Blog > Category: Business
Posted by Bill George |
Filed in: Business
Originally published in the StarTribune.
What a difference a year makes!
A year ago Best Buy was headed for the unending troubles that have beset retailers like Sears, Kmart, Circuit City, J.C. Penney and Mervyn’s: storied histories followed by long-term decline of their brands.
Last April CEO Brian Dunn resigned over allegations about a relationship with an employee. However, Best Buy’s problems went beyond Dunn’s conduct. Its same-store sales were declining and its stock price had dropped from $45 to $25. Security analysts were predicting Best Buy’s ultimate demise, referring to it as “Amazon’s showroom.”
How did Best Buy get back on track while overcoming a rupture with founder Richard Schulze? Let’s look beyond the headlines at the leaders involved.
Dunn’s resignation was just the beginning of Best Buy’s troubles. In May, Schulze stepped aside as chair for failing to disclose allegations about Dunn, and later resigned from the board, threatening to take Best Buy private. Meanwhile, interim CEO Mike Mikan was preparing a plan to preserve Best Buy by closing stores and cutting costs. This upset Schulze as he feared “his baby” would be dismantled.
Schulze countered in August with a preliminary offer of $26-$28 per share to take Best Buy private and bring in his own management team led by former Best Buy CEO Brad Anderson. Wall Street seemed skeptical whether he could raise $8 billion to $9 billion for the buyout. Meanwhile, Best Buy’s 170,000 employees, customers and shareholders wondered whether the retailer had a future.
Things changed dramatically in September when Carlson CEO Hubert Joly was elected CEO. Joly left the CEO post of Carlson to take on dual uncertainties of Best Buy’s ownership battle and unclear strategy. A brilliant strategist and astute observer, Joly recognized that Schulze would be his No. 1 shareholder whether BBY was public or private. He reached out to Schulze to engage in discussions, only to be rebuffed at first.
Joly recognized Best Buy couldn’t just cut costs or return to its past. Online retailing was here to stay and Amazon’s threat couldn’t be ignored. More important, Best Buy’s employees, customers and shareholders needed light at the end of the tunnel.
With Christmas approaching, Joly announced his “Renew Blue” strategy: a balance between retail and online strategies and in-store matching of online prices. His ace in the hole Amazon couldn’t match: the Geek Squad to help customers set up their home electronics. Joly also reshaped his leadership team to fit the new strategy, replacing Dunn’s team with Shawn Score to lead retail, Scott Druckslag to spearhead online, and Sharon McCollam as CFO.
Best Buy’s shares continued to fall to a December low of $11.29, as investors didn’t believe Schulze could make a fully financed offer, nor did they think Joly could turn around Best Buy. In late December, Schulze and the Best Buy board agreed to extend his deadline for two months. Meanwhile, Joly continued to reach out to Schulze.
In January, Joly announced good news: Retail sales didn’t decline during Christmas as expected, and online sales climbed 10 percent. The bleeding was stanched, and the turnaround underway.
Meanwhile, discussions between Schulze and Best Buy continued, leading to the agreement announced March 25: Schulze became chairman emeritus as Anderson and former COO Alan Lenzmeier rejoined the board, representing Schulze’s 21 percent stake. Joly’s role as CEO was cemented. To reinforce Schulze’s newfound confidence, Joly on April 5 announced a strategic partnership with Samsung to install boutiques in Best Buy stores, giving Samsung a showroom to compete with Apple stores.
While Best Buy still has a long way to go, the road ahead is now clearer. From their December low, Best Buy shares have more than doubled to $26, so Joly can focus all of his energies on making this turnaround successful.
This outcome is far better than most anticipated. Credit Schulze for his deep commitment to Best Buy, rising above wounded pride, while letting Joly run the company. Also credit Anderson’s role as honest broker, and Best Buy’s board for hiring Joly and working toward equitable solutions. The real hero here is Joly, who recognized what was needed to turn the business around and find a way to reach an accommodation with the founder — certainly not easy tasks.
In the end there are no losers here, only winners. Enlightened leadership is transforming a great retailer and preserving this bedrock of the Twin Cities. Other companies threatened by rapid shifts to online and mobile would be well advised to learn from Best Buy’s experience.
Posted by Bill George |
Filed in: Business
Earlier this month I wrote a blog recommending Whole Foods founder John Mackey’s new book, Conscious Capitalism, as the most important book of the year, perhaps the decade. That's why I wrote its Foreword.
As the book is hitting the business best-seller lists, some people have pushed back because they think John Mackey is anti-union. Let’s take an honest look at what he actually believes:
- “While we believe that the best approach is to avoid the need for unions in the first place, businesses that already have labor unions should strive to engage with them constructively rather than viewing them as adversaries.” He cites Southwest Airlines as “a great example of a company that has had a predominantly positive and win-win relationship with its labor unions.” As Herb Kelleher, former CEO of Southwest Airlines, said, “I just treated them like human beings.” This is what I have always tried to practice in dealing with unionized and non-union employees.
- Whole Foods is a role model for treating its employees well. They are highly motivated, fairly paid with incentives, and have excellent health care and benefits. Walk into any Whole Foods store and talk to the first-line employees, as I have, and you immediately perceive they take great pride in their work and the Whole Foods mission to help people eat healthy foods.
- Not convinced? Then buy John’s book and read Chapter 11, page 157. There he says, “There has been a long history of adversarial relationships between companies and unions. These conflicts usually have been very harmful over the long term to all the stakeholders of the company, including unions and the team members (that is, employees) they represent. To fully flourish, companies must evolve to form win-win partnerships that create value for all stakeholders. This requires the leadership of the company and the union to both become more conscious and adopt a spirit of cooperation and partnership.”
- He goes on to note that unions grew 100 years ago in response to poor working conditions, saying, “There is no question that labor unions primarily came about because of the failure of businesses to care about their workers as human beings.” In my experience, management often gets the union it deserves. If it doesn’t treat its people well and pay them fairly, then employees will unionize and often engage in “win-lose” tactics to force better treatment. On the other hand, if employees are well treated and paid fairly, they do not feel the need for a third-party to represent them.
- Mackey observes, “private-sector union membership peaked at 36% in 1945 but has since declined to 6.9%.” My observation about this decline is not that employees have dropped out of unions or that companies have broken up the unions. Rather, the “win-lose” approach to collective bargaining has caused both companies and entire industries to go out of business. This pattern started with the steel industry, spread through shoes and textiles and then to airlines and automobile companies and their unionized suppliers, as well as some major retailers. Meanwhile, emerging industries, such as computers, semiconductors, IT, pharmaceuticals and medical technology, treat their employees so well that they do not feel a need for a union.
