Hewlett Packard’s Musical Chairs Game

Hewlett Packard’s Musical Chairs Game

Hewlett Packard is splitting in two.  Do you find yourself wondering why?  You aren’t alone.

Hewlett Packard is nearly 75 years old.  One of the original “silicone valley companies,” it started making equipment for engineers and electronic technicians long before computers were every day products.  Over time HP’s addition of products like engineering calculators moved it toward more consumer products.  And eventually HP became a dominant player in printers.  All of these products were born out of deep skills in R&D, engineering and product development.  HP had advantages because its products were highly desirable and unique, which made it nicely profitable.

But along came a CEO named Carly Fiorina, and she decided HP needed to grow much bigger, much more quickly.  So she bought Compaq, which itself had bought Digital Equipment, so HP could sell Wintel PCs.  PCs were a product in which HP had no advantage. PC production had always been an assembly operation of other companies’ intellectual property.  It had been a very low margin, brutally difficult place to grow unless one focused on cost lowering rather than developing intellectual capital.  It had nothing in common with HP’s business.

HP laptop

To fight this new margin battle HP replaced Ms. Fiorina with Mark Hurd, who recognized the issues in PC manufacturing and proceeded to gut R&D, product development and almost every other function in order to push HP into a lower cost structure so it could compete with Dell, Acer and other companies that had no R&D and cultures based on cost controls.  This led to internal culture conflicts, much organizational angst and eventually the ousting of Mr. Hurd.

But, by that time HP was a company adrift with no clear business model to help it have a sustainably profitable future.

Now HP is 4 years into its 5 year turnaround plan under Meg Whitman’s leadership.  This plan has made HP much smaller, as layoffs have dominated the implementation.  It has weakened the HP brand as no important new products have been launched, and the gutted product development capability is still no closer to being re-established.  And PC sales have stagnated as mobile devices have taken center stage – with HP notably weak in mobile products.  The company has drifted, getting no better and showing no signs of re-developing its historical strengths.

So now HP will split into two different companies.  Following the old adage “if you can’t dazzle ’em with brilliance, baffle ’em with bulls**t.”  When all else fails, and you don’t know how to actually lead a company, then split it into pieces, push off the parts to others to manage and keep at least one CEO role for yourself.

Let’s not forget how this mess was created.  It was a former CEO who decided to expand the company into an entirely different and lower margin business where the company had no advantage and the wrong business model.  And another that destroyed long-term strengths in innovation to increase short-term margins in a generic competition.  And then yet a third who could not find any solution to sustainability while pushing through successive rounds of lay-offs.

This was all value destruction created by the persons at the top.  “Strategic” decisions made which, inevitably, hurt the organization more than helped it.  Poorly thought through actions which have had long-term deleterious repercussions for employees, suppliers, investors and the communities in which the businesses operate.

The game of musical chairs has been very good for the CEOs who controlled the music.  They were paid well, and received golden handshakes.  They, and their closest reports, did just fine.  But everyone else….. well…..

What Steve Jobs Would Tell Mark Zuckerberg

Mark Zuckerberg was Time magazine's Person of the Year in December, 2010.  He was given that honor because Facebook dominated the emerging social media marketplace, and social media had clearly begun changing how people do things.  Despite his young age, Mr. Zuckerberg had created a phenomenon demonstrated by the hundreds of million new Facebook users.

But things have turned pretty rough for the young Mr. Zuckerberg. 

