How Not To Run a Company

A popular business book published in the last few years carries the intriguing title, First, Break All the Rules. While I have not in fact read this book, I thought of its title recently as I was complaining to a friend about how unbelievably stupid the leaders of most corporations are. When it comes to getting through a recession, even a mild one like the one that may now be ending, big companies seem paralyzed by conventional thinking, unable to do the things that set apart leaders from failures. To illustrate this point, I’ll focus on a particularly vulnerable and hard-hit industry: PC vendors. The dismal state of the dominant players in the PC industry and the unusual success of some smaller companies send a clear message: to succeed in business, we would do well to break all the rules.

PCs are unusual in the technology world in that they are basically commodity products—with Intel and Microsoft controlling the technological innovation, the “box makers” like Compaq and Dell have little basis on which to differentiate their products. In a sagging economy, conditions are ripe for a devastating price war and a consolidation of the industry, which we have in fact seen in the last year. Two of the major players—Hewlett Packard and Compaq—are doing everything wrong in response to this situation, while two of the others—Dell and Apple—have found wildly different, but equally successful, ways of actually growing through a recession.

Carly Fiorina, the frenetic CEO of Hewlett Packard, is a case study in bad leadership. In a company that famously values its employees, especially its scientists, to the point of never resorting to layoffs in bad times, Fiorina gave thousands of engineers the pink slip soon after taking the helm at HP. Then, believing that the best way to fix an ailing, giant company is to merge it with another ailing, giant company and hope for “synergy,” she announced a merger with Compaq, a move that is generating boardroom chaos even now, eight months after the announcement. Whatever happens, HP and Compaq are two companies whose core products—printers for HP and services and consulting for Compaq—are under attack or not growing. Merging the two to wring some advantage out of their disastrous PC divisions would only further dilute the earnings contribution of their viable divisions. As such, Fiorina’s approach—profits through layoffs, growth through acquisition instead of innovative R & D—represents the worst possible strategy for resurrecting Hewlett Packard, a strategy that will probably get her fired.

Michael Dell, CEO of the eponymous PC maker, has prospered by being the cause of HP and Compaq’s woes. Dell builds and ships its PCs directly to customers, taking most orders through its web site and avoiding sales channels, large parts inventories (which decline in value by the hour) and anything that might drag it down. Dell’s “direct” approach enables it to make money virtually no matter what a PC costs; thus, Dell launched a major price war last year to gain market share and force its competitors into the red, a strategy that has worked perfectly to date. Dell’s actions represent the best of strategy—maximizing resources and advantages under constraint—in clear contrast to HP’s helpless flailing.

Where Dell makes no attempt to distinguish its products, relying instead on process and price to give it advantage, Apple has succeeded in recent years by delivering an innovative, elegant product line. Apple’s strength, and the source of its strategy, is the quality of its product line; it focuses on quality above those critics who claim it must expand its market share “or die.” Its new operating system, OS X, is the sleekest, most stable, most intuitive consumer OS ever made. Every reviewer in the computer trade press swoons over its hardware—the iBook, the Titanium PowerBook, and especially the new iMac. And its software strategy, built around the Macintosh as a “digital hub,” has produced a string of successful, free multimedia applications like iTunes and iPhoto. The result: despite a meager market share of 4.5 percent, Apple, like Dell, actually made a profit selling PCs last year, something none of the other, more conventionally led companies can claim.

There are plenty of other industries in which small firms are out-competing their larger, more conventional rivals. I could just as easily have selected the airline industry, in which Southwest and JetBlue profit from a simple strategy that the larger players like United have been either unwilling or unable to replicate. And the once great steel companies of America’s past—US Steel and Bethlehem Steel—have both been so unsuccessful in competing with cheap foreign producers and nimble competitors like Nucor that both have applied for bankruptcy protection this year, with the distinct possibility that Bethlehem may never emerge as a viable company.

Dell, Apple and others like them succeed because they break the rules that keep their competitors hidebound. Does anyone see a pattern?

Alex F. Rubalcava ’02 is a government concentrator in Eliot House. His column appears on alternate Wednesdays.