Will Meg Whitman’s Layoffs Turn Around HP? Nope

Things are bad at HP these days.  CEO and Board changes have confused the management team and investors alike.  Despite a heritage based on innovation, the company is now mired in low-growth PC markets with little differentiation.  Investors have dumped the stock, dropping company value some 60% over two years, from $52/share to $22 – a loss of about $60billion. 

Reacting to the lousy revenue growth prospects as customers shift from PCs to tablets and smartphones, CEO Meg Whitman announced plans to eliminate 27,000 jobs; about 8% of the workforce.  This is supposedly the first step in a turnaround of the company that has flailed ever since buying Compaq and changing the company course into head-to-head PC competition a decade ago.  But, will it work? 

Not a chance.

Fixing HP requires understanding what went wrong at HP.  Simply, Carly Fiorina took a company long on innovation and new product development and turned it into the most industrial-era sort of company.  Rather than having HP pursue new technologies and products in the development of new markets, like the company had done since its founding creating the market for electronic testing equipment, she plunged HP into a generic manufacturing war.

Pursuing the PC business Ms. Fiorina gave up R&D in favor of adopting the R&D of Microsoft, Intel and others while spending management resources, and money, on cost management.  PCs offered no differentiation, and HP was plunged into a gladiator war with Dell, Lenovo and others to make ever cheaper, undifferentiated machines.  The strategy was entirely based upon obtaining volume to make money, at a time when anyone could buy manufacturing scale with a phone call to a plethora of Asian suppliers.

Quickly the Board realized this was a cutthroat business primarily requiring supply chain skills, so they dumped Ms. Fiorina in favor of Mr. Hurd.  He was relentless in his ability to apply industrial-era tactics at HP, drastically cutting R&D, new product development, marketing and sales as well as fixating on matching the supply chain savings of companies like Dell in manufacturing, and WalMart in retail distribution. 

Unfortunately, this strategy was out of date before Ms. Fiorina ever set it in motion.  And all Mr. Hurd accomplished was short-term cuts that shored up immediate earnings while sacrificing any opportunities for creating long-term profitable new market development.  By the time he was forced out HP had no growth direction.  It's PC business fortunes are controlled by its suppliers, and the PC-based printer business is dying.  Both primary markets are the victim of a major market shift away from PC use toward mobile devices, where HP has nothing.

HPs commitment to an outdated industrial era supply-side manufacturing strategy can be seen in its acquisitions.  What was once the world's leading IT services company, EDS, was bought in 2008 after falling into financial disarray as that market shifted offshore.  After HP spent nearly $14B on the purchase, HP used that business to try defending and extending PC product sales, but to little avail.  The services group has been downsized regularly as growth evaporated in the face of global trends toward services offshoring and mobile use.

In 2009 HP spent almost $3B on networking gear manufacturer 3Com.  But this was after the market had already started shifting to mobile devices and common carriers, leaving a very tough business that even market-leading Cisco has struggled to maintain.  Growth again stagnated, and profits evaporated as HP was unable to bring any innovation to the solution set and unable to create any new markets.

In 2010 HP spent $1B on the company that created the hand-held PDA (personal digital assistant) market – the forerunner of our wirelessly connected smartphones – Palm.  But that became an enormous fiasco as its WebOS products were late to market, didn't work well and were wholly uncompetitive with superior solutions from Apple and Android suppliers.  Again, the industrial-era strategy left HP short on innovation, long on supply chain, and resulted in big write-offs.

Clearly what HP needs is a new strategy.  One aligned with the information era in which we live.  Think like Apple, which instead of chasing Macs a decade ago shifted into new markets.  By creating new products that enhanced mobility Apple came back from the brink of complete failure to spectacular highs.  HP needs to learn from this, and pursue an entirely new direction.

But, Meg Whitman is certainly no Steve Jobs.  Her career at eBay was far from that of an innovator.  eBay rode the growth of internet retailing, but was not Amazon.  Rather, instead of focusing on buyers, and what they want, eBay focused on sellers – a classic industrial-era approach.  eBay has not been a leader in launching any new technologies (such as Kindle or Fire at Amazon) and has not even been a leader in mobile applications or mobile retail. 

While CEO at eBay Ms. Whitman purchased PayPal.  But rather than build that platform into the next generation transaction system for web or mobile use, Paypal was used to defend and extend the eBay seller platform.  Even though PayPal was the first leader in on-line payments, the market is now crowded with solutions like Google Wallets (Google,) Square (from a Twitter co-founder,) GoPayment (Intuit) and Isis (collection of mobile companies.) 

