Tuesday, August 30, 2011

Resource Allocation and Innovation at HP

HP’s recent decision to sell or spin off its low margin PC business represents a classic problem in strategy to which there are different points of views.

Option 1: Sell the Dogs
In the early years of modern business strategy (the 60s and 70s), the conventional wisdom was to perform a portfolio analysis and analyze the characteristic of your portfolio of opportunities. A common characteristic of such portfolio models, made popular by BCG and McKinsey was the decision to sell off the “dogs” in the portfolio. The dogs were typically characterized as low or negative growth businesses with poor profitability or cash flow.

Option 2: Rejuvenate the Dogs
Over the years, portfolio analysis has leaned away from this first generation view of portfolios and encompassed the idea that mature businesses can be rejuvenated and transformed into more profitable businesses through innovation, increased value added, new business models, tackling untapped adjacent markets, or through expansion into adjacent businesses.
Many have criticized the HP decision to move more in the direction of a services business and imitate the move IBM made earlier away from its personal computer business to a services and solution orientation.

The Value of News About a Company
Others have criticized HP for the clumsy and value destroying way in which it announced its decision to exit the PC, tablet and mobile business. As Regis McKenna, PR guru to Steve Jobs and Apple board member has pointed out in his writings, news about a company is as much part of a product and the perception of its brand and ecosystem value as is product information. This is clearly a lesson that HP has not understood as well as Apple.

But the decision to focus on corporate services rather having two lines of business one focused around business and the other around consumer technology and services shows the importance of thinking about the future, values and vision.

It’s pretty hard to imagine an HP that does not attempt to compete with IBM by offering services and solutions. The EDS acquisition was clearly part of that strategy.

Adjacent and Downstream Innovation
What surprised me personally was that HP would walk away from the products of the digital household. I have two reasons for being surprised:

First, increasingly product innovations for business are born in the consumer sector, where consumers often adopt technologies more quickly than businesses. Businesses are constrained by issues of standardization, support and security. By nature they are often more conservative in their adoption. CD-ROM drives, smartphones and Skype all represent examples of technologies adopted much earlier by consumers. Without a presence in the consumer end of the market, HP will miss many trends.

Second, the consumption of digital devices in the home is likely to be a large and growing area that will encompass many areas outside of HP’s traditional strengths in printers and PCs. There are many dollars at stake. Yes, the barriers to entry are lower and there are many consumer electronics competitors that HP would had to have faced, but the need to develop the design and user interface skills that Apple has demonstrated so ably would have been a significant benefit to HP in all its businesses. The ability to do deals to build ecosystems would also have been a core strength in a world where integration matters.

Centralized vs. Decentralized Innovation
Bob Sutton at Stanford’s engineering school has written about the success of Apple being tied to a centralized command structure and a small product line. 

Reference: http://bobsutton.typepad.com/my_weblog/2011/08/5-warning-signs-apple-has-started-to-slip.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FBobsutton%2Fmy_weblog+%28Bob+Sutton%29

HP’s history is one of decentralized innovation, in a way, a far more difficult culture to create and maintain. The spin-off of the PC business and all the downstream consumer innovations that it would inevitably have seeded may not be the most damaging consequence of this spin off. Rather it is the move away from strong decentralized innovation and impact on HP’s culture that may be the biggest loss.

What Motivated HP’s Decision
Without being party to the discussions on this decision, it’s hard to know which of two factors was more important in the decision.

One factor may have been that the capital costs of maintaining leadership in the business services market may have been the critical issue. HP’s core profit center – printers and ink – is certainly under pressure from competition and the substitution of devices and web servers for paper. If you can download to a computer or tablet, you print less. A networked world needs less paper.

A second factor may be the comfort zone of the new CEO. CEO’s come to the board room table with areas of comfort and discomfort. The rejuvenation of a consumer business is no small task and requires many strong innovators. It would likely take time. 

It would be a terrible shame if the decision to spin out the PC business were driven by the unrealistic time expectations of the stock market, and even worse if it were motivated by the way in which senior management was incented. 

Perhaps the best we can hope for is that HP’s PC division will be spun out and its new management team, newly refocused, can pursue innovation, unbound by the trade-offs of portfolio analysis in a business with radically different business models

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