How It Companies Compete

HOW IT COMPANIES COMPETE By: Branda, Dan., Canadian Business Review, Spring95, Vol. 22 Issue 1, p20, 4p, 2 diagrams

INFORMATION TECHNOLOGY COMPANIES ARE USING INTERNAL AND EXTERNAL STRATEGIES TO BOOST THEIR COMPETITIVENESS Information technology (IT) companies worldwide understand that their share of any product category or service might evaporate overnight. They accept that today's array of products and services could become obsolete and therefore unprofitable tomorrow. Product life cycles for everything from CPUs to storage capacity are measured in months, not years. To compete effectively, next year's solutions must be on the drawing board today. Another cold reality: The products and services that drive the information highway no longer generate the same returns they did just a few years ago. Profit margins seem to be shrinking almost as fast as the products themselves evolve, and to compete effectively, IT companies must merchandise to global markets. These new business imperatives have led to a rethinking of how IT companies compete, especially in the Canadian context. Hewlett-Packard Canada has developed a strategic outlook that maximizes its competitive advantage in the face of these new business imperatives. The first element of the company's strategy, embodied in its Centres of Excellence Program, addresses the need to compete within the organization itself for the global production mandates that dictate the company's long-term success. The second element focuses on enhancing the shift towards "co-opetition," a term coined by Ray Noorda, Chief Executive Officer, Novell Inc. Co-opetition is characterized by the constantly changing alliances and partnerships within the IT sector whereby companies challenge each other for business opportunities while at the same time collaborating on the development of specific projects, products and services. CENTRES OF EXCELLENCE PROGRAM Given that the Canadian market accounts for less than 5 per cent of its revenue, Hewlett-Packard Canada, as is the case with most transnational companies in the IT sector, must win global mandates for its products and services. The company has chosen to focus on the telecommunications and networking subsectors in order to take advantage of the critical mass that exists in Canada in terms of skills training capacity, R&D expertise, and component production and assembly. Canadian universities such as Waterloo and Ecole Polytechnique produce outstanding engineers; Hewlett-Packard's Canadian competitors--the IBMs, Northern Telecoms, Mitels and Newbridges--are potential sources of technical and component support (see Exhibit 1). In order to win global mandates in the telecommunications and networking subsectors, Hewlett-Packard Canada competes internally with its sister sites in other countries. To make its case for any product or service, the company must clearly demonstrate that its products are worthy of a global mandate, that an infrastructure exists to support R&D, and that the company has access to a world-class supplier chain during the production stages of its products' life cycles. The Centres of Excellence Program exists as a strategic overlay to Hewlett-Packard Canada's internal planning, production and marketing programs. Centres of Excellence targets senior managers within the global organization who have the power to award global production mandates. Its purpose is to ensure that decision makers at the company's corporate headquarters, as well as those based at centres around the world, are fully aware of the competitive opportunities for product and service development that exist in Canada. Simply put, Centres of Excellence advances the notion that for certain defined activities, Canada is the best place in the world for Hewlett-Packard to do the job. In this context, the Centres of Excellence Program identifies new opportunities in product engineering, joint ventures and strategic acquisitions and assigns internal benefits to each. The benefits include new revenue streams, the creation of high-value-added jobs, market share and export growth, and the establishment of new global product mandates. The program stresses the added value of Canada's strong infrastructure, with its cost-effective, knowledge-based resources, and the equally important presence of advanced supplier chains. THE INNOVATION--PRODUCTIVITY EQUATION It would be difficult if not impossible for Hewlett-Packard Canada to win and hold global production mandates if it did not have a well-developed internal strategy for maximizing innovation and productivity--a strategy that is responsive to the changes occurring within the IT sector, both in Canada and around the world. The development of this element of the company's strategic outlook is predicated on four conditions. ° Management's most important task is to build a framework for creativity. This fosters risk-taking and ensures the continuous development of new ideas, processes, products and services. ° Change is the only constant. The organization understands that its success is measured by its ability to forecast change: to develop new ideas, engineer practical applications, map new markets, win new global mandates, and assemble and market new products. ° It is vital to seek out customer feedback and input. Everyone from product engineers to senior managers must have the ability to respond in tangible ways to customer needs. ° Today, no company can afford to engage in complex production processes alone. Whether the process is driven by customer input or the need to match and better a competitor's new products, the key is to short-circuit the "not invented here" syndrome. This means outsourcing component production and supply and shrinking the time-to- market cycle. FROM COMPETITION TO CO-OPETITION As is the case with many of Canada's top IT companies, Hewlett-Packard Canada has come to place increasing reliance on some of its traditional competitors--as well as smaller, or boutique, suppliers--to provide specialized production support. "Co-opetition," as it is called, allows leading IT companies to compete against each other in certain areas at the same time as they co-operate in others (see Exhibit 2). Co- opetition is occurring to a greater degree in Canada today because IT companies are taking similar niche approaches to survival and spinning off highly focused divisions that concentrate on specialized products. In keeping with this approach, during the last four years Hewlett-Packard Canada has created four divisions that fit into the telecommunications or networking subsectors. These divisions have been kept small in order to preserve their entrepreneurial spirit. Each produces products that have world mandates, and in some cases, these products hold a