Had Ms. Whitman applied an information-era strategy Paypal could have been a global platform changing the way payment processing is handled.  Instead its use and growth has been limited to supporting an historical on-line retail platform.  This does not bode well for the future of HP.

HP cannot save its way to prosperity.  That never works.  Try to think of one turnaround where it did – GM? Tribune Corp? Circuit City? Sears?  Best Buy? Kodak?  To successfully turn around HP must move – FAST – to innovate new solutions and enter new markets.  It must change its strategy to behave a lot more like the company that created the oscilliscope and usher in the electronics age, and a lot less like the industrial-era company it has become – destroying shareholder value along the way.

Is HP so cheap that it's a safe bet.  Not hardly.  HP is on the same road as DEC, Wang, Lanier, Gateway Computers, Sun Microsystems and Silicon Graphics right now.  And that's lousy for investors and employees alike.

OOPS! 5 CEOs that Should Have Already Been Fired (Cisco, GE, WalMart, Sears, Microsoft)

This has been quite the week for CEO mistakes.  First was all the hubbub about Scott Thompson, CEO of Yahoo, inflating his resume to include a computer science degree he did not actually receive.  According to Mr. Thompson someone at a recruiting firm added that degree claim in 2005, he didn't know it and he's never read his bio since.  A simple oversight, if you can believe he hasn't once read his bio in 7 years, and he didn't think it was ever important to correct someone who introduced him or mentioned it.  OOPS – the easy answer for someone making several million dollars per year, and trying to guide a very troubled company from the brink of failure. Hopefully he is more persistent about checking company facts.

But luckily for him, his errors were trumped on Thursday when Jamie Dimon, CEO of J.P.MorganChase notified the world that the bank's hedging operation messed up and lost $2B!!  OOPS!  According to Mr. Dimon this is really no big deal. Which reminded me of the apocryphal Senator Everett Dirksen statement "a billion here, a billion there and pretty soon it all adds up to real money!" 

Interesting "little" mistake from a guy who paid himself some $50M a few years ago, and benefitted greatly from the government TARP program.  He said this would be "fodder for pundits," as if we all should simply overlook losing $2B?  He also said this was "unfortunate timing."  As if there's a good time to lose $2B? 

But neither of these problems will likely result in the CEOs losing their jobs.  As obviously damaging as both mistakes are, which would naturally have caused us mere employees to instantly lose our jobs – and potentially be prosecuted – CEOs are a rare breed who are allowed wide lattitude  in their behavior.  These are "one off" events that gain a lot of attention, but the media will have forgotten within a few days, and everyone else within a few months.

By comparison, there are at least 5 CEOs that make these 2 mistakes appear pretty small.  For these 5, frequently honored for their position, control of resources and personal wealth, they are doing horrific damage to their companies, hurting investors, employees, suppliers and the communities that rely on their organizations.  They should have been fired long before this week.

#5 – John Chambers, Cisco Systems.  Mr. Chambers is the longest serving CEO on this list, having led Cisco since 1995 and championed much of its rapid growth as corporations around the world began installing networks.  Cisco's stock reached $70/share in 2001.  But since then a combination of recessions that cut corporate IT budgets and a market shift to cloud computing has left Cisco scrambling for a strategy, and growth.

Mr. Chambers appears to have been great at operating Cisco as long as he was in a growth market.  But since customers turned to cloud computing and greater use of mobile telephony networks Cisco has been unable to innovate, launch and grow new markets for cloud storage, services or applications.  Mr. Chambers has reorganized the company 3 times – but it has been much like rearranging the deck chairs on the Titanic.  Lots of confusion, but no improvement in results.

Between 2001 and 2007 the stock lost half its value, falling to $35.  Continuing its slide, since 2007 the stock has halved again, now trading around $17.  And there is no sign of new life for Cisco – as each earnings call reinforces a company lacking a strategy in a shifting market.  If ever there was a need for replacing a stayed-in-the-job too long CEO it would be Cisco.

#4 – Jeffrey Immelt, General Electric (GE).  GE has only had 9 CEOs in its 100+ year life.  But this last one has been a doozy.  After more than a decade of rapid growth in revenue, profits and valuation under the disruptive "neutron" Jack Welch, GE stock reached $60 in 2000.  Which turns out to have been the peak, as GE's value has gone nowhere but down since Mr. Immelt took the top job.

GE was once known for entering and changing markets, unafraid to disrupt how the market performed with innovation in products, supply chain and operations.  There was no market too distant, or too locked-in for GE to not find a way to change to its advantage – and profit.  But what was the last market we saw GE develop?  What has Mr. Immelt, in his decade at the top of GE, done to keep GE as one of the world's most innovative, high growth companies?  He has steered the ship away from trouble, but it's only gone in circles as it's used up fuel. 