- Contrast this situation with Germany, where employees have “co-determination” with management and the two have pursued “win-win” solutions that benefit both sides and have enabled German companies in the chemical, automobile, auto parts, machine tools and high tech products to become world leaders in spite of the high cost of hourly labor.
- Mackey concludes his rationale about employees by arguing, “A conscious business knows that treating its people well is the right thing to do; it does not need to be coerced into doing so. Unions simply aren’t necessary if a business operates with a stakeholder philosophy and if team members are seen as important stakeholders who should be well compensated, happy, and flourishing in the workplace.”
I find these statements compelling and inspiring. Collectively, they describe a philosophy that is identical to the one we followed at Medtronic. The company's bedrock philosophy is to have employees whose loyalty is to the company and the patients Medtronic serves, and who have a sense of well-being because they are well paid, fairly treated, and have “a means to share in the company’s success.”
Posted by Bill George |
Filed in: Business
During the World Economic Forum, I had the pleasure of participating on a panel on “The Moral Economy” with Mary Robinson, former UN High Commissioner for Human Rights, Jim Wallis, founder of Sojourners, and two outstanding CEOs. Here are some quick takeaways from the discussion:
- Corporations are not about conflicts between investors and societal needs. Their responsibility is Creating Shared Value – a courageous concept promoted by my colleague Michael Porter. “CSV” rebuts Milton Friedman’s doctrine that companies should strive solely to maximize shareholder value.
- Corporations are chartered by society, and so fundamentally they must consider their impact on society. They also have different stakeholders too: customers, employees, investors, government, labor unions, suppliers, and the public. If they “value maximize” to one group (investors) then they destroy the ecosystem they depend on in order to remain competitive.
- Jim Wallis and I both commented that the best way to transcend a system where the corporation is navigating the interests of the different stakeholder groups is through establishing a powerful mission. At Medtronic our mission is to restore people to full life and health. We went from restoring 300,000 new patients per year to 10 million people today.
- Carlos Danel at Compartamos told us that they have set up an internal report card for how they manage metrics that may create tension, such as their value of “transparency to customers” and economic indicators like profitability.
- Similarly, Jonathan Reckford, CEO of Habitat for Humanity, asked a question from the audience about balancing profit versus consumer affordability, particularly in financial services. Each institution has to balance these objectives, but it is more important to realize this is not zero-sum. Through focusing on a powerful mission, we can transcend tradeoffs and actually create more value for each stakeholder group and society as a whole.
- Transcending these individual interests is the work of great leaders. Leaders must align the company around a powerful mission. They must reinforce that mission through measurements and compensation. They must also have confidence to push back on Wall Street, when it has short-term needs (EPS growth) that are incompatible with the long-term health of the company.
Several big themes emerged during the dialogue, including the fact that we have a broken social contract, the need for business to treat each person with respect, and the need to seek out ways to promote the common good through our institutions, including business.
On my part, I asserted that any company that only focuses on creating shareholder value will self-destruct. General Motors, Kodak, K-Mart, and Sears Roebuck all lost their way. They didn’t create shared purpose and values. Leaders cannot run a company just with rules and regulations; instead, they must bring them together around a sense of shared purpose and values. Then they have to align the incentives to reflect these needs.
Posted by Bill George Staff |
Filed in: Business
By Ashlee Vance and Aaron Ricadela for Bloomberg Businessweek on January 10, 2013
On Jan. 16, Hewlett-Packard (HPQ) plans to hold a ribbon-cutting to show off an overhauled customer meeting center at its headquarters in Palo Alto. A year in the making, the complex creates a striking first impression. The off-white 1980s-vintage entryway has been updated with an ultra-modern look—lots of open space and blue lighting. Peer through the floor-to-ceiling glass walls, and you see that the space has been rebuilt around an old, bending oak tree in the middle of a courtyard: William Hewlett and David Packard planted it there back in the 1960s. “Without overstating things, this is symbolic of the rebirth of Hewlett-Packard anchored by the foundation of that oak tree,” says Meg Whitman, who works in a cubicle in the same building.
Whitman, HP’s fourth chief executive in two and a half years, is eager to project calm. She tries to have a swim each morning at a public park near her home before heading to the office. In person, she can be playful, dancing in her chair while explaining the country music-themed ringtone on her phone. For the most part, though, she’s direct about her past and HP’s future.
People outside Silicon Valley may know Whitman best for her short-lived political career. After a successful 10 years as CEO of EBay (EBAY), she made an unsuccessful run at the California governor’s office in 2010. She argued with a former housekeeper in the press about how she treated the help and whether or not Whitman knew she had hired an undocumented worker. The squabble was a final kick to the head for a struggling $150 million campaign, but Whitman says she learned a few things about resolve from the experience. “Running for political office was the hardest thing I have ever done,” she says. “When things seem challenging here, I go back to that.”
Things are challenging at HP—more, perhaps, than at any time in its history. Customers are buying less of two of HP’s most important products—PCs and printers—while the company has amassed debt and laid out billions on acquisitions that haven’t worked out. Wall Street analysts have kicked off the New Year by saying that Whitman ought to break up the company. Since August 2010 the company has lost 70 percent of its share price and close to $68 billion in value. Despite being a component of the Dow, HP currently is worth $29 billion, half a billion or so less than Carnival Cruise Lines (CCL), which has roughly one-ninth the revenue. “You just wonder how HP can possibly fall so far so fast,” says William George, a professor at Harvard Business School and board member of ExxonMobil (XOM), Goldman Sachs (GS), and the Mayo Clinic. “You look at HP’s share price and think, ‘Are you kidding me? That’s all it’s worth?’ ”
It’s true that HP has a collection of now commoditized businesses such as PCs, servers, and printers, and that its products look dated in some areas. But many of these businesses remain cash machines, with HP generating more than $12 billion in operating income a year. The disarray at the top of the org chart, though, has just been too much. “This is one of the great corporate destructions of all time,” says George. “They will continue drifting and disappointing their shareholders unless they’re ready to make some really hard decisions.”
Whitman says she’ll make them, but needs time to really change things. “Five years,” she says. “Some people don’t like that answer.”
Before HP, no one had heard of inventing things in a garage and changing the world. “HP is the model for the idea that as a startup you can become one of the biggest and most important companies,” says Leslie Berlin, the project historian for the Silicon Valley Archives at Stanford University. “It’s an idea that’s still vitally important for the Valley.”
Through the years, HP has shifted—not always nimbly, though usually successfully—from producing scientific tools to calculators to PCs to printers to data center gear. Hewlett and Packard mastered the balance of spending enough on R&D to come up with new products, while making lots of money on the old ones.
