The Chicken Coop

HP and Palm

Earlier this week, Hewlett Packard announced plans to spend $1.2b to buy Palm. I have at least four people in the message queue, each curious about my reaction.

I'm frankly perplexed.

I know Palm well. Their business was one of the first Locusts that caught my eye. I criticized their purchase of Handspring as a doomed-to-fail effort, and events bore me out. I watched them split up and combine again, and learned from them how hard it is to make a Locust succeed.

HP put a lot of money on the table for Palm and I can only wonder what it was they wanted. Some candidates:

• The Palm operating system. This would, theoretically, give them independence from Windows for their mobile devices. The newspaper noted that HP and Microsoft have broken off their efforts to create an iPad equivalent so there's a possible rift between the two. I doubt much will come of this, though.
• Access to supply chain partners, especially the mobile phone companies. I've read some speculation about this but I am deeply skeptical. Hardware is the way to open up a relationship with the carriers, as Apple has taught us. I've not seen anything to indicate that Palm's hardware was superior to or distinctly different from the phones of its rivals.
• Key talent hidden in Palm. This is the most plausible candidate but it's impossible to know what that might be, sitting at my computer here in Buffalo, NY.

HP uses acquisitions to sweeten the value proposition it brings to the table. (To see how aggressive they've been with this, take a look through their news archives. Pick a year of news releases and look for the word "acquires". You'll be amazed at how many companies HP has quietly acquired.)

I'm not sure what part(s) of Palm will help them, but I think HP spent $1.2b to acquire a Palm resource that, on its own, might not be that significant, but when combined with other HP assets, will make HP's value proposition more compelling.

It's their way of doing things.

Toyota's woes

Toyota's crisis isn't a "quality" issue in its classic sense. Historically, quality issues have been issues of manufacturing. Toyota's quality problems are deeper and much more troubling. Their quality problem is based upon the design of their automobiles.

Toyota's faulty gas pedals are not manufacturing problems. Their factories didn't produce "defects." Their factories made the cars as designed, in much the way the original Hubble was manufactured: perfectly, but to flawed specifications.

Toyota's problems are rooted in the engineering and management decisions that produced cars prone to gas pedal problems and lacking the override mechanism used by rivals.

The problems were made worse by management control systems that didn't respond quickly or aggressively enough to problems as they became apparent.

Toyota's quality problems are deep seated and high up in the organization. Barring a total and disruptive shakeup, they will be very tough to eliminate.

For a Locust like Toyota, the quality issue and its resolution is a strategic matter that strikes right at the heart of its value proposition.

I'm one of those people who think driving is fun, especially when things like speed limits don't get in the way. I'm not alone - lots of people see cars and driving as I do.

We're not Toyota's customers. Indeed, Toyotas are distinctly unfun to drive.

Toyota targets people like my wife, a person who sees driving as a means to far more pleasurable ends.

Toyota's value proposition to drivers like my wife has been: our vehicles are practical, solid, dependable, quiet, comfortable ... never something to worry about. If you're not sure what to buy, you can't go wrong with a Toyota.

That value proposition rings hollow right now, doesn't it?

I'm sure they'll fix the gas pedal problems. And maybe the steering problems with Corollas that I've read about won't amount to much, either.

But the company will be in the news for a long time: lawsuits will see to that. Even those who don't follow the company very closely will hear the drumbeat of negative news.

Customers will, for at least a generation, hear a small warning bell in the backs of their mind when they step into the dealership. "We're not quite a practical and solid and dependable as you thought we were. We're like all the others. Buying from us is not a means of avoiding problems and surprises."

A tragic situation for a great company.

So Amazon.com has lost its fight with Macmillan over the price of e-books. The book seller will have to price books in line with the publisher's desires, not theirs.

Who's the winner?

From what I've read, Apple will give the publisher a 70% royalty of the list price of the electronic title. Apple has also let the publishers determine the list price. The selling price of iPad titles will be set by the publisher and will rise from the $9.99 (Amazon's selling price) to an average $13.50 for the latest releases of top selling authors.

It looks like the publishers are the winners: they set the price for their intellectual property. If Apple has to discount the e-books, the lost revenues will come out of their 30%.

The lessons of Intel are, it seems, ignored. One of the core principles of the Chickens and Pigs framework is that your customer's customer isn't yours. Intel launched its "Intel Inside" campaign to bypass the computer makers and speak directly to the end user. The ideas was that the end user would demand that their computer have an Intel microprocessor inside.

The campaign was a resounding success. The computer makers capitulated. Intel printed profits

When Intel wanted to diversify, though, the price of their Intel Inside campaign became clear. Intel wanted to get into cell phones. Having seen how Intel treated its customers, the cell phone manufacturers would not let Intel put a microprocessor into their products. No matter how good the technology that Intel offered, the chip maker was left on the outside.

The publishers are acting as though e-book customers are theirs. Wrong. Apple and Amazon are the publisher's customers. Readers like you and me aren't the publisher's customers: we are not invoiced by, nor do we send revenue, to the publishers. (See this page on my web site for a discussion.)

Chickens and Pigs says: Build a successful business by helping your customer be successful with his customer. It's hard to see how Amazon.com is helped by Macmillan's practices.

By using a new entrant (Apple) as a vehicle to muscle their approach to pricing, the publishers are signaling future partners how they "play the game." Don't be surprised if, in a year or two, the publishers come to regret their recent victory.

Welcome to the Chicken Coop

Hello World!

A friend of mine once said, Chickens and Pigs are everywhere!” When he realized that companies in the news every day were illustrating the framework's principles, the world became his classroom.

I try to bring the same realization to my students. I use stories about companies in the news to teach the Chickens and Pigs framework. In the process, they come to understand business in a deeper way than they can get from any conventional text.

This blog will bring those same company stories and their lessons to you. I'll show you the principles each illustrates. I'll tell you what I think of the company's actions, and what I think will come of them.

Most important, I'll ask you to share your views.

I hope we'll be able to generate conversations that are fun and exciting. I'd like to make this the corner of the Internet where people who love business get to talk about business.

Welcome!