By Larry Gorkin
Managing Director, Stonebridge Consulting Group
When HP announced plans in August to exit the PC business and build a position in software, the market reaction was immediately negative. HP’s stock fell over 20% in a day. A few weeks later there was a new CEO. HP’s soap opera provides a great case study about the opportunities and challenges in choosing where to compete for growth.
Portfolio decisions about where to compete and invest can be powerful drivers of growth. But, without clear criteria and disciplined thinking, leaders can destroy value rather than create it. That’s the lesson from HP’s controversial plan to exit the PC business and build a position in software.
Broadly speaking, no strategy decision is more important than selecting the categories or segments a company will compete in. Category attractiveness is a basic driver of opportunity. Big fast growth categories present more opportunity than mature or declining ones. High margin markets are better than thin ones.
Still, category attractiveness does change, so successful companies regularly revisit these choices. Jack Welch famously unloaded GE’s small appliance business to invest in healthcare and financial services; that choice drove decades of high profit growth. Now GE is shrinking in financial services as it becomes less attractive. Corporate portfolios must stay aligned growth goals.
Of course, category selection is much more than just forecasting size and growth. In considering new segments, leaders need to analyze factors like the success requirements, internal skills, competition, and the costs and barriers to entry. Before leaving a market, companies need to model the strategy and financial implications overall, and for the customers and businesses it wants to keep.
And here is why HP’s PC -software announcement has generated controversy. To outsiders, it seemed to lack a thorough and rigorous evaluation of the complex issues in this decision. HP’s choice seems based on a simple judgement that software is more attractive than PCs. But, it’s not that simple.
In exiting PCs, HP seemed to ignore the value of its leadership position, and the business synergy with its printer and corporate hardware units. If PC profits are migrating to smart devices, wouldn’t HP be well positioned to participate in that growth? What sales synergy exists between PCs, printers, and servers? How will each business be impacted?
Similarly, there are fundamental questions about HP’s ability to compete in software. Sure it’s big, growing, and profitable. But, the enterprise software market is already dominated by major competitors like IBM, Oracle, and SAP. Does HP have the skills and resources to compete with these established players? What will it cost to do so?
In short, HP’s announcement failed to meet a simple “smell test”. HP seems to be giving up a profitable PC business in a category it leads, with the hope of building a software business in a market dominated by established players. It all seems too fast and easy. Sure enough, Meg Whitman has promised to revisit the decision as a first priority. It will be interesting to see how this plays out.
In the meantime, here are things you can do to avoid similar missteps and position your portfolio to maximize growth.
- Regularly Evaluate Your Markets— Leaders should comprehensively evaluate their categories yearly against clear measurable criteria. Every market should be rated on key factors like size, growth, profitability, and competition. Benchmark criteria should be set that trigger further discussion/planning when thresholds are crossed. Most changes in category attractiveness occur over time; on-going tracking allows thoughtful planning.
- Revisit Current Strategies First— Start any category review by first revisiting current strategies. A market size decline doesn’t necessarily indicate a segment is no longer attractive. Instead, it may call for a new strategy. For example, if margin is migrating to a particular segment, leaders may consider redirecting resources there. Maximizing a current business will most often be easier than entering a new market.
- Carefully Evaluate New Markets-– Leaders should use specific criteria to evaluate new categories. Size, growth, and profitability are only the first gate. Then, it is important to know how the requirements for success align with your capabilities. Competitive positions must be evaluated, along with the costs and barriers to entry. Finally, there are “build” versus “buy” decisions. Once all of that is known, leaders need to compare strategy scenarios to develop their path forward.
- Take a Portfolio Approach— Leaders should manage their business as a portfolio. Category attractiveness changes over time, as do the requirements for success. A good strategy will recognize these differences and manage investment and growth across them.
Succcessful leaders need to ensure they compete in attractive categories that can support their growth objectives. A comprehensive approach using fact-based analysis and disciplined thinking will ensure good decisions that create value.
Larry Gorkin is Managing Director of Stonebridge Consulting Group. The firm helps companies develop winning strategies that accelerate growth. Stonebridge serves industry leading companies in Technology, Financial Services, Health Care, and Consumer Goods/Services. Over his 30 year career, Larry has held senior leadership positions at Procter & Gamble, GE, MCI, and McKinsey & Company. He can be reached at 203-221-6400 or firstname.lastname@example.org.