Along the way, HP crystallized many of the mores of Silicon Valley’s business culture, creating a casual office environment run by engineers, with workers sharing in the company’s performance. “This was a company founded by good men with good employees that built good products,” Berlin says. “It functioned as sort of the moral core of the Valley.”
The roots of HP’s decline go back at least to the 1990s. Carly Fiorina, Mark Hurd’s predecessor and the first outsider hired for the CEO job, spent her tenure doing away with what she saw as stodgy management principles baked into HP’s DNA—such as an abhorrence of large-scale layoffs—that were slowing it down. In 1999, HP sold Agilent Technologies (A), the electronic instruments division closest to HP’s roots.
Two years later, after an acrimonious shareholder battle between Fiorina and Bill Hewlett’s son Walter, HP bought Compaq, the huge personal-computer manufacturer. That deal gave HP great heft but sapped it of a cohesive corporate culture and set it on the path toward becoming a slave to the supply chain rather than a company obsessed with invention. Fiorina was fired in early 2005 after she missed Wall Street’s numbers one time too many; it was under her watch that HP turned into a misfiring conglomerate and introduced the high-level intrigue that has plagued its leadership since.
Most infamously, members of Fiorina’s board leaked information about their meetings to reporters, and company directors then proceeded to spy on HP employees and reporters to figure out who had done the leaking. HP “was considered a bit of a model board for a long time,” says Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance. “When Carly came in, that changed.”
What HP could have used in March 2005 was a unifying principle, if not a return to its foundational identity. What it got was Hurd. A suit-wearing, Baylor football-loving, foul-mouthed alpha male, he had been running NCR (NCR) in Dayton for two years when he took over at HP. Hurd had done well at NCR, which made cash registers, automated teller machines, and, at the time, data warehousing software that the world’s largest companies used to keep track of and analyze their merchandise, customers, and sales.
Few people beyond the Wall Street analysts covering the company had any idea who he was. It would turn out that Hurd was practically a human cash register: Flash a spreadsheet in front of him and he would remember every figure on every line. HP had a dizzying array of businesses—low-profit PCs, printers it virtually gave away to sell ink, high-end supercomputers, software sold via multiyear licenses, and a services arm that charged by the hour.
In short order, businesses such as PCs and servers that often lost money became very profitable. Hurd hit Wall Street’s revenue numbers in 21 out of 22 quarters and increased profits 22 quarters in a row. HP’s revenue rose 63 percent, while its share price doubled. “Mark Hurd was cutting costs and doing a good job of it,” says Jayson Noland, an analyst at Robert W. Baird. “But you can’t cut costs forever, and investors wanted to see growth.”
According to interviews with dozens of former HP executives—almost all of whom refused to speak on the record to avoid alienating the company, but who are fans of Hurd—he came close to operating HP with a founder’s authority. He was for all intents and purposes the CEO, CFO, COO, and head salesman. “Within 30 to 45 days of Mark joining HP, there was not a single person at HP that could say that he had not been affected by Mark in some way,” says Sandeep Johri, a former vice president at the company. “They might not always have been happy about the effect, but they had felt it.”
Any request for outside consultants had to pass Hurd’s desk. HP went from spending about $100 million a year on firms such as McKinsey and Bain & Co. to almost nothing. A yearly bonus system got broken up into quarters; employees who were used to sharing a bonus pool were now meticulously and frequently ranked and rewarded based on their achievements. Hurd called for the lowest 10 percent of performers to be fired each year. He also had all the company’s executives interviewed and then analyzed by Heidrick & Struggles (HSII), an executive recruiting and talent evaluation firm, and personally reviewed the assessments.
If sales of a certain type of printer slowed, the person in charge of the product soon received a brutal, curse-filled reprimand from Hurd. If real estate costs were out of whack in Vietnam or a currency shift in Brazil was hurting server margins, he knew about it. One executive recalls Hurd discovering 715 people in San Diego working on tens of thousands of printer drivers and getting the team pared down to 64 people and a handful of drivers. “It’s hard to believe that in a company of 300,000 people one guy can have that much influence, but he did,” says Johri.
Whatever Hurd’s influence, HP’s board didn’t consider him indispensable, and forced his resignation in August 2010. The board had learned of a complaint sent by a former marketing contractor named Jodie Fisher that accused Hurd of sexual harassment. Hurd denied the allegations and recoiled at the notion of making the complaint public, while a handful of board members accused him of trying to obfuscate his relationship with Fisher. “The board recognizes that this change in leadership is unexpected news for everyone associated with HP, but we have strong leaders driving our businesses, and strong teams of employees driving performance,” HP director Robert Ryan said at the time. An HP investigation into the matter unearthed e-mails between Hurd and Fisher that undermined her harassment claims. HP’s board threw Hurd out anyway.
Three days after he’d resigned as CEO under pressure from the company’s board of directors, Hurd received an e-mail from Steve Jobs. The Apple (AAPL) founder wanted to know if Hurd needed someone to talk to. Jobs had lived through a similar experience decades earlier when Apple’s board turned on him, an analogy Hurd and Jobs’s mutual friend and Oracle (ORCL) CEO Larry Ellison was quick to draw, condemning Hurd’s ouster as “the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago.”
Hurd met Jobs at his home in Palo Alto, according to people who know both men but did not wish to be identified, compromising a personal confidence. The pair spent more than two hours together, Jobs taking Hurd on his customary walk around the tree-lined neighborhood. At numerous points during their conversation, Jobs pleaded with Hurd to do whatever it took to set things right with the board so that Hurd could return. Jobs even offered to write a letter to HP’s directors and to call them up one by one.
Over the previous five years, Hurd had built HP into the largest technology company in the world; sales in 2010 were $126 billion. Shares were on a tear, and profits kept rising. Yet Jobs told Hurd and other friends that he thought the board would unwind HP’s progress and send the company spiraling into chaos.
By offering Hurd counsel, Jobs wasn’t merely lending a friend psychological support. Rather, he was going to bat for the legacy of Bill Hewlett and Dave Packard. A healthy HP, Jobs urged, was essential to a healthy Silicon Valley. “It’s the founding company of the Valley,” says Bill Campbell, the chairman of Intuit (INTU) and an Apple board member. “You don’t want to see it go away.”
Jobs ultimately could not pull off a reconciliation between Hurd and HP. He passed away a little over a year later, but lived long enough to see his prediction borne out. A couple months after Hurd and Jobs talked, HP’s board picked Léo Apotheker as its new chief and tapped Ray Lane as the new chairman. Lane, a member of Silicon Valley’s old guard, took on a major role in restructuring the company—and has served as a constant during HP’s implosion.
