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    Claus Schafhalter is executive level Management Consultant and owner of Sunogos - Change for the Better


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    • Strategic Change, Execution Blunder (Part 5) — Does Hewlett Packard Know What It Wants To Be?

    By Claus Schafhalter | October 19, 2011

    HP is the prover­bial Sil­i­con Val­ley com­pany: Con­ceived in a Garage in Palo Alto by Bill Hewlett and Dave Packard it grew into a multi­na­tional Infor­ma­tion Tech­nol­ogy pow­er­house. Along the way it shed impor­tant busi­nesses (its pre­ci­sion mea­sure­ment devices was spun off into Agi­lent), and it acquired major busi­nesses like Com­paq Com­put­ers and EDS, a huge IT ser­vices oper­a­tion. It also acquired smaller play­ers like net­work­ing spe­cial­ist 3Com and strug­gling mobile phone maker Palm.

    On the lead­er­ship side HP seemed to strug­gle to find the right leader for the IT giant. While Carly Fio­r­ina (CEO from 1999 to 2005) over­saw the merger with Com­paq, Mark Hurd (CEO from 2005 to 2010) acquired EDS and Palm. Leo Apotheker (CEO from late 2010 to Sep­tem­ber 2011) seemed to try to steer the HP tanker to a more ser­vices / Soft­ware com­pany. Apotheker him­self came form Ger­man Soft­ware giant SAP, where he was ousted as CEO report­edly because of major cus­tomer and employee dis­con­tent with his actions and leadership.

    At HP Apotheker took over when HP’s share price was in the mid for­ties and mar­ket cap was in the $80 Bil­lion area. Start­ing around March 2011 HP’s share per­formed poorly. How­ever, Apotheker’s moment came when he uttered that HP wild change strat­egy, will shed the PC-hardware busi­ness and con­cen­trate on Ser­vices and Soft­ware. The stock mar­ket reacted and within days HP’s value plum­meted from around $ 75 Bil­lion to about $47 Bil­lion. Nice job.

    Now, also the board reacted, Apotheker had to go (receiv­ing a multi mil­lion sev­er­ence pack­age), and ex-Ebay CEO Meg Whit­man took the reigns.

    So, what went wrong at HP? Is the sharp drop in cor­po­rate value Apotheker’s fault? Which role plays the board, and why is it that a CEO utters some­thing about divest­ing the Hard­ware busi­ness pub­licly with­out demon­strat­ing why it is good for stake hold­ers and nhow it will be done to not dam­age the corporation?

    Can  you see a pat­tern between Steven Elop’s “Burn­ing Plat­form” memo that sent Nokia into a tail­spin, Reed Hasting’s price increase and retreated Qik­ster spin off from Net­flix, and Leo Apotheker’s mus­ings to get rid of the PC Hard­ware busi­ness? How is it that these well paid CEOs destroy Bil­lions and Bil­lions of Dol­lars of share­hold­ers wealth overnight, and can stay on or get rewarded with a sev­er­ance pack­age many mul­ti­ples higher than the life time income of professionals.

    I will post a dis­cus­sion why it went wrong in these com­pa­nies in part 6 of this series.

    Claus Schafhal­ter, Man­age­ment Con­sul­tant @ Suno­gos

     

    Find the other install­ments of this series:

    Strate­gic Change, Exe­cu­tion Blunder:

    (1) Part 1 — Intro­duc­tion
    (2) Part 2 — What Hap­pened At Nokia
    (3) Part 3 — Net­flix’ Trou­bles
    (4) Part 4 — Net­flix Com­mits A U-Turn
    (5) Part 5 — Does HP Know What It Wants To Be?

     

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    Strategic Change, Execution Blunder (Part 4) — Netflix Commits A U-Turn

    By Claus Schafhalter | October 10, 2011

    U-Turn

    Qwik­ster is no more. In an abrupt change of strat­egy Net­flix announced on Oct 10th that they will give up on spin­ning off their DVD-by-mail ser­vice dubbed Qwik­ster, only a few weeks after they announced they would spin it off.

