Category: Management

WSJ writes how HP is willing to sell PCs at almost no margin:

“We think the PC business is strategic,” says Chief Executive Carly Fiorina. She says she is willing to allow the company’s $22 billion computer division to do little more than break even because PC sales help H-P make money on printers, consulting and consumer electronics. The company is content to sell PCs at “a very modest profit for now,” says H-P Chief Financial Officer Bob Wayman.

The result is the biggest threat yet to Dell, the PC industry’s most profitable company. Having acquired Compaq in 2002, H-P is using its size to slash prices, in an attempt to undercut Dell’s formula for gleaning profits in one of the nation’s most competitive markets. The challenge puts pressure on Dell’s earnings just as the tech industry is emerging from its prolonged slump and consumers are beginning to invest more in computers.

Still, for H-P, the strategy is a serious gamble. By cutting prices, the company earns less on each sale, leaving it with less of a cushion to absorb the inevitable shocks that roil competitive markets. H-P’s profit margins in its PC division haven’t exceeded 1% since the merger.

Dell continues to post solid profits; its operating profit margins of more than 8% are the widest in the industry. But its executives are complaining that H-P is subsidizing its PC business with earnings from other divisions, which to some suggests Dell is beginning to feel H-P’s heat.

There are only three companies that make big profits directly from PCs: Intel, Microsoft and Dell.

As I see it, the opportunity going ahead lies in providing software for a monthly subscription fee with thin clients available at costs-plus to drive consumption in the emerging markets.

Wired interviewed eBay’s CEO Meg Whitman. Excerpts:

In just the first quarter of this year, our users traded $8 billion. So annualized, they’re on track to trade $32 billion dollars. Our revenues this year will be just over $3 billion, so we’re a very large company. We think that the growth potential for the company is still very significant, and we look at it in three ways.

First is the U.S. business, which continues to grow at a 30 to 75 percent compound annual growth rate. And we believe that we have a big opportunity left here. In every category in which we have sellers, we have less than 5 percent of the total sales in that category. Collectibles — our most mature and oldest category — is still only about 5 percent of the collectibles business in the United States. So we should be able to move that up somewhat across all categories.

Second is international expansion. International is the fastest-growing segment of our business, and that’s because in virtually every country in the world, eBay is nascent. We’ve been there one, two, three, four years maximum. So we think we have a lot of growth potential, and this concept is as relative in Germany as it is in France, as it is in Korea, as it is in China. It’s universal. Trading is in the human DNA, and entrepreneurs like to be successful doing what they love.

The third leg of our strategy is PayPal. We bought PayPal about 15 months ago because it had become the de facto payment standard on eBay.com. PayPal’s strategy is to continue to be the standard on eBay.com, and then secondarily follow eBay’s footprint around the world. And then finally of course, PayPal has an off-eBay opportunity. If you have a website and you just sell on the Web, regardless of your affiliation with eBay, you can use PayPal to accept credit cards and accept payment electronically.

NYTimes writes about Dutch Auctions in the context of Google’s forthcoming IPO:

Google is going to use a variation on what is known as a Dutch auction, called that because it was created in the early flower markets of the Netherlands to sell multiple identical items. In the classic Dutch auction, a seller indicates how many items are available for sale and sets the minimum bid price.

Bidders indicate the number of items they want to buy and the price per item they are willing to pay. All winning bidders pay the same price per item – which is the lowest successful bid, called the clearing price. Those who bid above the clearing price, however, earn the right to buy the number of items they want, while those who bid at the clearing price have to divide the remainder.

Google’s shares would be sold in a modified Dutch auction because it has reserved the right to set the final sale price, the allocation of shares and other auction terms. It said in its public offering statement that its goal was to eliminate the first day “pop” in prices that was built into most initial stock offerings.

[A] potential problem with Dutch auctions is that investors have an incentive to bid higher than the fair value of a stock so that they can be assured of getting shares to buy. If only a few people bid high, they would still only pay the market clearing price determined by the vast number of presumably more rational investors, since the price would be set by the lowest bid. But if lots of investors take up this strategy, the price would be driven above sustainable levels.

