Hewlett-Packard – The Flight of the Kittyhawk Essay
The technology industry is a market of change, due to innovative breakthroughs. But for the firms in this sector, the challenge is to predict success. The disk drive industry provides some characteristics of how changes can cause certain types of firms to succeed or fail in choosing for instance a disruptive or a sustaining innovation.
HP was founded in 1939 by Bill Hewlett and Dave Packard. Their first product was an audio-oscillator, built in a Palo Alto garage. HP growth was driven by several innovations in high technology over so many decades. Today, HP is a leading global provider of computing and imaging solutions and services, which is focused on making technology and its benefits accessible to all. HP is still a company of inventors led by Carly Fiorina; Chairperson and CEO.
In 1992 Hewlett Packard had four major business organisations (Test and Measurement, Computer Systems, Measurement Systems and Computer Product). Among the different groups of the Computer Products organisation, we could find the Mass Storage Product Group, which contained the Disk Memory Division (also called DMD), responsible for developing and launching disk drive models.
The Kittyhawk was a disk drive that HP designed to be the need of next-generation. In this study, we will try to answer the following question: how did an organisation that appeared to do everything right eventually fail ?
First, we will present the high-potential of the DMD and Kittyhawk project, through the disk-drive market, by characterizing the Kittyhawk innovation, and the HP way of management. Then, we will analyse the reasons for failure, defining sustaining and disruptive innovations and the market and strategic objectives that were taken. Finally, we will see how HP could have avoided this failure by suggesting some solutions.
I. High potential of the DMD and the project
1. Place of HP through DMD in the disk drive market
The Disk Memory Division activity is based on the development and the commercialisation of disk drive models. The hard disk drives are magnetic information storage and retrieval devices used with computers. The first disk drives invented in the middle of the 50s were huge and heavy with a small capacity. In the space of 30 years those parameters had changed considerably: weight and size were steadily reduced whereas capacity was increased. A disk drive’s architecture was categorized by the size of the disk’s diameter.
The DMD product line offered a substantially higher capacity in megabytes than the industry norm. Most of the HP engineers concentrated their work on increasing the disk drive’s capacity, and HP was the first to introduce one and two gigabytes drives. This division had a small weight in the corporate revenue in the 80s: from 1983 to 1991 this weight never exceeded 5.7% of the corporate net revenue. While the global revenue had been rising permanently from 1983 to 1992, the DMD revenue hardly kept the same level and even sank from $315.5 million to $251.3 million (1984 to 1986) and from $533.4 million to 280.7 millions in 1991 which came to be one of the worst years the DMD had known in this decade. It wouldn’t be an exageration to define this Division as an anomaly in HP for the group was often the leader in other businesses.
But even thanks to their research of higher capacity that supplied high profit margins, the place of the DMD in the disk drive market was small compared to its competitors. In 1992 the capacity of the median model sold by the industry was 400MB, but the market leaders Seagate Technology and IBM sold 500MB and 700MB models respectively, whereas HP median models had a capacity of 1.027GB. However this overhang allowed $519 million sales when Seagate Technology disk drives sales reached $4 billion and IBM disk drives sales reached $3 billion. In 1992 the DMD only positioned itself as a niche player.
The competition in this field was intense. The supply was evolving very quickly and products always changed into smaller size and higher capacity. Innovation was the keyword of HP but didn’t seem to fit with the large market at this moment.
2. An innovation: the Kittyhawk
In order to transform DMD into the market leader, HP’s management decided that the division would be responsible for developing and launching a brand new drive. 2.5″ drives would be too large for next-generation portable devices so a new opportunity was on the horizon. If HP could develop a drive only 1.3″ in diameter, the company could establish itself as the market leader and set the next industry standard.
This miniaturization of the classic hard drive was called Kittyhawk. It held 20MB of disk storage. HP designed the Kittyhawk for use in mobile-computing devices, such as PDAs (personal digital assistants) and small hand-held devices, and non-traditional applications, such as game machines and printers. HP wanted a product that transcended the traditional market boundaries and could be used in any product that used a microprocessor. In spite of the financial risks DMD could afford it thanks to the profits from the division’s one and two gigabyte products.
The genesis of this idea came from Bruce Spenner (General Manager of the DMD) and his project to implement Reduced Instruction Set Computing (RISC) architecture into HP’s minicomputers and workstations. RISC design is based on the premise that most of the instructions a computer carries out are simple instructions. As a result, RISC architecture limits the number of instructions that are built into the microprocessor but optimises each one so that it can be carried out very quickly. On top of that, their motto could have been: The smaller, the better. The new technologies market had huge potential to cause new-market disruptions especially with regard to the size of products.
HP would be a precursor with its Kittyhawk. Indeed, a 1.3″ disk drive would be the smallest drive in the world. Its potential competitors were:
– Flash memory: it retained information stored on it even if the power was turned off. But it had a very low capacity drive.
– A 1.8″ disk drive: the most predictable next step after the 2.5″ drive. It would have greater capacity than the Kittyhawk but it would be larger and consume more power.
