Marketing Memos

You can lead a company to market, but you can’t always make it think.

Founder and CEO leadership are hot topics this month as we see Steve Jobs stepping down as Apple’s CEO and HP appointing their CEO of the week. It is arguable that Jobs resurrected Apple from failed leadership and that HP lost its Way due to the same disease. Leadership – be it the valiant general in combat or a CEO on the battle field of the technology markets – is a very real substance and one unevenly distributed.

All organizations are groups of people who either run in random directions and thus impede progress, or who head in one direction and cause change to occur. Leadership is pointing everybody in the same direction. However, the degree of leadership required and the goals set by CEOs varies wildly from industry to industry. The CEO of an iron ore mining company sets very different corporate goals and provides vastly different leadership than the top dog at Intel.

High tech is one of the most dangerous leadership silos around. High tech invents things that have never existed to solve problems that were previously pervasive. To mold an organization to change the world through applied science requires articulating abstract visions, or establishing viable guidelines so others can be visionaries.

HP and Apple show two variations of tech industry leadership and lack thereof. Both companies once thrived and then faltered, with Apple regaining its vibe through leadership and HP not. HP had original mojo through a decentralized organization and the HP Way, a short and simple set of rules for guiding all employees and thus achieving Bill and Dave’s vision.  Apple is a more centralized operation, and one that receives hands-on visionary guidance from the top. Both systems work until the prime source of guidance disappears and is not replaced with leadership of equal or greater value.

The HP Way is now standard fodder for management school freshmen. The rules once told all HP employees how they would conduct themselves, addressing topics like trust, respect, integrity, achievement, teamwork, flexibility and innovation. The HP Way otherwise left employees alone to invent. This simple set of rules led to complex and intelligent thinking throughout HP, causing them to invent or refine products ranging from mini-mainframes to hospital heart monitors – complex rules would have killed such a diverse and decentralized company. More to the point, it provided universal leadership to employees in each department, across all product groups and in every country. The HP Way allowed people to invent technology toward common goals.

Until Bill and Dave were replaced by a string of interloper CEOs who used the HP Way for personal hygiene.

When Jobs left Apple, it fell on hard times. A Silicon Valley darling for a variety of reasons, Apple floundered like a prototypical headless chicken, for it was operating without one. Jobs is uniquely visionary, and often too ahead of the market as evidenced by NeXT. Yet when filled with his vision, Apple employees execute with astounding enthusiasm and fidelity. One reason Apple Stores are so popular is because the vision of providing competent help to customers has great appeal to anyone who survived a tech support call to India.

The point is that high tech innovations occur from individuals, be they founders of start-ups or cogs in corporate behemoths. Creating the right product in the right way thus requires either individual discipline or guidance through leadership. If you are managing more than ten people from the top, then you are in a leadership position. You have studied programming, electrical engineering, Chasm theory and maybe even Zen Buddhism. Now study leadership and how communicating your vision helps every employee reach your goals.

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Cisco CEO and Cheerleader John Chambers has a gift for understatement.

In a recent mea culpa of insight, Chambers declared that Cisco had “disappointed investors and confused employees.”  This is akin to saying nuclear bombs annoyed some Japanese during World War II.  As evidenced by the chart on stage right (click to enlarge), Juniper Networks has been soaring, the tech heavy NASDAQ has been rising, and even the leadership spasmodic Hewlett Packard has been doing better than Cisco in terms of share price.

And with little wonder.  Cisco, the once (and maybe future) king of network plumbing did what many large companies do, namely make the erroneous decision to diversify.  Diversification is not inherently incorrect, but it makes sense mainly for consumer products, markets where brand consciousness requires different brands for different products or price points, or where the primary market is completely tapped.  Cisco did not face a saturated network hardware market (if anything is growing out of control, it is data and its transmission).  Their brand was largely elastic throughout business networking, and perhaps even into consumer gear.

