Upheaval at HP and Apple: What’s Next for Tech

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It has been a month of seismic change for the tech sector. Hewlett-Packard, the largest computer and printer maker in the world, may begin to transition away from hardware by jettisoning its PC division. Meanwhile, Apple is facing the end of an era, with the announcement that visionary leader Steve Jobs is relinquishing his role as CEO.

Due to his ailing health, Jobs’s departure was not unexpected. Nevertheless, the August 24 announcement caused an uproar within the industry. Jobs’s 14-year run saw the introduction of several products that reshaped the personal technology industry, including the iPod, iPhone and iPad. Although most analysts expect the company to remain strong under the leadership of new CEO Tim Cook, questions remain about whether Apple can continue its track record of innovation over the long term.

HP is looking to refocus its business on software and services, announcing on August 18 that it might spin off or sell its computer business, the world’s biggest. The move comes a year after a rocky leadership transition at the company; former CEO Mark Hurd resigned last August over a sexual harassment probe and allegations about inaccurate expense reports. He was replaced by Leo Apotheker, former CEO of business software firm SAP.

A day after Apotheker discussed the possible changes during HP’s fiscal third quarter conference call, HP shares plunged 20%. The company also decided to discontinue its tablet computer, the TouchPad, after it failed to strongly compete with rivals including the iPad. But intense consumer demand created by the resulting “fire sale” — which saw prices of the TouchPad lowered from $399 to $99 — caused HP to say this week that it would temporarily resume manufacturing the tablet, a move some analysts greeted with skepticism.

The tech industry has been further roiled by Google’s purchase of Motorola Mobility and, more recently, the Department of Justice’s antitrust lawsuit aimed at blocking a proposed merger between AT&T and T-Mobile. 

Knowledge@Wharton asked Wharton management professors Saikat Chaudhuri and David Hsu to discuss the outlook for Apple and HP, possible future opportunities and what Cook and Apotheker could learn from Jobs’s leadership style.

An edited transcript of the conversation appears below.

Knowledge@Wharton: We’re here today with Wharton management professors David Hsu and Saikat Chaudhuri to discuss two recent shake-ups in the tech sector — Steve Jobs stepping down as CEO of Apple, and HP announcing that it’s considering selling or spinning off its PC business. Could both of you talk to me about what you think will be the short and long term impacts of each of these events?

David Hsu: That’s a broad question. I think that from the standpoint of Apple … this is a big loss with regard to the visionary and creative side of the company, as well as someone who really paid attention to the details. Luckily, they had a very forward-looking strategy with regard to developing their IOS operating system for their mobile devices, and I think that’s going to pave the path forward with regard to ongoing development. In the short term, I would see that kind of continuing along with some of the relationships with the media content providers. Obviously, that’s going to be instrumental, as well as relationships with the application developer community.

In the long term, in order to sustain shareholder expectations and company growth — and meanwhile, of course competition’s not standing still — Tim Cook and other top executives at Apple have to think about the next revolution in the space and how to get ahead of that curve….

And HP, now this is a company that’s been in some trouble. If you think about its natural competitors as say, IBM or Oracle, HP has been slow at developing the enterprise side of their business…. I see the challenge as really trying to parley different niches in the enterprise space, and incorporating what HP has traditionally been good at into some of those domains.

Saikat Chaudhuri: To add to what David has been saying, I think that the challenges need to be seen and the impacts need to be seen at the strategic and organizational levels. I think that the contrast couldn’t be starker. Apple has been very successful and everyone wishes that Steve Jobs could have continued [as CEO], whereas HP has been struggling for some time. I think the test is going to be in how the transitions are managed. For Apple, clearly the market was shocked even though they were expecting this to happen sooner or later, [Jobs'] health concerns were known for some time. But the problem is Apple has not been really revealing much information.

I think the real question there is going to be can or has Apple been able to essentially codify its innovation machine and make it into something sustainable? Or was it really all tacitly imbedded in the aura, personality and actions of Steve Jobs? And if they’ve been able to create another leadership team and build the rest of the organization, build a culture, but also the processes to be able to sustain that innovation, I think Apple will be fine. But that’s the real open question at the moment.

And for HP I see it as two dimensions that they need to think about in their transformation, which really begun maybe ten years ago. Carly Fiorina [HP's CEO from 1999 to 2005] tried to jumpstart the engine. She did a merger [with computer services business EDS, which was ultimately bought by HP in 2008 under CEO Mark Hurd] that didn’t work so well. The question becomes, to what extent should HP emphasize software versus hardware? And the second becomes perhaps to what extent should the company emphasize services versus products? Clearly it’s been a hardware-oriented, product-oriented company in the past. And managing that transition, not just the strategy but the internal organization and delivering on that will be very, very difficult to do.