  • Facebook was pretty much forced, legally, to go public because it had accumulated so many shareholders.  The stock hit the NASDAQ with much fanfare in May, 2012 – only to have gone pretty much straight down since.  It now trades at about 50% of IPO pricing, and is under constant pressure from analysts who say it may still be overpriced.
  • Facebook discovered perhaps 83million accounts were fake (about  9%) unleashing a torrent of discussion that perhaps the fake accounts was a much, much larger number.
  • User growth has fallen to some 35% – which is much slower than initial investors hoped.  Combined with concerns about fake accounts, there are people wondering if Facebook growth is stalling.
  • Facebook has not grown revenues commensurate with user growth, and people are screaming that despite its widespread use Facebook doesn't know how to "monetize" its base into revenues and profits.
  • Mobile use is growing much faster than laptop/PC use, and Facebook has not revealed any method to monetize its use on mobile devices – causing concerns that it has no plan to monetize all those users on smartphones and tablets and thus future revenues may decline.
  • Zynga, a major web games supplier, announced weak earnings and said its growth was slowing – which affects Facebook because people play Zinga games on Facebook.
  • GM, one of the 10 largest U.S. advertisers, publicly announced it was dropping Facebook advertising because executives believed it had insufficient return on investment. Investors now fret Facebook won't bring in major advertisers.
  • Google keeps plugging away at competitive product Google+. And while Facebook  disappointed investors with its earnings, much smaller competitor Linked-in announced revenues and earnings which exceeded expectations.  Investors now worry about competitors dicing up the market and minimalizing Facebook's future growth.

Wow, this is enough to make 50-something CEOs of low-growth, non-tech companies jump with joy at the upending of the hoody-wearing 28 year old Facebook CEO.  Zynga booted its Chief Operating Officer and has shaken up management, and not suprisingly, there are analysts now calling for Mr. Zuckerberg to step aside and install a new CEO.

Yet, Mr. Zuckerberg has been wildly successful.  Much more than almost anyone else in American business today.  He may well feel he needs no advice.  But…. what do you suppose Steve Jobs would tell him to do? 

Recall that Mr. Jobs was once the young head of Apple, only to be displaced by former Pepsi exec John Sculley — and run out of Apple.  As everyone now famously knows, after a string of Apple CEOs led the company to the brink of disaster Mr. Jobs agreed to return and completely turned around Apple making it the most successful tech company of the last decade.  Given what we've observed of Mr. Jobs career, and read in his biography, what advice might he give Mr. Zuckerberg? 

