by Adam Hartung | Apr 4, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in, Web/Tech
Understand your core strength, and protect it. Sounds like the key to success, and a simple motto. It's the mantra of many a management guru. Only, far too often, it's the road to ruin.
The last week 3 big announcements showed just how damning the "strategy" of building on historical momentum can be.
Start with Research in Motion's revenue and earnings announcement. Both metrics fell short of expectations as Blackberry sales continue to slide. Not many investors were actually surprised about this, to be honest. iOS and Android products have been taking away share from RIM for several months, and the trend remains clear. And investors have paid a heavy price.
Source: BusinessInsider.com
There is no doubt the executives at RIM are very aware of this performance, and desperately would like the results to be different. RIM has known for months that iOS and Android handhelds have been taking share. The executives aren't unaware, nor stupid. But, they have not been able to change the internal momentum at RIM to the right issues.
The success formula at RIM has long been to "own" the enterprise marketplace with the Blackberry server products, offering easy to connect and secure network access for email, texting and enterprise applications. Handsets came along with the server and network sales. All the momentum at RIM has been to focus on the needs of IT departments; largely security and internal connectivity to legacy systems and email. And, honestly, even today there is probably nobody better at that than RIM.
But the market shifted. Individual user needs and productivity began to trump the legacy issues. People wanted to leave their laptops at home, and do everything with their smartphones. Apps took on a far more dominant role, as did ease of use. Because these were not part of the internal momentum at RIM the company ignored those issues, maintaining its focus on what it believed was the core strength, especially amongst its core customers.
Now RIM is toast. It's share will keep falling, until its handhelds become as popular as Palm devices. Perhaps there will be a market for its server products, but only via an acquisition at a very low price. Momentum to protect the core business killed RIM because its leaders failed to recognize a critical market shift.
Turn next to Yahoo's announcement that it is laying off 1 out of 7 employees, and that this is not likely to be the last round of cuts. Yahoo has become so irrelevant that analysts now depicct its "core" markets as "worthless."
Source: SiliconAlleyInsider.com
Yahoo was an internet pioneer. At one time in the 1990s it was estimated that over 90% of browser home pages were set to Yahoo! But the need for content aggregation largely disappeared as users learned to use search and social media to find what they wanted. Ad placement revenue for keywords transferred to the leading search provider (Google) and for display ads to the leading social media provider (Facebook.)
But Yahoo steadfastly worked to defend and extend its traditional business. It enhanced its homepage with a multitude of specialty pages, such as YahooFinance. But each of these has been outdone by specialist web sites, such as Marketwatch.com, that deliver everyhing Yahoo does only better, attracting more advertisers. Yahoo's momentum caused it to miss shifting with the internet market. Under CEO Bartz the company focused on operational improvements and efforts at enhancing its sales, while market shifts made its offerings less and less relevant.
Now, Yahoo is worth only the value of its outside stockholdings, and it appears the new CEO lacks any strategy for saving the enterprise. The company appears ready to split up, and become another internet artifact for Wikipedia. Largely because it kept doing more of what it knew how to do and was unable to overcome momentum to do anything new.
Last, but surely not least, was the Dell announced acquisition of Wyse.
Dell is synonymous with PC. But the growth has left PCs, and Dell missed the markets for mobile entertainment devices (like iPods or Zunes,) smartphones (like iPhone or Evo) and tablets (like iPads and Galaxy Tab.) Dell slavisly kept to its success formula of doing no product development, leaving that to vendors Microsoft and Intel, as it focused on hardware manufacturing and supply chain excellence. As the market shifted from the technologies it knew Dell kept trying to cut costs and product prices, hoping that somehow people would be dissuaded from changing technologies. Only it hasn't worked, and Dell's growth in sales and profits has evaporated.
Don't be confused. Buying Wyse has not changed Dell's "core." In Wyse Dell found another hardware manufacturer, only one that makes old-fashioned "dumb" terminals for large companies (interpret that as "enterprise,") mostly in health care. This is another acquisition, like Perot Systems, in an effort to copy the 1980s IBM brand extension into other products and services that are in like markets – a classic effort at extending the original Dell success formula with minimal changes.
