On September 11^th, 2001, The Asian Wall Street Journal published an article entitled "How Palm Tumbled From Tech Beacon to Microsoft Target". As the title suggests, the focus was on the Silicon Valley company's declining business fortunes, though the pain currently suffered by Palm Inc. must be said to be primarily self-inflicted. This paper will explain how the Wall Street Journal article reflects the ideas offered by Bruce D. Henderson's "The Origin of Strategy", a much-read article on the nature of competition and strategy. Although critiquing past decisions is very easily done in hindsight, it will be shown that Palm could have benefited greatly from choosing a different strategy based on the logical principles drawn by Mr Henderson. In particular, the focus will be on Palm's mistaken definition of market share and, in addition, on the company's failure to recognise its leading position in the market.

Palm is the world's leading producer of hand-held computers, and has an even more dominating share of the market for hand-held computer operating systems. Around 80 percent of hand-held computers in the U.S. are run on a Palm operating system, while Microsoft is the only major competitor with a share of 16 percent. The hardware market is, on the other hand, less consolidated, and leaves Palm with a market share of 60%. Of the major competitors, Sony and Handspring are using Palm's operating system, and hold 7% and 14% of the market respectively. The other players, including Compaq and H-P, use Microsoft's operating system, each controlling just below 10% of the market. Palm has so far been most successful in the consumer market, but the hope for the future is to sell more products to corporations. An intended deal with Extended Systems Inc, now scrapped due to Palm's economic difficulties, was intended to achieve this goal by the use of wireless software. More scrutiny will be given to Palm's plans later on, as will there be on the potential threat posed by the Microsoft Corporation.

Before commencing, it should be mentioned that the WSJ article was published on a day that was to go down in the journals of infamy, and the events of September 11^th are likely to have a very negative impact on the future of Palm. For instance, the company's stated goal of getting in the black by the next quarter must now seem overly optimistic. While this paper will attempt to make some suggestions regarding Palm Inc.'s future strategy, it should obviously not be ignored that the terror attacks on New York and Washington may have changed the situation dramatically. The impact of the September 11^th attack is, however, yet not clear in economic terms, and the conclusions drawn by this paper will thus be drawn mainly on information from the earlier mentioned WSJ article.

Chief Executive Officer of Palm, Carl Yankowski, certainly has some explaining to do when it comes to the strategies implemented by his company. In just one year, the value of the company has fallen an impressive 95%. Taking this into consideration, the fact that Mr Yankowski has been able to keep his job must be considered even more astonishing. In March, Palm started noticing some signs showing that sales were falling. Rather than carefully assessing the situation, Yankowski decided it was time for quick action to spur demand, and decided to launch the company's newest models of hand-held computers. It was unanimously decided that the m500 line could be launched in two weeks, yet it actually turned out to take three times as long. Additionally, initial signs of a downturn in the computer industry were ignored, and the sole focus appears to have been on the quantity of hand-held computers sold. The result, evidently, was not to be pretty. Palm was soon saddled by an inventory consisting of both new and old parts, experiencing a sharp decline in sales of Palm Vx and Palm VIIx while the new m500 series did not reach the market. Already in May, revenue forecasts for the year were down 70% compared to the expectations just a few months earlier. Bruce Henderson would probably consider Palm's strategy a perfect example of what not to do.

Commenting on the goals of strategy, Mr Henderson writes "Strategy seeks to make sweeping changes in competitive relationships". Then, he proceeds to mention two fundamental inhibitions that can moderate the threat posed by a competing firm's strategy. The author mentions one factor to be "The inherent advantage that an alert defender has over an attacker". In the market of hand-held computers, Palm definitively is not the attacker, this due to factors as the company's dominating position in the market as well as brand value, the latter likely leading to for example high unaided awareness among consumers. This is not to say that Palm should be on the defensive in terms of developing new technologies, but its focus should be on consolidating its position as the market leader and trend-setter. The last thing the company should do is to react uncritically to feeble signs of falling sales. One reason for this has to do with the definition of market share, yet the second has to do with Henderson's second potential inhibition to strategy; namely failure.