As its fortunes have diminished, the new CEOs have tended to blame Hurd. He fired people, got rid of office space, eliminated benefits, and asked employees to do more with less quarter after quarter. The company, in this version of events, had become lean to the point of emaciation. By the end of Hurd’s tenure, HP’s internal technology systems were antiquated, and the company had no attractive products to offer in high-growth areas such as mobile and cloud computing. Moreover, morale had suffered as talented employees were culled via the mandatory ranking system, and top executives found Hurd to be less receptive to new ideas. While many of these criticisms have the ring of truth, they fail to capture why HP’s prospects got so much worse so quickly after Hurd left.
The impression that many people seem to have is that HP’s sales fell off a cliff because it made inadequate products. Not so: HP posted revenue of $126 billion in Hurd’s last year and $120.4 billion in 2012. It remains the dominant seller of corporate computing products in the world. “I see them looking more like a junior IBM (IBM) situation,” says Chris Bertelsen, chief investment officer at Global Financial Private Capital in Sarasota, Fla., which has $1.8 billion in assets under management and has been buying HP stock. “Meg could get this going,” he adds, underscoring that HP’s biggest challenge hasn’t been its core businesses, but its leadership. The company’s struggles are compounded by a debt-laden balance sheet. “It looks like the darkest hour now with the cash issues and the stock down,” says Ed Zander, the former CEO of Motorola. “I think it will survive, but the question is whether HP will be relevant again.”
As Jobs was advising Hurd to patch things up with the HP board, Larry Ellison, Hurd’s friend and tennis buddy, offered him a powerful platform to exact his vengeance. One month after Hurd departed HP, Ellison named him co-president of Oracle, an HP rival in the data center software and hardware business. (Hurd declined to comment for this article. Ellison did not respond to requests for an interview.)
When Hurd left, HP tapped CFO Cathie Lesjak as its interim chief executive officer. She had no aspirations to be CEO, though a number of HP division heads did. In the background, Marc Andreessen, the Netscape co-founder turned venture capitalist, began exerting more influence in his role as a board member and started a hunt for the company’s next leader. Lesjak assured investors and the press that HP would maintain the financial discipline imposed by Hurd, while looking for a replacement who understood software development and sales, and would encourage research and development. HP would stay lean and mean while growing in higher-profit areas and demonstrating more innovation. Instead, a new set of baffling moves followed.
First, Lesjak raised the company’s guidance for the upcoming quarter by about $500 million. Two weeks later, HP kicked off a bidding war with Dell (DELL) for the storage company 3PAR; it ended up paying $2.35 billion. Ten days after that, HP’s board approved a $10 billion share buyback. Following this flurry of activity, HP hired Apotheker as its new CEO and named Ray Lane as a new board member and executive chairman of the company.
Apotheker had spent decades at SAP (SAP), one of the world’s largest software makers, but had recently been let go after a short stint as CEO. Lane is known as an enterprise computing Mr. Fixit. During eight years at Oracle in the ’90s he worked alongside Ellison, helping to repair relationships with customers and imposing discipline on that company’s freewheeling sales culture. When he and Ellison had a falling out, Lane left for Kleiner Perkins Caufield & Byers, one of the Valley’s premier venture capital firms. The Apotheker-Lane combo signaled a shift away from hardware toward the higher-margin realm of business applications.
Apotheker started work in November 2010. In his first month as CEO, he once again hiked HP’s sales forecasts, only for HP to later miss the numbers and begin a pattern of disappointing Wall Street. Meanwhile, Apotheker got teased in the press for not even being in the U.S. to run HP; he was on a global “listening tour,” speaking to customers and HP employees, the company said at the time—not, they insisted, trying to hide from a subpoena to appear in a California lawsuit between Oracle and SAP.
Internally, Apotheker did not make many friends. About half of HP’s executive vice presidents had been competing for his job, and former executives say he did little to reach out and win them over. There were other personality issues, too: Apotheker’s aloof demeanor and his seeming reluctance to dig into HP’s operational minutiae. As one high-ranking former executive in the services business recalls, at his first meeting with Apotheker—to provide the lowdown on the services business—he and a dozen people gathered in a conference room to hear the presentation, only to watch as Apotheker nodded off. The group waited uncomfortably for about 15 minutes. The CEO woke up and, to the gathering’s collective astonishment, said he wanted to move quickly past the financial details of the business, in order to talk about less specific customer satisfaction initiatives. Apotheker’s spokesman Sean Healy responds: “His typical workweek lasted 90 hours, visiting and researching sites long ignored by Palo Alto. With this schedule, it’s possible he drifted off a minute in one of what was hundreds of reviews he attended, in a bid to reorient HP’s long-term focus to metrics behind the financials, such as client satisfaction and product performance.”
Former executives recall how quickly HP returned to its free-spending, pre-Hurd ways. Apotheker dished out companywide raises and invited back the consultants. In part because of the circumstances of Hurd’s departure, many acted as if things he had done needed to be unwound. Apotheker, the former executives say, approved just about any plan if people described it as something Hurd had resisted.
By March 2011, Apotheker had been at HP for four months and finally held a press conference to lay out his plans. HP, he said, would install webOS, the mobile software made by Palm, across its PC and printer line, as well as on all new mobile devices. The company would also make a bold entrance into cloud computing, Apotheker said, even though it had no products at the time to do this.
Five months later, in August, Apotheker abandoned the Palm software plan, and the company announced it would be getting rid of its smartphone and tablet technology. HP also announced that, after being advised by McKinsey, it was considering selling off its $40 billion-per-year PC business. Then it lowered its earnings forecast for the coming quarter. And it was going to acquire Autonomy, a software maker that mines corporate data for legal and regulatory compliance purposes, for $10 billion, or 10 times its annual revenue.
The week of the announcements, Apotheker and his team held nonstop meetings to discuss the plan. At one, communications director Bill Wohl and a public-relations consultant named Joele Frank warned Apotheker that all these shifts would generate a big drop in the company’s stock price and a storm of negative press. Apotheker charged out of the meeting, came back to his office, and threw a chair at Wohl, adding that he didn’t ever want to see Frank in front of the board again, according to one person who was in the room. Apotheker spokesman Healy, who says the chair was more shoved than thrown, responds: “The passage of time clearly is directly related mathematically to exaggeration level.”
One month later, Apotheker was fired and replaced by Meg Whitman.
If HP’s tumultuous past two years can be said to have had an architect, it’s the chairman of the board, Ray Lane. He masterminded the January 2011 board shake-up that brought Whitman on as a director. (Lane, through HP, declined to comment for this article.) During the shuffle, HP tapped five new directors and released four Hurd-era holdovers. According to people familiar with the matter, Lane told directors Robert Ryan—also a director of Citigroup (C) and General Mills (GIS) and a Cornell University trustee—and Lucie Salhany, a former protégée of Barry Diller at Fox, that he needed to remove two anti-Hurd board members to balance the two Hurd loyalists he was removing. Then he proposed throwing a going-away party, these people said. It never happened. “I’m not sure what the hell is going on over there,” says Zander of HP’s board. “When you have all these changes going on, it’s tough to get things done.”
