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August 12, 2012

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HP’s tablet strategy – A couple of pages to borrow from Amazon’s book

HP is the world’s largest PC maker and it has been holding that position for quite sometime. However, their attempts to enter the tablet market which is looked as a natural evolution to PC market, were futile. Let’s list HP’s attempts in this direction. HP has initially started working on a tablet that runs Windows mobile OS. This initiative was abandoned after failing badly at it. They bought Palm in the hopes that Palm’s WebOS could be a good alternative to other mobile OS’es like iOS and Android. Even though WebOS received good reviews from critics, it never gave a decent fight to the two most popular OS’es. HP released the Touchpad with WebOS before it finally discontinued its production. All in all, it has been a very bitter experience to HP.

When an ecosystem starts adopting a new technology, the leaders of old technologies of that ecosystem often make lazy and late decisions. As a result, they lose the edge in their core businesses. That’s what is the fate of HP today. However, there is counter example to this opinion. When the world started adopting the client-server architecture by abandoning the mainframes, IBM made it up well. They retained their leadership in servers business until today. The market leaders must lead the new developments if they wish to remain leaders. However, HP failed at it and now its own presence in hardware field has become questionable. Of course, we don’t see this happen in a year or two. But, that’s what is going to happen eventually if HP fail to respond properly and quickly.

May be HP can try out a new strategy with their Touchpads. Instead of developing and using its own WebOS or a new OS, they should start using Windows Phone OS or Android. Developing an Operating System has never been HP’s expertise nor its strength. Of course HP-UX is one exception. However, it is NOT a mainstream OS. Therefore, it makes sense to leave that part to the experts – Microsoft or Google. The problem with this approach is low profit margins. The hardware market has been so commoditized that achieving more than 10% profit margin has become a daunting challenge. Most of the profits are taken by the software providers such as Microsoft. In fact, Amazon was quoted to lose money on their Kindle fire devices. In other words, Kindle Fire is sold at a discounted price which is less than the manufacturing cost. Then why do I suggest HP to go that route? Let’s see here.

HP’s obvious strength lies in designing hardware that performs better. They have been manufacturing PCs for decades now. So it’s highly possible that they can come up with better hardware than Amazon Kindle‘s or Google Nexus tab’s. As a result, they can even charge a premium on it. That means, instead of selling it at $199, they can sell it at a higher price so that they see a decent margin on hardware. Is that all for HP in it? No. We are NOT done yet.

If Amazon has been losing money on Kindle Fire, why is it still willing to produce this device. Where they get the money from? They get the money by selling the content like Music, Videos and Books/Magazines/News Paper subscriptions. HP can do something similar to it. HP can let Microsoft take the burden of promoting Windows App Store. HP can leverage Windows App store or they can have their own Windows mobile app store just the way Amazon developed Android app store. To compete with Amazon, HP can acquire an online book retailer – like Barnes & Noble, an online music provider – like Pandora/Spotify and Netflix for online video streaming.

Of course, HP won’t get all the functionality with the mere acquisitions. They need to alter or enhance/extend the already existed platforms in these companies. For example, Pandora/Spotify don’t sell the music as the way Apple iTunes does. So HP needs to work on extending the company’s platform and its partnerships with the content producers. I believe, by making these acquisitions and integrating them into the HP Windows Mobile App Store could bring HP back in to the play. Even though success cannot be guaranteed, it’s better to try something instead of not trying anything.

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August 5, 2012

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Corporate Strategy from Military warfare

A couple of days back, I watched a documentary, “When Aliens Attack”, in National Geographic Channel. To brief the theme of this hypothetical documentary, when aliens attack the earth and start decimating the population, how the humankind fight the aliens back. The documentary guessed on how the aliens attack and assumed that they are much more advanced species than we are. The argument that backs this theory is, if they can come from a distant planetary system from possibly a different star, then they must be much more intellectual than we are as our technology couldn’t achieve it. So in this fight Aliens are like Goliath and we, humans, are like David. In other words we are a weaker opponent to a much stronger opponent. Documentary discussed the military warfare strategies that humans adopt to win over the aliens.

