Wednesday, August 24, 2011

Innovation and Strategic Exhaustion

I write today about a beloved company - Hewlett-Packard, and all that it has meant to my life.  One of my first consumer electronic purchases was an H-P calculator, and as a young engineer fresh out of college we were regaled with the history of H-P:  born in a garage, during a depression, making excellent products.  The H-P story is in many ways the story of Silicon Valley writ large, or at least the story that used to be.

H-P represented the entrepreneurial story of two guys who decided to do it on their own, in a garage, developing great products, scaling up a company.  They built real products and delivered real value - not "eyeballs" or advertising revenue, but a solid business built on excellent products which created a lasting reputation.  But over the years, the company has lost its way, and become in many of its product and service lines a fast follower rather than an innovator.

I'll argue that it started with the acquisition of Compaq.  In this acquisition, H-P decided to compete with Dell and other fast growing PC manufacturers.  At the time, the decision was controversial, and now, as H-P seeks to divest some of its consumer hardware, it looks wrong-headed.  Rather than stake out a vision of what computing could be, Fiorina and others around her followed the consumer PC business, but didn't fully grasp Dell's model, which was far more efficient, or, eventually, Apple's model, which was far more profitable. 

Next, Mark Hurd entered the picture and started slashing costs, placing a premium on slimming H-P down.  From what I've heard, innovation and research took a back seat to cost cutting. Under Hurd, H-P acquired EDS to bulk up on computer services. Then, of course, Hurd left under less than optimal circumstances and Apotheker has taken over.  In less than six months H-P has announced and retracted a complete line of tablets, and switched its strategic course yet again, this time to follow IBM, Oracle and other "big system" software and service integrators.  Yet again, I suspect this is a following strategy that places H-P at the back of the line just as the trends lead to a different emerging reality.

This isn't a problem just for H-P.  Microsoft created and retracted an entire product line of smart phones.  Motorola, once the leader in handset development, is now split into two pieces and will be purchased by Google.  Many of our former innovation leaders have run up on hard times, and will seek to blame the economy, foreign competitors and fickle customers, when I think they should be examining their so-called strategies.  I think many of these larger firms suffer from what I'll call strategic exhaustion.

Many seem to have decided to avoid creating a clear strategy, or have decided to simply follow what appears to be the prevailing strategies of the current ascending firms.  Rather than break out simple innovation tools like trend spotting and scenario planning and carve off a path that is interesting and unique, and may solve customer needs or even create new customers, most seem content to follow what are already tired strategies and focus on cost cutting and right sizing. 

This strategic exhaustion can only lead to a few outcomes.  For the really large firms, like Microsoft, they will remain stagnant with little growth until they free up their smaller product teams where real innovation can occur.  Microsoft is "too big to acquire" and too stagnant to change, so only by freeing up ideas on the margins will it regain its momentum.  H-P and others like it, including firms like Nokia and Motorola, will cast about, seeking to acquire or be acquired, hopefully by others who have more energy, innovative spirit and vision.  Who knows if the Motorola/Google acquisition will pay benefits?  Will it be the Compaq/H-P merger of its day?  Finally, strategic exhaustion will lead those firms that are too small to acquire to reconsider their purpose, their place in the market and their strategies.  This re-assessment will most likely result in a flowering of innovation, because the firm will have to rediscover its focus, its purpose and its markets.  The other option is a slow withering away, gradually then suddenly slipping into irrelevance.

I've often argued that innovation happens in many companies once all other management initiatives are pursued and all other options are exhausted.  As more firms exhibit signs of strategic exhaustion, perhaps they'll rekindle their innovative spirit to identify a new purpose.  Perhaps they'll return to the garage, to base principles, to an original vision, to chart out a new direction and re-energize the organization, rather than simply follow the strategies of other, equally exhausted management teams.  Now, more than ever, innovation is the important management tool, not simply to generate new products or services, but to identify new purposes, new markets and new strategies. 
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posted by Jeffrey Phillips at 5:44 AM


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