Will Meg Whitman be more like Steve Jobs, or Carol Bartz?

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The media has enjoyed a field day last week amidst the ouster of Leo Apotheker as Hewlett Packard’s CEO and appointments of former Oracle executive Ray Lane as Executive Chairman and former eBay CEO Meg Whitman as CEO.  There have been plenty of jabs at the Board, which apparently hired Mr. Apotheker without everyone even meeting him (New York Times), and plenty of complaining about HP’s deteriorating performance and stock price.  But the big question is, will Meg Whitman be able to turn around HP?

Ms. Whitman is the 7th HP CEO in a mere 12 years.  Of those CEOs, the only one pointed to with any attraction was Mark Hurd.  He did not take any strategic actions, but merely slashed costs – which immediately improved the profit line and drove up the short-term stock price.  Actions taken at the expense of R&D, new product development and creating new markets, leaving HP short on a future strategy when he was summarily let go by the Baord that hired Apotheker. 

And that indicates the strategy problem at HP – which is pretty much a lack of strategy.

HP was once a highly innovative company. We all can thank HP for a world of color.  Before HP brought us the low-priced ink-jet printer all office printing was black.  HP unleashed the color in desktop publishing, and was critical to the growth of office and home printing, as well as faxing with their all-in-one, integrated devices. 

But then someone – largely Ms. Fiorina – had the idea to expand on the HP presence in desktop publishing by expanding into PC manufacturing and sales, even though there was no HP innovation in that market.  Mr. Hurd expanded that direction by buying a service organization to support field-based PCs. 

This approach of expanding on HPs “core” printer business, almost all by acquisition, cost HP a lot of money.  Further, supply chain and retail program investments to sell largely undifferentiated products and services in a hotly contested PC market sucked all the money out of new products development.  Every year HP was spending more to grow sales of products becoming increasingly generic, while falling farther behind in any sort of new market creation.

Into that innovation void jumped Apple, Google and Amazon.  They pushed new mobile solutions to market in smartphones and tablets.  And now PCs, and the printers they used, are seeing declining growth.  All future projections show an increase in mobile devices, and a sales cliff emerging for PCs and their supporting devices.  Simultaneously as mobile devices have become more popular the trend away from printing has grown, with users in business and consumer markets finding digital devices less costly, more user friendly and more adaptable than printed material (just compare Kindle sales and printed book sales – or the volume of tablet newspaper and magazine subscriptions to printed subscriptions.)  HP invested heavily in PC products, and now that market is dying. 

Now HP is in big trouble.  There are plenty of skeptics that think Ms. Whitman is not right for the job. What should HP under Ms. Whitman do next?  Keep doubling down on investments in existing markets?  That direction looks pretty dangerous.  IBM jumped out years ago, selling its laptop line to Lenovo for a tidy profit before sales slackened.  With all the growth in smartphones and tablets, it’s hard to imagine that strategy would work.  Even Mr. Apotheker took action to deal with the market shift by redirecting HP away from PCs with his announced intention to spin off that business while buying an ERP (enterprise ressource planning) software company to take HP into a new direction.  But that backfired on him, and investors.

Mr. Apotheker and Carol Bartz, recently fired CEO of Yahoo, made similar mistakes.  They relied heavily on their personal past when taking leadership of a struggling enterprise. They looked to their personal success formulas – what had worked for them in the past – when setting their plans for their new companies.  Unfortunately, what worked in the past rarely works in the future, because markets shift.  And both of these companies suffered dramatically as the new CEO efforts took them further from market trends. 

The job Ms. Whitman is entering at HP is wildly different from her job at eBay.  eBay was a small company taking advantage of the internet explosion.  It was an early leader in capitalizing on web networking and the capability of low-cost on-line transactions.  At eBay Ms. Whitman needed to keep the company focused on investing in new solutions that transformed PC and internet connectivity into value for users.  As long as the number of users on the internet, and the time they spent on the web, grew eBay could capitalize on that trend for its own growth.  eBay was in the right place at the right time, and Ms. Whitman helped guide the company’s product development so that it helped users enjoy their on-line experience.  The trends supported eBay’s early direction, and growth was built opon making on-line selling better, faster and easier.

