CASE STUDY

I 'LL MAKE FRED pay for dinner,"thought Jack Thompson, theCEO of Praxim, Incorporated, as

he drove north on Interstate 101 to-ward 11 Fornaio, his favorite restau-rant in Palo Alto. Fred Wong, a long-time friend, had been one of Praxim'searly backers, and Jack knew he'dget an earful about his company'scontinued lackluster performance."I'll be getting all the grief," Jacksaid to himself. "At least Fred canpickup the tah."

Jack had been with Praxim for 18years and had served as CEO for the

last 12. He could take a lot of thecredit for building the company intoa multihillion-doUar business sell-ing workstations, PCs, servers, soft-ware, and services. But now, aftermany years of strong growth and prof-itability, Praxim was being draggeddown by increasingly intense com-petition in the consumer segment.The company had sold to consumerssince the early 1990s; as long asthere had been upmarket customerswilling to pay $2,000 or more forfast, powerful equipment, Praximhad done well. But that higher in-

come market was now saturated,and Praxim, like most PC makers,was competing increasingly on price.

The consumer division currentlyaccounted for 20% of Praxim's sales -but the gross margin had dropped toa dismal 12%. Just two days earlier,Praxim had announced its sixthstraight disappointing quarter, andthe stock price had been hit hard.Stock options all over the companyhad been driven further under water.

Jack was beginning to wonder if itwas even possible to make money inthis business. 1

THE CASE OFPraxim can't make money on consumers. Should it even

CASE STUDY

His new consumer-division man-ager, Linda Marcus, was entirelysure it was possible. In fact, it was inpart because of her certainty tbatthey could turn the business aroundthat Jack had lured her away from aleading paekaged-goods company,where she'd headed up a highly suc-cessful new-product division. Butthen, Linda seemed sure abouteverything. She drove a red Ferrariand golfed competitively in herspare time. She was no pushover.

Jack stretched and mentallyplayed baek the early morning meet-

ing of his senior staff, where Lindahad presented her initial plans.

"If we intend to win in the con-sumer business, we need a totallynew approach," Linda had begun,"We have to sell to consumers dif-ferently, market to them differently,and service them differently." Un-like the others in the meeting-mostof whom were wearing knit shirtsand khakis-Linda wore a businesssuit. Her tone was all business, too,and did not allow for argument; shedefinitely commanded attention.

"Think about how hard we workto develop relationships with ourcommercial customers," she con-tinued. "We do that because if weunderstand their needs, we can sellthem not just PCs but all their com-puter-related products and services.

Andy Blackburn is a vice president,Matt Halprin is a manager, andRuth Veloria is a consultant in theSan Francisco office of the BostonConsulting Group. They are allmembers of BCG's high-technologypractice.

THE PROFITLESS PCBY ANDY BLACKBURN. MATT HALPRIN. AND RUTH VELORIA

CASE STUDY THE CASE OF THE PROFITLESS PC

We build a genuine relationship withthem, and they come back again andagain and again."

As Linda spoke. Jack scanned hisexecutive group. Amid all the execu-tives paying close attention, therewas Mike Eisenstein, the ehief tech-nology officer, who was, as usual,fiddling with his notebook PC, seem-ingly oblivious to anything going onat the meeting.

"Why is it, then, that we haven'tmade relationship building a strate-gic priority in the consumer mar-ket?" Linda was continuing. "If wecan find a way to do that success-fully, the same benefits will comeour way. If individual buyers see usas a trusted brand-the one peoplecan come to for all their computer-related purchases-we ean sell bun-dles, not boxes. Bundles that includehigh-margin items like software, ser-viee contracts, and Internet access.And if we find a way to maintain thatrelationship, we'll sell them equip-ment and services over a lifetime.Remember, the future market willbe mainly repeat buyers, so buildingloyalty ean really pay off."

Bob Tanshaw, the vice president ofthe commercial division, shifted inhis seat, and Jack could sense his irri-tation. Bob was a wiry, short manwho could - and often did - talk a bluestreak. He was an effective VP, butJack always came up with excuses toavoid spending casual time with him.

"Something to say. Bob?" Jackasked, knowing from long experi-ence that Bob was just about to in-terrupt Linda.

"Yeah, I do. Like, well, here we goagain. How many consumer strate-gies have we tried and abandoned,folks? The fact is, consumers won'tbe loyal to us. They won't be loyal toanybody. The only difference is thatwe'll blow millions on some brand-ing campaign that works for tooth-paste but not for PCs. Consumersthink PCs are all the same-a eom-modity. And they're right."

