Be Wary of Quick Fixes – HP, Dell, EDS and Perot Systems

by | Sep 29, 2009 | Current Affairs, Defend & Extend, Disruptions, General, In the Swamp, Leadership, Lock-in, Web/Tech

Last week was big news for technology.  Hewlett Packard announced it was killing the EDS brand name, pushing to make HP more of an integrated solutions company (like IBM).  And Dell bought Perot Systems to launch itsfirst push into services.  According to Washington Technology "HP, Dell Know They Have to Change or Die."  The article talks about the dramatically shifting marketplace (love that language!), and how these two hardware oriented companies are trying to avoid the Sun Microsystems finality by getting into services.  The author says the companies must "adapt or die," and "there's no sitting still."  He goes on to say "it may take years," but he thinks they will transition and eventually be successful.  His success forecast hinges on his belief that they must change to survive – and that will be sufficient motivation.

I love the awareness of shifting markets, and the recognition that shifts are demanding changes in these former leaders.  But I don't agree with the conclusion that future success is highly likely.  Because even with big acquisitions and name changes – HP and Dell haven't laid the groundwork to change.  They have taken some rifle shots, but they haven't followed The Phoenix Principle and that means the odds are less than 10% they will successfully transition.

Lots of companies have tried to transition via acquisition.  Heck, GM once bought EDS (and Hughes Electronics) – and look what it did for them.  Just because a company buys something doesn't mean they'll change.  McDonald's bought Chipotle, and then sold it despite double digit growth to fund acquisition of additional McDonald's.  Just because a company needs to change its Success Formula to succeed – or even survive – is a long way from proving they will do it.

Neither HP or Dell show they are building a company for the future.  Unfortunately, they look to be chasing a model built by IBM in the 1990s.  Taking action in 2009 to recreate "best practices" of 15 – 20 years ago is far from creating a company positioned for success.  There is no discussion of future scenario planning from either company – about technology use or changing business practices.  No description of their scenarios for 2015 and 2020 – scenarios that would demonstrate very high growth and payoff from their action.  To the contrary, all the discussion seems to be defensive.  They are getting into services – finally – because they realize their growth has slowed and profits are declining.  It's not really about the future, it's action taken by studying the rear view mirror.

Additionally, there is no discussion of any Disruptions at either company.  To change organizations must attack old Lock-ins.  Embedded processes – from hiring and reviews to product development and resource allocation – all exist to Defend & Extend past behavior.  If these aren't attacked head-on then organizations quickly conform any potential change into something like the past.  In the case of these companies, lacking a clear view of what future markets should look like, they have opted to forgo Disruptions.   Mr. Gerstner attacked the sacred cows around IBM viciously in his effort to transition the company into more services.  But the CEOs at HP and Dell are far less courageous.

And there's no White Space here for developing a new Success Formula aligned with market needs as they are emerging.  Instead of creating an environment in which new leaders can compete in new ways, these businesses are being instructed on how to behave – according to some plan designed by someone who clearly thinks they are smarter than the marketplace.  Without White Space, "the plan" is going to struggle to meet with markets that will continue to shift every bit as fast the next 2 years as they did the last year.

I have very limited expectations that these actions will increase the performance of either company.  I predict organic growth will slow, as "integration" issues mount and "synergy" activities take more time than growth initiatives.  They will not see a big improvement in profits, because competition is extremely severe and there is no sign these companies are introducing any kind of innovation that will leapfrog existing competitors – remember, mere size is not enough to succeed in today's marketplace.  They will largely be somewhat bigger, but no more successful.

It's easy to get excited when a company makes an acquisition off the beaten path.  But you must look closely at their actions and plans before setting expectations.  These companies could make big changes.  But that would require a lot more scenario planning, a lot more focus on emerging competitors (not the existing, well known behemoths), much more Disruption to knock back the Lock-in and White Space for building a new Success Formula.  Without those actions this is going to be another acquisition followed by missed expectations, cost cutting and discussions about size that cover up declining organic growth.

Buying the Business – Kraft, Cadbury and Del Monte vs. Google & Apple

by | Sep 8, 2009 | Current Affairs, Defend & Extend, Food and Drink, General, In the Swamp, Leadership, Lock-in

When they can't figure out how to grow a business, leaders often turn to acquisitions.  This despite the fact that every analysis ever done of public companies buying other public companies has shown that such acquisitions are bad for the buyer.  Yet, after no new products at Kraft for a decade, and no growth, "Kraft shares fall on Cadbury bid, Higher offer awaited" is the Marketwatch.com headline.

Some analysts praise this kind of acquisition.  And that's when we can realize why they are analysts, in love with investment banking and deals, and not running companies.  "Kraft is demonstrating its operational and financial strength" is one such claim.  Hogwash.  After years of cost cutting and no innovation, the Kraft executives are worried they'll get no bonuses if they don't grow the top line.  So they want to take a cash hoard from all those layoffs and spend it, overpaying for someone else's business which has been stripped of cost by another CEO.  After the acquisition the pressure will be on to cut costs even further, in order to pay for the acquisition, leading to more layoffs.  It's no surprise that 2 years after an acquisition they all have less revenue than projected.  Instead of 2 + 1 = 3 (the expected revenue) we get 2 + 1 = 2.5 as revenues are lost in the transition.  But the buyer will claim revenues are up 25% (.5 = 25% of the original 2 – rather than a 12.5% decrease from what the combined revenues should be.) 

With rare exceptions, acquisitions generate no growth.  Except in the pocketbooks of investment bankers and their lawyers through deal fees, the golden parachutes given to select top executives of the acquired company, and in bonuses of the acquirer who took advantage of poorly crafted incentive compensation plans.  These are actions taken to Defend & Extend an existing Success Formula.  The executives want to do "more of the same" hoping additional cost cutting (synergies – remember that word?) will give them profits from these overpriced revenues.  There is no innovation, just a hope that somehow they will work harder, faster or better and find some way to lower costs not already found. Kraft investors are smart to vote "no" on this acquisition attempt.  It won't do anybody any good. 

Simultaneously we read in MediaPost.com, "Del Monte To Hike Marketing Spend 40%."  If this were to launch new products and expand the Del Monte business into new opportunities this would be a great investment.  Instead we read the money is being spent "to drive sales of Del Monte's core brands and higher-margin businesses."  In other words, while advertising is off market-wide Del Monte leadership is attempting to buy additional business – not dissimilarly to the goals at Kraft.  By dramatically upping the spend on coupons, shelf displays and advertising Del Monte will increase sales of long-sold products that have shown slower growth the last few years.  Del Monte may well drive up short-term revenues, but these will not be sustainable when they cut the marketing spend in a year or two.  Nor when new products attract customers away from the over-marketed old products.  Lacking new products and new solutions such increased spending does not improve Del Monte's competitiveness.

You'd think after the last 10 years business leaders would have learned that investors are less and less enamored with financial shell games.  Buying revenues does not improve the business's long term health.  A cash hoard, created by cutting costs to the bone, is not well spent purchasing ads to promote existing products – or in buying another business that is already large and mature.  Instead, companies that generate above-average rates of return do so by developing and launching new products and services.

You don't see Google or Apple or RIM making a huge acquisition do you?  Or dramatically increasing the marketing budget on old products?  Compare those companies to Kraft and you see in stark contrast what generates long-term growth, higher investor returns, jobs and a strong supplier base.  Disruptions and White Space lead these companies to new innovations that are generating growth.  And that's why even the recession hasn't shut them down.