dominant market share. All four rely heavily on outsourcing to supply everything from software to circuit boards. In fact, one of the divisions has no manufacturing or assembly capability at all, though it develops and markets highly sophisticated electronic switching products. It is staffed almost entirely by engineers engaged in research and development, and its production operation has been contracted out. The development of smaller, semi-autonomous units operating with specific global product mandates has helped Hewlett-Packard Canada become more profitable and more productive. However, co-opetition can succeed only when highly developed infrastructures can be tapped for staffing and R&D purposes and when a world-standard supply chain is present to carry out production functions. As a result of the migration towards marketplace co-opetition and increased outsourcing, hundreds of smaller Canadian companies have become indispensable in terms of their capabilities and expertise. Many began operating only within the last five years and experienced growing pains as they geared up to meet rigorous international standards. Hewlett-Packard Canada has worked in co-operation with other leading companies through the Information Technology Association of Canada (ITAC) to qualify these new supplier companies to meet standards set by ITACs Supplier Development Program. In addition to performing important production functions, these supplier companies are seen as valuable resources, and their capabilities are actively marketed to other Hewlett-Packard companies around the world. GOVERNMENT'S ROLE? The Canadian government plays an important role in fostering co-opetition by balancing the forces of competition against the need for greater co-operation. Governments can help to improve the competitive advantage of the entire industry by taking a proactive role in supporting the development of a competitive environment, not merely in terms of post-secondary institutions but in a variety of ways. Tax regimes that reward R&D, primary education that emphasizes the importance of maths and sciences, federal support for industry-wide standards, encouragement for such initiatives as the information highway, and aid in offshore marketing are a few elements that contribute to the type of infrastructure that is vital to IT industries today. Two examples illustrate the point. First, the federal government, through the Department of Industry, supported the creation of ITAC's Supplier Development Program, which has benefited both suppliers and their clients. Second, R&D tax credits have done much to make it possible for Canadian IT companies to grow. The role of tax credits is apparent in a 1994 study conducted by Hewlett-Packard Canada, which demonstrated that R&D conducted in Canada was between 35 per cent and 46 per cent more cost-effective than similar work done in the United States. In one case, a Canadian division funding R&D in both Canada and the United States discovered that R&D work done in Edmonton was 40 per cent less expensive than comparable work undertaken in Colorado Springs. SMALL IS BEAUTIFUL Players in today's IT sector understand they must maintain an innovative yet focused approach to product development; they must partner and out-source more, while controlling quality and costs; and they must maximize global market share for their new products and services. While the changing business environment in the IT sector has caused some dislocation, it has also resulted in more focused and more productive output. Product engineering that is R&D-intensive generates more high- tech jobs, which in turn supports the need for stronger educational systems at every level. Increased reliance on outsourcing is creating a network of independently owned and operated Canadian companies with world- standard capabilities. Smaller business units focused on research and development must rely heavily on an advanced educational infrastructure for personnel recruitment, as well as world-standard suppliers capable of meeting production and manufacturing needs. Co-operative efforts, through either partnering or outsourcing, can maximize competitive abilities in specific areas. Governments seeking to foster the growth of high-tech industries have come to recognize the need for less regulation and more assistance in terms of managing industry-wide matters. The need for public sector support transcends any one department or single level of government. For Canada to compete effectively on world markets, governments at every level must better understand the nature of change as it affects key post- industrial business sectors, the challenges inherent in change, and the impact that comes with a co-ordinated approach to infrastructure support. Governments must learn to be more like the industries they wish to support. They must communicate with their stakeholders more effectively in terms of promoting the value of their programs. Co-opetition must begin to apply to the public sector as well. It is important for various levels of government to compete less and partner more, to identify their individual strengths, to avoid program duplication and to short-circuit the time-to-market cycle for their new initiatives. A final point. The current trend towards less government or less intrusive government must not come at the price of neglecting the care and maintenance of infrastructure. For Canada's industries to compete globally, the country's educational systems must meet and exceed global standards. Perhaps it is in this area that partnering will pay its greatest dividends--partnering between the public and private sectors focused on developing a world-class supplier chain and delivering a well-educated labour force capable of providing expertise and responding to rapid change. CHART: EXHIBIT 1: CENTRES OF EXCELLENCE PROGRAM DIAGRAM: EXHIBIT 2: SET-UP FOR CO-OPETITION Co-opetition can succeed only when highly developed infrastructures can be tapped for staffing and R&D purposes and world-standard supply chain is present to carry out production functions. ~~~~~~~~ By DAN BRANDA DAN BRANDA is President and CEO of Hewlett-Packard (Canada) Ltd. and is responsible for all phases of the company's operations in Canada, including sales, support and business management. He is also responsible for strategic planning and development programs.

Copyright of Canadian Business Review is the property of Conference Board of Canada and its content may not be copied without the copyright holder's express written permission except for the print or download capabilities of the retrieval software used for access. This content is intended solely for the use of the individual user. Source: Canadian Business Review, Spring95, Vol. 22 Issue 1, p20, 4p, 2 diagrams.