The situation could not be more different at HP.  It’s products are almost all out of the trend.  If Ms. Whitman does what she did at eBay, trying to promote more, better and faster PCs, printers and traditional IT services things will not go well.  That was Mr. Hurd’s strategy.  “Been there, done that” as people like to say.  That strategy ran its course, and more cost-cutting will not save HP.

In 2020 if we are to discuss HP the way we now discuss Apple’s dramatic turnaround from the brink of failure, Ms. Whitman will have to behave very differently than her past – and from what her predecessor and Ms. Bartz did.  She has to refocus HP on future markets.  She has to identify triggers for market change – like Steve Jobs did when he recognized that the growing trend to mobility would explode once WiFi services reached 50% of users – and push HP toward developing solutions which take advantage of those market shifts.

HP has under-invested in new market development for years.  It’s acquisition of Palm was supposed to somehow rectify that problem, only Palm was a failing company with a failing platform when HP bought it.  And the HP tablet launch with its own proprietary solution was far too late (years too late) in a market that requires thousands of developers and a hundred thousand apps if it is to succeed.  The investment in Palm and WebOS was too late, and based on trying to be a “me too” in a market where competitors are rapidly advancing new solutions. 

There are a world of market opportunities out there that HP can develop.  To reach them Ms. Whitman must take some quick actions:

1. Develop future scenarios that define the direction of HP.  Not necessarily a “vision” of HP in 2020, but certainly an identification of the big trends that will guide HP’s future direction for product and market development.  Globalization (like IBM’s “smarter planet”) or mobility are starts – but HP will have to go beyond the obvious to identify opportunities requiring the resources of a company with HP’s revenue and resources.  HP desperately needs a pathway to future markets.  It needs to be developing for the emerging trends.
2. A recognition of how HP will compete.  What is the market gap that HP will fulfill – like Apple did in mobility?  And how will it fulfill it?  Google and Facebook are emerging giants in software, offering a host of new capabilities every day to better network users and make them more productive.  HP must find a way to compete that is not toe-to-toe with existing leaders like Apple that have more market knowledge and extensive resoureces.
3. HP needs to dramatically up the ante in new product development.  Innovation has been sorely lacking, and the hierarchical structure at HP needs to be changed.  White Space projects designed to identify opportunities in market trends need to be created that have permission to rapidly develop new solutions and take them to market – regardless of HP historical strengths.  Resources need to shift – rapidly – from supporting the aging, and growth challenged, historical product lines to new opportunities that show greater growth promise.

Apple and IBM were once given almost no chance of survival.  But new leadership recognized that there were growth markets, and those leaders altered the resource allocation toward things that could grow.  Investments in the old strategy were dropped as money was pushed to new solutions that built on market trends and headed toward future scenarios.  HP is not doomed to failure, but Ms. Whitman has to start acting quickly to redirect resources or it could easily be the next Sun Microsystems, Digital Equipment, Wang, Lanier or Cray

Where Bartz Blew It, and What Yahoo! Needs To Do Now

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Carol Bartz was unceremoniously fired as CEO by Yahoo’s Board last week.  Fearing their decision might leak, the Chairman called Ms. Bartz and fired her over the phone.  Expeditious, but not too tactful.  Ms. Bartz then informed the company employees of this action via an email from her smartphone – and the next day called the Board of Directors a bunch of doofusses in a media interview.  Salacious fodder for the news media, but a distraction from fixing the real problems affecting Yahoo!

Unfortunately, the Yahoo Board seems to have no idea what to do now.  A small executive committee is running the company – which assures no bold actions.  And a pair of investment banks have been hired to provide advice – which can only lead to recommendations for selling all, or pieces, of the company.  Most people seem to think Yahoo’s value is worth more sold off in chunks than it is as an operating company.  Wow – what went so wrong?  Can Yahoo not be “fixed”?