From that high in 2001, GE fell to a low of $8 in 2009 as the financial crisis revealed that under Mr. Immelt GE had largely transitioned from a manufacturing and products company into a financial house.  He had taken what was then the easy road to managing money, rather than managing a products and services company.  Saved from bankruptcy by a lucrative Berkshire Hathaway, GE lived on.  But it's stock is still only $19, down 2/3 from when Mr. Immelt took the CEO position. 

"Stewardship" is insufficient leadership in 2012.  Today markets shift rapidly, incur intensive global competition and require constant innovation.  Mr. Immelt has no vision to propel GE's growth, and should have been gone by 2010, rather than allowed to muddle along with middling performance.

#3 – Mike Duke, WalMart.  Mr. Duke has been CEO since 2009, but prior to that he was head of WalMart International.  We now know Mr. Duke's business unit saw no problems with bribing foreign officials to grow its business.  Just on the basis of knowing about illegal activity, not doing anything about it (and probably condoning and recommending more,) and then trying to change U.S. law to diminish the legal repurcussions, Mr. Duke should have long ago been fired. 

It's clear that internally the company and its Board new Mr. Duke was willing to do anything to try and grow WalMart, even if unethical and potentially illegal.  Recollections of Enron's Jeff Skilling, Worldcom's Bernie Ebbers and Hollinger's Conrdad Black should be in our heads.  How far do we allow leaders to go before holding them accountable?

But worse, not even bribes will save WalMart as Mr. Duke follows a worn-out strategy unfit for competition in 2012.  The entire retail market is shifting, with much lower cost on-line companies offering more selection at lower prices.  And increasingly these companies are pioneering new technologies to accelerate on-line shopping with easy to use mobile devices, and new apps that make shopping, paying and tracking deliveries easier all the time.  But WalMart has largely eschewed the on-line world as its CEO has doggedly sticks with WalMart doing more of the same.  That pursuit has limited WalMart's growth, and margins, while the company files further behind competitively. 

Unfortunately, WalMart peaked at about $70 in 2000, and has been flat ever since.  Investors have gained nothing from this strategy, while employees often work for wages that leave them on the poverty line and without benefits.  Scandals across all management layers are embarrassing. Communities find Walmart a mixed bag, initially lowering prices on some goods, but inevitably gutting the local retailers and leaving the community with no local market suppliers.  WalMart needs an entirely new strategy to remain viable – and that will not come from Mr. Duke.  He should have been gone long before the recent scandal, and surely now.

#2 Edward Lampert, Sears Holdings.  OK, Mr. Lampert is the Chairman and not the CEO – but there is no doubt who calls the shots at Sears.  And as Mr. Lampert has called the shots, nobody has gained.

Once the most critical force in retailing, since Mr. Lampert took over Sears has become wholly irrelevant.  Hoping that Mr. Lampert could make hay out of the vast real estate holdings, and once glorious brands Craftsman, Kenmore and Diehard to turn around the struggling giant, the stock initially took off rising from $30 in 2004 to $170 in 2007 as Jim Cramer of "Mad Money" fame flogged the stock over and over on his rant-a-thon show.  But when it was clear results were constantly worsening, as revenues and same-store-sales kept declining, the stock fell out of bed dropping into the $30s in 2009 and again in 2012. 

Hope springs eternal in the micro-managing Mr. Lampert.  Everyone knows of his personal fortune (#367 on Forbes list of billionaires.)  But Mr. Lampert has destroyed Sears.  The company may already be so far gone as to be unsavable.  The stock price is based upon speculation of asset sales.  Mr. Lampert had no idea, from the beginning, how to create value from Sears and he surely should have been gone many months ago as the hyped expectations demonstrably never happened.

#1 – Steve Ballmer, Microsoft.  Without a doubt, Mr. Ballmer is the worst CEO of a large publicly traded American company.  Not only has he singlehandedly steered Microsoft out of some of the fastest growing and most lucrative tech markets (mobile music, handsets and tablets) but in the process he has sacrificed the growth and profits of not only his company but "ecosystem" companies such as Dell, Hewlett Packard and even Nokia.  The reach of his bad leadership has extended far beyond Microsoft when it comes to destroying shareholder value – and jobs.

Microsoft peaked at $60/share in 2000, just as Mr. Ballmer took the reigns.  By 2002 it had fallen into the $20s, and has only rarely made it back to its current low $30s value.  And no wonder, since execution of new rollouts were constantly delayed, and ended up with products so lacking in any enhanced value that they left customers scrambling to find ways to avoid upgrades.  By Mr. Ballmer's own admission Vista had over 200 man-years too much cost, and its launch still, years late, has users avoiding upgrades.  Microsoft 7 and Office 2012 did nothing to excite tech users, in corporations or at home, as Apple took the leadership position in personal technology.