Lane has his defenders. “He’s always been straightforward and easy to deal with,” says Scott McNealy, the former CEO at Sun Microsystems, which counted Oracle as a close partner. McNealy characterizes Lane as an “economic volunteer” who has agreed to spend a large portion of his golden years trying to rescue HP from the abyss. “You are doing that for the good of the company, not to burnish your reputation,” McNealy says.
Several former HP executives disagree sharply with this assessment, characterizing Lane as power-hungry. “You can’t cut Ray Lane any slack because he brought in a lot of these board members who were close to him. The whole idea of a board is to give a company some institutional memory of what the company stands for and how it got there,” says George. “I think they have lost the essence of what they are.”
Since Lane joined HP’s board, the company has bought at least two companies affiliated with Lane. HP paid $350 million for the data analysis company Vertica, which Lane celebrates on his Kleiner bio page, and $1.5 billion for the security technology specialist ArcSight, also a Kleiner investment.
Lane also approved the acquisition of Autonomy, which has blown up. In November, HP said it would write down $8.8 billion of the $10 billion acquisition due to poor sales of the software, while also leveling charges of accounting fraud against Autonomy’s management. (Autonomy founder and former CEO Mike Lynch has denied these charges and set up a website defending Autonomy’s management point by point.)
Like Lane, Whitman has tried to distance herself from the Autonomy decision, telling analysts on a Nov. 20 conference call that the blame lies with Apotheker and former merger and acquisitions head and CTO Shane Robison, who departed in 2011. “The CEO at the time and the head of strategy who led this deal are both gone—Léo Apotheker and Shane Robison,” Whitman said.
Robison declined to be interviewed for this article, but Apotheker pointed the blame squarely back at Lane and the rest of the board in an e-mail to Bloomberg News. “No single CEO is ever able to make a decision on a major acquisition in isolation, particularly at a company as large as HP—and certainly not without the full support of the chairman of the board,” he wrote.
“The narrative is worse than what is actually going on here,” Whitman says. Internally, she has preached frugality and humility. At one meeting with 150 or so top HP executives, she declared, “We are a Marriott company, not the Four Seasons.” When working late, Whitman orders in pizza or Chipotle (CMG). “This is not a fancy pants kind of company,” she says. To prove her point, Whitman removed executive vice presidents from their plush offices and placed them in cubicles.
Whitman has also tried to rally employees and outsiders around innovation. The company has already started to stem market share losses in PCs through a new line of tablets and elegant laptops with detachable screens. The services business, having been retooled, will grow again, and HP will make printing more attractive through a host of Web-based features on its products, according to Whitman.
HP may return to the smartphone business as well. “Ultimately, we have to do that,” Whitman says. “But we have to figure out how to do it without losing a boatload of money.”
She allows that HP can’t make any major acquisitions just now, while insisting that outsiders have overstated the limitations imposed by the company’s cash crunch. “To my predecessors’ credit, they assembled a very powerful set of assets,” Whitman says, ticking off a half-dozen acquisitions. It’s these storage, security, networking, and data analysis companies that HP will use to spice up its data center product lines, which now—at long last—also include a broad suite of cloud computing options. HP has started upgrading its own technology systems around cloud services from Salesforce.com (CRM) and Workday (WDAY) in a bid to save costs and modernize.
Perhaps the most difficult task may be dealing with the talent drain HP has suffered since 2010. Though unwanted exits have slowed under Whitman, at least 120 executives have departed in the last two years, many to rivals. HP has lost its former CTO, head of printers, research chief, head of corporate hardware, head of corporate sales, and chief investment officer. General Motors (GM) recruited away dozens of people from HP’s internal technology team.
On Jan. 4, the investment research division of UBS (UBS)issued a note that many people in the Valley had feared was coming. It led with a discussion of HP’s management, and how it needs to think about breaking up the company. What UBS said it “preferred” would be an “enterprise and PC/printer split” in which HP’s data center business became one company and its PC and printer businesses another. This note added to gossip that was already bubbling in the Valley about rivals and private equity firms sizing up for parts. Several high-ranking executives at Silicon Valley firms confirm that they’ve been analyzing HP’s bits and pieces.
Whitman says HP will remain stronger if kept whole. She portrays HP as the only company that can sell corporations technology stretching from the device through to the data center. The goal in the coming years will be to stitch all these products together through cloud software and convince customers that HP offers the best mix of good-looking, secure, smart computing systems. It’s a winning pitch. Execution, of course, is another matter. “We’ll see how it turns out,” Whitman says. “My view is that it will be one of the great comeback stories in American business.”
Posted by Bill George |
Filed in: Business
"Conscious Capitalism," the stunning new look at how capitalism should work by Whole Foods Founder John Mackey and Raj Sisodia, hit the market this week. The authors have completed a series of public interviews describing the book, which is certainly the most important book of the year and possibly the decade.
At Mackey's request, I had the privilege of writing the foreword. I began: "This is the book I always wanted to write." This is the first book that puts capitalism, and how it can work effectively, in its full context.
It strikes me that Mackey's goal is to return capitalism to its roots. He and co-author Sisodia make a compelling case for capitalism as the greatest wealth creator the world has ever known, even as he derides what he terms "crony capitalism." Decrying companies focused solely on pleasing Wall Street, he believes CEOs and business leaders should focus on serving their customers, employees, suppliers, the environment, and communities as well as their owners and shareholders. He even highlights the importance of respecting the interests of the "outer circle of stakeholders" such as labor unions, consumer advocates, regulators and government officials.
Mackey is a strong believer in venerating the purpose of any business. In Whole Foods’ case, the company’s purpose promotes healthy eating that leads to improved health. He himself is a vegan who tries to avoids sugar, salt and oils. He supports coffee, wine, and cheese, but not diet sodas or sugar-based cereals. His beliefs stand in sharp contrast to the late Nobel Prize-winning economist Milton Friedman, with whom Mackey had a widely publicized debate. Whereas Friedman advocated that the only purpose of business is to serve its shareholders, Mackey believes "businesses make a profit in order to fulfill their missions," not the reverse.
In "Conscious Capitalism" Mackey and Sisodia demonstrate unequivocally that leadership matters. They show us how to become conscious leaders, a notion that is virtually synonymous with Authentic Leadership. They recognize how essential it is for leaders to integrate their hearts with their heads by developing self-awareness and emotional intelligence, while empowering other people to do the same. With the enormous loss in confidence in our leaders in the past decade, developing conscious leaders is the best way to rebuild trust in our leaders and to ensure that they follow their True North.