  • Don't give up your job.  Not even partly.  If you create a "shadow" or "co" CEO you'll be gone soon enough.  Lead, quit or make the Board fire you.  If you had the vision to take the company this far, why would you quit? 
  • Nothing is more important than product.  Make Facebook's the best in the world.  Nothing less will allow a tech company to survive, much less thrive.  Don't become so involved with financials and analysts that you lose sight of your #1 job, which is to make the very, very best social media product in the world.  Never stop improving and perfecting.  If your product isn't obviously superior to other solutions you haven't accomplished your #1 priority.
  • Be unique.  Make sure your products fulfill needs no one else fulfills – at least not well.  Meet unserved and underserved needs so that people talk about your product and what it does – not how much it costs.  Make sure that Facebook has devoted, diehard customers that believe your products meet their needs so well they would not consider your competition.
  • Don't ask customers what they want – give them what they need.  Understand the trends and create future scenarios so you are constantly striving to create a better future, not just improve on history.  Never look backward at what you've done, but instead always look forward at creating what noone else has ever done.  Push your staff to create solutions that meet user needs so well that you can tell customers why they need your product in ways they never before considered.  
  • Turn your product releases into a show.  Don't just run out new products willy-nilly, or on a random timeline.  Make sure you bundle products together and make a big show of each release so you can describe the upgrades, benefits and superiority of what you offer for customers.  People need to understand the trends you are meeting, and need to see the future scenario you are creating, and you have to tell them that story or they won't "get it."
  • Price for profit.  You run a business, not a hobby or not-for-profit society.  If you do the product right you shouldn't even be talking about price – so price to make ridiculous margins by industry standards.  At Apple, Next and Pixar the products were never the cheapest, but they accomplished what customers needed so well that we could price high enough to make margins that supported additional product development.  And you can't remain the best solution if you don't have enough margin to keep developing future products.
  • Don't expect products to sell themselves.  Be the #1 passionate spokesperson for the elegance and superiority of your products.  Never stop beating the drum for the unique capability and superiority of your product, in every meeting, all the time, never ending.  People like to "revert to the mean" so you have to keep telling them that isn't good enough – and you have something far superior that will greatly improve their success.
  • Never miss an opportunity to compare your products to competition and tell everyone why your products are far better.  Don't disparage the competition, but constantly reinforce that you are first, you are ahead of everyone else, you are far better — and the best is yet to come!  Competition is everywhere, and listen to the Andy Groves advice "only the paranoid survive."  You aren't satisfied with what the competition offers, and customers should not be satisfied either.  Every once in a while give people a small glimpse as to the radically different world you see in 3-5 years so they buy what you are selling in order to prepare for that future world.
  • Identify key customers that need your solution and SELL THEM.  Disney needed Pixar, so we made sure they knew it.  Identify the customers who can gain the most from doing business with you and SELL THEM.  Turn them into lead customers, obtain their testimonials and spread the word.  If GM isn't your target, who is?  Find them and sell them, then tell us all how you will build on those early accounts to eventually dominate the market – even displacing current solutions that are more popular.  If GM is your target then make the changes you need to make so you can SELL THEM.  Everyone wants to do business with a winner, so you must show you are a winner.
  • Identify 5 of your competition's biggest customers (at Google, Yahoo, Linked-in, etc.) and make them yours.  Demonstrate your solutions are superior with competitive wins.
  • Hire someone who can talk to the financial community for you – and do it incredibly well.  While you focus on future markets and solutions someone has to tell this story to the financial analysts in their lingo so they don't lose faith (and they are a sacrilegious lot who have no faith.)  Keep Facebook out of the forecasting game, but you MUST create and maintain good communication with analysts so you need someone who can tell the story not only with products and case studies but numbers.  Facebook is a disruptive innovation company, so someone has to explain why this will work.  You blew the IPO road show horribly by showing up at meetings in a hoodie – so now you need to make amends by hiring someone who will give them faith that you know what you're doing and can make it happen.

These are my ideas for what Steve Jobs would tell Mark Zuckerberg.  What are yours?  What do you think the #1 CEO of the last decade would say to the young, embattled CEO as he faces his first test under fire leading a public company?

Where did all the jobs go? 9 recommendations for Mr. Obama!


Friday we learned, as the New York Daily News headlined, “August 2011 Jobs Report: NO Net Jobs Created.”  U.S. unemployment, and underemployment, remain stubbornly stuck at very high levels.  This situation is unlikely to improve, as reported at 24×7 Wall Street in “August Lay-off Plans Up 47%” with the latest Challenger Gray report telling us 51,144 people are soon getting the axe.  No wonder we saw a dramatic decline of nearly 15 points, to 44.5, in the Conference Board’s Consumer Confidence Index – near record-low levels. 

This has all the Presidential candidates talking about jobs, and President Obama signed up to deliver a jobs speech to Congress. 

The problem actually goes beyond just jobs.  Buried within consumer concerns lies the fact that for most people, their incomes are going nowhere.  Adjusted for inflation, almost everyone is making less now than they did when the millenium turned.  Generally speaking, about 15% less than 11 years ago!  Most family incomes are about where they were in 1998.  For the wealthiest, income since the mid-1960s has grown only about 1.5%/year on average. For everyone else the improvement has only been about .5%/year. And universally almost all of that increase occurred between 1992 and 2000 (for anyone who wonders about Bill Clinton’s resurgent popularity, just look at incomes during his Presidency compared to every other administration on this chart!)

Real income growth 1967-2010 from BI
Source: “U.S. Household Incomes: A 42 Year Perspective” Doug Short, BusinessInsider.com

But will anything the President, or the candidates, recommend make a difference?

So far, the politicos keep fighting the last war, and seem surprised that nothing is improving.  The recommendations for putting people back to work in factories, such as autos and heavy equipment, or  building roads simply defies the reality of work today.  America has not been a manufacturing-dominated jobs country for over 60 years!  All job creation has been in services!

