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February 11, 2005

Learning from HP's Mistakes

Let's remember some bigger picture investing lessons from the travails of HP, courtesy of Forbes publisher Rich Karlgaard.  In this morning's Wall Street Journal he offers an editorial (subscription required) entitled "Carly Fiorina's Seven Deadly Sins."  His commentary contains some excellent lessons for investors, touching on several themes to which we pay close attention at our firm:

. . . 2. Failing to see the cheap revolution. Carly allowed HP to drift onto the wrong side of the defining divide in the global economy. The cheap revolution has two elements: plummeting hardware costs combined with the Web-mediated ability to run world-class operations from anywhere. Dell is on the right side of the cheap revolution divide. It sells powerful servers for under $5,000 and keeps overhead low in Round Rock, Texas, where the average three-bedroom house sells for $200,000. HP sells servers for tens of thousands and keeps high overhead in Palo Alto, Calif., where the average three-bedroom sells for $1,500,000.

IBM's deal to combine its personal computer business with that of China's Lenovo is one effort by that elephant to get on the right side of not only the "cheap revolution," but the "size revolution" covered below.  One way to judge the management qualities of larger companies is the realignments they make to handle these two "revolutions."

3. Failing to see the consumer revolution. A huge shift has occurred in the last five years. The coolest tech products now go straight into the consumer market. Until a few years ago, most got a footing in the business market first: Copiers, PCs and cellphones were expensive products that only became cheap riding the Moore's Law curve over time. Today, the most transformative products and services go straight for the consumer: Blackberry, Apple iPod, eBay, Orbitz, Google, WiFi and so on. Carly has ineffectively maneuvered HP into this consumer field.

The MIT Technology Review has found a group of radiologists using their iPods to move their patient's images across departments and workstations where they work. Business adopts a consumer product.

4. Obsession with size over flexibility. Carly is blamed for ignoring a tech truism that large mergers never work. Maybe we need to go deeper and challenge the very premise of these mergers: that large scale is a requirement of success in the global economy. By merging with Compaq, Carly clearly believed this. But maybe the opposite is true -- that speed and flexibility now trump scale. The cheap revolution has armed startups and small companies with powerful, cheap technology and access to global labor pools. You don't need a large organizational unit to manage your outsourcing initiative. Just go to www.elance.com. . . .

When you hear a CEO talk about scale, just think "bathroom scales." Heavier is unhealthy in today's economy.

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