"Conscious Capitalism" is an invaluable treatise on how to integrate all the company’s constituencies for the long-term benefit of creating sustainable organizations that serve society’s interests simultaneously with their own. Mackey refers to capitalism as a “heroic force” addressing society’s greatest challenges. In that sense his ideas dovetail perfectly with those of my Harvard Business School colleague Michael Porter, the pioneer of modern corporate strategy, who has called corporate leaders to contribute to society by “creating shared value.”
I sincerely hope that these ideas became a widely accepted and practiced mode of running corporations in the future, thereby enabling capitalism to flourish in the decades ahead as the dominant force contributing to a prosperous global society. Read it, tweet about it, share it with your friends, and most importantly: bring its principles into your business!
“Do your shareholders choose you or do you choose them? Sophisticated CEOs choose their investors by defining their particular business approach and strategy and ensuring that their investors are aligned with that program.” - Bill George, former Medtronic CEO
Startup founders eager for cash can put the long-term vision of their venture at risk if they make assumptions about investors and why they want to participate. Startup investors have various objectives in mind when they consider a startup, including financial returns, passion for the narrative, or affinity for the team involved. But when investors’ motivations diverge from founders’, friction ensues — so it’s up to you, as a founder, to make sure your investor’s goals align with your own.
In my nine years of building startups, I’ve heard many stories of misalignment causing entrepreneurs and investors to row in different directions. That’s why I began wondering how I would explore alignment when I co-founded Fig, a mission-driven startup focused on enhancing holistic wellness for consumers.
Importantly, alignment is different than “value add,” which is about the relevant skills, connections, and reputation that an investor provides your company. Value add is important, but it isn’t everything. Alignment is sharing commitment to the same mission, values, and time horizon.
Here are a few approaches I’ve found helpful for exploring fit along these dimensions:
1. Define your mission and values and share them early.
What is the purpose of your venture? What principles are most important to your founding team? What are your objectives and exit plans? This clarity will help with evaluating investors, team members, and other kinds of of partners. Clearly articulating these values, as companies like Twilio have done, is also important for creating a reinforcing culture. At Fig we aim to incorporate our values into every hiring, investor, and partnership decision.
After determining your mission and values, ensure investors know they are important by sending them in your pre-pitch deck. Including 1-2 slides on mission and values as part of a 5-6 pre-pitch deck will not only highlight their importance to you but also allow investors to self-select based on compatibility — saving both of you time.
2. Share specific instances of your values in action.
Give specific examples of your behavior that illustrate your commitment to your mission and/or values. While many investors are hoping you’ll build an enduring and consequential company, others are hoping for a quick flip.
When I told potential investors that my co-founder Bart and I rejected our first acquisition offer largely because we were not convinced it would lead to furthering our mission, I was conveying our commitment to building a mission-driven company over the long term. My goal was to weed out investors hoping for a quick exit.
3. References are a must.
You wouldn’t make a key hire without checking their references. Do the same for potential investors. Leverage your network of friends, mentors, and former colleagues to both find and screen potential investors. Your friends are likely to share at least some of your values and know others who hold similar priorities. Structure these discussions beforehand to honor your friends’ time. Your company’s mission and values should determine what you’re solving for.
4. Be transparent with your due diligence.
Sometimes it’s impossible to evaluate alignment before a meeting. If an investor seems keen on moving forward, let them know you plan to talk with mutual contacts. I’ve found it helpful to ground this “heads up” in a spirit of reciprocity.
While raising funding for Fig, I would say, “I want you to be confident in who you’re investing in, Mr. Investor. Feel free to talk to anyone I’ve worked with in the past — I’m even happy to introduce you to one or two Fig investors. I plan to call one or two of my friends who have worked with you. I want both of us to enter this partnership with eyes wide open.”
5. Pay attention to your emotions and internal dialogue during pitching conversations.
Building a company will definitely have its ups and downs. Choose investors you want to spend time with at the peak and in the valley. Quality time means enough time to accumulate sufficient firsthand data for your mind and impressions for your gut. In my experience, most investors will want two conversations with you before they invest. During these conversations, ask yourself, “Do I want to spend more time with this person or less? Would I be proud to introduce this investor to my team?”
Investors are key business partners; misalignment with investors has the potential to negatively affect all other areas of your business. Prioritize alignment from the beginning, and enjoy the benefits of everyone rowing in the same direction.
Kevon Saber is cofounder of Fig, a mobile startup focused on personal wellbeing. Prior to Fig, Kevon co-founded GenPlay Games, a mobile games developer which has created 15 games and $40+ million in revenue. Kevon holds an MBA from the Stanford Graduate School of Business.
The Young Entrepreneur Council (YEC) is an invite-only nonprofit organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.
Posted by Bill George |
Filed in: Business
Why all the fuss over Michigan’s new law to give workers the right to choose whether to join a labor union?
The Michigan legislature has voted decisively to give workers the freedom to choose. Governor Rick Snyder signed them both within hours, calling them "pro-worker and pro-Michigan." This makes Michigan the 23rd state to pass right-to-work legislation. House Speaker Jase Bolger said, "This is about freedom, fairness and equality. These are basic American rights – rights that should unite us."
The protests by the United Auto Workers (UAW) leadership are not surprising, but why has President Obama jumped into the controversy by flying into Michigan to speak out against the legislation? Last time I checked, this is a state issue, not a federal one, so it is not the President’s or Congress’s issue to decide. To the contrary, since this law extends a vital freedom to workers and removes the prohibition to work at a unionized facility if they don’t pay dues to the union, President Obama should support it.
As a native of Michigan, I have witnessed the fifty-year decline of a once-great American industry as the UAW-demanded work rules, pensions and healthcare plans cost Michigan hundreds of thousands of jobs as the Big 3 steadily lost market share to foreign competitors. This handicapped Michigan workers and their employers in competing with Japanese, German and Korean automobile manufacturers, most of whom located major plants in right-to-work states like North and South Carolina, Georgia, Tennessee and Alabama.
These restrictions rendered General Motors, Ford and Chrysler non-competitive, forcing them to relocate their factories to Mexico and China. Whereas the companies can locate their factories wherever they choose, their employees cannot, so they wind up out of work and dependent on government unemployment compensation. As a consequence, Michigan’s unemployment rate far exceeds those states, and its economy is hurting. USA Today reports that in 2000, Michigan was 19th among U. S. states in per capita income; today it’s 36th.