Which is why they decided to make servers (and compete against their former partners) and pocket video cameras.

Old adages exist for a reason, and such is the case with “stick to your knitting.”  Every company and most humans need a narrow scope of things with which to deal, be it products lines or children.  Too many of either leads to overload, confusion, a lack of focus and occasional temper tantrums.  Companies that successfully diversify are those who do it incrementally into adjoining segments or markets, where they can leverage their expertise and brands to completely conquer said markets.

The largest maker of high-speed, enterprise-grade networking gear did not need to make consumer video cameras (which Cisco now won’t).

Diversification is a C-suite decision, but marketing is always involved.  Sometimes marketing is the instigator, though their proper role should be the voice of reservation.  When a CEO begins mismanaging their minions with Bonaparte-style bravado about diversifying, marketing should question how this impacts the brand, how a marketing team will serve multiple markets and masters, and what this takes away from their core business and vision.  CEOs who can’t address those question in advance need bridles attached, and no organization in an enterprise is better at breaking horses than the marketing cowboys.

The burning branding iron of unemployment likely keeps them from objecting loudly … or at all.

The marketing lesson herein is that CEOs, determined to ever grow shareholder wealth, occasionally take the wrong road. Cisco could have edged into adjacent markets (especially into the ever expanding mobile markets) instead of extremes such as consumer cameras and home print servers (I have one by Cisco … it rarely works right). Marketing is the best speed bump available and needs to keep such mistakes from tanking share price.

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The client was slightly stunned to see our proposal for conducting a market research survey.  He blinked twice, signed the contract, and asked if the terms included surrendering his first born male child.

The good news is that we had no use for his offspring, and thus Junior was not part of the transaction.

CEOs from start-ups and billion dollar enterprises alike balk at market research.  There is always a cost, and unless the price is three digits or less, they often hesitate to commit … until I ask them what the cost of failure is, and the contract gets signed instantly.

The cost of failure fits nicely with our formula concerning market success.  The formal is beautiful in its simplicity, and reads:

P(s) = 1-P(f)

Or stated in English for those of your who forgot your college statistics class work, the probability of success equals one minus the probability of failure.  The elegant extension of this principle is that when you work toward reducing failure, the odds of succeeding automatically rise.  Likewise, the probable cost of failure can be easily estimated by taking the cost of an action (anything from a new promotional campaign to a start-up launch) and multiplying by the current state of ignorance, which is roughly analogous to the probability of failure.

The problem with committing to market research is that few people are certain about the need for it in one or another circumstance.  After all, in the realm of marketing, there are hundreds of variables.  The cost of achieving certainty among them all takes more money than Gawd has.  Likewise, perfect clarity is unnecessary – knowing any situation to a 65% level of knowledge is sufficient, because most competitors will likely have a 30% or less view into one or another market metric.

One process through which I drag clients is a marketing readiness review, whereby on a table of 51 strategic marketing elements we jointly identify how complete their knowledge and readiness are.  Any cell where they are less than 50% knowledgeable is an area where market research might be appropriate.

For start-ups, most of the cells score zero.

Interestingly, the more basic the knowledge, the more it affects other points of knowledge.  One’s estimate on segment sizes are hindered by a lack of knowledge about the total and addressable markets. Buyer expected outcomes from using a product are defined by market segmentation models.  The more primitive the information, the more items of refined clarity it affects.

The corollary is that if you don’t get the most fundamental marketing research right, everything else will be faulty and your probability of failure grows exponentially.

The marketing lesson is that market research is essential, but you don’t need to spend your entire budget to achieve perfect clarity on all aspects.  List what you know and don’t know, estimate the cost of failure for what you currently don’t know, then prioritize which bits of research are the most likely points of failure.  This will tip the success equation rapidly and help you make more money than Gawd.

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I love watching people fuss over false dichotomies.  Liberal/conservative, Republican/Democrat, Sane/Congress …

This week’s dubious duo are Innovators and Fast Followers.