Another factor, called the “winner’s curse,” can potentially lead to depressed prices after the initial offering. The top bidders may realize that they bid more than what other bidders believe the shares are worth. If the winners start to worry about the share price paid, they may sell shares immediately after the auction, causing a drop in the price. For more thoughtful investors, the fear of the winner’s curse could lead them to moderate their bids in advance – a move that might lead to lower prices in an auction than in a traditional offering in which the price is set by investment bankers.

Adds the Economist:

Paul Klemperer, an economics professor at Oxford University and a designer of Britain’s 3G auction, explains in a new book (Auctions: Theory and Practice) that the details of auctions can make all the difference. In essence, auctions can fail in two main ways: by setting a price that is too high, or one that is too low. The latter failure has been more common recently. Collusion between bidders can reduce the price paid, as happened in one American auction of radio spectrum in the 1990s. Alternatively, the costs of entering an auction can be prohibitive, as with one British television franchise. The government had imposed such high costs by requiring detailed programming plans that only one bidder bothered.

Given the large number of expected bidders and the relatively low costs, Google’s IPO runs a bigger risk of setting a price that is unsustainably high. That would be the result of what economists call the winner’s curse: high bidding by naive punters that allows them to win an auction, but only by overpaying.

Mr Klemperer says that Google needs to do more to save its auction from this fate. Ensuring that small investors have the same information provided to big investors would help. So would simply explaining to unsophisticated bidders how the Google auction will work.

One concrete idea proposed by Mr Klemperer is to start by auctioning a small fraction, say 10%, of the shares to institutions. This would allow more sophisticated investors to give their view of the fair price, before unsophisticated individuals place their bets. Another option is to hold an English (ascending-bid) auction in which institutional shareholders’ bids can be observed. Again, inexperienced investors could keep a close eye on what the smart money is doing, and adjust their bets accordingly. This could diminish the risk that over-eager punters bid up the price too high, which would put a damper on the use of such auctions in the future.

Seth Godin explains the difference:

Differentiation means thinking very hard about the market and your competitors and somehow making yourself different. Any rational person spending a fair amount of time with perfect information will have no trouble figuring out why you’re different.

Segmentation is a variation of that, but it involves breaking the audience into pieces you invent, and then differentiating yourself for that segment.

Both are selfish.

Both assume that people care about you.

Both don’t work the way they used to.

Used to be that you could buy enough ads and interrupt enough people to make this strategy work. No longer. The filters are too strong. People are too resistant.

You don’t create a purple cow by being different. You do it by creating something worth talking about!

The Economist takes a look at innovation in big companies, suggesting that “rather than chasing wonder new products, [they]should focus on making lots of small improvements:”

Blockbuster new products are harder and harder to come by, and big companies can do much better if they focus on making lots of small things better. Adrian Slywotzky of Mercer Management Consulting says that, in most industries, truly differentiating new-product breakthroughs are becoming increasingly rare.

William Baumol, a professor at New York University, argues that big companies have been learning important lessons from the history of innovation. Consider, for example, that in general they have both cut back and re-directed their R&D spending in recent years. Gone are the droves of white-coated scientists surrounded by managers in suits anxiously awaiting the next cry of eureka.

Indeed, says Mr Baumol, the record shows that small companies have dominated the introduction of new inventions and radical innovationsindependent inventors come up with most of tomorrow’s clever gizmos, often creating their own commercial ventures in the process.

But big companies have shifted their efforts. Mr Baumol reckons they have been forced by competition to focus on innovation as part of normal corporate activity. Rather than trying to make money from science, companies have turned R&D into an internal, bureaucratically driven process. Innovation by big companies has become a matter of incremental improvements within the processes that constitute daily operations.

Another factor to take into account is the fragmentation of markets. Once-uniform mass markets are breaking up into countless niches in which everything has to be customised for a small group of consumers. Looking for blockbusters in such a world is a daunting task.

NYTimes has a profile:

In just two and a half years, Mr. Jobs, Apple’s chief executive, has managed to take a well-designed hand-held gadget, add software connecting it to Macintoshes and Windows-based personal computers and convince the recording industry that he has found an elegant solution for ending its nightmare of digital piracy. In doing so, he has shifted the emphasis of Apple from what made it famous – hip, even lovable computers – to what he hopes will keep it relevant and profitable in the future: products for a digital way of life.