    Strate­gic mas­ter­piece? Well, you can look at it from two very dif­fer­ent perspectives:

    1. Great move! Net­flix heard that cus­tomers do not like the split, and Net­flix lis­tened to cus­tomers and stopped the spin off. It really shows that Net­flix is a cus­tomer ori­ented orga­ni­za­tion. Or
    2. Despa­ra­tion! Net­flix has no clue what they are doing, and after cus­tomers left in droves used the emer­gency brakes to res­cue what is left.

    In my opin­ion Net­flix did some very bad moves within the last few months:

    But why did they do what they did, and why did they do it how they did it? Read on in a fol­low­ing post in this series.

     

    Claus Schafhal­ter, Man­age­ment Con­sul­tant @ Suno­gos

     

    Find the other install­ments of this series:

    Strate­gic Change, Exe­cu­tion Blunder:

    (1) Part 1 — Intro­duc­tion
    (2) Part 2 — What Hap­pened At Nokia
    (3) Part 3 — Net­flix’ Trou­bles
    (4) Part 4 — Net­flix Com­mits A U-Turn
    (5) Part 5 — Does HP Know What It Wants To Be?

     

     

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    Strategic Change, Execution Blunder (Part 3) – Netflix’ Troubles

    By Claus Schafhalter | October 3, 2011

     

    Net­flix, the movie rental ser­vice, has been a con­sumer favorite and Wall Street dar­ling for a long time. Net­flix changed the way Amer­i­cans con­sume movies and Net­flix drove com­peti­tors out of the mar­ket with their sim­ple and valu­able busi­ness model. Cus­tomers man­age a queue of movies and TV episodes on their web­site, and Net­flix ships out DVDs to the customer’s home com­plete with a pre­paid enve­lope to send the disk back. They also intro­duced a stream­ing ser­vice where cus­tomers can watch movies and TV series on con­sumer devices using con­nected TVs, set top boxes, com­put­ers, tablets or smart phones.

    All for a flat fee with­out con­cerns to incur nasty late fees.

    As more and more cus­tomers signed up, Net­flix’ share price rose to a high of almost $300 in July 2011 valu­ing the com­pany at $15.8 Bil­lion. Who could stop Net­flix’ run?

    Appar­ently inside Net­flix’ cor­po­rate walls a new strat­egy evolved. Man­age­ment iden­ti­fied that the DVD rental busi­ness will be replaced by stream­ing con­tent via the Inter­net, and Net­flix needs to con­cen­trate on stream­ing ser­vices to ensure to stay in the lead. Net­flix’ DVDs-by-mail ser­vice seem to be a destruc­tion and might even hin­der the growth of the stream­ing library because most con­tent pro­vides price their offer­ings depend­ing on the num­ber of sub­scribers. There are cer­tainly other con­sid­er­a­tions for man­age­ment and board to pur­suit this strat­egy, for the pur­pose of this post it is suf­fi­cient to know that Net­flix came up with this new strat­egy and started to exe­cute on it.

     

    Mis­er­able exe­cu­tion of a sound strategy?

    In July 2011 Net­flix made a — for the pub­lic — sur­pris­ing announcement:

    They will price their ser­vice offer­ings for mail ser­vice (DVDs) and stream­ing ser­vice sep­a­rately and – in the process – hike the price for their ser­vices by up to 60% if the cus­tomer wants to keep both. Very lit­tle infor­ma­tion was given why they do that, in a press release they even tried to sell this as a poten­tial price reduc­tion. Net­flix’ Chief Ser­vice and Oper­a­tions Offi­cer released: “By bet­ter reflect­ing the under­ly­ing costs and offer­ing our low­est prices ever for unlim­ited DVD, we hope to pro­vide a great value to our cur­rent and future DVD-by-mail members” .