In all industries, but in exaggerated form for high tech, there is a need to innovate.  Mankind was built through innovation that allegedly improved life (fire did improve living though Twitter remains debatable).  Many companies thrive on innovating while other lay in wait for innovation to occur and then compete through plagiarism.  It can (and should) be argued that Microsoft rarely innovated anything, but made a tidy living by hijacking innovations from CP/M, Lisa/Mac, WordPerfect, and other also rans.

Microsoft was the fast follower model to follow.

This is not to decry the innovators.  Apple grows consistently and has high stock price multiples not by dominating every market (aside from MP3 players) but from perpetually rethinking products.  Collective gasps were heard when they introduced the Lisa (the Mac’s antecedent) because it completely rethought the nature of user interfaces (and truth be told, Apple kinda swiped the idea from neighboring Xerox PARC, making Apple both an innovator and fast follower).  But collective yawns were also echoed by Apple’s innovative Newton.  Still, people buy Apple for quality engineering, intelligently designed UIs and an overrated coolness factor.

There are advantages and distinct disadvantages to being one or the other.  Innovators have first mover advantages, though this requires more marketing savvy than engineering prowess.  Apple makes a good living being first with the best and earning fat margins on 5-10% of a market (over the long run).  Fast followers have lower margins but substantially lower risk, allowing Apple-like companies to invent duds as well as dynamite.  Money can be made at both ends though the risk side clearly favors fast followers.

Late followers get nothing.

With the exception of the patent trap, whereby innovators may earn 17 years of monopoly status for their inventiveness, being a fast follower is the better business and marketing strategy.  Innovators assume R&D and market development risk whereas savvy fast followers learn from all the innovator’s mistakes, and have the option of improving upon the original concept.  They do so with far less capital, much short time-to-market and the benefit of someone else proving that a market actually exists.

The marketing lesson is really a business lesson.  With each method of earning market share, there are risks and rewards.  If you have little to risk, don’t.  Watch other companies as they innovate, listen to the social networks to see how they are doing it right and wrong, then start your move when their buzz reaches the point that a market has been clearly identified.  Let your competitors slave away and earn only the early adopter share while you keep expenses low and dominate the rest of the market.  Be like the Microsoft of the 1980-90s or the Google of the new millennia.

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“If you liked Hurd,” began the email from an HP employee, “Then you’re going to love Leo!”

Yes, it was sarcasm on his part.

Mark Hurd was a darling with Wall Street and a demon to HP employees.  Hurd did what imported CEOs often do, which is cut expenses by cutting employees and burning deadwood.  HP employees lived under unemployment fears but HP’s bottom line improved.  Some souls who still fondly remember Bill and Dave and a kinder, gentler and more stable HP didn’t much care for Hurd (or Carly for that matter).  Where as HP once stood for innovation and nearly family-style employee relations, it now more closely resembled Oracle in its ruthlessness.

So it surprised nobody in HP that Hurd landed at Oracle after HP auditors found a soft-core porn star on Hurd’s expense report.

What HP staffers and the larger tech and investment communities were surprised about was when Leo Apotheker – the former and suddenly ousted CEO of SAP – was selected to take Hurd’s place.  Leo oversaw SAP’s stumbling in the face of Oracle’s slash and burn acquisition spree, where they purchased most of SAP’s competitors.  Larry Ellison was on a mission to move from being an infrastructure software company making relatively low margins, to being a total stack company that sold everything from centralized applications to the solder joints on server mother boards.  Key though was the upper layer of the stack – applications, where fat margins and user lock-in reign.

Which explains, in part, Leo’s new job at HP.