Wyse is not a "cloud" company. Rackspace, Apple and Amazon provide cloud services, and Wyse is nothing like those two market leaders. Buying Wyse is Dell's effort to keep chasing HP for market share, and trying to pick up other pieces of revenue as it extends is hardware sales into more low-margin markets. The historical momentum has not changed, just been slightly redirected. By letting momentum guide its investments, Dell is buying another old technology company it hopes it can can extend its "supply chain" strenths into – and maybe find new revenues and higher margins. Not likely.
Over and again we see companies falter due to momentum. Why? Markets shift. Faster and more often than most business leaders want to admit. For years leaders have been told to understand core strengths, and protect them. But this approach fails when your core strength loses its value due to changes in technologies, user preferences, competition and markets. Then the only thing that can keep a company successful is to shift. Often very far from the core – and very fast.
Success actually requires overcoming internal momentum, built on the historical success formula, by putting resources into new solutions that fulfill emerging needs. Being agile, flexible and actually able to pivot into new markets creates success. Forget the past, and the momentum it generates. That can kill you.
by Adam Hartung | Mar 20, 2012 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
The Good – Apple
Apple's latest news to start paying a big dividend, and buying back shares, is a boon for investors. And it signals the company's future strength. Often dividends and share buybacks indicate a company has run out of growth projects, so it desires to manipulate the stock price as it slowly pays out the company's assets. But, in Apple's (rare) case the company is making so much profit from existing businesses that they are running out of places to invest it – thus returning to shareholders!
With a $100B cash hoard, Apple anticipates generating at least another $150B of free cash flow, over and above needs for ongoing operations and future growth projects, the next 3 years. With so much cash flowing the company is going to return money to investors so they can invest in other growth projects beyond those Apple is developing. Exactly what investors want!
I've called Apple the lowest risk, highest return stock for investors (the stock to own if you can only own one stock) for several years. And Apple has not disappointed. At $600/share the stock is up some 75% over the last year (from about $350,) and up 600% over the last 5 years (from about $100.) And now the company is going to return investors $10.60/year, currently 1.8% – or about 4 times your money market yield, or about 75% of what you'd get for a 10 year Treasury bond. Yet investors still have a tremendous growth in capital opportunity, because Apple is still priced at only 14x this year's projected earnings, and 12 times next year's projected earnings!
Apple keeps winning. It's leadership in smart phones continues, as the market converts from traditional cell phones to smart phones. And its lead in tablets remains secure as it sells 3 million units of the iPad 3 over the weekend. In every area, for several years, Apple has outperformed expectations as it leads the market shift away from traditional PCs and servers to mobile devices and using the "cloud."
The Bad – Google
Google was once THE company to emulate. At the end of 2008 its stock peaked at nearly $750/share, as everyone thought Google would accomplish nothing short of world domination (OK, a bit extreme) via its clear leadership in search and the way it dominated internet usage. But that is no longer the case, as Google is being eclipsed by upstarts such as Facebook and Groupon.
What happened? Even though it had a vaunted policy of allowing employees to spend 20% of their time on anything they desired, Google never capitalized on the great innovations created. Products like Google Wave and Google Powermeter were created, launched – and then subsequently left without sponsors, management attention, resources or even much interest. Just as recently happened with GoogleTV.
They floundered, despite identifying very good solutions for pretty impressive market needs, largely because management chose to spend almost all its attention, and resources, defending and extending its on-line ad sales created around search.
- YouTube is a big user environment, and one of the most popular sites on the web. But Google still hasn't really figured out how to generate revenue, or profit, from the site. Despite all the user activity it produces a meager $1.6B annual revenue – and nearly no profit.
- Android may have share rivaling Apple in smartphones, but it is nowhere in tablets and thus lags significantly in the ovarall market with share only about half iOS. Worse, Android smartphones are not nearly as profitable as iPhones, and now Google has made an enormous, multi-billion investment in Motorola to enter this business – and compete with its existing smartphone manufacturers (customers.) To date Android has been a product designed to defend Google's historical search business as people go mobile – and it has produced practically no revenue, or profit.