Service v Mfg jobs 1939 to 2010 from SAI
Source:”Charting the Incredible Shift From Manufacturing to Services” Doug Short, BusinessInsider.com

For this entire period, productivity has been climbing.  Just 50 years ago most people spent 1/3 to 1/2 their income on food.  No longer.  Today, few spend more than 5 to 10%, and everyone can enjoy an automobile, telephone, television and computer – regardless of their income!  We have all the stuff anyone could want, and in many cases a lot more of some stuff than we need – or want! 

The old notion of “what’s good for G.M. (General Motors) is good for America” is simply no longer true!  As we recently witnessed, a multi-billion dollar bail-out of the largest American auto maker may have saved some unemployment – but it did not create an economic turn-around, or create a slew of jobs! 

Today’s jobs are all in information – the accumulation, assimilation, analysis and use of information.  Few “managers” actually manage people any more – most manage a data set, or a computer program, or some sort of analysis.  The vast majority of “managers” have no direct reports at all!  The jobs – and incomes – are all in information.  Job growth is in places like Facebook, Google, Linked-in, Groupon, Amazon and Apple (the latter of which outsources all its manufacturing.)

No President or economist can manufacture jobs today.  As we’ve seen, interest rates are at unprecedent low levels – yet nobody wants to take a loan to hire a new employee!  In fact, business productivity is at record high levels as business keeps accomplishing more and more with fewer and fewer workers!

Profits per worker 2001-2011
Source: “Corporate Efficiency is Getting AbsurdBusinessInsider.com

Public companies aren’t going broke, by and large.  Most have cash balances at record levels.   Only they keep using the money to buy back their own stock!  Every month sees a wave of new stock buy back commitments, as 24×7 Wall Street reported “August’s New Massive Stock Buybacks… Over $30 Billion!”  Business leaders find it less risky to buy back their own stock (supporting their own bonuses, by the way) than invest in any sort of growth program – something that might create jobs.

So what’s the President to do?

We need to radically jack up the investment in innovation! Think about that last period of very low unemployment and growing incomes – in the 1990s.  We had the explosion in technology as people began using PCs, the internet, mobile phones, etc.  New technology introduced new business ideas (mostly services) and created a rash of growth!  And that created new jobs – and higher incomes.  Innovation is the jobs engine – not trying to save another tired manufacturing company, or pave another highway or extend another bridge!  Today those projects simply do not employ very many people, and the “trickle down” affect of a highway project creating more jobs has disappeared!

Bloomberg/BusinessWeek reported in “Failing at Innovation? Bank On It

  • Government spending on higher education has been declining since the 1970s reducing the number of graduate students and innovation projects
  • Federal share of R&D has been less than 1% since 1992 – all while corporate R&D spending has declined dramatically!  The days of spending “to put a man on the moon” has disappeared, as we fairly quietly mothballed the space program and commence to dismantle NASA
  • The number of entrepreneurs is actually declining!  There were fewer startups with 1 or more employees in 2007 (before the financial collapse and ensuing economic mayhem) than in 1990
  • New companies are not employing people.  In the 1990s the average startup employed 7.5 people, but now the number is 4.9
  • Meanwhile “infrastructure” spending today is the same as it was in 1968! 

We’ve done a great job of cutting taxes, but we’ve simultaneoously gutted our investment in R&D, innovation and doing anything new!  If you wonder where the jobs went it wasn’t oversees, it was into higher corporate cash levels, more stock buybacks, increased bank reserves and dramatically higher executive compensation! 

We don’t need more tax cuts – because nobody is investing in any new projects!  We don’t need more unemployment insurance, because that – at best – delays the day of reconning without a solution.