OK, now let’s jump into the actual topic of the article and see how this theme is related to corporate strategies. While watching the documentary, I got a question what if the same strategies are applied in the corporate world. I started listening to the strategies the documentary discussed and tried to apply it to corporate world. Three strategies that were discussed in the documentary are 1) Instead of one big attack several smaller attacks cause more damage to the opponent. 2) Distributed Leadership 3) Win Aliens before they make the Earth their place.

One big attack vs. Several Smaller attacks – This could have a psychological effect on the opponent. If we apply this to competition in market, if a smaller company has to be fight a much bigger counterpart, then they have to concentrate on winning several smaller deals than winning one large deal. The smaller company can leave the bigger deals to the opponent and divert all the resources to smaller deals. By snatching several such smaller deals, it could make the bigger opponent feel insecure. Decisions made in insecurity and anxiety could go wrong to the opponents.

Distributed Leadership – Another strategy is distributed leadership. Instead of staying in one place and work as one large group, it makes sense to work as multiple and independent smaller groups. One larger group could be wiped out by one major attack. If the same head count is divided into several smaller groups and each group is operated under different leadership, then it would be difficult for the opponent to get a hold of us. Often decisions made by the leaders reflect their personal traits. A hasty decision maker of course makes hasty decisions. A slow mover makes decisions lately. As each group is operated under a different leader, each group’s strategy would be different. For opponent, it will be a lot mode difficult to figure out the strategy of each leader and come up with a counter strategy. As a result, the opponent might lose control on the situation.

Recently, there has been a lot of buzz on distributed leadership. Organizations are moving towards this concept and trying to develop leaders at every level of the organization. If implemented successfully, distributed leadership could create wonders. However, the problem would be to find out efficient and talented leaders, not one but several of them. To become a leader, one has to know what the current status of the organization is and where the industry in which the company is operating is heading. There has been a research going on at MIT’s Leadership Center. Their web page mentions that to become a leader one has to possess four qualities. Sense making – Knowing the context in which the organization is operating, Relating – Relating oneself with several people within and across the organization, Visioning – Ability to understand the future market developments, and Inventing – Defining new ways to work together to realize the vision.

There are several examples to prove the potential of distributed leadership. In early days of Southwest Airlines, frontline employees helped the company to come up with a strategy that gave lifeline to the company. In my opinion, franchising is the best example of distributed leadership. Franchisees do NOT belong to the franchiser. They are owned by individual owners who operate them mostly independently. Owners are free to define their own marketing campaigns and promote their businesses as long as it doesn’t hurt the brand. There are instances where an idea came from one of the franchisees and gave life to the franchiser. Have you heard of Subway’s Five Dollar Footlongs? Have ate one? Or at least have you watched its commercial either on TV? It’s so popular that most of us are aware of it. This wonderful idea has forced its competitors such as KFC to come up with a Five Dollar Meal promotion. This idea was originally originated and implemented at a Subway in Miami, Florida by its owner. His sales went up almost instantly and the parent company has decided to take it up to all the branches. We all know the result.

Win Aliens before they make the Earth their place – If the Aliens conquer the Earth, the first thing they do would be to accustom the Earth to their needs. They make Earth their place. Once they achieve it, it’s hard for us to get it back. Companies can do the same thing. Once they become market leaders, they need to define the market going forward. Make their strong areas market’s de-factos. Drive the market developments as per their strengths. One example of this, that I can see, is in Technology sector. In enterprise software world, IBM is more or less a leader. Now we see IBM heading most of the future versions of the specifications. They drive the upcoming features in the new versions of the products. That way they can stay on top.

I felt, there are many warfare strategies that can be applied in corporate world. Of course, corporations have been doing this for a long time now. Nonetheless, this is my two cents.

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August 21, 2011

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A close look at HP

In recent times, Hewlett-Packard’s stock price has become a concern to its investors. On Friday, 19th of Aug 2011 itself it lost 20% of its market capitalization which is equivalent to $12 B approximately. A day before that HP announced its plans to either spin-off or sell its PC business. After I heard this news, I was shocked initially then thought of doing some math on HP revenues and growth rates.