So today Microsoft, after dumping Zune, dumping its tablet, dumping Windows CE and other mobile products, is still the same company Mr. Ballmer took control over a decade ago.  Microsoft is  PC company, nothing more, as demand for PCs shifts to mobile.  Years late to market, he has bet the company on Windows 8 – as well as the future of Dell, HP, Nokia and others.  An insane bet for any CEO – and one that would have been avoided entirely had the Microsoft Board replaced Mr. Ballmer years ago with a CEO that understands the fast pace of technology shifts and would have kept Microsoft current with market trends. 

Although he's #19 on Forbes list of billionaires, Mr. Ballmer should not be allowed to take such incredible risks with investor money and employee jobs.  Best he be retired to enjoy his fortune rather than deprive investors and employees of building theirs.

There were a lot of notable CEO changes already in 2012.  Research in Motion, Best Buy and American Airlines are just three examples.  But the 5 CEOs in this column are well on the way to leading their companies into the kind of problems those 3 have already discovered.  Hopefully the Boards will start to pay closer attention, and take action before things worsen.

 

Sell Google – Lot of Heat, Not Much Light

With revenues up 39% last quarter, it's far too soon to declare the death of Google.  Even in techville, where things happen quickly, the multi-year string of double-digit higher revenues insures survival – at least for a while. 

However, there are a lot of problems at Google which indicate it is not a good long-term hold for investors.  For traders there is probably money to be made, as this long-term chart indicates:

Source: Yahoo Finance May 3, 2012

While there has been enormous volatility, Google has yet to return to its 2007 highs and struggles to climb out of the low $600/share price range.  And there's good reason, because Google management has done more to circle the wagons in self-defense than it has done to create new product markets.

What was the last exciting product you can think of from Google?  Something that was truly new, innovative and being developed into a market changer?  Most likely, whatever you named is something that has recently been killed, or receiving precious little management attention.  For a company that prided itself on innovation – even reportedly giving all employees 20% of their time to do whatever they wanted – we see management actions that are decidedly not about promoting innovation into the market, or making sustainable efforts to create new markets:

• killed Google Powermeter, a project that could have redefined how we buy and use electricity
• killed Google Wave, a product that offered considerable group productivity improvement
• killed Google Flu Vaccine Finder offering new insights for health care from data analysis
• killed Google Related which could have helped all of us search beyond keywords
• killed Google synch for Blackberry as it focuses on selling Android
• killed Google Talk mobile app
• killed the OnePass Google payment platform for publishers
• killed Google Labs – once its innovation engine
• and there are rumors it is going to kill Google Finance

All of these had opportunities to redefine markets.  So what did Google do with these redeployed resources:

• Bought Motorola for $12.5billion, which it hopes to take toe-to-toe with Apple's market leading iPhone, and possibly the iPad.  And in the process has aggravated all the companies who licensed Android and developed products which will now compete with Google's own products.  Like the #1 global handset manufacturer Samsung.  And which offers no clear advantage to the Apple products, but is being offered at a lower price.
• Google+, which has become an internal obsession – and according to employees consumes far more resources than anyone outside Google knows.  Google+ is a product going toe-to-toe with Facebook, only with no clear advantages. Despite all the investment, Google continues refusing to publish any statistics indicating that Google+ is growing substantially, or producing any profits, in its catch-up competition with Facebook.

In both markets, mobile phones and social media, Google has acted very unlike the Google of 2000 that innovated its way to the top of web revenues, and profits. Instead of developing new markets, Google has chosen to undertaking 2 Goliath battles with enormously successful market leaders, but without any real advantage.

Google has actually proven, since peaking in 2007, that its leadership is remarkably old-fashioned, in the worst kind of way.  Instead of focusing on developing new markets and opportunities, management keeps focusing on defending and extending its traditional search business – and has proven completely inept at developing any new revenue streams.  Google bought both YouTube and Blogger, which have enormous user bases and attract incredible volumes of page views – but has yet to figure out how to monetize either, after several years.

For its new market innovations, rather than setting up teams dedicated to turning its innovations into profitable revenue growth engines Google leadership keeps making binary decisions.  Messrs. Page and Brin either decide the product and market aren't self-developing, and kill the products, or simply ignore the business opportunity and lets it drift.  Much like Microsoft – which has remained focused on Windows and Office while letting its Zune, mobile and other products drift into oblivion – or lose huge amounts of money like Bing and for years XBox.