As for the charge that companies in right-to-work states won’t pay their employees fairly, the evidence simply doesn’t support it. The employees of factories owned by Mercedes, BMW, Toyota, Nissan, Kia and Hyundai are well paid and fairly treated. They are voting with their feet by lining up by the thousands whenever new jobs are posted. Their quality is exceptional, as any owner of one of these cars will attest. The new factories have created automobile clusters of suppliers and vital infrastructure, as has been seen in South Carolina. That’s good for the U.S. as it creates jobs, reduces unemployment and enhances our trade balance.
With growing interest in bringing manufacturing back to the U.S., the timing of this legislation is perfect. It gives Michigan the opportunity to be fully competitive once again. It supports the revitalization of a vital U.S. industry and aids the transformations underway at the Big 3 U.S. producers. That’s good news for Michigan workers, and it enhances America’s competitiveness in the global marketplace.
Being a right-to-work state can lead to restoring Michigan’s pre-eminence as “the auto capital of the world,” revitalize a wobbling economy and get people off the unemployment rolls and back to work. Sounds like a win-win solution to me.
Posted by Bill George |
Filed in: Business
Published November 28 in NY Times DealBook: http://dealbook.nytimes.com/2012/11/28/to-save-hewlett-packard-break-it-in-two/
Hewlett-Packard’s $8.8 billion write-down of its Autonomy acquisition is just the latest evidence of the steady decline of one of the world’s great companies. Don’t blame Meg Whitman, the chief executive. She is just cleaning up the messes created since 1999 by her three predecessors and H.P.’s strategically challenged board of directors.
For more than thirty years, Hewlett-Packard served as my role model of a company. Having met David Packard in 1969, I deeply admired his, and Bill Hewlett’s, philosophy of “management by wandering around” and “The Hewlett Way.”
Like the founders of my former company Medtronic, Hewlett and Packard started in a garage. They never forgot that the company was an egalitarian organization focused on innovations that met their customers’ needs. Trying to compete with H.P. in its prime was very difficult because of its innovative products, superior customer service and product quality.
The founders also created a financial model that enabled the company to sustain its growth for 40 years: grow revenue at 20 percent, maintain 20 percent operating margins, and reinvest approximately 10 percent of revenue in research and development. Their internally groomed successors, John A. Young and Lewis E. Platt, carried on their philosophy for another twenty years.
In 1999, everything changed. Based on a consultant’s recommendation, the board decided to spin off its core business of test, measurement and medical instruments in order to focus on the rapidly growing computer business.
Wanting to shift its culture, the board passed over several internal candidates to bring in Carly Fiorina from AT&T and its Lucent spinoff. She quickly abandoned The Hewlett Way, moving aggressively to reshape the company as a prominent marketer of computer equipment and enterprise systems. Her fateful move was acquiring Compaq Computer, despite the objections of several board members, in order to become the leader in low-cost personal computers.
Ms. Fiorina tried to focus simultaneously on high-end enterprise systems. The split focus was costly. In its bid to buy the business consulting practice of PricewaterhouseCoopers, H.P. lost out to I.B.M. As time continued, Hewlett’s growth and profitability stagnated.
Ms. Fiorina was succeeded by NCR’s Mark V. Hurd, who focused on near-term sales growth and cost reduction, doubling the company’s earnings and stock price. Mr. Hurd also acquired Electronic Data Systems’ computer services capabilities, an unfortunate deal that led to an $8 billion write-down in 2012. The company’s investment in R&D, meanwhile, fell to 2.3 percent from 4 percent.
When Mr. Hurd resigned after admitting he had violated company standards, the board hastily hired Léo Apotheker, the failed co-chief executive of the enterprise software giant SAP. Mr. Apotheker proposed selling the company’s PC business and dropping its tablets and smartphones to concentrate on systems and software. He acquired the British software maker Autonomy for $10 billion.
His strategies caused such controversy that he was terminated after only 11 months and succeeded by a board member, Ms. Whitman, the former eBay C.E.O. and unsuccessful Republican candidate for governor of California.
Ms. Whitman has tried to stabilize Hewlett-Packard’s management and strategy by facing the issues forthrightly. She is cleaning house and cutting costs, while deferring hopes for a turnaround until 2014. The company’s share price has continued to fall, hitting a low in November of $11.35, 79 percent below its 2010 high water mark.
With 330,000 employees and $120 billion in revenue, H.P. has become too big to manage.
It is really two businesses: a commodity personal computer and printer business and an enterprise systems, services and software business. The characteristics of these businesses are entirely different.
The commodity business requires low costs and aggressive distribution through multiple channels combined with rapid new product introductions, qualities incompatible with the company’s historically high cost structure and cumbersome organization.
The enterprise systems business requires heavy investments in research and development, including very sophisticated software (an area where H.P. is sorely lagging behind I.B.M., Oracle and SAP), high touch customer service and an expensive support structure to meet its customers’ complex needs.
The time is ripe to split the company into two businesses — enterprise systems and computer hardware — each with roughly $60 billion in revenue, positive cash flow and solid profitability.
Ms. Whitman could run enterprise systems, using her strengths in software and customer relationships to restore the company to its original roots and The Hewlett Way.
Upon being spun off, the new computer hardware company could be run by Todd Bradley, executive vice president of the printing and personal systems group and a former chief of Palm. He could create a leaner, more competitive company to take on Dell, Lenovo and the Japanese printer companies. And the restructuring could eliminate as much as $1 billion of corporate overhead required to manage H.P.’s current set of businesses.
In its current form, Hewlett-Packard is a wasting asset, whose value to customers, employees and shareholders is steadily declining. It is time for the board to move quickly to restore its former status as a company everyone can admire, one that can compete successfully in two very different global markets.
If it does so, Hewlett-Packard’s beleaguered shareholders will finally benefit from a substantial jump in the combined market valuation of the separate companies.
By Karen Dybis for Detroit Regional News
Wanna be a rock star? Come to Detroit.
That’s one takeaway a group of Harvard Business School professors had Thursday night during a presentation on their year-long project on U.S. competitiveness.
Granted, most of the evening was rightly focused on the weighty issues of whether the United States has the mustard to compete globally. A large part also was dedicated to discussing the sustainability of the current resurgence of the Big Three (it was great fun to watch the back-and-forth discussion; it’s as close as I’ll ever get to “The Paper Chase” in real life).
But those last five minutes finally touched on what I came all the way to The Henry Ford to hear – the impression of these four Harvard professors on the city itself. Their words were grim, pointed and introspective. But they were tinged with optimism.
I say tinged with some purpose – there was a feeling, a flavor, a fleeting moment of hope for Detroit somewhere there between their words. And I don’t mean to get all wicked smart on you, but I like it when Harvard profs give us some love.