There was a time, a decade or so back, when Yahoo was the #1 home page for browsers.  Yahoo! was the #1 internet location for reading news, and for doing internet searches.  And, it pioneered the model of selling internet ads to support the content aggregation and search functions.  Yahoo was early in the market, and was a tremendous success.

Like most companies, Yahoo kept doing more of the same as its market shifted.  Alta Vista, Microsoft and others made runs at Yahoo’s business, but it was Google primarily that changed the game on Yahoo!  Google invested heavily in technology to create superior searches, offered a superior user experience for visitors, gave unique content (Google Maps as an example) and created a tremendously superior engine for advertisers to place their ads on searches – or web pages. 

Google was run by technologists who used technology to dramatically improve what Yahoo started – seeing a future which would take advantage of an explosion in users and advertisers as well as web pages and internet use.  Yahoo had been run by advertising folks who missed the technology upgrades.  Yahoo’s leadership was locked-in to what it new (advertising) and they were slow with new solutions and products, falling further behind Google every year.

In an effort to turn the tide, Yahoo hired what they thought was a technologist in Carol Bartz to run the company.  She had previously led AutoCad, which famously ran companies like IBM, Intergraph, DEC (Digital Equipment) and General Electric owned CALMA out of the CAD/CAM (computer aided design and manufacturing) business.  She had been the CEO of a big technology winner – so she looked to many like the salvation for Yahoo!

But Ms. Bartz really wasn’t familiar with how to turn an ad agency into a tech company – nor was she particularly skilled at new product development.  Her skills were mostly in operations, and developing next generation software.  AutoCad was one of the first PC-based CAD products, and over 2 decades AutoCad leveraged the increasing power of PCs to make its products better, faster and relatively cheaper.  This constant improvement, and close attention to cost control, made it possible for AutoCad on a PC to come closer and closer to doing what the $250,000 workstations had done.  Users switched to the cheaper AutoCad not because it suddenly changed the game, but because PC enhancements made the older, more costly technology obsolete.

Ms. Bartz was stuck on her success formula.  Constantly trying to improve.  At Yahoo she implemented cost controls, like at AutoCad.  But she didn’t create anything significantly new.  She didn’t pioneer any new platforms (software or hardware) nor any dramatically new advertising or search products.  She tried to do deals, such as with Bing, to somehow partner into better competitiveness, but each year Yahoo fell further behind Google.  In a real way, Ms. Bartz fell victim to Google just as DEC had fallen victim to AutoCad.  Trying to Defend & Extend Yahoo was insufficient to compete with the game changing Google.

The Board was right to fire Ms. Bartz.  She simply did what she knew how to do, and what she had done at AutoCad.  But it was not what Yahoo needed – nor what Yahoo needs now.  Cost cutting and improvements are not going to catch the ad markets now driven by Google (search and adwords) and Facebook (display ads.)  Yahoo is now out of the rapidly growing market – social media – that is driving the next big advertising wave.

Breaking up Yahoo is the easy answer.  If the Board can get enough money for the pieces, it fulfills its fiduciary responsibility.  The stock has traded near $15/share for 3 years, and the Board can likely obtain the $18B market value for investors.  But “another one bites the dust” as the song lyrics go – and Yahoo will follow DEC, Atari, Cray, Compaq, Silicon Graphics and Sun Microsystems into the technology history on Wikipedia.  And those Yahoo employees will have to find jobs elsewhere (oh yeah, that pesky jobs problem leading to 9%+ U.S. unemployment comes up again.)

A better answer would be to turn around Yahoo!  Yahoo isn’t in any worse condition than Apple was when Steve Jobs took over as CEO.  It’s in no worse condition than IBM was when Louis Gerstner took over as its CEO.  It can be done.  If done, as those examples have shown, the return for shareholders could be far higher than breaking Yahoo apart.  