Knowledge@Wharton: What are some specific steps that each company can take in order to strengthen its outlook for the future?

Hsu: Again, I’ll speak about Apple first. I had mentioned before that one of the keys is extending the platform that they have built already, but also making sure that they have the content on a forward looking basis, as well as the developer community invested there. With the rise of alternative channels that these providers can harness, that’s going to put some pressure on Apple even though they have a huge installed base, which gives them a fair amount of bargaining power.

In my view, they have to not only iterate well on the hardware side and software side, but also be mindful that there are just a deluge of competitors that are going to be offering the content providers better deals. And so the question becomes how to navigate that kind of bargaining game with both the content providers as well as the software application developers.

The HP situation is a little bit more complicated. You think about the traditional strengths of the company. You think about the imaging or the printer divisions. They have announced this acquisition of Autonomy [a company that develops search software], which I believe is motivated by the decision to get into the database space. Reports indicate that the aspiration is to try to integrate less structured data into the company, so I would think that one of the high priorities would be to somehow think about the synergies between their strength on the printer side and the software associated with imaging. And as companies convert their physical documents into electronic documents, how to capture that value and, as more electronic documents are being produced, how to raise the analytics that can be done at the enterprise level. That is a space that’s crowded; IBM, Oracle and others surely are in the space and there’s this recognition that you have to kind of look ahead to see where the value is going to be.

Chaudhuri: The imperative for both companies is to convince all the stakeholders, whether it’s the markets, the employees or the customers, that the leadership — and its new leadership in both cases really — that’s orchestrating these activities has a clear vision in place and are capable of delivering on that. Clearly in Cook’s case, he has to show that, yes, the charismatic, detail-oriented, yet visionary Steve Jobs is no longer there, but we have the organization in place, the leadership in place, to continue and to expand on the offerings to make [Apple] sustainably successful in the future.

That could come in a variety of ways. One would be simply to give some indications about what those new initiatives might be….

On HP’s side, you know, there was a healthy dose of [talk about] Apotheker right at the beginning when he was appointed, you know, why this person? But perhaps what he needs to do now is demonstrate his operational prowess, because apparently that’s what he’s strong at, despite his mixed run at SAP. What he can do is based on acquisitions like Autonomy and before that, EDS [which HP bought in 2008], he can craft a vision and show what will the HP of the future look like. Because I still haven’t seen that. We’re still waiting for that since his appointment. [Apotheker also needs to say] “Here’s how we’re going to change the organizational culture in order to match that [new focus], which we’ve tried before. But here’s why we’ll be successful this time.” I think those are two important activities they need to do to really build that legitimacy and credibility, while at the same time actually changing the strategy in the organization to match that.

Knowledge@Wharton: If you are a competitor of one of these companies, and I think it’s pretty safe to say that most of the big tech companies are a competitor of one, if not both, what are some possible actions to take in order to capitalize on these two events?

Chaudhuri: For one, whenever there’s change it takes some time for companies undergoing that change to convince everyone that that the change is good or that it will be successful. In the interim, others can maybe vouch for continuity. If I look at the tablet market, the Samsung Galaxy Tab has done fairly well in the Asian market and moderately well in Europe, though they have a court case going on and an injunction in place at the moment [the result of a legal battle with Apple over intellectual property rights], but is not so successful here. Perhaps that’s one angle to approach this for stronger branding. But really, they too, ultimately, will need to come up with new innovative products and services….

In terms of HP’s competitors, one of the questions that arises is who are they exactly? And it depends on how HP defines itself, right? If they’re in the PC business, they thought about Dell for a while. Now they’re thinking about getting out of that. On the services side, they’ve thought about challenging IBM, but they were always a product oriented company. So it’s been tough for them. Maybe with [the purchase of] EDS they have a bit more of that, also vis-à-vis Accenture. And then they have other competitors in the data space, for example, and in the networking space and so forth.

I think in their individual niches, the other competitors will continue to do what they’re doing, probably watch, wait and watch and see what direction it takes. But I as a competitor would actually observe first what’s going on without going all out because I don’t think there’s an immediate gain to be had.

Hsu: I think that the tablet side, and more generally the kind of post-PC environment is one in which there’s increasing recognition, both at the kind of annual rates of growth level, but of what’s required to really compete there. The Android platform is the major competitor to what Apple offers. And certainly there’s a fair amount of momentum there in the smartphone market. I think the results have been mixed so far on the tablet market, but certainly there’s an upward trajectory there. And so I would see that as a threat to the Apple platform.