Here’s what we do need today:

  1. Implement a tax on corporate stock buybacks.  At least as great as the tax on corporate dividends.  Buybacks simply drain the economy of investment funds, with no benefit.  At least dividends give returns back to shareholders – who might invest in a new company!  And if buybacks are taxed, executives might start investing in projects again!
  2. Quit giving such large depreciation allowances for physical assets.  We don’t need more buildings – we’re overbuilt as we are right now!  Again, it’s not “things” that make up our economy, it’s services!
  3. Re-introduce R&D credits!  Give businesses a $3 tax break for every dollar spent in R&D and new product development!  Prior to President Reagan this was considered normal.  It’s not a new idea, just one that’s been forgotten.  If we can give credits for oil and gas drilling, which creates almost no jobs, why not innovation?
  4. Cut payroll taxes on the self-employed and small business.  Today self-employed pay 2x the payroll taxes, so it’s a big dis-incentive to entrepreneurship.  Give start-ups a break by lowering employment taxes on small employers – say less than 50 employees.
  5. Allow investors in start-ups to write off up to 2x their losses.  It takes away a lot of the risk if you can get most of your money back from a tax break should your investment fail.  And for all those corporations that abhore taxes this would incent them to invest in small enterprises that have new ideas they’d like to see developed.
  6. Remember the Small Business Administration (SBA)?  Re-activate it by giving it $100B (maybe $200B) to guarantee bank loans of small businesses.  Bank lending has ground to a halt as banks eliminate risk – so let’s get them back into their primary business again.  In WWII the government guaranteed every loan for the construction of the Liberty Ships – and behold business built 2,751 of the things in 4 years!  
  7. Increase funding for higher education.  Increase the grants for science, engineering and new product research at America’s universities.  Increase grants for students in science and engineering, and allow students to deduct out-of-pocket educational expenses from their taxes.  Allow corporations to deduct all the expense of employee education – uncapped!  Allow corporations to deduct the university grants they make!
  8. Invest in today’s digital infrastructure.  Once we paid to send men to the moon – and a flood of innovation (from microwave ovens to powdered drinks and frozen food) followed.  Today we should invest in a nationwide WiFi network that’s everywhere from rural forests to city buildings – and make it all FREE.  Digital networks are the highways we need today – not concrete ribbons.  Create tax deductions for people to buy smartphones, tablets and other products that drive innovation, and make it easy for innovators to network for solutions to emerging needs.
  9. Streamline the process for small companies to test and sell new bio-engineered products.  The existing complicated process is a legacy of big companies and traditional pharmaceutical research.  Make it easy for entrepreneurs to test and launch the next wave of medical technology based on the new bio-sciences.  Offer federal-backed safety insurance to protect small businesses that show efficacy in new solutions.

These are just 9 ideas.  I’m sure readers can think up 90 more (in fact, I challenge you to offer them as comments to this blog.) If we invest in innovation, we can create a lot of jobs.  But we need to start NOW!

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. 

 

 

Status Quo Police – Innovation Killers


Nobody admits to being the innovation killer in a company.  But we know they exist.  Some these folks “dinosaurs that won’t change.”  Others blame “the nay-saying ‘Dr. No’ middle managers.”  But when you meet these people, they won’t admit to being innovation killers.  They believe, deep in their hearts as well as in their everyday actions, that they are doing the right thing for the business.  And that’s because they’ve been chosen, and reinforced, to be the Status Quo Police.

When a company starts it has no norms.  But as it succeeds, in order to grow quickly it develops a series of “key success factors” that help it continue growing.  In order to grow faster, managers – often in functional roles – are assigned the task of making sure the key success factors are unwaveringly supported.  Consistency becomes more important than creativity.  And these managers are reinforced, supported, even bonused for their ability to make sure they maintain the status quo.  Even if the market has shifted, they don’t shift.  They reinforce doing things according to the rules.  Just consider:

Quality – Who can argue with the need to have quality?  Total Quality Management (TQM,) Continuous Improvement (CI,) and Six Sigma programs all have been glorified by companies hoping to improve product or service quality.  If you’re trying to fix a broken product, or process, these work pretty well at helping everyone do their job better.