    What Net­flix did not expect was the firestorm of neg­a­tive reac­tions fueled by social media and entries on Net­flix’ blog. The dis­cus­sion was mainly about the 60% price hike for the com­bined DVD / stream­ing offer­ing, in a time when the U.S. strug­gles with an ane­mic econ­omy and stag­nat­ing incomes. Share­hold­ers did not like the announce­ment either and share prices started to decline. Later Net­flix warned that sub­scriber growth started to be lower than antic­i­pated and became even neg­a­tive. And share price accel­er­ated its downturn.

    Later Net­flix’ CEO released a let­ter to cus­tomers some­what “apol­o­giz­ing” for how they man­aged the infor­ma­tion flow about the plan changes. He also intro­duced that Net­flix will split off the DVD by mail ser­vice entirely into the new “Qik­ster” ser­vice, thus leav­ing Net­flix with stream­ing only. Again the reac­tion by cus­tomers and share­hold­ers was very neg­a­tive, and Net­flix shares plum­meted. All said and done Net­flix shares moved from $300 in July to less than $110 end of Sep­tem­ber 2011, destroy­ing more than $9 Bil­lion in share­holder value.

     

    Sound Stragey?

    Hard to say. Def­i­nitely it does not make much sense to send dig­i­tal infor­ma­tion stored on a phys­i­cal DVD by mail. Elec­tronic deliv­ery via the Inter­net seems to be the way of the future. How­ever, Net­flix has at least 2 problems:

    1. Tim­ing / Data Caps: Many con­sumers might not be ready to solely rely on their Inter­net con­nec­tions for enter­tain­ment pur­poses, and increased usage of the Inter­net for mul­ti­me­dia con­tent deliv­ery is run­ning into Data caps increas­ingly enforced by ISPs. There are very few prod­ucts avail­able that still allow unlim­ited data on wire­less phone net­works. Also, providers using cable or DSL have data caps. A lot of con­tent streamed from Net­flix’ servers bring cus­tomers close to approach these lim­its. It seems pre­ma­ture to bet the house on stream­ing only when a the deliv­ery chan­nel (Inter­net) is out of Net­flix’ con­trol and – worse – very often run by direct com­peti­tors like AT&T (uVerse) or Com­cast with their con­tent offerings.
    2. Con­tent: Net­flix stream­ing con­tent in gen­eral pro­vides TV episodes and older B movies. Lat­est movies are usu­ally not avail­able via stream­ing. These movies are usu­ally released on DVDs, which means for a lot of cus­tomers that stream­ing alone does not cover all the con­tent they wanna watch.

     

    Exe­cu­tion Blunder?

    Cer­tainly. The pub­lic out­cry fueled by social media, sub­scriber can­cel­la­tion, and col­lapse of share price are evi­dence that the exe­cu­tion of strate­gic change was mis­man­aged. What the most egre­gious blun­ders are, why I think they were made, and what man­age­ment could have done dif­fer­ently will be sub­ject of a later post in this series. But before I go there, I want to look at HP’s sui­ci­dal moves that lead to the fir­ing of their CEO a few weeks ago.

    Claus Schafhal­ter, Man­age­ment Con­sul­tant @ Suno­gos

     

    Find the other install­ments of this series:

    Strate­gic Change, Exe­cu­tion Blunder:

    (1) Part 1 — Intro­duc­tion
    (2) Part 2 — What Hap­pened At Nokia
    (3) Part 3 — Net­flix’ Trou­bles
    (4) Part 4 — Net­flix Com­mits A U-Turn
    (5) Part 5 — Does HP Know What It Wants To Be?

     

     

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    Bay Area Consulting Business Level Improves To 92

    By Claus Schafhalter | September 29, 2011

    Bay Area Consulting Business Level Index at 92

    The Bay Area Con­sult­ing Busi­ness Level Index (BA-CBL) came in at 92 for the week end­ing Sep­tem­ber 25th 2011. This is still in the “sub­dued busi­ness” area, where it has been stuck since May this year. How­ever, it is a nice improve­ment com­pared to last week’s read­ing of 82.
    A read­ing above 100 sug­gests enhanced busi­ness activ­ity, a read­ing below 100 sug­gests sub­dued busi­ness activ­ity for con­sul­tants and exec­u­tive level con­trac­tors in the Bay Area.