- Chrome browsers came on the scene and quickly grew share beyond Firefox. But, again, Google has not really developed the product to reach a dominant position. While it has good reviews, there has been no major effort to make it a profitable product. Possibly Google fears fighting IE will create a "money pit" like Bing has become for Microsoft in search?
- Chromebooks were a flop as Google failed to invest in robust solutions allowing users to link printers, MP3 players, etc. – or utilize a wide suite of thin cloud-based apps. Great idea, that works well, they are a potential alternative to PCs, and some tablet applications, but Google has not invested to make the product commercially viable.
- Google tried to buy GroupOn to enter the "local" ad marketplace, but backed out as the price accelerated. While investors may be happy Google didn't overpay, the company missed a significant opportunity as it then faltered on creating a desirable competitive product. Now Google is losing the race to capture local market ads that once went to newspapers.
While Google chose to innovate, but not invest in market development, it missed several market opportunities. And in the meantime Google allowed Facebook to sneak up and overtake its "domination" position.
Facebook has led people to switch from using the internet as a giant library, navigated by search, to a social medium where referrals, discussions and links are driving more behavior. The result has advertisers shifting their money toward where "eyeballs" are spending most of their time, and placing a big threat on Google's ability to maintain its historical growth.
Thus Google is now dumping billions into Google+, which is a very risky proposition. Late to market, and with no clear advantage, it is extremely unclear if Google+ has any hope of catching Facebook. Or even creating a platform with enough use to bring in a solid, and growing, advertiser base.
The result is that today, despite the innovation, the well-known (and often good) products, and even all the users to its sites Google has the most concentrated revenue base among large technology companies. 95% of its revenues still come from ad dollars – mostly search. And with that base under attack on all fronts, it's little wonder analysts and investors have become skeptical. Google WAS a great company – but it's decisions since 2008 to lock-in on defending and extending its "core" search business has made the company extremely vulnerable to market shifts. A bad thing in fast moving tech markets.
Google investors haven't fared well either. The company has never paid a dividend, and with its big investments (past and future planned) in search and handsets it won't for many years (if ever.) At $635/share the stock is still down over 15% from its 2008 high. Albeit the stock is up about 8.5% the last 12 months, it has been extremely volatile, and long term investors that bought 5 years ago, before the high, have made only about 7%/year (compounded.)
Google looks very much like a company that has fallen victim to its old success formula, and is far too late adjusting to market shifts. Worse, its investments appear to be a company spending huge sums to defend its historical business, taking on massive gladiator battles against Apple and Facebook – two companies far ahead in their markets and with enormous leads and war chests.
The Ugly – Dell
Go back to the 1990s and Dell looked like the company that could do no wrong. It went head-to-head with competitors to be the leader in selling, assembling and delivering WinTel (Windows + Intel) PCs. Michael Dell was a modern day hero to other leaders hoping to match the company's ability to focus on core markets, minimize investments in anything else, and be a world-class supply chain manager. Dell had no technology or market innovation, but it was the best at beating down cost – and lowering prices for customers. Dell clearly won the race to the bottom.
But the market for PCs matured. And Dell has found itself one of the last bachelors at the dance, with few prospects. Dell has no products in leading growth markets, like smartphones or tablets. Nor even other mobile products like music or video. And it has no software products, or technology innovation. Today, Dell is locked in gladiator battles with companies that can match its cost, and price, and make similarly slim (to nonexistent) margins in the generic business called PCs (like HP and Lenovo.)
Dell has announced it intends to challenge Apple with a tablet launch later in 2012. This is dependent upon Microsoft having Windows 8 ready to go by October, in time for the holidays. And dependent upon the hope that a swarm of developers will emerge to build the app base for things that already exist on the iPad and Android tablets. The advantage of this product is as yet undefined, so the market is yet undefined. The HOPE is that somehow, for some reason, there is a waiting world of people that have delayed purchase waiting on a Windows device – and will find the new Dell product superior to a $299 Apple 2 already available and with that 500,000 app store.