But these programs live with the mantra “if you can’t measure it, you can’t improve it.  Measure everything that’s important.”  If you’re innovating, what do you measure?  If you’re in a new technology, or manufacturing process, how do you know what you really need to do right?  If you’re in a new market, how do you know the key metric for sales success?  Is it number of customers called, time with customers, number of customer surveys, recommendation scores, lost sales reports?  When you’re trying to do something new, a lot of what you do is respond quickly to instant feedback – whether it’s good feedback or bad.

The key to success isn’t to have critical metrics and measure performance on a graph, but rather to learn from everything you do – and usually to change.  Quality people hate this, and can only stand in the way of trying anything new because you don’t know what to measure, or what constitutes a “good” measure.  Don’t ever forget that Motorola pretty much invented Six Sigma, and what happened to them in the mobile phone business they pioneered?

Finance.  All businesses exist to make money, so who can argue with “show me the numbers.  Give me a business plan that shows me how you’re going to make money.”  When your’e making an incremental investment to an existing asset or process, this is pretty good advice. 

But when you’re innovating, what you don’t know far exceeds what you know.  You don’t know how to meet unment needs.  You don’t know the market size, the price that people will pay, the first year’s volume (much less year 5,) the direct cost at various volumes, the indirect cost, the cost of marketing to obtain customer attention, the number of sales calls it will take to land a sale, how many solution revisions will be necessary to finally put out the “right” solution, or how sales will ramp up quarterly from nothing.  So to create a business plan, you have to guess. 

And, oh boy, then it gets ugly.  “Where did this number come from?  That one?  How did you determine that?”  It’s not long until the poor business plan writer is ridden out of the meeting on a rail.  He has no money to investigate the market, so he can’t obtain any “real” numbers, so the business plan process leads to ongoing investment in the old business, while innovation simply stalls.

Under Akia Morita Sony was a great innovator. But then an MBA skilled in finance took over the top spot.  What once was the #1 electronics innovator in the globe has become, well, let’s say they aren’t Apple.

Legal – No company wants to be sued, or take on unnecessary risk.  And when you’re selling something, lawyers are pretty good at evaluating the risk in that business, and lowering the risk.  While making sure that all the compliance issues are met in order to keep regulators – and other lawyers – out of the business.

But when you’re starting something new, everything looks risky.  Customers can sue you for any reason.  Suppliers can sue you for not taking product, or using it incorrectly.  The technology could fail, or have negative use repercussions.  Reguators can question your safety standards, or claims to customers. 

From a legal point of view, you’re best to never do anything new.  The less new things you do, the less likely you are to make a mistake.  So legal’s great at putting up roadblocks to make sure they protect the company from lawsuits, by making sure nothing really new happens.  The old General Motors had plenty of lawyers making sure their cars were never too risky – or interesting.

R&D or Product Development – Who doesn’t think it’s good to be a leader in a specific technology?  Technology advances have proven invaluable for companies in industries from computers to pharmaceuticals to tractors and even services like on-line banking.  Thus R&D and Product Development wants to make sure investments advance the state of the technology upon which the company was built.

But all technologies become obsolete.  Or, at least unprofitable.  Innovators are frequently on the front end of adopting new technologies.  But if they have to obtain buy-in from product development to obtain staffing or money they’ll be at the end of a never-ending line of projects to sustain the existing development trend.  You don’t have to look much further than Microsoft to find a company that is great at pouring money into the PC platform (some $9B, 16% of revenue in 2009,) while the market moves faster each year to mobile devices and entertainment (Apple spent 1/8th the Microsoft budget in 2009.)

Sales, Marketing & Distribution – When you want to protect sales to existing customers, or maybe increase them by 5%, then doing more of what you’ve always done is smart.  So money is spent to put more salespeople on key accounts, add more money to the advertising budget for the most successful (or most profitable) existing products.  There are more rules about using the brand than lighters at a smoker’s convention.  And it’s heresy to recommend endangering the distribution channel that has so successfully helped increase sales.

