Palm Inc.'s declining market share and financial performance analysis

¶ … Diagnosis/Palm Inc.

Output Level

At the output level, Palm produces a couple of major products. Palm's core business is in smartphones, where the company produces the Pre and the Pixi. There is also the Veer coming soon. These phones are available in a number of different brand extensions and are oriented towards both the business and consumer markets. The company also has a few other products that it produces and sells. Among these are applications for the company's phones, as well as accessories. Both of these products are complementary to the phones and their income is therefore going to be highly correlated with phone sales. The company is planning to introduce a "touchpad" tablet this summer in conjunction with HP.

With respect to performance, Palm's objectives for the smartphone industry remain high. The company was one of the early innovators in the industry and as a result continues with the long-term expectation of being an industry leader. The stated objective in the 2009 Form 10-K is "to establish Palm as a leading global mobile device company." The company seeks to "increase Palm's share of the growing smartphone market." The company does not explicitly state numerically what its market share objectives are. With respect to this particular objective, Palm has not seen much success. Palm's market share in the three months ended November 2010 was 3.9%. This represented a decline from the 4.6% share the company held in the three months ended August, 2010 (Virzi, 2011). If Palm's most significant measure of sales success is market share, then Palm is not succeeding as the decline in market share has been an ongoing issue for Palm, a company that was once a dominant player in the smartphone market.

There are other output measures for the organization as well. While market share is important in the long-run, sales figures are important in the short run. Because the smartphone industry is growing so rapidly, total unit sales are not bad, but the company has found that its unit sales have been below expectations, and this has led to factory shutdowns in order to manage inventory levels (Gonsalves, 2010). However, in terms of revenues and profits, Palm has struggled mightily in the past few years. Revenues peaked in 2006 with $1.578 billion and slipped to $735 million in 2009. In 2006, Palm recorded EPS of $3.33, but the company lost money in 2008 and 2009, the latter being a $6.51 per share loss. Palm's equity went from $1.062 billion in 2007 to a negative figure in 2009. By all measures of basic business success, Palm has failed. Its revenues, profits, equity and market share are all declining.

Individual Level

At the individual level, there are key individuals whose jobs must be considered. The first is the Chief Technology Officer. This individual is charged with bringing new products to the market. This position should be measured in a number of different ways. These include time, budget and measures concerning product quality. By all accounts, the Pre and the Pixi are critical successes, which indicates that the Chief Technology Officer's team has achieved its objectives. In addition, some of the patents that Palm held for its technology were key to the HP deal that more or less saved the company, so again from a technological perspective Palm has been relatively successful.

The VP, Marketing is another key position. This role entails getting the product to the market. In this respect, there are a number of different measures than can be used. Sales is the most significant, but there are others as well. These include metrics relating to market penetration, consumer sentiment and future purchase intent. By these measures, the VP Marketing has failed. The company's distribution issues have led to its being heavily promoted only by Sprint Nextel, which has the weakest network of the national U.S. carriers. Palm's international presence is weak, and with respect to the rapid global growth of smart phones, Palm is a non-entity. The company's phones are strong, but the image of their phones is not, again pointing to issues in marketing.

The CFO is in charge of the firm's financing. This role includes such elements as maintaining the optimal capital structure, reducing the cost of capital and building the firm's equity. Given the highly challenging environment that Palm has faced in the past couple of years, it is hard to fault the CFO, even though the company's metrics have become terrible in that span. Heavy losses have made it virtually impossible to maintain an optimal capital structure or a good credit rating. The buyout by HP has negated the relevance of this particular position.

The CEO can be measured by the company's total performance. Revenue, profit, market share and cost measures all ultimately fall to the CEO. In addition, shareholder-based measures also fall on the CEO as well. These include share price, EPS and P/E ratio. The stock price for Palm fell substantially prior to the company's purchase, as did the EPS and P/E ratio, which became irrelevant when the company lost over six dollars per share in fiscal 2009. The buyout by HP is a sign that the CEO was forced by the other failures of the company to have a good option for maintaining the existence of Palm. The buyout may have been the best deal available for Palm at the time, but it is unreasonable to consider it a good deal for a company that just a few years ago dominated its space.

Congruence

I believe that the congruence between the different outputs at Palm is low. The company basically markets two similar products and a couple of types of complementary products. The entire operation is very simple, and when the different elements work together the results should be consistent. The lack of performance at Palm, however, tells a different story. There is a significant divergence between the quality of the product and the company's performance. Under normal circumstances, if a company sees lousy performance it probably has a lousy product. That is not the case with Palm. The company has a good product, and normally that would mean that the marketing can be effective and the company will be successful. Palm's situation is that it has a good product that is not supported with good decisions in marketing, and ultimately not supported by good strategy at the highest levels.

What this means is that the individuals are not working effectively towards the company's goals. While the individuals and groups in question may feel that they are working towards the company-wide objectives, they are not doing it well. The problem is partly at the conceptual level (distribution partnerships) and partly at the execution level (advertising). At all levels of the firm, people are working towards the common objectives. There is a high degree of alignment between individual activities, group activities and organizational activities. The problem is that the people who are in charge of these activities are not very good at what they do. They are simply being outcompeted by other individuals in other organizations.

The Nadler-Tushman Congruence Model implies that when there is a high level of congruence between the activities at the individual, group and organizational levels, the company should succeed. Palm is an interesting case study because it counters the Nadler-Tushman model somewhat. The members of the firm are working with a high level of congruence, but they are simply not successful in their endeavors. Consider the distribution question. If the company wants to dominate the industry, it should have a national carrier. It does. But the choice of national carrier was suspect, and the types of distribution deals with Verizon and at&T left something to be desired. Likewise, Palm advertising connotes a high quality product. They are sending the right message to the market, but they are not doing it in a way that resonates with the market.

There is an element of execution that is failing at Palm, rather than a lack of congruence, but all told the result is that Palm has not been successful. Nadler-Tushman explains this more in terms of congruence between the inputs, outputs and the external environment than between the different levels of outputs. Thus, the output level is insufficient to explain the failure of Palm; the full Nadler-Tushman model however does explain why what Palm is doing simply is not working for the company. It also may shed light on what HP needs to do in order to turn Palm around, should it want to.

Works Cited:

Gonsalves, a. (2010). Palm sales lower than expected. Information Week. Retrieved March 1, 2011 from http://www.informationweek.com/news/hardware/handheld/showArticle.jhtml?articleID=223100743

Hewlett-Packard 2010 Annual Report. Retrieved March 1, 2011 from http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NzkyMjF8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

MindTools. (2011). Congruence model. MindTools.org. Retrieved March 1, 2011 from http://www.mindtools.com/pages/article/newSTR_95.htm

Palm 2009 Form 10-K. Retrieved March 1, 2011 from http://apps.shareholder.com/sec/viewerContent.aspx?companyid=PALM&docid=6710915

Virzi, a. (2011). Smartphone market share: Android bypasses Apple. ClickZ. Retrieved March 1, 2011 from http://www.clickz.com/clickz/stats/1935425/smartphone-market-share-android-bypasses-apple