Clearly, Dell has waited way, way too long to deal with changing its business. As its PC business flattens (and soon shrinks) Dell still has no smartphone products, and is remarkably late to the tablet business. And it offers no clear advantage over whatever other products come from Windows 8 licensees. Dell is in a brutal world of ever lower prices, shrinking markets and devastating competition from far better innovators creating much higher, and growing, profits (Apple and Amazon.)
For investors, the ride from a fast moving boat in the rapids into the swamp of no growth – and soon the whirlpool of decline – has been dismal. Dell has never paid a dividend, has no free cash flow to start paying one now, and clearly no market growth from which to pay one in the future. Dell's shares, at $17, are about the same as a year ago, and down about 20% over the last 5 years.
Leaders in all businesses have a lot to learn from looking at the Good, Bad and Ugly. The company that has invested in innovation, and then invested in taking that innovation to market in order to meet emerging needs has done extremely well. By focusing on needs, rather than business optimization, Apple has been able to shift with markets – and even enhance the market shift to position itself for rapid, profitable growth.
Meanwhile, companies that have focused on their core markets and products are doing nowhere near as well. They have missed market shifts, and watched their fortunes decline precipitously. They were once very profitable, but despite intense focus on defending their historical strengths profits have struggled to grow as customers moved to alternative solutions. By spending insufficient time looking outward, at markets and shifts, and too much time inward, on defending and extending past successes, they now face future jeopardy.
by Adam Hartung | Feb 29, 2012 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Web/Tech
This week people are having their first look at Windows 8 via the Barcelona, Spain Mobile World Congress. This better be the most exciting Microsoft product since Windows was created, or Microsoft is going to fail.
Why? Because Microsoft made the fatal mistake of "focusing on its core" and "investing in what it knew" – time worn "best practices" that are proving disastrous!
Everyone knows that Microsoft has returned almost nothing to shareholders the last decade. Simultaneously, all the "partner" companies that were in the "PC" (the Windows + Intel, or Wintel, platform) "ecosystem" have done poorly. Look beyond Microsoft at returns to shareholders for Intel, Dell (which recently blew its earings) and Hewlett Packard (HP – which says it will need 5 years to turn around the company.) All have been forced to trim headcount and undertake deep cost cutting as revenues have stagnated since 2000, at times falling, and margins have been decimated.
This happened despite deep investments in their "core" PC business. In 2009 Microsoft spent almost $9B on PC R&D; over 14% of revenues. In the last few years Microsoft has launched Vista, Windows 7, Office 2009 and Office 2010 all in its effort to defend and extend PC sales. Likewise all the PC manufacturers have spent considerably on new, smaller, more powerful and even cheaper PC laptop and desktop models.
Unfortunately, these investments in their core expertise and markets have not excited users, nor created much growth.
On the other hand, Apple spent all of the last decade investing in what it didn't know much about in 2000. Rather than investing in its "core" Macintosh business, Apple invested in the trend toward mobility, being an early leader with 3 platforms – the iPod, iPhone and iPad. All product categories far removed from its "core" and what it new well. But, all targeted at the trend toward enhanced mobility.
Don't forget, Microsoft launched the Zune and the Windows CE phones in the last decade. But, because these were not "core" products in "core" markets Microsoft, and its partners, did not invest much in these markets. Microsoft even brought to market tablets, but leadership felt they were inferior to the PC, so investments were maintained in traditional PC products. The Zune, Windows phone and early Windows tablets all died because Microsoft and its partner companies stuck to investing their most important, and best known, PC business.
Where are we now? Sales of PC's are stagnating, and going to decline. While sales of mobile devices are skyrocketing.
Source: Business Insider 2/14/12
Today tablet sales are about 50% of the ~300M unit PC sales. But they are growing so fast they will catch up by 2014, and be larger by 2015. And, that depends on PC sales maintaining. Look around your next meeting, commuter flight or coffee shop experience and see how many tablets are being used compared to laptops. Think about that ratio a year ago, and then make your own assessment as to how many new PCs people will buy, versus tablets. Can you imagine the PC market actually shrinking? Like, say, the traditional cell phone business is doing?