3. Flexibility of a start up and resources of a big structure
The team which had been dedicated to the Kittyhawk project combined the flexibility of a start up and resources of a big structure.
Indeed, as the DMD culture was focused on getting higher capacity the team had been separated from the rest of the division and was quickly considered as a priority project. This status gave the Kittyhawk team total autonomy to develop the drive, find new markets and cultivate a customer base. They were able to make any decisions regarding manufacturing, financial, marketing and commercial fields. One of the strongest points was the setting up of the team. It contained three functional representatives (manufacturing, marketing, and R&D). An entrepreneurial manager from R&D was assigned as group leader, and was given freedom to recruit any star engineering talent he required (mostly selected from within DMD). Above all, the two main skills were to be “can do” and “risk taker” people. In order to bind the team members together they were required to sign a creed that stated: “I am going to build a small, dumb, cheap disk drive”. And only those who had strong beliefs in the project were kept. This deep feeling of being part of this exciting new project was a real strength and had always been maintained by the executives.
Adding to this start up structure the project commanded the resources of a big structure such as HP. The latter employed a management by objective (MBO) process. They focused on financial goals and placed great responsibility on the team members so that they felt fully involved in the project. It made the work more challenging. Moreover HP executives developed Management By Wandering Around (MBWA). It allowed a decrease in bureaucratic lines of communication. It also allowed for managers to communicate organisational values and management philosophy at a personal level. The very top management of HP had supported the Kittyhawk team in every step of the project, facilitating any action or decision and putting at their disposal any resources they required. In order to ensure the way the team should work, literature on group development was created.
This approach of the project on two levels gave the team a strong background to start the Kittyhawk adventure.
II. The reasons for failure
Although the Kittyhawk team was well-managed, the commercialization of the product ultimately failed.
1. Sustaining versus disruptive innovation
In order to better understand the reasons of the Kittyhawk failure, it is important to define the two following approaches: sustaining and disruptive innovations. As mentioned before, the Kittyhawk was to be “the smallest hard disk drive in the world”, and the creed the engineers had to sign showed that the Kittyhawk was to be a disruptive innovation.
On the one hand, a disruptive innovation is an innovation that brings to the market a product not as good as the products in the current market, and so it cannot be sold to the mainstream customers. However it is simple and it is more affordable. Disruptive technologies take root in lower-end markets or entirely new ones. They are often the catalysts for emerging markets and they are typically cheaper, smaller, simpler, frequently more convenient to use and lower performing. They bring a different value proposition to the market but simpler disruptive products generally allow lower margins and no higher profits. Successful disruptions have been launched most often by entrant companies. On the other hand, a sustaining innovation is an innovation that brings to the market a product or service that a company in the existing market could sell for higher margins to its best customers. It is a better product with more capacity. Some sustaining innovations are incremental year-by-year improvements and others are breakthroughs. Successful sustaining innovations have been launched more often than not by the established companies.
In order to meet their potential customers’ requirements and to better commercialize the Kittyhawk, the team modified the product several times. The latter received several design specifications such as “to withstand a 3-foot drop onto concrete”, to have “low weight and low power consumption” and “20 MB of capacity”. All this led them to add components and features which increased the price of the product. The Kittyhawk which was designed to be a disruptive innovation and a “cheap” product, finally moved to a sustaining innovation and became an expensive product with better capacities. This shift was mainly due to bad customer targeting.
2. The target market
In order to define their target, the Kittyhawk team members had to define high-potential areas of opportunity and threat.
On the one hand, disruptive innovation markets are made of non-consumers or over served customers. This last kind of consumers are people complaining about overly complex product or customers refusing to pay premiums for previously valued innovations: they prefer low-end disruptive innovations that provide “good-enough” functionality at lower prices. The non-consumers are often locked out of a market because they lack special training or because consumption takes place in inconvenient settings: they prefer new market disruptive innovations that bring new benefits around convenience or customization.
On the other hand, sustaining innovation markets are made of existing customers interested in higher capacities. The Kittyhawk team had to choose between DMD’s existing customers or a new market. But the problem was that in existing markets, planners can forecast demand quite accurately; but when new markets for new technologies emerge companies have constantly dismal records in forecasting demand for innovations that can ultimately lead to the new markets and customers that secure long-term growth. There was a mismatch between the innovation and its deployment. The Kittyhawk team planned to offer the innovation to its most demanding customers who still were unsatisfied with the performance of the product they were purchasing.
The Kittyhawk team had to weigh up its market options:
– either a disk drive specifically focused at the mobile computing market (to DMD’s existing customers) or,
– A drive so inexpensive that it could be used in applications where disk drives previously had not been economically feasible (explore emerging opportunities elsewhere).
