Whither Big Tech... Hewlett-Packard, Intel, Cisco And Microsoft?

by: John M. Mason

These companies taught us what it meant to be a modern company, one that led its markets and maintained that lead on a regular basis.

But in this age of transient competitive advantages, maybe the market positions held by these firms are not as secure as they once were. Although these companies change with time, their idea of how to change over time may be falling behind and, as a consequence, they are suffering for it.

As investors we need to be aware of how companies and their leaders prepare themselves to meet the future. The management culture relating to change is all important for a company if it is to stay fully competitive. We as investors need to understand this if we are to make wise investment decisions.

Perhaps the concept of product change that initially captured the essence of this leadership was Moore's Law. Gordon Moore, a co-founder of Intel Corporation (NASDAQ:INTC), proposed Moore's Law. Moore discovered that between 1958, the year that the integrated circuit was invented, and 1965, the number of components in integrated circuits had doubled every year. In other words, the speed of the computer doubled every year.

Mr. Moore predicted that this progress would be maintained "for at least ten years." And Moore's Law was born. Although the timing slowed down somewhat as the century moved on, the law became a target for the progress of innovation in the semiconductor industry.

The important thing was that this "law" was not a technological law, but a marketing guideline. And the idea of having a marketing guideline became a standard for "tech" companies and was incorporated into the research literature as the process of "time pacing." (See "Competing on the Edge," by Shona Brown and Kathleen Eisenhardt, published by Harvard Business School Press in 1998.)

That is, to be a leader in an industry, a company had to produce a new product or a new version of the product every six months or twelve months or whatever, and this timeframe was based upon the frequency of trade shows or model years or some other major event in the industry.

Being a high-tech company meant achieving a lead in the market place and maintaining that lead through a constant creation of innovative ideas on a regular basis.

It is interesting to read that these innovative leaders are no longer the stars they once were. Quentin Hardy in the New York Times captures this fact: "Shifting Tech Scene Unsettles Big Players".

Hardy writes: "Outsiders often think of Silicon Valley as a constantly changing landscape, a place where fortunes rise and fall with the next great idea. Now some of the technology industry's biggest names are finding out that once you fall behind, it is pretty hard to catch up."

The primary focus of the article is on Hewlett-Packard (NYSE:HPQ), which announced not only a disappointing quarterly performance on Wednesday, but also reported some significant personnel changes.

Although HP chief executive Meg Whitman claimed that the company's difficulties were due to being in a turnaround situation in "not the greatest economic environment," Mr. Hardy writes that "the bad earnings news from older, big tech companies does not-so far-appear to be spreading to more youthful Internet companies like Google or Salesforce.com, which provide their software as a service over the Internet."

That is, the market has changed and HP, along with other "older, big tech companies, have failed to adapt to the new world order of smart phones and tablets and cloud computing," Hardy writes.

In writing about the employees of these companies, Hardy writes, "Many, particularly early employees were there when their innovations and more-affordable products displaced the last generation of big tech companies. Now they're on the downside of that curve."

The situation described in this New York Times article highlights that problems that these major firms are facing in these modern times and the difficulty that existing managements have in "leaving the past" and moving on into the future. It is situation I addressed in "Investing in an Age of Transient Competitive Advantages".

Meg Whitman is the "new kid on the block," but she comes bearing the burden of operating in the "old" mindset. She does not seemed to have moved on to where things are now.

John Chambers, chief executive of Cisco Systems Inc. (NASDAQ:CSCO), recently announced substantial job cuts at his company. Hardy writes, "but analysts believe that Mr. Chambers' economic discussion fails to address the technology changes with which Cisco is trying to cope." He seems to leave out the reality that he faces cheaper competition many of whom "rely more on software and off-the-shelf components," a different approach than Cisco's custom-made equipment.

These other organizations have defined the "arena" in which competition takes place differently than have Mr. Chambers and Cisco.

And in an effort to pick up revenues and keep on doing what they have been doing, these big, high tech companies are now cannibalizing each other. For example, HP has entered the market for Internet routers and hurt Cisco. Cisco has retaliated by attacking HP in the computer server business. Dell Inc. (NASDAQ:DELL) has hurt HP by giving steep discounts on personal computers. And so on and so forth.

And according to Hardy, Intel executives acknowledge that they are behind in building chips for mobile devices and other instruments of the new wave of hand held devices.

All these situations are pieces of evidence that the management cultures of these organizations have not adapted to the evolving generation of organizational structure and mindset. For one, this next generation of executives seems to be composed of individuals that are not as high-profile leaders as the previous generation because the new company cultures are more fluid and dependent upon shifting roles and responsibilities. Focus is just not placed on one person like Meg Whitman at HP and John Chambers at Cisco and Michael Dell at Dell. Inc. and Steve Ballmer at Microsoft Corporation (NASDAQ:MSFT).

Furthermore, these results indicate that the companies that seemed to be so creative in the past in constantly bringing something "new" to the market on a regular basis now seem unable to move outside of their historical range of view. These companies that achieved a competitive advantage that seemed unassailable now face the reality that what seemed to "permanent" in the past no longer exists. Now, innovation must constantly be created to replace past "legacy" competitive advantages, not try to extend them.

Can these bigger but older high tech companies re-capture their future? Can they make the adjustments necessary to remain competitive or even to create new arenas of competitive advantage? As the Hardy article implies, "that once you fall behind, it is pretty hard to catch up."

To me, the major problem is that to "catch up," the management culture has to change. The management culture is determined by and executed by the chief executive of the organization. It is extremely difficult, if not impossible, for the person that got you to where you are to do an about face and re-create themselves in a way that will solve the current needs. For one, they have so much invested in the current structure of the situation that they often see their problems as coming from outside the organization.

This is exactly the point that I was trying to make in the above post. In an age of transient competitive advantages one's mindset has to move on… one cannot just believe that competitive advantages will last forever. For the mindset of a company to move on, it just may require that the one determining and executing the company culture move on. In terms of investing in an age of transient competitive advantage, one must thoroughly investigate the management culture of the organization and firmly believe that it truly can perform in such a changing and changeable world.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.