By focusing on Windows, and specifically each generation leading to Windows 8, Microsoft took a crazy bet. It bet it could improve windows to keep the PC relevant, in the face of the evident trend toward mobility and ease of use. Instead of investing in new technologies, new products and new markets – things it didn't know much about – Microsoft chose to invest in what it new, and hoped it could control the trend.
People didn't want a PC to be mobile, they wanted mobility. Apple invested in the trend, making the MP3 player a winner with its iPod ease of use and iTunes market. Then it made smartphones, which were largely an email device, incredibly popular by innovating the app marketplace which gave people the mobility they really desired. Recognizing that people didn't really want a PC, they wanted mobility, Apple pioneered the tablet marketplace with its iPad and large app market. The result was an explosion in revenue by investing outside its core, in technologies and markets about which it initially knew nothing.
Apple would not have grown had it focused its investment on its "core" Mac business. In the last year alone Apple sold more iOS devices than it sold Macs in its entire 28 year history!
Source: Business Insider 2/17/2012
Today, the iPhone business itself is bigger than all of Microsoft. The iPad business is bigger than the desktop PC business, and if included in the larger market for personal computing represents 17% of the PC market. And, of course, Apple is now worth almost twice the value of Microsoft.
We hear, all the time, to invest in what we know. But it turns out that is NOT the best strategy. Trends develop, and markets shift. By constantly investing in what we know we become farther and farther removed from trends. In the end, like Microsoft, we make massive investments trying to defend and extend our past products when we would be much, much smarter to invest in new technologies and markets that are on the trend, even if we don't know much, if anything, about them.
The odds are now stacked against Microsoft. Apple has a huge lead in product sales, market position and apps. It's closest challenger is Google's Android, which is attracting many of the former Microsoft partners (such as LG's recent defection) as they strive to catch up. Company's such as Nokia are struggling as the technology leadership, and market position, has shifted away from Microsoft as mobility changed the market.
Microsoft's technology sales used to be based upon convincing IT departments to use its platform. But today users largely buy mobile devices with their own money, and eschew the recommendations of the IT department. Just look at how users drove the demise of Research In Motion's Blackberry. IT needs to provide users with tools they like, and use platforms which are easy and low-cost to leverage with big app bases. That favors Apple and Android, not Microsoft with its far, far too late entry.
You can be smarter than Microsoft. Don't take the crazy bet of always doubling down on what you know. Put your focus on the marketplace, and identify shifts. It's cheaper, and smarter, to bet early on trends than constantly trying to fight the trend by investing – usually at an ever higher amount – in what you know.
by Adam Hartung | Nov 28, 2011 | Books, Defend & Extend, Disruptions, In the Rapids, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
Not far from each other, in the area around Seattle, are two striking contrasts in leadership. They provide significant insight to what creates success today.
Steve Ballmer leads Microsoft, America's largest software company. Unfortunately, the value of Microsoft has gone nowhere for 10 years. Steve Ballmer has steadfastly defended the Windows and Office products, telling anyone who will listen that he is confident Windows will be part of computing's future landscape. Looking backward, he reminds people that Windows has had a 20 year run, and because of that past he is certain it will continue to dominate.
Unfortunately, far too many investors see things differently. They recognize that nearly all areas of Microsoft are struggling to maintain sales. It is quite clear that the shift to mobile devices and cloud architectures are reducing the need, and desire, for PCs in homes, offices and data centers. Microsoft appears years late recognizing the market shift, and too often CEO Ballmer seems in denial it is happening – or at least that it is happening so quickly. His fixation on past success appears to blind him to how people will use technology in 2014, and investors are seriously concerned that Microsoft could topple as quickly DEC., Sun, Palm and RIM.
Comparatively, across town, Mr. Bezos leads the largest on-line retailer Amazon. That company's value has skyrocketed to a near 90 times earnings! Over the last decade, investors have captured an astounding 10x capital gain! Contrary to Mr. Ballmer, Mr. Bezos talks rarely about the past, and almost almost exclusively about the future. He regularly discusses how markets are shifting, and how Amazon is going to change the way people do things.
