Why Focus Is Now In, Scale Is Out For Tech Giants

Wait. Scale is out? The One True Path. The core element of dominance. The North Star by which all tech enterprise success was guided.  How can that be? 

For those who follow economic cycles rather than breathless popular hype, this will be neither surprising nor alarming. The original concept of good times and bad times, the lean and fallow years of Biblical lore became more broadly applied to models and modes and memes in business. In the 60s and 70s, conglomerates like Gulf and Western (nicknamed 'engulf and devour') were all the rage to generate 'excess returns.'. Until the capital markets decided they would decide where value lay, thanks very much, and management should stick to managing.

Jack Welch of GE brought scale back into vogue in the 90s and with it 'the imperial CEO' who knew and controlled all - and was paid as such. But the markets again intervened, making life considerably less complacent for his successor.

The application of scale to tech, as the following article explains, was based largely on the belief that technological magic could be applied to virtually any business, much like superior managers were once thought to be able to ply their trade in any industry or organization. But having been encouraged to embrace change for a generation now, tech suddenly finds itself subject to the same realities it once imposed on others. The cloud has blown away much of the justification for scale at Microsoft, Intel, IBM and HP. Even Apple is forced to contemplate life without exponential iPhone sales growth and must adjust accordingly.

Focus will now be in. Until it isn't. JL

Dan Gallagher reports in the Wall Street Journal:

The ground shifts quickly in tech, leaving even rich, powerful companies disadvantaged. Scrambling is hard when you are huge. Even more so when the market is moving against you. As cloud offerings have grown more robust, fewer companies are selecting the huge sort of technology-outsourcing deals that once drove service sales. Scale matters in tech. Until it doesn’t.
Scale matters in tech. Until it doesn’t.
Microsoft said Wednesday it is laying off 1,850 employees from its smartphone business, which effectively kills most of what remained of the business it bought from Nokia less than three years ago for $7 billion.
This happened shortly after Hewlett Packard Enterprise announced plans to spin its services business into a merger with Computer Sciences Corp. CSC This unwinds the $13.9 billion acquisition of EDS done in 2008 and comes less than a year after HP split from its PC and printer business. Then there is Intel, which last month announced it would cut 12,000 workers, its largest-ever layoff, as part of an effort to move quicker on better opportunities.

 A common thread to all these moves is the stated desire for focus. That is quite the change: Scale once mattered in tech.
HP in particular was driven for years to outsize its rivals and build a one-stop shop that catered to nearly every technology need of businesses and consumers. That drove its purchase of EDS and—seven years earlier—its $25 billion merger with Compaq.
Those deals looked right at the time. But the ground shifts quickly in tech, leaving even rich, powerful companies disadvantaged. Consider that when HP bought EDS in 2008, Amazon ’s nascent cloud business was generating less than $400 million in annual revenue. That has surged to nearly $9 billion for the 12 months through March 31, making Amazon the undisputed leader in cloud services.
Put another way, the company once known best for selling books at a near loss has now forced every big, enterprise technology company into a scramble.
And scrambling is hard when you are huge. Even more so when the market is moving against you.

 As cloud offerings have grown more robust, fewer companies are selecting the huge sort of technology-outsourcing deals that once drove service sales. Hewlett Packard generated just under $20 billion in services revenue last year. But that is down 25% from five years ago, and analysts expect the number to keep trending downward for the next two years.
Microsoft’s acquisition of Nokia is an even starker reminder that size and money doesn’t guarantee a spot in the winners circle.
Late to mobile and with little support from other handset makers, buying Nokia was a last-ditch effort to keep Windows Phone alive.
But even Microsoft’s deep pockets couldn’t buy it market share from Apple and Google. Windows Phone powered just 2.5% of smartphones sold in 2012, and IDC projects that number will be 1.6% this year.
In this light, efforts by both companies to shrink make sense, even if significant business challenges remain. Hewlett Packard Enterprise will be smaller than Cisco in terms of revenue and will depend much more than it used to on the transactional nature of selling hardware. Microsoft will stem its losses in mobile devices, but still needs to keep its lucrative software offerings competitive against cheaper options while building up its own cloud business.
Both companies will benefit from better focus. And hopefully their recent histories serve as a cautionary tale that permanence in tech is illusory. Even so-called “transformative” deals don’t change that.