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Hewlett-Packard and the folly of the American managerial class

November 29, 2012

I have recently read in the newspapers that Hewlett-Packard, one of the US’s iconic technology companies continues to struggle economically. The latest calamity to strike the company was the decision to write off the $8 billion cost of the purchase of a company supposedly to bring new technology into H-P that would increase its competitiveness in an ever-changing market. Interestingly, the CEO of H-P, Meg Whitman not too long ago ran for governor of California claiming that an experienced business person would be better able to resolve the states economic difficulties that anyone else. She now finds herself not only unable to reverse the decline of the entity she manages but forced to admit in the case of current acquisition gone bad that she failed to do the due-diligence investigation before committing her company to take on that risk that even a neophyte governmental employee would have done.

Now I point this out not to comment on the wisdom of the California electorate nor on Ms. Whitman’s competence as a manager, but to speculate on why such a distinguished and innovative American technological powerhouse has fallen so low.

H-P is one of the poster children for the of the rise of Silicon Valley and America’s leadership in modern electronic technology. Beginning it the proverbial garage, H-P prospered moving from one innovative technological advance to another until it stopped. Why did it stop?

The innovation ended because at some point in its growth more and more trained managers from the best business schools in America like Ms Whitman and before her Leo Apotheker (Leo the pharmacist) and before the over-sexed Mark Hurd. Along with these highly trained business managers, the best accountants, financial analysts and attorneys were hired to join the management team. They discovered, as they discover in every innovative company they manage, a number of things that they knew would make the company better.

Among the first things they learned was that it was essential in order to make the company more successful that they needed to hire even more managers and the like and pay them even more money so that they could attract the best management talent and retain them. They realized this at the same time they realized that the experienced workers in the assembly lines, the technicians in the laboratories and the like could be hired for less money in other countries thereby saving the company money and making it more profitable. The first mistake that these highly trained and very expensive managers made was their failure to realize that they could save even more money for the company by out-sourcing their costly management jobs to low-cost jurisdictions. Nevertheless, they were certain with the cost cutting that had done they were going to be even more competitive in the market. But they weren’t.

The second thing these experts at running businesses realized was that it was cheaper to buy future innovation than to do it your self. So while the company’s in-house innovation efforts withered, they purchased company after company that had already spent the money on product development. They now were able with this newly acquired technology to become even more competitive. But they didn’t.

What about competition? They hated competition. It was risky and expensive they reasoned, so they decided to buy the competition where they could and this would make them more successful. They did and it didn’t.

It turns out that the buying of innovation and competitors has cost H-P more than $40 million over the last decade. Of that $40 billion, it should be noted that at least 15% went to Wall Street, accountants, consultants and lawyers to execute the transactions. What that means is that out of that $40 billion $6 never made it to making the company better. Did that make the company more profitable and competitive. I do not think so since during that same time period the company’s market value shrunk about 70%.

Imagine if instead the company did not need to attract all that managerial talent and instead spent that $40 billion of research, development and innovation and chose to compete rather than taking the lazy way out. And it was the lazy way out. You see only lazy people will spend whatever time it takes to figure out how to avoid doing the really hard work. In this case the hard work is to innovate, produce and compete.

This sad story is not a story about just one company. It is the story about how many companies operate in America today. No matter how many times Steve Jobs would have come back and forced the company to focus on innovation and competition the moment he left the management would go right back to seeking the short-term easy way out. Now that he has gone for good, Apple management seems committed to squandering his legacy and blaming it in everyone else, government regulation, changed competitive environment, wages, Obamacare or what have you.

Unfortunately, today in America all to often what passes for a successful company is one teetering at the edge between innovation and decline. Unless of course, the business is a fast food franchise or it drills for oil.

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