With roots both in Silicon Valley’s digital culture and the 1960’s counterculture, Mr. Jobs has long been an arbiter of what is cool in technology, much like a real-world version of a trend-spotting character from “Pattern Recognition,” one of the cyberpunk novels by William Gibson.

And, helped by his growing prominence in Hollywood through his second company, Pixar Animation Studios, Mr. Jobs has attained a level of influence over how life is lived in the digital age that is unmatched by even his most powerful computer industry rivals. “He is the Henry J. Kaiser or Walt Disney of this era,” said Kevin Starr, a culture historian and the California state librarian.

The iPod’s success is also the clearest indication that Mr. Jobs, if he is to successfully revamp Apple, will ultimately win not by taking on PC rivals directly, but by changing the rules of the game.

The Apple that is starting to emerge may be a harbinger. The company’s growth may no longer be defined by its PC market share, now a declining sliver of the PC industry, but instead by Mr. Jobs’s ability to create consumer markets.

Mr. Jobs, who says he has a 70 percent share of the market for legal music downloads and a 45 percent share of the MP3 market, sees the shift as sweet vindication. “We’re getting a chance to see what Apple engineering and Apple design can really do once we get out from underneath the 5 percent Macintosh operating system share,” he said.

for the first time the number of Macintosh computers it sold (749,000). At the same time, revenue for products other than Macintoshes reached 39 percent of the total of $1.91 billion for the quarter, more than double the percentage two years ago.

In creating the iPod, the iTunes Macintosh and Windows software and the iTunes music store, Apple has not just designed products; it has also designed a business system. That may help explain why, almost three years into Mr. Jobs’s foray into digital music, his major competitors are still playing catch-up, or, as in the case of Hewlett-Packard and Time Warner, have decided to ally with him.

Barron’s looks at Berkshire Hathway and likely successor to the “Great One”:

Berkshire’s Class A shares have broken out of a three-year trading range and fetch $93,000, up 10% for the year to date. The company’s business prospects look better than ever. Operating earnings, a record $3,531 per share in 2003, could approach $4,000 in 2004. Book value may exceed $55,000 per share by year end. And Berkshire is sitting atop $31 billion of cash, a reflection of Buffett’s reluctance to make major new investments.

Yet also on the minds of many attendees will be a less uplifting subject — the issue of succession. Buffett, who turns 74 in August, probably is the toughest act to follow in American business, due to his extraordinary talent and legendary success. He commands a company with $64 billion of annual revenue and $142 billion of market value, whose shares have risen 5,000-fold since he took control of what was then an ailing textile firm in 1965.

It is entirely possible Buffett still will be running Berkshire a decade from now. But in the event life has other plans, he is leaving less and less to chance. In this year’s shareholder letter Buffett wrote more about the succession issue than he has in the past, noting the “primary job” of the company’s board of directors “is to select my successor, either upon my death or disability, or when I begin to lose my marbles.” He added that the 11-member board continues to evaluate the “strengths and weaknesses of the four internal candidates to replace me.”

Who are these four candidates? The odds are Berkshire Hathaway’s next chief executive will be one of five top company executives: Joe Brandon, CEO of General Re, the largest insurance division within Berkshire; Ajit Jain, head of Berkshire’s lucrative specialty reinsurance operations; Tony Nicely, CEO of Geico, Berkshire’s fast-growing auto insurance division; Rich Santulli, CEO of NetJets, the leading provider of fractional ownership in corporate jets, and David Sokol, the CEO of MidAmerican Energy, an Iowa-based utility and the largest noninsurance division within Berkshire.

HBS Working Knowledge has an interview with Gerald Zaltman on his latest book “How Customers Think: Essential Insights into the Mind of the Market.” Excerpts:

Probing the unconscious mind of the consumer has tremendous value beyond advertising. For example, learning that a communications device or even a personal care product invokes deep thoughts and feelings about social bonding can be very helpful to R&D experts. In the case of a communications device, this suggests that tactile experiences of social bonding be “engineered in” through the design of how the product is gripped in the hand and in the choice of finish in the device’s housing material. In the case of a personal care product, colors and scents known to be evocative of social bonding experiences can be used. In both cases, the basic idea of connection is central to the product’s value proposition and becomes a more profound basis for developing marketing strategy than, say, technical superiority or long-lasting benefits. While the latter attributes are important, it is because they serve the deeper needs of connection or social bonding.