So here’s what Yahoo needs to do now if it really wants to create shareholder value:

1. Put in place a CEO that is future oriented.  Yahoo doesn’t need a superb cost-cutter.  It doesn’t need a hatchet wielder, like the old “Chainsaw Al Dunlap” that tore up Scott Paper.  Yahoo needs a leader that can understand trends, develop future scenarios and direct resources into developing new products that people want and need.  A CEO who knows that investing in innovation is critical.
2. Quit trying to win the last war with Google.  That one is lost, and Google isn’t going to give up its position.  Specifically, the just announced Yahoo+AOL+Microsoft venture to sell ad remnants is NOT where Yahoo needs to spend its resources.  Every one of these 3 companies has its own problems dealing with market shifts (AOL with content management as dial-up revenues die, Microsoft with PC market declines and mobile device growth.)  None is good at competing against Google, and together its a bit like asking 3 losers in a 100 meter dash if they think by forming a relay team they could somehow suddenly become a “world class” group.  This project is doomed to failure, and a diversion Yahoo cannot afford now.
3. In that same vein, quit trying to figure out if AOL or Microsoft will buy Yahoo.  Microsoft could probably afford it – but like I said – Microsoft has its hands full trying to deal with the shift from PCs to tablets and smartphones.  Buying Yahoo would be a resource sink that could possibly kill Microsoft – and it’s assured Microsoft would end up shutting down the company piecemeal (as it does all acquisitions.)  AOL has seen its value plummet because investors are unsure if it will turn the corner before it runs out of cash.  While there are new signs of life since buying Huffington Post, ongoing struggles like firing the head of TechCrunch keep AOL fully occupied fighting to find its future.  Any deal with either company should send investors quickly to the sell post, and probably escalate the Yahoo demise with the lowest possible value.
4. Give business heads the permission to develop markets as they see fit.  Ms. Bartz was far too controlling of the business units, and many good ideas were not implemented.  Specifically, for example, Right Media should be given permission to really advance its technology base and go after customers unencumbered by the Yahoo brand and organization.  Right Media has a chance of being really valuable – that’s why people would ostensibly buy it – so give the leaders the chance to make it successful.  Maybe then the revolving door of execs at Right (and other Yahoo business units) would stop and something good would happen.  
5. Hold existing business units “feet to the fire” on results.  Yahoo has notoriously not delivered on new ad platforms and other products – missing development targets and revenue goals.  Innovation does not succeed if those in leadership are not compelled to achieve results.  Being lax on performance has killed new product development – and those things that aren’t achieving results need to stop.  Specifically, it’s probably time to stop the APT platform that is now years behind, and because it’s targeted against Google unlikely to ever succeed.
6. Invest in new solutions.  Take all that wonderful trend data that Yahoo has (maybe not as much as Google – but a lot more than most companies) and figure out what Yahoo needs to do next.  Rip off a page from Apple, which flattened spending on the Mac in order to invest in the iPod.  Learn from Amazon, which followed the trends in retail to new storefronts, expanded offerings, a mobile interface and Kindle launch.  Yahoo needs to quit trying to gladiator fight with Google – where it can’t win – and identify new markets and solutions where it can.  Yahoo must quit being a hostage to its history, and go do the next big thing! Create some white space in the company to invest in new solutions on the trends!

Of course, this is harder than just giving up and selling the company.  But the potential returns are much, much higher.  Yahoo’s predicament is tough, but it’s been a management failure that got it here.  If management changes course, and focuses on the future, Yahoo can once again become a market leading company.  Sure would like to see that kind of leadership.  It’s how America creates jobs.

Audio Files

If you prefer to listen to Adam’s Blog Posts, you can listen to them on this page or go to iTunes and download them.

 

 

Audio Version September 7, 2011

 

Where did all the jobs go? 9 recommendations for Mr. Obama!