In addition, from Apple’s standpoint, there’s this whole space of penetrating the business market. Certainly they’ve done great on the consumer side, but — and this is obviously where HP is trying to go, except maybe Apple’s further along in their trajectory with their set of products — is [the business side] what’s going to be commodified next? There’s been a recent spotlight on the patent portfolios here. And I think that feeds into questions about what’s protectable over what time horizon and how to really appropriate the returns from innovation or creative effort.

I see the competitors really kind of rallying behind Android and trying to differentiate. It’s somewhat hard to do that on the hardware side. That seems to be the opening. There’s for sure going to be some further shakeout in that particular category. With the demand and the power that’s displayed on these post personal computer devices, I think that’s going to be an area that’s going to be very difficult to ignore, not withstanding the exit of HP….

In my view, the CEO of HP has really lost quite a major battle and the 20% stock price drop after the shift in strategy I think reflects this. And so I wouldn’t be surprised to see, as many have speculated, whether he’s going to last much longer.

Knowledge@Wharton: HP’s “fire sale” of its remaining stock of the TouchPad generated intense consumer interest. Do you think that was solely due to the $99 price? Or is it evidence of a burgeoning opportunity?

Hsu: Certainly it’s hard to understand exactly what drove that enthusiasm. Maybe it’s [thoughts of] “I want to kind of show my grandkids that this is what, before dominant design, the iPad really looked like, and these were the alternatives.” Or, obviously, it’s quite a cut-rate price when the alternative is $500 to $800 for an iPad. It’s hard for me to know. I don’t know in detail that particular product. But certainly there’s room for lots of innovation. And I think we’re still in the early stages of this category, in terms of how people interact, both at the consumer and at the business level.

And yes, Apple has a commanding lead in this particular space. But if you take a look at the smartphone market, the Android platform I think now is overtaking the Apple platform. And I think there’s a degree of customization. It goes back to this whole debate of how open versus closed should the product be. And of course, Apple’s benefited from that because of Steve Jobs kind of letting us know as consumers what we should be interested in. As Saikat had said before, can that be sustained over time, particularly in these new product categories and the evolution of these categories?

There’s going to be incremental advance in each of these specifications. But on a long term basis there’s going to be a huge amount of innovation as the hardware devices interface with information of all kinds that can be harnessed by consumers of all kinds. And so I think there’s quite a bit of innovation left to go in this particular product category.

Chaudhuri: I would agree. I would say that we haven’t even defined the product categories or we don’t know what will last. What we observe there is that the PC and the phone were somewhat distinct devices. And then we had smartphones come into the picture. We had netbooks as an alternative. And we have tablets now. In some sense, there’s convergence amongst them as well. They’re competing category versus category in addition to within each of these categories. So I think you’re right in saying, that evolution isn’t even complete yet. We don’t have dominant designs within each category yet. We don’t even have the resolution of those categories. So I completely agree that there’s tremendous innovation to be had.

What’s also interesting is that we can’t forget that there’s a lot of transformation and change happening in the industry across the sectors broadly as well. And so these are not the only companies that are affected, but potential competitors are, too. With Motorola’s mobility unit being bought by Google, for instance, clearly they’re now looking for a way to enter these markets much more strongly, especially on the smartphone side. And then let’s see what happens with Microsoft and Nokia, both of them have been struggling, clearly. Some argue this marriage [between Microsoft and Nokia], it’s an alliance at the moment, but perhaps it could lead to something else. This potential partnership might be the solution because the reason they couldn’t individually succeed is they were missing one piece, whether it’s the software on one side and the hardware on the other. I think that’s still an open question because you can also be more skeptical and say that two struggling companies coming together isn’t necessarily going to produce the complementarities that they need to succeed. But let’s see if they are the complementarities. Given all of that, there’s a lot of activity, there’s a lot of changes taking place.

And I think that point about the users, that Steve Jobs was always making technology push versus pull is a traditional debate. And network externalities and effects and how do they work, open versus closed systems, I think these are all — we’re in a world of experimentation right now. We’re seeing what works and what doesn’t. I raised my eyebrows when Apple squeezed its suppliers so much recently with the recent contracts where they took 30%, I believe, commission essentially. Does that mean their little ecosystem might, at some point, collapse? Not at the moment, but if a credible alternative comes up, then perhaps that might force some questions. But other competitors also have a long way to go just like these companies amid their changes. So I think it will be an exciting time to see all this churn.

Knowledge@Wharton: You both have talked a lot about innovation. Up until now, in the tech sector, it’s often been a situation of Apple introducing the “next big thing” and then other companies have created products based on that. How does Jobs’s departure from Apple and that innovation cycle affect the industry?

