Case study 10.2: Handheld Computers - Palm

One Palm flapping

Carl Yankowski is having a hard time turning Palm's promise into profits By rights, it should not have been this hard. Carl Yankowski, chief executive of Palm, the leading maker of handheld computers, is a former president of Sony's American operations. He is a big, dressedin-black 'gadget guy' with just the right combination of consumer-marketing experience and technology savvy to straddle the gap between computing and consumer electronics. From its start in 1996, Palm single-handedly generated the personal digital assistant (PDA) craze, succeeding where many had failed before, and it is now leading a drive into the new wireless world. Computing meets telecoms meets consumer electronics - the palmtop becomes the new desktop. And here, or so it might seem, in the right place at the right time, is Mr Yankowski. Yet he is struggling. For all Palm's success in defining and leading a booming new industry - its operating system runs more than three-quarters of the world's PDAs, giving it an almost Microsoft-like monopoly - the company itself is in a very unMicrosoft-like financial mess. Recently, it issued a warning that its losses in the current quarter would be twice what had been expected - as much as $190m. Its sinking fortunes also scuttled a planned merger 394 STRATEGY ANALYSIS with Extended Systems, a deal that was meant to take it to new heights in the corporate market. Palm's shares have fallen by 90% over the past six months. The company's difficulties do not all lie at the feet of Mr Yankowski - he took over only a year and a half ago, as Palm was freeing itself from 3Com, its former corporate parent and the source of its risk-averse corporate culture. But, like it or not, they are now his to solve. The biggest problem is that Palm is having a hard time finding the right strategy. At the moment, it follows a combination of Microsoft's with Apple's that ends up weaker than either. Like Apple, it makes its own hardware and software: a line of PDAs and the famed Palm operating system (OS) that is the secret of its success. Like Microsoft, it also licenses its OS to other companies, ranging from Handspring, which was started by Palm's original founders, to Sony and several mobile-phone makers. The downside to this is that Palm's licensees have proved all too good at making hardware. Today, a mere two years after it released its first PDA, Handspring is beating Palm in sales. And both Sony and Handspring have pushed their hardware further than Palm, introducing innovations such as expansion slots and add-on devices from phones to music players. The result is that the PDA business is quickly taking on the savage character of the PC industry, with commodity products, falling margins and cut-throat competition. Mr Yankowski inherited most of this, and it had too much momentum for him to change it quickly or easily. If Palm stops licensing its operating system, it risks losing out to OS competitors such as Microsoft and Psion. If it stops making hardware entirely, it would take the best-known brand of PDA out of circulation. The enthusiasm over Mr Yankowski's arrival in late 1999 was based largely on his background, which suggested that there might be a third way for the company. Aside from his Sony experience, which placed him at the heart of the best consumer electronics firm just as it was embracing digital technology, his career has been a virtual tour of great marketing firms: Reebok, General Electric, Pepsi, Memorex and Procter & Gamble. Starting it all was an engineering degree from MIT. The hope was that Mr Yankowski could combine Sony's design and marketing skills with Palm's technology. His type of consumer-marketing experience can make the difference between a niche gadget and a Walkman-like hit. Which is why it is so puzzling that Palm has changed so little since his arrival. CORPORATE PRIORITY Many expected him to push the company faster into the consumer market, with brightly-coloured PDAs and extra consumer features such as MP3 and video. Instead, he has made his main priority the staid corporate market. At present, most Palms make it into the office thanks to somebody's personal expense account. Mr Yankowski's aim is to encourage IT managers to purchase them directly for employees, much as they buy PCs. This is not a bad strategy - the corporate PDA market is about the same size as the consumer market, and both have lots of potential - but it may be a waste of Mr Yankowski's special talents. While he tries to sell his firm's strait-laced productivity tools, in black and grey, to corporate purchasing managers, his old company, Sony, is generating enviable buzz with a cool purple PDA that plays videos and has a headphone jack. Worse, the corporate market is the one in which Palm faces its toughest competition, in the form of Research in Motion's Blackberry interactive pagers, which have generated Sony-like excitement among the suits. Palm's recent results have at last provoked Mr Yankowski into thinking more broadly. He is now in management retreats with his staff and is expected to announce a new strategy soon. But his options get more limited by the day. Palm's finances are too rocky to get into a consumer-marketing race with Sony. Nor does it have the products to justify that. The first Palms designed on Mr Yankowski's watch are now out. They do little more than add an expansion slot like the one Handspring has had for two years. Meanwhile, the collapse of the planned merger with Extended Systems, which has had success selling to IT managers, limits the push into the corporate sector. And abandoning hardware entirely would reduce Palm to a software and services firm - hardly the place for a consumer-marketing guru. Mr Yankowski does not have much more time to find the right answer.

Questions

1 Describe Palm's positioning in the market, in terms of resources, capabilities, cost and benefit advantage.

2 What criteria can Palm use to segment its market?

3 Evaluate Palm's targeting strategy