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Friday we learned, as the New York Daily News headlined, “August 2011 Jobs Report: NO Net Jobs Created.”  U.S. unemployment, and underemployment, remain stubbornly stuck at very high levels.  This situation is unlikely to improve, as reported at 24×7 Wall Street in “August Lay-off Plans Up 47%” with the latest Challenger Gray report telling us 51,144 people are soon getting the axe.  No wonder we saw a dramatic decline of nearly 15 points, to 44.5, in the Conference Board’s Consumer Confidence Index – near record-low levels. 

This has all the Presidential candidates talking about jobs, and President Obama signed up to deliver a jobs speech to Congress. 

The problem actually goes beyond just jobs.  Buried within consumer concerns lies the fact that for most people, their incomes are going nowhere.  Adjusted for inflation, almost everyone is making less now than they did when the millenium turned.  Generally speaking, about 15% less than 11 years ago!  Most family incomes are about where they were in 1998.  For the wealthiest, income since the mid-1960s has grown only about 1.5%/year on average. For everyone else the improvement has only been about .5%/year. And universally almost all of that increase occurred between 1992 and 2000 (for anyone who wonders about Bill Clinton’s resurgent popularity, just look at incomes during his Presidency compared to every other administration on this chart!)

Source: “U.S. Household Incomes: A 42 Year Perspective” Doug Short, BusinessInsider.com

But will anything the President, or the candidates, recommend make a difference?

So far, the politicos keep fighting the last war, and seem surprised that nothing is improving.  The recommendations for putting people back to work in factories, such as autos and heavy equipment, or  building roads simply defies the reality of work today.  America has not been a manufacturing-dominated jobs country for over 60 years!  All job creation has been in services!

Source:”Charting the Incredible Shift From Manufacturing to Services” Doug Short, BusinessInsider.com

For this entire period, productivity has been climbing.  Just 50 years ago most people spent 1/3 to 1/2 their income on food.  No longer.  Today, few spend more than 5 to 10%, and everyone can enjoy an automobile, telephone, television and computer – regardless of their income!  We have all the stuff anyone could want, and in many cases a lot more of some stuff than we need – or want! 

The old notion of “what’s good for G.M. (General Motors) is good for America” is simply no longer true!  As we recently witnessed, a multi-billion dollar bail-out of the largest American auto maker may have saved some unemployment – but it did not create an economic turn-around, or create a slew of jobs! 

Today’s jobs are all in information – the accumulation, assimilation, analysis and use of information.  Few “managers” actually manage people any more – most manage a data set, or a computer program, or some sort of analysis.  The vast majority of “managers” have no direct reports at all!  The jobs – and incomes – are all in information.  Job growth is in places like Facebook, Google, Linked-in, Groupon, Amazon and Apple (the latter of which outsources all its manufacturing.)

No President or economist can manufacture jobs today.  As we’ve seen, interest rates are at unprecedent low levels – yet nobody wants to take a loan to hire a new employee!  In fact, business productivity is at record high levels as business keeps accomplishing more and more with fewer and fewer workers!

Source: “Corporate Efficiency is Getting Absurd” BusinessInsider.com

Public companies aren’t going broke, by and large.  Most have cash balances at record levels.   Only they keep using the money to buy back their own stock!  Every month sees a wave of new stock buy back commitments, as 24×7 Wall Street reported “August’s New Massive Stock Buybacks… Over $30 Billion!”  Business leaders find it less risky to buy back their own stock (supporting their own bonuses, by the way) than invest in any sort of growth program – something that might create jobs.

So what’s the President to do?

We need to radically jack up the investment in innovation! Think about that last period of very low unemployment and growing incomes – in the 1990s.  We had the explosion in technology as people began using PCs, the internet, mobile phones, etc.  New technology introduced new business ideas (mostly services) and created a rash of growth!  And that created new jobs – and higher incomes.  Innovation is the jobs engine – not trying to save another tired manufacturing company, or pave another highway or extend another bridge!  Today those projects simply do not employ very many people, and the “trickle down” affect of a highway project creating more jobs has disappeared!