    As always, please keep in mind that the BA-CBL is exper­i­men­tal, and the weekly read­ing can swing wildly.

    Suno­gos and its affil­i­ates decline any respon­si­bil­ity if the index is used for any purposes.

    Claus Schafhal­ter, Man­age­ment Con­sul­tant @ Suno­gos

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    Strategic Change, Execution Blunder (Part 2) – What Happened At Nokia

    By Claus Schafhalter | September 26, 2011

    Nokia N9

    Nokia of Fin­land was at the top 2007. Sure, their mar­ket cap was even higher in 2000 at the cli­max of the tech bub­ble, but only 4 years ago Nokia out­per­formed any com­peti­tor in the mobile phone busi­ness. Over­all they lead the cell phone mar­ket and invented the smart phone. Their share price was around $40 per share, their mar­ket cap almost $150 Billion.

    From 2007 to 2009 Nokia’s share price went down to $10, mar­ket cap was about $40 Bil­lion. Obvi­ously there was a lot wrong with Nokia, most notably they mis­cal­cu­lated the impact of new entrants into the mar­ket, like Apple and Google. And they were way too slow to answer their new chal­lengers with com­pet­i­tive products.

    Con­se­quently the board decided to hire a new CEO, tasked to stop the melt­down of Nokia, its mar­ket share, its prof­its and its share price. In Sep­tem­ber 2010 Steven Elop, and ex-Microsoft exec­u­tive took the reign in Espoo, Nokia’s head­quar­ters near Helsinki. Elop started out stream­lin­ing Nokia’s strat­egy, promised to sim­plify devel­op­ment of the soft­ware run­ning their phones by using a cross-platform tool (Qt), and repo­si­tioned Nokia’s exist­ing offer­ing appar­ently strength­en­ing their strengths and address­ing their weaknesses.

    The stock mar­ket rewarded the new way with a steady increase in share value from about $8 at the low to almost $12 at the recent high in Feb­ru­ary 2011.

    But then some­thing happened.

    In Feb­ru­ary 2011 Nokia’s CEO announced a new strat­egy, com­par­ing Nokia’s exist­ing offer­ings to a burn­ing plat­form, and announc­ing – among other things – that Nokia’s exist­ing oper­at­ing sys­tems are obso­lete, and Nokia will focus on an oper­at­ing sys­tem devel­oped by Elop’s pre­vi­ous employer, Microsoft.

    The reac­tion of the mar­ket par­tic­i­pants was dev­as­tat­ing. Nokia’s share price lost about 25% imme­di­ately after the announce­ment, and a total of more than 50% within 6 months after the announce­ment. Nokia’s mar­ket cap crashed from about $44 Bil­lion to about $19 Bil­lion, a loss of $25 Bil­lion within 6 months.

    So, what is the prob­lem here?

    Is the new strat­egy flawed? Appar­ently the mar­ket thinks so. (And I do too, but this is beside the point).

    But for cer­tain the exe­cu­tion of the new strat­egy is deeply flawed.

    I will exam­ine the exe­cu­tion flaws in a fol­low­ing post, but before that please read about my other 2 con­tenders for mis­er­able exe­cu­tion of strate­gic change, Net­flix and HP.

     

    Claus Schafhal­ter, Suno­gos Inc.

     

    Find the other install­ments of this series:

    Strate­gic Change, Exe­cu­tion Blunder:

     

    (1) Part 1 — Intro­duc­tion
    (2) Part 2 — What Hap­pened At Nokia
    (3) Part 3 — Net­flix’ Trou­bles
    (4) Part 4 — Net­flix Com­mits A U-Turn
    (5) Part 5 — Does HP Know What It Wants To Be?


     

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