Chaudhuri: I think it will certainly have a short term impact, because what Jobs was good at is trying to come up with new product categories and redefining the product. I think we have to credit him for that, whether it’s on the phone side or on the tablet side, he’s really been doing a lot to promote innovation on that front. That being said, there’s also an ecosystem which has been created; it’s not just individual companies now that do innovation. There are ecosystems that are in place: sometimes it’s in the form of suppliers, other times in the form of startups, which might be acquired, and other times in the form of outsourcing partnerships. That ecosystem promotes a lot of innovation. Setting those platforms, those perhaps standards, if they’re not quite standards or dominant designs yet, but at least platforms on which innovation can occur and getting the right players involved, I think that’s a big step in promoting innovation. Clearly we will feel the loss of Steve Jobs in some way, but I’m hoping that the ecosystem is also developed far enough that we can also pick up some of the threads and that we will give some guidance.

One way to look at it is that Steve Jobs has been placing a number of bets and he’s been right on all of them in his recent tenure. But if you look at his first [tenure as CEO] at the company, it wasn’t quite as strong. It’s time to move toward more systematic approaches to the innovation and codifying that knowledge and trying to move in that direction. And of course we need the creative spice from all these visionaries every once in a while. But we can’t just bank on that. I’m hoping the ecosystems are going to develop further and new insights are going to spring up as well.

Hsu: I think that part of what can happen with regard to innovation is firms start pursuing leads based on platforms that they didn’t know had existed before. To illustrate, before the iPod, we had album sales and we had illegal album sales. And that kind of deconstruction of an album into purchasable songs really kind of paved the way for that industry, much like in the book world. I think even of Wharton Publishing moving to an all digital press and thinking about what does a book really mean and about the old definition of page length, the written word, the physical word. It turns out that we can be highly creative and innovative in many different ways.

If you take a look at the early incarnations of what the magazines are doing on tablet PCs, there’s a little bit of that, or even in the textbook space, the electronic textbook space, there are different ways in which people can interact with media that can be media rich, different ways to communicate ideas that are now being unleashed. I think that we have this more radical version of new devices, new platforms. But I think there’s also quite a bit of latitude for individual sector level innovations that can really kind of revolutionize the way that we interact with different media of all types.

Knowledge@Wharton: What type of leadership does each company need right now to move forward successfully?

Hsu: Since we haven’t been talking about HP as much, I think let’s certainly talk about them…. If we think about the enterprise space, particularly business services, which is where there’s been a great deal of speculation as to what different competitors are going to do, there’s a lot of legacy data that businesses have and whether it’s an orchestration of a supply chain or understanding unstructured data that’s contained within business units of a large multi divisional firm, those are not easy tasks. And I think there’s a lot of room for innovation in terms of the algorithms that we use to get that data, the analytics that we can do on that data and how we can harness that data at all levels of the supply and value chain.

For HP, it’s a delicate balancing act. On the one hand, you’ve got the cash cow type of businesses in which they’ve been great, and even in their PC business, relative to competitors they weren’t as sparkling, but certainly there’s a business call in terms of what type of returns do we need to keep up with shareholder expectations. And so there was this judgment call about now that we’ve bought the webOS and Palm, it’s a bold move to really abandon that.

My sense is that the leadership there has to really go back to the roots of the company and really understand the fundamentals of what is the competitive space, where’s the comparative advantage, what is missing that the other incumbents in the enterprise space are not doing a good job at? And how can [HP], in some sense, revolutionize, just as say Steve Jobs did in a different category, there? How can we change the rules of the game so that it benefits us?

That’s no easy task to do, but it does take some kind of visionary leadership. And as Saikat alluded to before, it can’t be kind of a flip flop strategy because you’ve got a huge organization that you have to really communicate with and lead. HP is an organization that’s trying to shift using both external strategies, i.e. the acquisition route, but also internally. Those choices about where to place the bets, that requires some strong leadership in terms of strategic direction.

Chaudhuri: I would agree with that. And to expand on some of those points a little bit, I think that the challenge before both leaders is to establish the credibility that they can transform their respective organizations. In Apple’s case, I think Cook needs to show that he, too, has new creative ideas that aren’t just Jobs’s ideas, and do so credibly, rather than [saying], “OK, we have Jobs on board for a little while longer. We’ll continue with that.” He needs to really make his mark saying, “Look, I know you saw Steve Jobs out there all the time, but we were and I was doing all kinds of things and here are some of the new things we’re planning.” And this can work very successfully or it may not.

