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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 28, 2011

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Tim Cook, Steve Jobs’ Alter-Ego?

Note: I like to listen and learn from your opinions. If you like to share your view with me, then don’t hesitate to leave a comment on this and all other articles. I welcome any constructive discussions.

One of the most discussed topics last week is Steve Jobs’ resignation as Apple’s CEO. I like to put forward my thoughts on it. Many reports and TV shows covered this story. Almost everybody agreed that Tim Cook is a good alternative to Steve Jobs. When I read a little bit about Tim Cook, I could not come to the same conclusion immediately. If I was asked my response on this would be, “we don’t have enough information to say either way”. I may sound strange by saying so, but let’s look into why I have to say that way.

First of all let me acknowledge Jobs’ achievements. I am trying to establish Jobs’ personality so that the comparison between Jobs and Cook would be easier. I don’t go into the history a lot but will briefly touch a few important milestones in Jobs’ life. As we all know Steve Jobs is a Co-founder of Apple. Who is the other co-founder(s) then? That’s Steve Wozniak. He is the design and the electronics guy behind early days of Apple. Apple’s first computer in the market was Apple-I. It was designed by Wozniak and was sold by Jobs. Then it was a good success and laid the path to its next generation computer Apple-II. Apple-II was a huge success. It redefined the computer world and over night Apple and Jobs became the hot news in Tech world. Jobs was the face of the company and he was believed to be a whiz-kid by most of the tech people.

After the success of Apple-II, company did not have a success for a long time during which it had to rely on Apple-II’s revenue for survival. Meanwhile, Jobs started working on a project called Lisa. This was supposed to be a high-end computer with much better configuration than the previous models. For some reasons Jobs was forced to leave the Lisa project which is taken over by others in the company. As a replacement Jobs was given another project (which was completely his brainchild) called Macintosh. Despite the hype it created, Mac was NOT an instant success. Eventually it did good. On the other hand, Jobs was forced to leave Apple.

After leaving Apple, Jobs started another company called NeXT which is acquired by Apple after his return to it. NeXT was not a successful venture, if not a failed one. While Jobs was with NeXT, he happened to buy Pixar Studios for $10M (some say it was only for $5 M). Jobs’ main idea behind buying PIxar was to manufacture Computers for Imaging purposes. His idea behind it was always to sell computers that can be used with Medical Systems etc. Jobs never considered Pixar to be an animation studio though he let some of its resources to be spent on animation. It was the case at least until Toy Story got released. Eventually Pixar was proved to be one of the best animation studios and was bought by Disney for $ 7.4 billion. With this deal, Jobs has become a board member and the biggest investor of Disney.

We all know what happened with Apple after Jobs’ return. He turned the company which was on the brink of bankruptcy to one of the most successful companies in American history ( I am sure Microsoft must be regretting its decision to lend a helping hand of $150M to Apple at that time). Today it’s the largest tech company in the world. By looking at Apple’s history everyone agrees that Steve Jobs is one of the best CEO’s that world ever had.

On the other hand, Tim Cook worked at some of the best computer manufactures such as IBM and Compaq. At both Compaq and Apple he was mostly responsible to the supply chain management. He doesn’t have much experience as a CEO except for a couple of months in 2004 in Jobs’ absence and then seven months in this year. That means mostly he is an operations person and yet to be proved as a CEO.

I like to recollect one of the most common questions in management world. What is the difference between a Leader and a Manager? Just think of it for a while before you continue to read on. Leader is a person who is mostly responsible to set the future course of the company. He has to motivate the employees, define the vision of the company and see how and where the company would be in the years to come. He is also responsible to make the company reach its vision in the given period of time. On the other hand, a manager is a person who takes care of the day-to-day operations. He might define the processes that would facilitate the day to day activities. He makes sure products/services/solutions are delivered on time. The same person can be a good leader as well as a manager. But there is no guarantee that a good manager makes a good leader and vice versa. That’s why most of the companies have two different designations CEO (Chief Executive Officer) and COO (Chief Operating Officer). What’s the difference between a CEO and a COO? Yes, COO reports to CEO and CEO directly reports to the Board of Directors. But that’s not what I am trying to highlight here. CEO is mainly responsible to define the future course of the company whereas COO is responsible to make sure the operations are performed without any hiccups.

So far Tim Cook was more of an operations person than of a leader. No doubt he did an excellent job in removing all the chaos in Apple’s supply chain. He outsourced all the manufacturing to China and saved a lot of money to Apple while improving the quality of its products. His experience as a CEO is not known yet. Jobs as the CEO and Cook as the COO proved to be one of the best teams (just as Oracle’s Larry Ellison and Ray Lane did). Jobs always had a vision to the company. He is believed to be the world’s best consumer. He had an aesthetic touch to all of his thoughts. Aesthetics always played a crucial role in Apple’s products. If you ask any Apple customer why they like Apple products, the most frequently given answer would be “they look cool”. Apart from coolness, Apple products are simple to use. All this came into Apple’s products only because of Jobs. I am not saying Jobs himself designed all these products. But he has the taste of picking up the best of the designs/features to provide. He would never be satisfied with anything inferior. Tim Cook has declared that he would continue to give the same importance to designs and designers. However, what he also needs is the ability to pick the best one out of 10s of options provided to him. This quality cannot be acquired with experience. It has to be possessed by birth.

In the last seven months, since Steve Jobs announced his leave of absence, Tim Cook has been working as Apple’s CEO. However, in these seven months, I didn’t see any major decisions that can change the company’s path. It’s not very often you see the companies changing or redefining their strategies. So I would say we need to wait on this and see how Tim Cook will do when the time comes to define the company’s vision. With Apple’s current product line any operations person can lead the company for the next couple of years. But we need to see how Tim Cook is going to fare at his job when the time comes. It’s a skill to read the pulse of the consumers. Based on their pulse, products have to be made. It’s what Steve Jobs excelled. Even he was not correct all the time. He had some misfires too. For example, his purpose behind buying Pixar was to sell Image Computers. But how many of us know about Pixar Image Computers? His bet did not work in this scenario. However, Pixar was successful for other reasons which he too surprised about.

Generally when founders of the companies leave and the second generation leaders come in, it’s not easy to share the same vision and view as the founders did. We have at least a couple of cases in front of us to prove it. Where is Microsoft’s growth since Bill Gates gave up the reigns? What happened to Dell in the absence of Michael Dell? What went wrong with Apple between Steve Jobs’ exit and reentry into Apple? On the other hand there are successful stories too when the next generation leadership replaced the founders. Companies like HP and IBM did well even when the next generation took over.

It’s possible that Apple can stand in the same league as HP and IBM does. However, Steve Jobs cannot be replaced. There is no second Steve Jobs and there is no another Bill Gates. Every person is different with his/her own strengths and weaknesses. As Michael Porter, the famous Strategist once said, the leader’s personal values have to be taken into consideration while defining the future course of a company (in defining the feasible strategy of the company). All we need to do now is, just wait and see how Tim Cook’s strengths and weaknesses can off-set Steve Jobs absence.

PS: I hope iPhone 5 release is NOT delayed by Steve Jobs’ absence. Generally new models of iPhone release in June. This time it is NOT out yet. Hmmm…..it’s already end of August, I suppose. Are we seeing Jobs’ effect already 😉 ?

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

Tim Cook, Steve Jobs’ Alter-Ego?