Duane covered a lot of territory in his recent post.  I disagree with
several of his analogies and conclusions.  But for purposes of this post I
would like to concentrate on comment #2.  This is exactly the kind of poor
thinking that HP is in the grips of right now and why the company is
getting deeper into trouble by raising its exposure to commodity products.
Too many people believe these arguments to be a universal truth (applied
out of context).

By the way, Duane, while you mentioned being busy migrating you neglected
to mention what kinds of applications you are migrating and the strategy
you are using (Windows, Linux, etc.)  --  I think we would all be
interested in this, especially since you believe that "most of us" are busy
doing it too.

On Sun, 7 Apr 2002 07:25:55 -0700, Duane Percox <[log in to unmask]> wrote:

>2. Those who think HP is making a mistake by focusing on commodity systems
>   are missing the point entirely.  There is nothing wrong with being
>   in a commodity business.  Does anyone here have a problem with Proctor
>   and Gamble?  Nestle?  Or any other company selling commodity products?

Yes, there is nothing wrong with being in a commodity business in an
industry that has no or slow technological movement.  Your food and soap
examples are not likely to require large amounts of expensive R&D to stay
ahead of competition.  These are stable businesses where little is changing
and market share based on advertising and packaging is all important.
Unfortunately, it seems to have little relevance when talking about
computers and software.  Even in the case of low end computers, which are
not manufactured by the company selling them (probably outsourced to the
same plant where their competitors product is also manufactured), there
needs to be some R&D to keep up with changing standards and related
technologies.

By definition a commodity business is one where your products are not
distinguishable from your competitors products, except for the package
design they are delivered in.  Once the package is thrown away upon
consumption, you just have the plain product left with no particular value
added features compared to the competition.  Commodity products have low
margins that cannot support much R&D and other overhead.  Success is based
primarily on price and volume formulas.  This model is very vulnerable to
any innovation suddenly introduced in the marketplace by a competitor that
can upset the competitive landscape.  Food and soap don't have to worry a
lot about this, high technology does.

>   It has been proven that if you are a growth company and want to provide
>   continued shareholder value you need to own markets to be successful. If
>   you don't own a market then you always fall behind. You don't have
>   enough revenue to improve your products enough to catch up. HP is only
>   applying this basic economic truth to the businesses they operate.

Where is this concept "proven" for growth (high technology/computer)
companies?  UNIVAC was #1 in computers for a while (1950's)  --  what
happened?  They lost focus and did not invest in R&D, so IBM a company that
got its start making butcher scales (true) and keypunch equipment (later)
and computers (much later) came along and ate their lunch.  (Skip ahead to
the 1980's).  IBM was #1 in PC's for a while  --  what happened?  Compaq
came along (with a cheaper manufacturing and marketing model) and became #1
in PC's for a while  --  what happened?  Dell came along (with an even
cheaper manufacturing and marketing model) and became #1 in PC's (until
whatever is next [unlikely to be HP/Compaq for very long] comes along).
These are all relevant examples of growth companies in the high technology
industry of computers (not food and soap) that "owned" and even created the
market.  For some reason "ownership" didn't do them a lot of good in the
long run  --  why?  Could it have something to do with management focus and
vision, sufficient profit margins to permit further investment (or the lack
thereof), competitive innovation?

Hewlett-Packard was NOBODY in the computer business in the late 1960's (I
know because I was there).  This was a company that purchased computers
from Digital Equipment to control their instrumentation and testing
products.  IBM "owned" every part of the computer market except mini-
computers.  IBM thought that mini's were not legimate computers worth much
competition leaving it to the DEC's and HP's of the world.  DEC was #1 in
mini-computers and "owned" that market, but was eaten by Compaq (giving
Compaq horrible, nearly fatal, indigestion), a micro-computer company.

Now, how did HP go from NOBODY to the #2 computer manufacturer in the world
without "owning" any part of the computer market?  The answer was
innovation (the HP3000), quality of support and service, and R&D investment
that produced the RISC chip years before anyone else had it or understood
the importance of it.  All of these things were made possible by the higher
margins commanded by innovative HP products.  Indeed HP's testing and
instrumentation business (and reputation) were built on these same concepts.

I would also like to briefly mention some of those other titans of
market "ownership" in software technology: VisiCalc, Lotus, Wordstar,
WordPerfect, Novell, Netscape, etc..  What happened to these "owners"?

>  The sale doesn't stop at the system. There is support, consulting, etc.
>  that they are wanting to provide. BTW - the Superdome is NOT a commodity
>  and they have been selling lots of these. Companies can be commodity
>  focuses at one end of their product line but not at the other end. Don't
>  assume an entire commodity play here.

True, enterprise installations are fertile markets for support and
consulting, but in a world of "me too" operating system environments these
can be obtained from lots of sources, not necessarily from HP.  Selecting
HP for these services requires a confidence in HP's long term vision and
commitment to its products.  If you don't make much money on the software
(OS) or hardware, what's left?  Only these services.  (This is why Carly
wanted to buy the Price Waterhouse consulting arm.)  One of HP's big
arguments (complaints) about the HP3000 "ecosystem" is that there are too
many users that were only "mere owners", and not enough direct "customers"
(under service contract).  How did that happen?  Probably the biggest part
of that answer is through lost contact with the customer  --  no sales
people (unless you are very large indeed).

It is true that Superdome is not a commodity item (with sales of about 100
of these so far).  Such high end products require heavy sales and software
(OS) commitment, whether it is a proprietary HP-UX or a highly customized
Linux.  Products as expensive as this require a customer confidence in HP's
management vision and a reliable commitment by the vendor to its products
and customers.  Customer loyalty works both ways and is the foundation of
the relationship between vendor and customer in mission critical
environments.  HP has disturbed this foundation, not just with the HP3000
decisions, but more fundamentally with the Compaq purchase and apparent
product strategy in their irrational quest for #1 market status at the
expense of customer loyalty.  This will affect customer decisions
throughout the product line from one end to the other.

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