Apotheker was quoted declaring that software is the “glue” that holds together          the different parts of the company.  Giving him the benefit of doubts, I’ll assume he was talking about IT consumers and not HP, which has never been known for software (some HP employees forcibly remove HP add-on software from their laptops because of the latter’s notorious instability, though the former are occasionally as unstable).  What IT software HP sells today is all infrastructure, though they dabbled in the past with apps (Slate/Word/Desk on their extinct HP3000 minis, AllBase in middleware, and other market losers).  Bringing a software maven into a hardware and infrastructure company indicates that HP’s board thinks software is essential to their future prospects.

No doubt Leo thinks the same way.

The problem is that HP’s software hole is huge.  They have a few components of the stack’s bottom, and Openview remains a darling of the network jockeys.  Yet HP has nearly nothing in the middle and certainly nothing on top.  Compare this with Oracle (who has all but completed their mission to have a complete vertical stack) and IBM who has had many software successes and acquisitions.  Yes, HP may have brought Leo on board to start backfilling HP’s empty software shelves, but they should have brought in Caterpillar instead.

Their direction is as admirable as it is audacious.  The higher up the stack you go, the more margin you earn and the longer the lock-in you have over customers.  Since IT customers still prefer having one throat to choke when possible, having a complete vertical stack increases hardware sales and generally makes good marketing strategy, one which Larry Ellison launched long ago and has now achieved.  This is why HP makes nearly 50% more in revenue per each employee than Oracle, but Oracle profits almost twice as much per employee.  That and Larry scares his employees so badly that they work 25 hour days just to avoid being placed on the rack.

Interestingly SAP earns more money per employee than HP and IBM and almost as much as Oracle.

Despite early rumors, it is doubtful that HP and SAP would merge (though HP has successfully merged with big companies before).  Such a significant and transatlantic marriage would require a significant degree of effort and delay, and then only bring HP into parity with part of Oracle’s application empire.  To remain competitive in the IT market and get the fatter margins HP’s board appears to crave, HP will have to acquire many best of breed solutions and orchestrate integration (which their EDS division will protest since custom integrations are a big chunk of their revenue base).  With a relatively paltry $15B in cash (Oracle has $24B and Microsoft $37B) HP has to choose acquisitions wisely and mergers that make sense from end to end (like Oracle’s acquisition of PeopleSoft and Sun).

Which may be the wrong strategy.

One thing HP got right long ago was the commoditization of the hardware market.  HP used to make several proprietary platforms that ran proprietary operating systems (HP1000/RTE, HP3000/MPE, HP9000/HPUX) but now they sell a lot of Linux-running x64 boxes.  Yes, there is room for super servers at the hub of a data center, but volume-wise, the world is commodity hardware and HP’s merger with Compaq helped them with that and dominating the x86 PC market.

This may well happen to software too.

To make a commodity out of enterprise server application software, you have to develop a solution that becomes de facto through one or more clear benefits.  Linux came to dominate server operating systems because it was ‘free’, stable and cross platform.  Nothing in the marketing playbook says this cannot happen to applications.  Already we see several open source applications making major dents in competitors.  SugarCRM continues to creep into offices, and other bright folks are integrating various open source suites for interoperability.  Oracle’s edge in top-tier enterprise applications could suffer the same way that Sun’s position in servers did as Linux and x64 servers eroded their competitive advantage.

HP could hasten the process, though odds are they won’t.  Leo Apotheker knows high-margin software and HP’s board picked him because of that.  But the alternative to going toe-to-toe with Oracle would be to eliminate Oracle’s income streams by enhancing, integrating and popularizing no-revenue alternatives to Siebel, PeopleSoft, EnterpriseOne, etc.  They could fork MySQL or even acquire EnterpriseDB and swipe Oracle database customers.  In short, HP could avoid planting their own fields and just burn Larry’s crops instead.

There is no marketing lesson because it is too soon to know with certainty what Leo Apotheker intends to attempt.  But we do know that HP has options, and it all depends on if they believe applications will become commodities as well as servers and operating systems and DBMSs.

If HP doesn’t, someone else will.

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