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Does Cost Containment Have to Crush Innovation? Two Case Studies from HP and IBM

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Efforts to contain costs at HP Labs killed innovation and stripped the company of its market-leading capabilities. David Croslin, author of Innovate the Future: A Radical New Approach to IT Innovation, contrasts this disaster with IBM Labs' more innovative style and profitable results.
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In these days of market contractions, reduced consumer spending, layoffs, and cost-containment efforts, many companies struggle just to survive. Even the largest companies in the world, delivering highly innovative products, are slashing their costs. Hewlett-Packard is an excellent example, with tens of thousands of layoffs, dramatic reductions in research and development spending and shifts in R&D direction, as well as highly inconsistent corporate directions defined by one CEO after another.

Unfortunately, in times like these, new CEOs often follow a practice of "slash and burn" with regard to cost containment:

  • Across-the-board layoffs that encompass a set percentage of all groups
  • Elimination of employee training programs, travel, and other expenses that the executive team sees as employee "perks" that can't be afforded in lean times

How Bad Executive Decisions Wasted HP Labs' Innovations

Just like in physics, in the corporate world every action has an opposite reaction. But, unlike in physics, where actions and reactions are equal, some corporate actions create reactions that far exceed the perceived impact of the original action. For instance, Hewlett-Packard Labs was world-renowned for new technology discoveries. However, HP seemed to experience very little follow-up commercialization of those discoveries, and hence HP shareholders saw little return. In an attempt to fix the problem, HP refocused the definition of how HP Labs would function:

  • Instead of 150 projects, it would have only 15.
  • Each project required a champion in one of HP's largest customers.

This approach created a direct linkage between R&D and key customer needs. Problem solved!

Well, sort of.

In reality, this approach might have saved expenses, but it also damaged one of HP's best assets that it was simply using poorly. Consider it this way: If you have a TV in your living room that's angled in such a way as to make viewing uncomfortable, you don't throw out the TV. Instead, you change the angle of either the TV or the furniture to correct the situation and properly utilize those assets.

HP didn't "adjust the angle" of how it used the highly inventive technologies coming out of HP Labs. Instead, HP's CEO threw out the old concept and brought in a new one. The old concept was consistently delivering highly inventive technologies that, if targeted correctly, could create new, disruptive market technologies. The flaw was in the utilization of the inventions by the rest of HP, not within HP Labs itself. Inventions have to be targeted to become innovations, and that targeting simply wasn't occurring.

Instead of fixing the problem by targeting new inventions as new market innovations, HP changed HP Labs to focus future inventions toward existing targets in its current customer base. In one seemingly straightforward action, HP shifted its labs from a disruptive innovation force into an incremental innovation force.

Taken as a whole, a market full of customers can provide a company with a wealth of information on how to create new disruptive innovations that can allow the company to dominate the market. Taken individually, however, a single customer will constantly focus invention on solving existing problems. Let's consider an example. My daughter likes extra pickles on her hamburgers. Taken individually, her opinion would force Wendy's to add more pickles to all its hamburgers. But many people don't want pickles at all, and most people only want one or two pickles. Taking the view of a single customer too seriously can be detrimental to the value of the product for the broader customer base.

HP targeted each of its HP Labs inventions to a single customer's needs and wants. This practice effectively killed disruptive innovation and through excessive incremental innovation killed the competitiveness of HP's products.

While it's highly likely that HP Labs could have been focused better, it's generally accepted that a laboratory environment will produce technologies that have no current innovation applicability. But the majority of those results should be applicable to existing products and markets; properly targeted, they could lead to extremely disruptive technologies. Why didn't HP see this possibility? Part of the reason is that its excessive layoffs eliminated many market analysis personnel, reducing the quality of innovative thinking that was being applied to how HP's markets were responding to existing and new products from both HP and its competitors. Without such detailed ongoing analysis, it's very difficult to discover the innovation opportunities that consumers constantly point out through their compliments and complaints.

The main reason that HP handled the HP Labs issue incorrectly? Money. In order to target inventions into innovations, you need to spend money on market analysis, product design, etc. Look at a competitor's example: Apple uses a designer—not an engineer—to work out the form factors for Apple products. The goal is to make the product pleasing to see, touch, and use. That approach costs money, and HP was too busy cutting costs. Aggressively cutting costs often leads to changing approaches completely.

IBM Labs: Creating Innovations That Lead to Success

IBM took a different approach. IBM Labs is highly inventive, creating advances across a broad spectrum of technologies. Some of its results may not be usable in IBM products for many years. To make sure that executive mandates don't restrict money sufficiently to prevent IBM from creating disruptive new markets, IBM sets up a virtually independent business headed by a highly successful senior IBM executive. This business will have a guaranteed budget (say, $5 million), and the executive will have carte blanche to set up a team and spend the money. The team will then attack the new market by analyzing its needs and determining how to apply IBM products and inventions in innovative new ways within that market. In essence, IBM is creating internal startup companies with funding that have the rest of IBM as an integrated partner. Success is virtually guaranteed.

Through proper organization, funding, and invention targeting, IBM can create new disruptions to dominate new markets. By contrast, HP and other companies focus on cost containment without recognizing the resulting long-term losses in innovation, making them destined to fail. We're seeing those results right now in HP products.

The HP Labs example is just one of many possible mistakes that successful companies make in the process of trying to remain profitable in challenging times. The same issue—failure to target assets to proper product and market disruptions—can be seen in many other seemingly positive actions, including data center consolidation, cloud computing, virtualization, off-shoring, and so on. Each of these directions can combine a positive action with horrible reactions within the quality and disruptive potential of products.

Let's look at a simple example. Dell sent its customer service department offshore. The response from Dell's customers was so negative that many customers—especially enterprise customers—began to purchase products from Dell's competitors, eventually forcing Dell to return its customer support onshore. Dell had reduced the value of its products in an attempt to reduce its internal costs, and customers reacted by abandoning Dell's products.

Is Cost Containment Always Negative?

Cost containment is always reasonable, not just during economically challenging times. But to stay ahead of its competitors, the company must be able to deploy disruptive new products, while simultaneously staying focused on the value of its current products to its current customers.

I've always thought that Wendy's produces the best fast-food hamburgers, so I didn't hesitate to try one of the new "improved" burgers recently added to the Wendy's menu. Without a doubt, it was one of the blandest, oddest-textured hamburgers I've ever eaten. I won't be going back any time soon—even if they add extra pickles.

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