But innovators regularly need to behave differently.  They need to sell to different people – Xerox sold to secretaries while printing press manufacturers sold to printers.  The “brand” may well represent a bygone era, and be of no value to someone launching a new product; are you eager to buy a Zenith electronic device?  Sprucing up the brand, or even launching something new, may well be a requirement for a new solution to be taken seriously.

And often, to be successful, a new solution needs to cut through the old, high-cost distribution system directly to customers if it is to succeed.  Pre-Gerstner IBM kept adding key account sales people in hopes of keeping IT departments from switching out of mainframes to PCs.  Sears avoided the shift to on-line sales successfully – and revenue keeps dropping in the stores.

Information Technology – To make more money you automate more functions.  Computers are wonderful for reducing manpower in many tasks.  So IT implements and supports “standard solutions” that are cost effective for the historical business.  Likewise, they set up all kinds of user rules – like don’t go to Facebook or web sites from work – to keep people focused on productivity.  And to make sure historical data is secure and regulations are met.

But innovators don’t have a solution mapped out, and all that automated functionality is an enormously expensive headache.  When being creative, more time is spent looking for something new than trying to work faster, or harder, so access to more external information is required.  Since the solution isn’t developed, there’s precious little to worry about keeping secure.  Innovators need to use new tools, and have flexibility to discover advantageous ways to use them, that are far beyond the bounds of IT’s comfort zone.

Newspapers are loaded with automated systems to collect and edit news, to enter display ads, and to “Make up” the printed page fast and cheap.  They have automated systems for classified advertising sales and billing, and for display ad billing.  And systems to manage subscribers.  That technology isn’t very helpful now, however, as newspapers go bankrupt.  Now the most critical IT skills are pumping news to the internet in real-time, and managing on-line ads distributed to web users that don’t have subscriptions. 

Human Resources – Growth pushes companies toward tighter job descriptions with clear standards for “the kinds of people that succeed around here.”  When you want to hire people to be productive at an existing job, HR has the procedures to define the role, find the people and hire them at the most efficient cost.  And they can develop a systematic compensation plan that treats everyone “fairly” based upon perceived value to the historical business.

But innovators don’t know what kinds of people will be most successful. Often they need folks who think laterally, across lots fo tasks, rather than deeply about something narrow.  Often they need people who are from different backgrounds, that are closer to the emerging market than the historical business.  And pay has to be related to what these folks can get in the market, not what seems fair through the lens of the historical business.  HR is rarely keen to staff up a new business opportunity with a lot of misfits who don’t appreciate their compensation plan – or the rules so carefully created to circumscribe behavior around the old business.

B.Dalton was America’s largest retail book seller when Amazon.com was founded by Jeff Bezos.  Jeff knew nothing about books, but he knew the internet.  B.Dalton knew about books, and claimed it knew what book buyers wanted.  Two years later B.Dalton went bankrupt, and all those book experts became unemployed. Amazon.com now sells a lot more than books, as it ongoingly and rapidly expands its employee skill sets to enter new markets – like publishing and eReaders.

Innovation requires that leaders ATTACK the Status Quo Police.  Everything done to efficiently run the old business is irrelevant when it comes to innovation.  Functional folks need to be told they can’t force the innovatoirs to conform to old rules, because that’s exactly why the company needs innovation!  Only by attacking the old rules, and being willing to allow both diversity and disruption can the business innovate.

Instead of saying “this isn’t how we do things around here” it is critical leaders make sure functional folks are saying “how can I help you innovate?”  What was done in the name of “good business” looks backward – not forward.  Status Quo cops have to be removed from the scene – kept from stopping innovation dead in its tracks.  And if the internal folks can’t be supportive, that means keeping them out of the innovator’s way entirely.

Any company can innovate.  Doing so requires recognizing that the Status Quo Police are doing what they were hired to do.  Until you take away their clout, attack their role and stop them from forcing conformance to old dictums, the business can’t hope to innovate.