Mr. Bezos' fixation on the future has created incredible growth for Amazon. In its "core" book business, when publishers did not move quickly toward trends for digitization Amazon created and launched Kindle, forever altering publishing. When large retailers did not address the trend toward on-line shopping Amazon expanded its retail presence far beyond books, including more products and a small armyt of supplier/partners. When large PC manufacturers did not capitalize on the trend toward mobility with tablets for daily use Amazon launched Kindle Fire, which is projected to sell as many as 12 million units next year (AllThingsD.com).
Where Mr. Ballmer remains fixated on the past, constantly reinvesting in defending and extending what worked 20 years ago for Microsoft, Mr. Bezos is investing heavily in the future. Where Mr. Ballmer increasingly looks like a CEO in denial about market shift, Mr. Bezos has embraced the shifts and is pushing them forward.
Clearly, the latter is much better at producing revenue growth and higher valuation than the former.
As we look around, a number of companies need to heed the insight of this Seattle comparison:
- At AOL it is unclear that Mr. Armstrong has a clear view of how AOL will change markets to become a content powerhouse. AOL's various investments are incoherent, and managers struggle to see a strong future for AOL. On the other hand, Ms. Huffington does have a clear sense of the future, and the insight for an entirely different business model at AOL. The Board would be well advised to consider handing the reigns to Ms. Huffington, and pushing AOL much more rapidly toward a different, and more competitive future.
- Dell's chronic inability to identify new products and markets has left it, at best, uninteresting. It's supply chain focused strategy has been copied, leaving the company with practically no cost/price advantage. Mr. Dell remains fixated on what worked for his initial launch 30 years ago, and offers no exciting description of how Dell will remain viable as PC sales diminish. Unless new leadership takes the helm at Dell, the company's future 5 years hence looks bleak.
- HP's new CEO Meg Whitman is less than reassuring as she projects a terrible 2012 for HP, and a commitment to remaining in PCs – but with some amorphous pledge toward more internal innovation. Lacking a clear sense of what Ms. Whitman thinks the world will look like in 2017, and how HP will be impactful, it's hard for investors, managers or customers to become excited about the company. HP needs rapid acceleration toward shifting customer needs, not a relaxed, lethargic year of internal analysis while competitors continue moving demand further away from HP offerings.
- Groupon has had an explosive start. But the company is attacked on all fronts by the media. There is consistent questioning of how leadership will maintain growth as reports emerge about founders cashing out their shares, highly uneconomic deals offered by customers, lack of operating scale leverage, and increasing competition from more established management teams like Google and Amazon. After having its IPO challenged by the press, the stock has performed poorly and now sells for less than the offering price. Groupon desperately needs leadership that can explain what the markets of 2015 will look like, and how Groupon will remain successful.
What investors, customers, suppliers and employees want from leadership is clarity around what leaders see as the future markets and competition. They want to know how the company is going to be successful in 2 or 5 years. In today's rapidly shifting, global markets it is not enough to talk about historical results, and to exhibit confidence that what brought the company to this point will propel it forward successfully. And everyone recognizes that managing quarter to quarter will not create long term success.
Leaders must demonstrate a keen eye for market shifts, and invest in opportunities to participate in game changers. Leaders must recognize trends, be clear about how those trends are shaping future markets and competitors, and align investments with those trends. Leadership is not about what the company did before, but is entirely about what their organization is going to do next.
Update 30 Nov, 2011
In the latest defend & extend action at Microsoft Ballmer has decided to port Office onto the iPad (TheDaily.com). Short term likely to increase revenue. But clearly at the expense of long-term competitiveness in tablet platforms. And, it misses the fact that people are already switching to cloud-based apps which obviate the need for Office. This will extend the dying period for Office, but does not come close to being an innovative solution which will propel revenues over the next decade.
by Adam Hartung | Aug 24, 2011 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
“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
Chart Source: AllThingsD.com “Is 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.com “Low 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.