They thought “that the PDAs would be the next bigg thing to hit the market” the Kittyhawk’s marketing staff was projecting the next 2 year demand from the PDA market to be over 500 000 units. At the end OEM was pricing high volume at about $250. However, they were interested by Nintendo. The leading video game manufacturer told them that if the Kittyhawk’s team could supply a 1.3″ drive for $50, then they would be interested in purchasing millions of units for their gaming cartridges. Nintendo needed to have more cheap storage, for their more complex games. This challenge, designing a $50 drive, seemed to be unrealistic for Seymour (he was the program manager from R&D, leader of the project team) and White (he was the marketing manager of the team), and “would require a significant design breakthrough”.
The team, in order to meet the requirements of the Kittyhawk potential customers, needed to develop three technologies like the accelerometer (3-foot drop of capacity), a new substrate material for disks, and a new level of integration for Kittyhawk’s electronics (the 1.3″ module would use less power, be lighter, and manufacturable at lower cost). The specificity of the 1.3″ drive should have at least 20 megabytes of storage. As a result, HP decided that its small disk should target the PDA and ultrathin laptop market rather than the video game manufacturers.
Indeed, the market research led nowhere because they talked to existing customers and to the Kittyhawk team, without changing their normal methodology for finding where the larger customers would be. They were influenced by the Kittyhawk’s team. The latter found several customers, but not those they had initially considered (Japanese word processors, Digital cameras, Cash registers, Telecom switching systems) except for PDA’s, but they never reached the volumes expected. The Kittyhawk wasn’t able to meet either HP’s Corvallis Division for their storage requirements; or Chicago’s control requirements with the Kittyhawk II and its 43 MB of storage. Nonetheless, the Kittyhawk team found its real market which finally seemed to be divided in two groups: customers interested in Kittyhawk’s ruggedness based upon its accelerometer technology (most prized attribute), customers who needed a cheap, simple drive priced at around $50. The Kittyhawk team got out of their laboratories and focused groups in order to create knowledge about new customers and applications; they made discovery-driven expeditions into the marketplace (Customers Electronic Show in Chicago). Finally they did not have the capability to enter a small emerging market: they did not see at first the value in investing in a disruptive innovation whereas leadership in this kind of technology could have created enormous value.
3. The strategic objectives
HP’s senior managers decided to design the smallest drive in the world 1.3″ which would undercut the 2.5″ drives in terms of cost and outdo them in terms of capacity, but it was also the drive that would enable the DMD to hold a profitable position.
DMD’s division had to bear the financial risks of the Kittyhawk. HP senior managers had raised Kittyhawk’s annual revenue targets to $100 million within two years of product release (3 times higher than had been originally forecast), the revenue growth rate had to be around 35%, and the Kittyhawk’s team had to accomplish a BET of less than 36 months and a few months after they set a launch schedule six months shorter than initially planned. Finally, the objectives were presented in a three page strategy document: “Lead industry in 1.3 inch form factor”, “ride the mobile computing explosion to get to low cost”, and “I’ll sell you a drive for $49.95”. These aggressive revenue targets were mainly responsible for the Kittyhawk’s failure.
Given these requirements, creating a $50 drive wasn’t possible according to Seymour and White because it “might not spawn a large market fast enough to achieve Bruce Spenner’s desired break-even-time”. The drive could not satisfy the revenue expectations within the launch schedule. There were inadequacies between the corporate strategy and Kittyhawk team’s project. The team viewed their disruptive technology as an irrational investment and dedicated their resources to sustaining improvements instead. According to the predictions, superportables like PDAs and ultrathin laptops should have been the next emerging market and should have been huge. However it wasn’t and the Kittyhawk team mismatched the requirements of potential customers. Moreover, they couldn’t meet Nintendo’s requirements because the team added components and features that inflated the price point well beyond $50, and Kittyhawk’s strategic flexibility was constrained by its growing losses. By seeking to improve the disruptive technology enough so that it would be suitable for known markets, the Kittyhawk team focused on a technical challenge rather than a marketing challenge. Focusing on profit can destroy even well-run corporations.
The Kittyhawk never followed the S-curve of Christensen because the cost structure the senior managers set up led the team to find larger markets to achieve the revenue goals. The Kittyhawk didn’t immediately reach its target market which impeded its takeoff and prevented it from reaching profitable margins. HP experienced both a financial and moral loss. The financial expectations decisions handicapped Kittyhawk. The Kittyhawk as a disruptive technology should have required “a very different overhead structure than the one Seymour had built in his push to get the Kittyhawk into the market in a year”, by setting modest revenue expectations. The target revenue was too large, and the division was forced to choose larger markets that wouldn’t value the disruptive technology. HP wanted to satisfy customers in established markets with higher performance which led it to include features that made the Kittyhawk too expensive to customers in the emerging market, and built the wrong product for the wrong customers. The team focused on large market in order to reach its financial goals (profit and BET) rather than focusing on small markets destined to become the larger ones in the future and ensure long term growth.
By using the management practices that allowed HP to become a leader – listening and responding to customer needs, spending R&D dollars to meet those needs – it made it difficult for the Kittyhawk team to develop a disruptive technology.