Bloomberg/BusinessWeek reported in “Failing at Innovation? Bank On It“

• Government spending on higher education has been declining since the 1970s reducing the number of graduate students and innovation projects
• Federal share of R&D has been less than 1% since 1992 – all while corporate R&D spending has declined dramatically!  The days of spending “to put a man on the moon” has disappeared, as we fairly quietly mothballed the space program and commence to dismantle NASA
• The number of entrepreneurs is actually declining!  There were fewer startups with 1 or more employees in 2007 (before the financial collapse and ensuing economic mayhem) than in 1990
• New companies are not employing people.  In the 1990s the average startup employed 7.5 people, but now the number is 4.9
• Meanwhile “infrastructure” spending today is the same as it was in 1968! 

We’ve done a great job of cutting taxes, but we’ve simultaneoously gutted our investment in R&D, innovation and doing anything new!  If you wonder where the jobs went it wasn’t oversees, it was into higher corporate cash levels, more stock buybacks, increased bank reserves and dramatically higher executive compensation! 

We don’t need more tax cuts – because nobody is investing in any new projects!  We don’t need more unemployment insurance, because that – at best – delays the day of reconning without a solution.

Here’s what we do need today:

1. Implement a tax on corporate stock buybacks.  At least as great as the tax on corporate dividends.  Buybacks simply drain the economy of investment funds, with no benefit.  At least dividends give returns back to shareholders – who might invest in a new company!  And if buybacks are taxed, executives might start investing in projects again!
2. Quit giving such large depreciation allowances for physical assets.  We don’t need more buildings – we’re overbuilt as we are right now!  Again, it’s not “things” that make up our economy, it’s services!
3. Re-introduce R&D credits!  Give businesses a $3 tax break for every dollar spent in R&D and new product development!  Prior to President Reagan this was considered normal.  It’s not a new idea, just one that’s been forgotten.  If we can give credits for oil and gas drilling, which creates almost no jobs, why not innovation?
4. Cut payroll taxes on the self-employed and small business.  Today self-employed pay 2x the payroll taxes, so it’s a big dis-incentive to entrepreneurship.  Give start-ups a break by lowering employment taxes on small employers – say less than 50 employees.
5. Allow investors in start-ups to write off up to 2x their losses.  It takes away a lot of the risk if you can get most of your money back from a tax break should your investment fail.  And for all those corporations that abhore taxes this would incent them to invest in small enterprises that have new ideas they’d like to see developed.
6. Remember the Small Business Administration (SBA)?  Re-activate it by giving it $100B (maybe $200B) to guarantee bank loans of small businesses.  Bank lending has ground to a halt as banks eliminate risk – so let’s get them back into their primary business again.  In WWII the government guaranteed every loan for the construction of the Liberty Ships – and behold business built 2,751 of the things in 4 years!  
7. Increase funding for higher education.  Increase the grants for science, engineering and new product research at America’s universities.  Increase grants for students in science and engineering, and allow students to deduct out-of-pocket educational expenses from their taxes.  Allow corporations to deduct all the expense of employee education – uncapped!  Allow corporations to deduct the university grants they make!
8. Invest in today’s digital infrastructure.  Once we paid to send men to the moon – and a flood of innovation (from microwave ovens to powdered drinks and frozen food) followed.  Today we should invest in a nationwide WiFi network that’s everywhere from rural forests to city buildings – and make it all FREE.  Digital networks are the highways we need today – not concrete ribbons.  Create tax deductions for people to buy smartphones, tablets and other products that drive innovation, and make it easy for innovators to network for solutions to emerging needs.
9. Streamline the process for small companies to test and sell new bio-engineered products.  The existing complicated process is a legacy of big companies and traditional pharmaceutical research.  Make it easy for entrepreneurs to test and launch the next wave of medical technology based on the new bio-sciences.  Offer federal-backed safety insurance to protect small businesses that show efficacy in new solutions.

These are just 9 ideas.  I’m sure readers can think up 90 more (in fact, I challenge you to offer them as comments to this blog.) If we invest in innovation, we can create a lot of jobs.  But we need to start NOW!