More on competitiveness later. Here’s what they said about us.
The best part of what they said was that they had spent Thursday touring the city; in particular, they met with folks at Quicken Loans. They saw the Offices That Gilbert Built. They met with some of the kiddos that are roosting there, including the high-tech startup companies.
“Why Detroit?” the professors asked. The answer? Because in Boston, these startups would be no big deal. Just another small fish. In Detroit, they’re someone. They’re special. They’re like Metallica, Hendrix and Justin Bieber all rolled into one.
Another question – this one from an audience member – came up during the after-glow portion of the night. So what about the city? What can be done about a problem called Detroit?
“Problems that are a long time in the making are a long time in the fixing,” said Willy Shih, professor of management practices. (Let me interject: Word.)
Shih, who is co-author of “Producing Prosperity: Why America Needs a Manufacturing Renaissance,” also noted that cities like Pittsburgh, which the Harvard competitiveness project studied, were able to pivot from despair to success by finding new industries, such as biotech.
“You have an enormous skill base in the people here,” Shih added, so we need to find a manufacturing industry that uses that skill base.
The costs here to start a business are lower than the West or East coasts, added Chester (Chet) A. Huber, former CEO of OnStar and a senior lecturer at Harvard. Low cost + lots of talent = a nice base if someone(s) act as the catalyst to get things started.
Now, ironically, Huber still has a house here. But even his place in Grosse Pointe isn’t going to sell for what it’s worth, so he’s still got a foot on the ground.
Our advantage, Huber believes, is that our “Vacancy” sign is hung high. People know we’re open for business. But we need to reach critical mass. And the question always hangs over us: Will it take this time? Will our recovery be real? Will the fabled renaissance really occur?
Just one thing Detroit and all cities need to know: Don’t rely on politicians or the government for help, noted Prof. William W. George. (The former Grand Rapids resident also is the former chairman and CEO of medical device manufacturer Medtronic and author of “7 Lessons for Leading in Crisis.”)
“There’s no messiah coming here from Washington,” George said. “A community is only as strong as its leaders in the community. Each of us has to step up and take action.”
And Detroit cannot be left behind as the suburbs recover. As the good professors (and umpteen others) agree, having a hole in the donut is ridiculous. None of us can think of any places where the downtown or city center is dying while the outlying areas are thriving. Over time, it just cannot work.
So how do you fix things here or anywhere within the United States for that matter? How do we get competitive? How do we re-establish manufacturing and innovation? How do we create that commons where we all care about our mutual success?
George summed it up: Improve K-12 education. Diversify your cities. Focus on skills training. Encourage entrepreneurship. Develop technology. Center on health because a healthy worker is a good worker.
Pretty smart stuff out of those boys from Boston.
To finish, George gave us this quote. I think it’s a fitting finish here as well:
“Few will have the greatness to bend history itself, but each of us can work to change a small portion of events. It is from numberless diverse acts of courage and belief that human history is shaped. Each time a man stands up for an ideal, or acts to improve the lot of others, or strikes out against injustice, he sends forth a tiny ripple of hope, and crossing each other from a million different centers of energy and daring those ripples build a current which can sweep down the mightiest walls of oppression and resistance.” ― Robert F. Kennedy
Posted by Bill George |
Filed in: Business
Here is my latest HBR blog, "The Idea that Led to 10 Years of Double Digit Growth" - Clay Christensen and Joe Bower's "Disruptive Technologies" that we used at Medtronic to spawn our 18% per annum growth (http://bit.ly/Rv6Uqj).
Full Text Here:
In the mid-90s as CEO of Medtronic, I was concerned about whether we could sustain the remarkable success in innovation that we had enjoyed during the previous 10 years. As we grew, I knew it would be very difficult to continue to create the breakthrough innovations that had led to Medtronic's high growth rate, which had exceeded 18% per annum for a decade. Then I read Clay Christensen and Joe Bower's 1995 article "Disruptive Technologies: Catching the Wave" in HBR.
Christensen and Bower's article offered the counterintuitive notion that great companies fail for the same reasons they initially experience success. They listen to their best customers — something we did religiously at Medtronic — making increasingly complex products to meet those customers' most sophisticated needs. This process leaves companies vulnerable to competitors who develop new forms of technology that initially fail to serve the "best" customers well, but quickly improve.
This process of "disruptive innovation" enabled new competitors to create entirely new product categories. For example, early cell phones were woefully unreliable, and their voice quality paled in comparison with land lines. Then rapid improvement in cell phone technology combined with sharp reductions in cost opened up massive new markets that existing terrestrial business telecommunications companies had missed.
Impressed by the HBR article's framework for resolving the tension between existing businesses and innovative ideas, I wrote an article for our employees titled "Reinventing Medtronic" that captured the essence of what was required to sustain our growth. We then initiated 12 radical innovations that challenged our conventional businesses. We organized these initiatives around small venture units, incubating them separately (and far away) from existing businesses. Venture innovators had greater freedom to deploy their independent R&D budgets. In financial terms these were small bets, with very low overhead. (See Peter Sims' book, Little Bets, for a more complete description of how this works.)
One example was Medtronic's reinvention of mainstream coronary artery bypass surgery. This involved minimally invasive cardiac surgery that eliminated the need to crack open a patient's chest and put the heart on Medtronic's bypass equipment. Clearly, this was threatening to people in Medtronic's core business. Nevertheless, we steadfastly supported the venture. The new procedure proved to be effective and now accounts for 20% of heart surgeries while producing better outcomes.
Another innovation was a super low-cost pacemaker that reduced production costs 80% by challenging many of the traditional rules of pacemaker design. The product worked effectively, but never became a big seller. Still, it enabled Medtronic to expand into the Chinese market. Meanwhile, the mainstream pacemaker designers borrowed many of the creative ideas, resulting in a 40% cost reduction across the entire line. As I told our executives, "If we don't make these innovations, our competitors will."
All in all, the "Disruptive Technologies" article helped Medtronic broaden its ability to fulfill the mission of "alleviating pain, restoring health, and extending lives." First, we increased our R&D budget from 9% to almost 12% of revenue. Second, we separated the ventures from existing business units so they could focus on disruptive innovations while the strategic business units focused on better engineering our existing product categories. Third, we made selected acquisitions of new technologies that fit in our product platforms or enabled Medtronic to expand into related product categories. Finally, our top executives gave the ventures the support required to go full throttle on innovation, spending time in the labs with them, understanding their work, and championing it throughout Medtronic.
Thanks to the HBR article, Medtronic avoided the lost years of stagnation that Hewlett-Packard and other once-great innovators experienced because they were unable to reinvent themselves. As a result, Medtronic's revenue growth continued at 18% per annum for the next decade.
