Android Handset Maker, says Insider“).  

Acquisitions that “work” are  ones where the acquirer buys a leader (technology, products, market) usually in a high growth area – then gives that acquisition the permission and resources to keep adapting and growing – what I call White Space.  That’s what went right in Google’s acquisitions of YouTube and DoubleClick, for example.  With Motorola, the business is so bad that simply giving it permssion and resources will lead to greater losses.  It’s hard to disaagree with 24/7 Wall Street.com when divulging “S&P Gives Big Downgrade on Google-Moto Deal.”

Some would like to think of Google as creating some transformative future for mobility and copmuting.  Sort of like Apple. 

Yea, right.

Google is now stuck defending & extending its old businesses – search, Chrome O/S for laptops, Google+ for mail and social media, and Android for mobility products.  And, as is true with all D&E management, its costs are escalating dramatically.  In every market except search Google has entered into gladiator battles late against very well resourced competitors with products that are, at best, very similar – lacking game-changing characteristics. Despite Mr. Page’s potentially grand vision, he has mis-positioned Google in almost all markets, taken on market-leading and well funded competition, and set Google up for a diasaster as it burns through resources flailing in efforts to find success.

If you weren’t convinced of selling Google before, strongly consider it now.  The upcoming battles will be very, very expensive.  This acquisition is just so much chum in the water – confusing but not beneficial.

And if you still don’t own Apple – why not?  Nothing in this move threatens the technology, product and market leader which continues bringing game-changers to market every few months.

Why Defend & Extend Management Doesn’t Work – Pfizer

"Pfizer reports lower profit, revenue" is the Marketwatch headline.  Unhappy news has become the norm for Pfizer shareholders.  Since peaking in 2000 at just under $50/share, the stock has gone nowhere but down for the entire decade – going below $13.00 in 2009 (see Yahoo Finance chart here).  You have to go back to 1997 to find the last time Pfizer was valued this lowly.  Despite its ownership of several well known, branded drugs – like Viagra and Lipitor – Viagra cannot regain revenue growth or investor interest.

Leadership has done a lot of things the last 10 years to try and improve the business.  In 2000, at the valuation peak, the company bought Warner Lambert.  In 2002 Pfizer bought Pharmacia (the merged Upjohn/Searle company).  In 2005 they spent massively on legal work to protect the remaining patent life on Lipitor.  In 2006 they sold the consumer products business to Johnson & Johnson.  Across the last 4 years the company has dramatically cut R&D costs for both human and animal products.  And earlier this year they agreed to pay a premium to buy Wyeth.  But none of this has increased valuation for the last 8 years.  To the contrary, value has continued to step down again, and again, and again – losing about 70%

The problem at Pfizer is management built a Success Formula many years ago, and keeps trying to defend it.  They believe in the model of finding, or buying, blockbuster drugs – meaning a product with wide appeal.  And selling this only if it has patent protection in order to generate a huge price premium.  This made Pfizer huge and profitable long ago.  And the company keeps trying to find a way to replay that tune, hoping to achieve the old results

But the world has shifted.  The science of pharmacology has been mined for nearly 100 years.  Today, most new drugs have as many problems as benefits.  Increasingly, improvement happens only in narrow population niches where genetics align with the chemical additive.  Pharmacology is running out of gas.  Medical science has shifted to biologics.  Instead of looking for a chemical solution, the focus is on nano-tech to isolate product delivery directly to diseased cells.  Or engineering to alter genes through cell modification for superior healing performance.  These bio-engineering solutions are now offering far better results at far lower cost – while the costs of pharmacology skyrocket amidst diminishing returns.

Pfizer has not shifted.  Pfizer management keeps trying to Defend & Extend its old business.  Locked-in to the old Success Formula, leadership looks for new drugs, new therapy programs, new solutions that "fit" its approach to the market.  But it simply isn't paying off.  And everyone from investors to employees to suppliers is at risk.  Desperately, leadership is willing to overpay for Wyeth to avoid falling into oblivion when existing drugs come off patent protection in the next few years.  But everyone knows this game is nearly over.  This may extend the senior leader's jobs, and their pay, it doesn't provide a return to shareholders.  Unless leadrship changes the Success Formula Pfizer will never again be as profitable as it once was, or grow as it once did.

Even though it is located in New Jersey, not Michigan, and is full of phramacology Ph.Ds and medical doctors rather than mechanical engineers, Pfizer is more like GM than it would ever admit.  It developed a Success Formula, and it is doing everything possible to keep it alive – rather than shift with the market.  As GM has shown, no matter how big you are if you don't shift with the market eventually you go bankrupt.  Size is no protection from market shifts.  Too bad for investors and employees that size is the only thing leadership is trying to use to protect itself. 

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