I personalized that last comment onto the Google founders intentionally.  The biggest news out of Google lately has been a pure financial machination done for purely political reasons.  Announcing a stock dividend that effectively creates a 2-for-1 split, only creating a new class of non-voting "C" stock to make sure the founders never lose voting control.  This was adding belt to suspenders, because the founders already own the Class B stock giving them 66% voting control.  The purpose was purely to make sure nobody every tries to buy, or otherwise take over Google, because the founders will always have enough votes to make such an action impossible.

The founders explained this as necessary so they could retain control and make "big bets."  If "big bets" means dumping billions into also-ran products as late entrants, then they have good reason to fear losing company control.  Making big bets isn't how you win in the information technology industry.  You win by creating new markets, with new solutions, before the competition does it. 

Apple's huge wins in iPod, iTouch, iTunes, iPhone and iPad weren't "big bets."  The Apple R&D budget is 1/8 Microsoft's.  It's not big bets that win, its developing innovation, putting it into the market, shepharding it through a series of learning cycles to make it better and better and meeting previously unmet – often unidentified – needs.  And that's not what the enormous investments in mobile handsets and Google+ are about.

Although this stock split has no real impact on Google today, it is a signal.  A signal of a leadership team more obsessed with their own control than doing good for investors.  It is clearly a diversion from creating new products, and opening new markets.  But it was the centerpiece of communication at the last earnings call.  And that is a avery bad signal for investors.  A signal that the leaders see things likely to become much worse, with cash going out and revenue struggling, before too long.  So they are acting now to protect themselves.

Meanwhile, even as revenues grew 39% last quarter, there are signs of problems in Google's "core" market leadership is so fixated on defending.  As this chart shows, while volume of paid ads is going up, the price is now going down.

Source: Silicon Alley Insider

Prices go down when your product loses value.  You have to chase revenue.  Remember Proctor & Gamble's "Basics" product line launch?  Chasing revenue by cutting price.  In the short-term it can be helpful, but long-term it is not in your best interest.  Google isn't just cutting price on its incremental sales, but on all sales.  Increasingly advertisers are becoming savvy about what they can expect from search ads, and what they can expect from other venues – like Facebook – and the prices are reflecting expectations.  In a recent Strata survey the top 2 focus for ad executives were "social" (69%) and "display" (71%) – categories where Facebook leads – and both are ahead of "search."

At Facebook, we know the user base is around 800million.  We also know it's now the #1 site on the internet – more hits than Google.  And Facebook has much longer average user times on site.  All things attractive to advertisers.  Facebook is acquiring Instagram, which positions it much stronger on mobile devices, thus growing its market.  And while Google was talking about share splits, Facebook recently announced it was making Facebook email integrated into the Facebook platform much easier to use (which is a threat to Gmail) and it was adding a new analytics suite to help advertisers understand ad performance – like they are accustomed to at Google.  All of which increases Facebook's competitiveness with Google, as customers shift increasingly to social platforms.

As said at the top of this article, Google won't be gone soon.  But all signs point to a rough road for investors.  The company is ditching its game changing products and dumping enormous sums into me-too efforts trying to catch well healed and well managed market leaders.  The company has not created an ability to take new innovations to market, and remains stuck defending and extending its existing business lines.  And the top leaders just signaled that they weren't comfortable they could lead the company successfully, so they implemented new programs to make sure nobody could challenge their leadership. 

There are big fires burning at Google.  Unfortunately, burning those resources is producing a lot of heat – but not much light on a successful future.  It's time to sell Google.

CIO’s – will you be relevant in 2017?

My latest bi-monthly column for CIO magazine came out in print this week.  In it I challenge CIOs to think hard about what made the role successful in the 1970s – then in the 1990s – and how it is transitioning today.  Far too many CIOs are locked in on old notions about what  made them successful – usually controlling both hardware and software and forcing managers to behave in ways acceptable to IT.  But today cloud computing, mobile devices and apps make it possible for many "users" to obviate the IT department entirely – skip the enterprise applications – and find an easy route for their information needs.

I encourage you to click through to the article on CIO.com, or ComputerWorld.com – if you're in IT it should give you something to think about regarding your role.  If you are an investor it should give you some new thoughts about what IT companies are worth your money (time to rethink Oracle and SAP, for example.)  And if you're a manager it just might embolden you to focus on your needs and fight back on IT solutions that don't work for you.

CIO Mag – http://www.cio.com/article/704934/CIOs_Will_You_Be_Relevant_in_2017_

ComputerWorld – http://www.computerworld.com/s/article/9226722/CIOs_Will_You_Be_Relevant_in_2017_