For simplicity purposes, all the numbers mentioned here are rounded to the nearest integer. For 2010 FY, HP’s total revenue was $126 billion. Out of this, PSG (Personal Systems Group), its PC business, has contributed $41 billion (approx) towards that number. PSG’s revenue was nearly $41 billion, one-third of the total revenue. Total earnings from operations was $11.5 Billion out of which earnings from PSG were just $2 Billion. That means the group that contributed 33% of the total revenue has only resulted in 17% of the total earnings. As a result of this drag, HP’s margins look too low. IBM’s operating margin is 20% which is twice as HP’s. Let’s see how HP’s numbers look if we exclude PSG from HP’s portfolio. HP’s revenue excluding PSG was $85 billion and its earnings were $9.5 billion. HP’s operating margin with PSG is 9.12% where as without PSG is 11.17%. Either way HP’s operating margin doesn’t look as good as IBM’s 20%.

On the other hand, the growth of HP is also not on par with IBM’s. HP’s total Y-o-Y (Year over Year) growth including PSG for 2010 was 10%. Enterprise Servers, Storage and Networking group (ESS) grew at 21% and IPG (Imaging and Printing Group) grew at 7%. These numbers too don’t look so good. ESS grew at a good rate 21%. On the other hand the growth of Services was a meager 0.7%. This group is mainly composed of its $13.9 billion acquisition of EDS. PSG group grew at 15.4%. In fact this the second best growth after ESS.

The numbers for the first three quarters of 2011 compared to the first three quarters of 2010 look a little different. These numbers are the three most recent quarters numbers. So we can give more importance to these over 2010’s numbers. Services almost remained same between 2010 and 2011 (1% growth). Growth of other Organization Units are as follows ESS +14.6%, Software +14%, PSG -3%, IPG +3%. PSG actually contracted by 3%. On the other hand, their services definitely seems to be in bad shape. They are hardly seeing any growth there. IBM and other players in Services area are growing well in that sector with good operating margins. IPG growth is also NOT so appealing. However, it might be the market which is already saturated where it’s hard to see any rapid growth.

Good Decision to spin-off/sell PSG (Personal Systems Group)

By looking at these numbers, HP definitely doesn’t look good as of today. Investors’ concerns are NOT meaningless. In my opinion, HP has a lot of work to do at hand. As they declared last week, it’s a good idea to spin-off its PSG group. With narrow margins and weak growth prospects of the market, it’s a good idea to get rid of that division which IBM did long time back when there was no concept of tablet PCs which are the reason for PC market shrinking. However, IBM was not a big player in that market. Therefore it was an easy decision to them. On the other hand, HP is the world’s largest PC maker. But considering the industry’s growth prospects, the decision is wise on HP’s side to divest in this market. It will NOT reduce HP’s profit a lot but increases the operating margin by 2% which is a good metric to please the investors to some extent. By selling this business, they can release the money that’s been stuck in it and spend the money in a growing sector.

Lurking Danger – Services Group

In 2008, HP spent $13.9 billion to acquire Electronic Data Systems (EDS). I believe it was a good decision although it was a little pricey one. Services industry is the one where margins are high. HP is more like a follower in this sector than a leader. IBM has entered sector long before HP did and remained the market leader. Though the decision was good, its implementation doesn’t seem to be right. This group grew by 1% between 2010 and 2011. Between 2009 and 2010 it grew by 0.7%. In my opinion, this seems to be a disaster waiting to strike. Unless, HP solving the problem that’s hindering the growth, this group would also lose its steam. HP’s history with acquisitions is not-so-good, if not bad. Last year, they acquired Palm for $1.2 billion dollars which they are simply throwing it away, today. For the same money around the same time it could have got someone like Pega Systems which is a good player in BPM software world. In 2001, when the Application Servers were ruling the enterprise software world, HP acquired an application server vendor, Bluestone Software. Given the time at which this decision was made, one has to agree that it was a good move. However, the execution part of that strategy was not so good as HP had to discontinue the product. So, one of the things that HP has to address is it’s Services group’s growth issues.