Linda had a ready answer. "Bob,your elients don't come to you for aIDOX. They eome for help solvingbusiness problems. We need to usethat approach with individual con-sumers. You may not realize this,but today's first-time buyers are ner-

vous about technology. They buy be-cause they think they owe it to theirkids or out of a vague sense that theyneed to be on the Internet. They'redesperate for someone to guide themthrough the process not just of buy-ing a computer but of buying soft-ware, setting up the system, and us-ing it. They want a single point ofcontact - someone who doesn'tspeak technobabble when some-thing breaks, or seems to break. Thatsomeone should be us. And if wemove first to improve the experienceof buying and owning a computer,we can lock in loyal customers."

"We work hard todevelop relationshipswith our commercial

customers. Whyhaven't we done that

with consumers?"

Mike, barely glancing up from hisnotebook, said, "Costs a lot, thatkind of hand-holding. Where's themoney coming from?"

"Thanks for the lead-in, Mike,"said Linda, smiling. "The secondreason we need a new strategy isprofits. Better bundling - more ex-tensive bundling-can give us theprofit boost we need. Gross marginsrange from 20% to 80% on peripher-als, software, and consumables, in-stead of the 12% to 14% we get onthe box. Even if we get only a sliceof that, we're better off."

Bob still looked dubious. "So howdo you see making this happen?"

Linda responded confidently. "Tobegin with, we need more direct con-tact with customers, so we're goingto put our own people in stores atpeak selling times, Customers willfind that we're more knowledgeablethan the typical retail salesperson.We're also going to create a presales800-number staffed with people whocan answer questions in plain Eng-lish. Sure, this will add eosts to ourbusiness but, over time, it will buildcustomer loyalty."

"Give me a break," Bob said. "Youwon't get loyal eustomers without alot of direct contact. So unless youwant to go completely direct, forgetit. You're talking about adding a di-rect sales force on top of an indirectchannel. Without an unrealistic pricepremium, you can't afford it. We can'tafford it."

Bob was hitting his stride now,and when Linda tried to break inhe talked over her with a torrent ofwords. "Let me finish, please," hesaid, irritably, "You'll also have tospend a lot of money building the in-frastructure and the brand beforeyou find out if it works. It could takeyears. In the meantime, our earningswill go down. Do you have any ideawhat that will do to our valuation?"Bob didn't have to mention the nega-tive impact on everyone's stock op-tions. "We'll lose some of our bestpeople-including people from someof our profitable businesses. Thekind of investment you're talkingabout is way too risky."

Jaek listened to Bob on two levels -to hear what he was actually sayingand to gauge his level of annoyance.Bob, like most of them, got regularcalls from headhunters. If the valueof his stoek options went too low,and if Bob didn't buy in to the newconsumer approach, he might walkaway at a moment's notice.

Jack spoke up, "Hold on a secondhere, folks. Let's remember that webrought Linda in because we knowthat what we ore doing isn't work-ing. What would you do differently.Bob?" As the group turned back toBob, Jack surreptitiously popped anantacid pill and washed it down withspringwater.

Bob took a deep breath and tried toslow down. It wasn't easy. "This is acommodity business," he said, "soyou focus on cost. Gross margins arelow, and they're going to get lower.Linda should squeeze more out ofthe costs she has some control over,like marketing, G&A, and customerservice. If we take out more costthan anyone else, we ean reduceprices, build volume, and use thatleverage to beat suppliers even fur-ther down on eosts. If we squeezethe lemon harder than our competi-tors and let some of them waste

30 ARTWORK BY VICTOR JUHASZ

CASE STUDY THE CASE OF THE PROFITLESS PC

money on branding, we can get backin the black."

Before Linda could respond, Mikespoke up. "But Bob," he said, hisvoice dripping with exaggerated pa-tience, "scale economies don't mat-ter in the PC business. You knowthat. Most of our costs go to buymaterials, right? And the suppliershaven't exactly heen eager to give usvolume discounts on them. Best-case scenario, we'd get a i % cost ad-vantage by squeezing harder, butthat's not meaningful. And we'd benuts to cut costs on service. Thepress is already slamming the indus-try for keeping customers on hold 45minutes or longer.

