From today's WSJ editorial page....
Regards,
John
HP and Compaq Should
Return to Their Roots
By David B. Yoffie and Mary Kwak. Mr. Yoffie is a professor at the Harvard Business School, where Ms. Kwak is a research associate. They are co-authors of "Judo Strategy" (HBS Press, 2001).
Following the Packard Foundation's decision to oppose the merger of their companies, Hewlett-Packard CEO Carly Fiorina and Compaq CEO Michael Capellas have redoubled their efforts to sell the plan to institutional investors and to rally their own troops. They should give it up. No matter how the remaining shareholders vote, the HP-Compaq marriage will fail.
Look at the historical evidence. No large-scale high-tech merger has ever worked -- ever. In 1969, Xerox tried to buy its way into the computer business with the purchase of Scientific Data Systems, one of the largest acquisitions in history at the time. Six years later, Xerox closed down the company, taking some of the largest write-offs in history. In 1984, IBM tried to buy its way into the telecommunications business with the purchase of Rolm. Five years later, after sinking a billion dollars into the business, IBM sold Rolm to Siemens for less than it paid. In 1991 AT&T acquired NCR for $7.5 billion, but spun it off in 1996 after incurring billions in losses. The list goes on.
Today, HP and Compaq want to make the same mistake. Melding two large and fiercely competitive organizations is a formidable challenge in any industry. The benefits of scale and scope in mature industries, like oil or financial services, can sometimes outweigh the time and energy squandered in the long integration process. But in high technology, no company has ever attempted this trade-off and come out ahead. In fast-moving industries, while the acquirer sorts out its product portfolio and redraws organizational lines, unencumbered rivals seize their chance to race ahead.
No one should know this better than Mr. Capellas, who owes his job in part to Compaq's last forays into the high-stakes acquisition game. Former CEO Eckhard Pfeiffer tried to escape from the commodity personal-computer business by buying Tandem Computer for $3 billion in 1997 and a year later acquiring Digital Equipment for $8.5 billion, the highest price ever paid for a computer company. Mr. Pfeiffer believed the mergers would enable Compaq to offer corporate customers a soup-to-nuts menu of computer hardware and software, backed by a global services organization -- the same failed strategy HP and Compaq are pursuing today. But while more than 200 internal committees struggled with the integration process, the company drifted. Losses mounted, Mr. Pfeiffer lost his job, and Dell passed Compaq to become the No. 1 seller of PCs in the U.S.
In announcing the merger, Ms. Fiorina and Mr. Capellas signaled their determination to avoid these problems. But even if they execute flawlessly throughout the integration process, merging two weak companies is still not the answer. Every successful company in high technology has achieved its current position through organic growth. IBM and Dell, the two industry leaders that HP and Compaq hope to challenge, built their core businesses from scratch. While small acquisitions can jumpstart the building of new capabilities -- an approached used successfully by Cisco in switching equipment -- joining two giant companies with overlapping businesses doesn't equate to competitive advantage.
The newly merged HP will be able to cut costs by eliminating overhead, streamlining product lines, and squeezing concessions from suppliers. But these one-time moves will not counter the fundamental superiority of Dell's build-to-order, direct sales business model when it comes to selling commodity PCs. Meanwhile, in the upper reaches of the market, combining two weak services organizations will pose little threat to IBM. More than 60% of the new HP's service employees can provide only basic maintenance and support, not the high-level consulting and outsourcing services that big-budget customers demand. In short, HP and Compaq are embarking on a dangerous path. Two new CEOs are ignoring history while simultaneously seeking to out-Dell Dell and out-IBM IBM.
This doesn't mean the outlook is hopeless for either HP or Compaq. There is another option: Both companies should return to their roots. For Compaq, that means focusing on innovation in engineering and industrial design. Today, there's not much to distinguish Compaq computers from competitors' PCs. But the picture was very different in the 1980s when Compaq started out. Compaq was the first company to market a portable IBM-compatible PC and the first company to launch IBM-compatibles based on Intel's 80386 chip. Moves like these rocketed the company to a leadership position.
In the 1990s Compaq largely abandoned this strategy in favor of competing on price -- a game that, due to its business model, Compaq can't win. As long as PCs remain commodities, Dell's low-cost model will retain the lead. But Compaq could carve out a distinctive position by "decommoditizing" the PC. As Apple has shown with the iMac -- and Compaq itself has done with the iPaq PocketPC -- companies that invest in superior design can sustain a price premium. And no one who has confronted the welter of cables under his desk can argue that there is no room for PC innovation.
Superior engineering would also strengthen Compaq's position in the growing and profitable market for corporate servers. If Compaq can tackle the challenges involved in building multiple-processor Wintel servers, it could deliver high-end performance while retaining a significant cost advantage over competitors such as Sun. Moreover, by focusing on innovation and markets that leverage its strength in third-party distribution, Compaq could build a strong defense against Dell's campaign to move up-market. Due to its focus on driving down costs, Dell would have great difficulty matching these moves.
As for Hewlett-Packard, "back to the future" is more about organization than strategy. In the short term, the company can maximize value from its printing and imaging business, which generates the vast majority of HP's income, and pull back from the money-losing PC business in non-strategic areas, such as consumer sales. In addition, HP should bolster its position against Sun and IBM in the UNIX server market by forming alliances with experienced service organizations, as rival Sun just did with PricewaterhouseCoopers.
Over the longer term, however, HP may reap the greatest benefits by going back to its organizational roots. The original Hewlett-Packard competed on the basis of innovation, not scale. One of the keys to the company's success was a decentralized, autonomous organization that promoted innovation (such as the technology that led to laser and ink-jet printers) and organic growth. Over time, HP inevitably began to sprawl, and one of Ms. Fiorina's first moves upon becoming CEO was to streamline the company by cutting the number of business units to 16 from more than 80. Now, however, it may be time to move in the opposite direction and give the forces of creativity at Hewlett-Packard freer rein. |