The insights offered by methods that probe the unconscious mind are relevant at all stages of the product life cycle. For instance, when introducing a radically new product, it is necessary to understand how consumers currently frame their experience of the problem addressed by the new offering. That is, no matter how radical a new product is, it will always be perceived initially in terms of some frame of reference. It is essential that this frame be understood, especially if it is an inappropriate one detrimental to early trial of the product. For a mature product, insights about the category or a specific brand can lead to modifications that will extend its life and sustain its economic value to the firm. One firm with a very “tired” brand explored consumers’ hidden thoughts and feelings and discovered a relevant, basic emotion that had been overlooked by all brands in the category. They were able to connect this emotion with their brand giving it a major sales boost. Other firms use the hidden treasures of the unconscious mind to identify new product opportunities. Using metaphor-elicitation techniques, firms providing farming supplies, home appliances, office systems, and beauty care have identified important unmet needs. R&D departments use information about the architecture of these needs to identify opportunities for new products and services.

Feed Wilson has asuggestion to those among us in the enetrprise software business:

The enterprise software business has been built on a simple business model – build a new software product and sell it to companies that will pay you for the increased efficiency that the software creates for them.

But its harder and harder to get companies to pay for software today. Theyve got a lot it in place already and they are paying more and more every year to maintain it. Plus theyve been burned by relying on small companies to deliver for them.

I dont believe that we have come anywhere close to addressing every problem that software and information technology can solve for businesses. But I am beginning to feel that we may be reaching a saturation point in terms of what enterprises can pay for software and information technology.

So what should we do about this? I think we should turn our customers into suppliers.

A technology that solves a fundamental business problem can be monetized in more ways than you might imagine at first blush. And the most obvious business model is often not the best one.

So when you are writing your next business plan, think long and hard who your best customer is and who your best supplier is. It might not be the ones you first think of.

He gives a good case stufy of Multex.

Another point to ponder: “Its not the obvious business model that often generates the most value. Its the company that figures out to get inside of this beautiful open system and expose hidden value that often wins the biggest.”

David Kirkpatrick interviews Tom Malone and writes about his new book “The Future of Work”:

[Malone’s] new book posits that the central transformative development of our time is the radically decreased cost of communications caused by the Internet, wireless voice and data, and cheap long distance, among other new technologies. It is all fundamentally changing the nature of work, Malone says: “This change may be as important for business as the change to democracy has been for government.” He stopped by the office the other day to talk about the book, published this month, and his ideas.

Malone sees a parallel between the evolution of human society and the evolution of business. “For millenia,” he says, “all human societies were organized as small, autonomous, egalitarian groups called bands. Then we saw the rise of bigger and bigger, more centralized societies called kingdoms. Only in the last 200 years have we seen the rise on a large scale of the third way of organizing human society-democracy.” Each of those stages, Malone says, can be explained by a change in a single factor–the cost of communication. In his view, writing is what enabled hierarchically organized kingdoms to arise. Printing led to democracy.

Likewise, he says, “until a couple hundred years ago businesses were still organized like bands. It was only when new communications technologies like telegraph and telephone and even the Xerox machine made communication cheap enough to coordinate larger groups of people that we saw the rise of the centralized corporation–the kingdoms of the business world.” I like the way this guy thinks.

So where are we now? It’s the revolution, he says. “Near the end of the 20th century, it became possible for the first time to exchange the detailed kind of information necessary to coordinate a business on a very large scale even as lots of individuals made decisions for themselves. When communications costs fall it becomes possible for vastly more people to be well-enough informed to make decisions instead of just following orders from their uniquely well-informed superiors.”

For most of our lives, Malone says, “the big message of business history was that getting bigger and more centralized was the way you succeed. But now you can have both the economic benefits of bigness and the human benefits of smallness.”

He cites all the small companies that now can sell around the country and the world via the Internet: “They’re no longer limited by being in a certain region. They can buy and sell anywhere.”

Here is an excerpt on Decnetralisation from the book on HBS Working Knowledge.