If you see, for example, Intel, Andy Grove was the Jobs-like figure, essentially, but their COO was the person who was making things happen. And when they had their successions, yes, the market for chips and so forth was troubled, but it was essentially others like [current Intel CEO Paul] Otellini for example, who made some of these moves. And that can be one model.

If you look at HP it’s a bit more challenging because HP’s been trying to change itself for quite a while. And nobody’s quite gotten it right. We had Carly Fiorina come and then Mark Hurd come and then due to unfortunate circumstances, Mark Hurd had to leave and now another transition. And all of them were trying to make their mark. It’s become very difficult.

A lot of the innovations in the tech space that both of these companies have been doing have been associated much more focused on the consumer space. And yet the enterprise, the corporate space is where a lot of potential exists. So clearly making that link will, I agree entirely with David, will be very, very essential for these companies to penetrate those markets as well. And that’s a challenge before them. Certainly from the HP perspective, having someone like Apotheker who has dealt traditionally more with, at SAP, the enterprise side, I think that might be a little bit easier than perhaps for Cook. But we don’t know enough about Cook and his background or his aspirations and his strengths in order to be able to assess that.

And I think that final point that is very important in any transformation is if you don’t have some core competencies that you can actually leverage in the new areas, as much as you change them, to make a radical, complete departure becomes very, very tough. And so they have to maintain that thread and not just lose themselves amid something that seems very promising, but they’re not able to deliver on and implement.

Knowledge@Wharton: Do you think that there are things that either of these two leaders can learn from Steve Jobs’s tenure at Apple? Either aspects they can emulate, or areas to avoid?

Hsu: If we think about why we hold up Steve Jobs so much, I think it’s because the traditional way in which we kind of arrive at new products has very much been [to ask] what does the consumer think? Let’s really pursue that tactic. But in order to really come up with the radical innovations there has to be some personality and vision as to what is the world going to look like in some five, ten years from now. And Jobs has been famous for obsoleting certain features, [something] that he has been criticized for. [For example,] taking out the DVD drive in computers before the market is actually ready. But that has helped speed consumer behavior.

As we think about HP’s management challenge or the new Apple management’s challenge, there’s the sense in which you could learn or avoid some of the characteristics that Jobs has done. But I think it’s also important to recognize that these people are leaders. They have experiences. They have unique backgrounds. They have surrounded themselves with smart, talented executives. They are trusted with using their own judgment. And maybe they can take some inspiration, but I do think that they have to play up to their own strengths. This is their time. Of course, there’s going to be numerous comparisons, but they have to — I think what they can take away is this notion of really being more forward looking. And then, let’s not forget about the details. I think that Jobs has been a master at thinking about the design, the interface, the interaction. And so I think that those details — and of course Jobs is the master of perhaps overdoing it — but in some sense not leaving any of those stones unturned and having a great consumer experience, I think adds to this aura of Apple products that has been rewarded with so much market allegiance.

Chaudhuri: I would actually make this point probably even more strongly. I think it’s very risky to try to emulate Steve Jobs. Clearly, neither should do that. Unless you’re Steve Jobs, you have that charisma and people believe you and you can create that type of fan following, I think it’s very hard to do that. Clearly one can draw inspiration, the directions in which he’s taken the company have been very, very good. Also his emphasis on the branding and marketing side, which is very important because some of us are holding out and not buying an iPad because it doesn’t have Flash, for example, and it doesn’t have a USB port that you can directly plug into. But many others are not. From a functionality point of view, there may be other devices which might actually be, perhaps, more useful. And Steve Jobs has demonstrated how you can pull it off. And so clearly with new visions and people who believe in that kind of idea.

Cook or Apotheker come with their own strengths. And perhaps their strength might lie a bit more in the implementation side, we hope so at least, to be able to do this. But obviously they will need some personality, some charisma, otherwise it’s very hard to invent new product categories or keep up with technological innovation in the kind of world that we live in today, especially given all the changes and convergence that we observe. One angle they might follow which might distinguish them and yet provide a link, especially in view of the theme we were talking about earlier, is to penetrate the corporate market more, is thinking about how is the global corporation changing?

The way I see it, we’re really seeing the advent of the global disaggregated virtual corporation. And I haven’t seen tools and products yet applied in that context to really allow this seamless tying and usage of capabilities around the world in real time as much as we love to talk about the vision of it. Maybe that’s one angle, one hook that they can use to associate themselves with so they keep that alive, but transfer some of these ideas to other areas. But I’m sure that they are qualified in their own right and they can stand up and do that. And if not, then there will be other successors who will probably come up and take the helm.

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