Positive Signs – ESS (Enterprise Servers, Storage and Networking) Group

Except for servers, the other two are HP’s recent initiatives. They ventured into storage and networking sectors recently. The growth in this group seems to be really encouraging to HP. Before and after, Palm, some of HP’s acquisitions are in this sector. These acquisitions include Opsware, 3Com, 3Par, ArcSight etc. I believe HP is doing the right thing here and needs to continue to focus on this sector. May be, Juniper Networks would be a good fit to them to compete better with Cisco in Networking.

Untapped Market – Software

Though HP has the presence in Enterprise Software market, it is still a small player in this sector. Out of HP’s $126 billion revenue, Software contributes only 2%. I believe this is where HP can look for more growth in near future, along with Services and Data Storage and Networking (ESS). It has announced, some time back, as its focus is to expand into the enterprise software. Its main intention is to concentrate on Cloud based software which is an upcoming trend in Software world. By making this decision, HP is going in the right direction. However, it is already too late for HP to enter Enterprise Software market which is already filled with a lot of big players like Oracle, IBM, SAP etc. Their current presence is negligible compared to these other players’. So HP has to make the decisions quick. We need to wait and see how the acquisition of Autonomy would help HP to lay the first steps in this direction. However, I doubt if it could help them to enter the Cloud Computing area. While acquisitions stimulate the inorganic growth, HP has to concentrate on Organic growth as well. It has to put more focus on getting more and more talented people in to this division. New products have to be developed in-house as well. Being the highest margin market, Software can take the HP’s growth by leaps and bounds. It’s going to be HP’s cash cow, provided the right decisions are both made and implemented.

To conclude, HP has some serious problems in hand to solve. They have to work on their margins. In my opinion, the recently announced decisions, if correctly executed, can save HP from current crisis. HP is not the first one to be in this situation. In 90’s, IBM had the same problem and they were able to turn the things around in to their favor. Now it’s HP’s time. All it needs is a right person who can drive HP’s growth engine in right direction. Can Leo Apotheker be the one? We need to wait and see. May be, an experienced hand in M&A and post M&A activities is what Mr. Apotheker needs at this moment.

Personal Experience with HP: I like to see HP make a come back. I started my career at HP as an intern. I wish HP good luck !!!

References: Key Stats Page at Yahoo Finance , Annual Report 2010 and 2011 Q3 Financial Report

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November 5, 2010

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My Take on: Article – How I Knew AOL Time Warner Was Doomed (No, Really!)

The original article can be read at
http://blogs.hbr.org/martin/2010/11/how-i-knew-aol-time-warner.html

I would agree with the things that are discussed here. When we read the article in disjunction with any other case studies, it sounds reasonable. However, I feel, analyzing the things ten years later after the fact is easier than analyzing them before the fact. The actual takeover/merger has happened 10 years back and now a postmortem analysis may make us think that it was a fundamental strategic mistake. Generally there are more factors –like improper execution of the strategy, differences in organizational structure and culture – are in play than the author discussed –like competition, customer development etc. The reason might have been a simple fact that the two corporations were hugely different in their culture that they were unable to work in synergy; or it might have been a real strategic blunder as the author suggested.

These kinds of deals are not new and didn’t stop with AOL and Time Warner. There is a similar deal announced in this very year. I can see similar attempt in Comcast’s acquisition of majority stake of NBC Universal (51% of it). Comcast is a content distributor more like AOL and NBC Universal is the content producer, more like Time Warner. Are we really certain that Comcast is going to bite dust as a result of this acquisition? We never know. They might even be successful with this venture. Had Time Warner/AOL deal been a basic strategic blunder, Comcast would have definitely considered it before bidding for NBC Universal. After all we all learn from the past mistakes so as Comcast.

This comment can be found at http://blogs.hbr.org/martin/2010/11/how-i-knew-aol-time-warner.html#comment-94080351

KP

Category Archives: Strategy

HP’s tablet strategy – A couple of pages to borrow from Amazon’s book

Corporate Strategy from Military warfare

My Take on: Article – How I Knew AOL Time Warner Was Doomed (No, Really!)