"All of you know where I thinkwe should be investing. We shouldhe beating everybody else to the nextkiller app-the device that's comingafter the PC-TV combo. Whoevergets there first will leapfrog the com-petition." Mike was typing furiouslyin his notebook, talking all the while."But that's a discussion for anotherday. I'd like to hear what Linda thinkswe'll be selling, aside from 'trust.'Hardware-software bundles? Ser-vice? Internet access?"

Linda looked grateful to have theball back in her court. "All of thoseand more. We're looking at segment-ing different groups with differentneeds-say, Internet cruisers versushome-office buyers versus parents-"

Mike snorted. "This is what youmean by a brand? It's not exactly fo-cused, is it?" Mike shook his head,and Jack overheard him mutter,"This used to be a technology com-pany. Now we just talk marketinggarbage."

Jack didn't worry about Mike de-fecting, despite regular offers. He'dbeen with the company almost for-ever, and he had an old-fashionedsense of loyalty. But if he didn't likethe company's direction, he couldeasily retire. Like all the senior staff,he was financially secure. Unlikethe others, he lived simply. He drovean old station wagon and dressedin the shorts-and-sandals uniform ofthe early technical gurus. If Mikeleft, a lot of Praxim's spirit wouldleave with him.

Linda seemed a little rattled byMike's dismissal. "Look, nobody's

ever done sophisticated consumermarketing on PCs. Figuring outwhat customers want-getting in-side their heads and then using whatyou find there - is good business strat-egy. It's not 'marketing garbage.'"She glared at Mike. "Have you peopleever followed Mr. Middle Americaaround in a computer superstore,watching him try to buy a computer?It's patbetic. Not because he's pa-thetic but because none of the peo-ple trying to sell to him-and thisincludes us-has bothered to figureout who he is and what he needs.Where I come from, we spend our

]ack looked quizzicallyattheCFOand

asked, "What are yousuggesting; Vie-thatwe exit the consumerbusiness completely?"

lives doing that. And we make a lotof money when we do it well."

Victor Huang cleared his throat,and the group turned to him. Vic wasalways able to get the floor withoutappearing to try. He was the most re-laxed CFO Jack could ever imagine.He left promptly at 4:30 every day,took several fishing trips a year, andnever missed his adored daughter'spiano recitals.

"With all due respect, Linda, let'slook at this question from the finan-cial perspective. I've heen with thiscompany three years, and I've done11 quarterly Wall Street analyst con-ference calls. Every time, it's thesame drill. 'Why aren't your profitshigher? You're growing the top line,but the bottom line is lousy.' There'salways at least one analyst who askswhy we haven't pulled the plug onthe consumer business.

"I think we should face reality. It'snot our fault; it just is what it is.We're up against a dozen competi-tors with deep pockets. Any newprofit source-from marketing ortechnology - will get competed away.At least in the commercial business.

we have a chance to create someshareholder value." Victor folded hisarms, leaned back, and smiled.

Jack looked quizzically at the CFOand asked, "What are you suggest-ing, Vic-that we exit the consumerbusiness completely?"

"No, not completely," Victorreplied. "But I think we should limitour participation and our invest-ment. Why not sell commercialproducts, with very minor modifica-tions, to the consutner market? Andwhy not use the commercial infra-structure - customer service, techni-cal support-to serve consumers aswell? Personally, I can't see spendingany money at all on promotions orhranding. A n d - w h a t the h e c k -keep the selling price high enough sothat for every unit we sell, we'll turna profit. Let customers self-select tous. Sure, our volume will go down-maybe a lot. But our commercialsales are high. We'd still have cloutwith the suppliers. The big differ-ence," he finished, "is that we'll stoplosing money."

With that, everyone started to talkat once. Jack raised his hand to cutoff further discussion. "Listen. We'renot going to make any radical deci-sions right now. I appreciate the is-sues you've all raised. But, as youknow, we recruited Linda to pursuea consumer goods approach to thisbusiness."

As Jack pulled into II Fornaio'sparking lot, he realized that the drivehadn't had its usual calming effect.In fact, he felt uncharacteristicallyindecisive. His instinct was to pur-sue branding, but his staff certainlywasn't on board. If he didn't gain atleast grudging commitment, his besttalent could vote with their fect-possibly within a few weeks.

And, worse yet, he wasn't at allsure what it would take to succeed.

HBR's cases present common man-agerial dilemmas and offer concretesolutions from experts. As written,they are hypothetical, and thenames used are fictitious. We inviteyou to write to Case Suggestions.Harvard Business Review, 60 Har-vard "Way, Boston, MA 02163. <i^ddescribe the issues you would liketo see addressed.

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