Bruce Henderson comments that failure "can be as far-reaching in its consequences as success". Palm amply illustrated this by having its share price reduced by 95% in one year, achieving this downfall almost without any help from the competition. Among the basic elements of strategic competition, Henderson mentions the ability to "predict risk and return with enough accuracy and confidence to justify the commitment". Palm certainly did not assess the risks of moving up the release-date of its new products, and then it becomes rather insignificant that the company at least had the courage to act. Facing the same initial problems as a start-up would have, Palm did not accurately recognise its dominant position in the market. Additionally, the company did not properly understand the actual significance of a decrease in sales, something that paves the way for a discussion on market share.

In the same way as searching for gold at the end of rainbow can prove a rather futile use of energy, Henderson argues that chasing market share can be as unproductive. Defining a company's market as "what, where, and to whom you are selling what you now sell", Henderson reasons that a company can achieve growth by expanding "the market in which you can maintain an advantage over any and all competitors that might be selling to your customers". In March, the Palm executives were quick to believe incoming information concerning sinking demand, and thus decided to release the m500 series the same month. An electronics retailer interviewed by the WTJ, however, argues that sales momentum for hand-held devices was high right up till the announcement concerning the new product line-up, but that sales then went into a sharp decline as consumers decided to delay their purchases. When introducing the m500-series, Palm basically created a new competitor to their still growing Palm Vx-devices, thus cannibalising the company's own products. If falling demand was the issue, a better solution would have been to first cut prices of their previous models to get rid of inventory, for then to arrange for a more controlled release of the company's new product line. Instead, the company decided to ignore its long-term strategy in hope of short-term growth, an issue that will be touched upon later.

Mr Henderson goes to great lengths to emphasise that "market share is a meaningless number unless a company defines the market in terms of the boundaries separating it from its rivals". Being both the dominating company and the pioneer in the industry for hand-held devices, Palm should have focused on moving its boundary of advantage into the markets of its major competitors. The Microsoft Corporation, for instance, is evidently a formidable foe, but must be faced in the same way as any other competitor. Palm must do its utmost to use the strengths and advantages it has required to at least match any positive attribute Microsoft might offer, and that at a better value to consumers. Unless Bill Gates decides to use his experiences from the launch of Microsoft Explorer, for then to use unfair methods of competition to drive Palm out of business, the latter company should be able to enter the markets of its competitors, evidently given that other fundamentals do not change.

Palm's misfortune has much to do with its original idea of market share and growth, yet there were certainly additional factors at play. Mr Yankowski argues that the company was blindsided, but it might be as accurate to say the company was wearing a blindfold. In some ways, however, it is perhaps not surprising that no one internally raised doubts concerning the early release of the m500 line. The company had over a short life span enjoyed a seemingly never-ending boom with a sense of unrelenting optimism. In the same way as tulips were once imagined an incredible future in Europe, technology companies, particularly those even remotely connected to the internet, were envisioned incredible growth rates. Many economists are currently vocal about the admittedly unsustainable growth experienced in the Internet era, yet optimism certainly outflanked the smell of concern in the air before the inevitable NASDAQ decline not long ago. Taking this into consideration, it is perhaps not too surprising that no one voiced any concerns about releasing the m500 line in two weeks. At a similar meeting soon after, managers were again unanimous concerning the prospect of getting the line out in two weeks. Unavoidably, problems quickly surfaced.

Henderson writes, "Strategic commitment is deliberate, carefully considered, and tightly reasoned". Satjiv Chahil, chief marketing officer of Palm, confirmed to the WSJ that this advice was not followed at Palm. His excuse is that companies in a growth mode tend not to focus on keeping a tightly tuned organisation, an almost inevitable consequence when the full attention is set on meeting the growth potential in the market. This fact can help explain why the Palm executives did not realise early enough that the company would not escape the general slump in the tech market. In addition, very few meetings were held on operational issues, and the managing of the supply chain and forecasting sales did thus not reach a satisfactory level. Related to this, Henderson also adds that strategy calls on the dedication and commitment of the entire organisation, meaning that strategy in this sense is all encompassing. Taking this into account, there is no reason to believe that Palm's employees and management did not work hard enough to release the m500 line. Rather, the problem is that they were panicking and ignoring the company's long-term strategy. Yet, as mentioned earlier, it is perhaps even more troubling that no concerns were raised concerning the launch of the new product line. One reason for this might evidently be the company's lack of experience. The latter might leave it vulnerable to a company like the Microsoft Corporation, which evidently possesses extensive know-how from earlier product launches. Mr Yankowski partly confirms this by mentioning that this was Palm's first major product transition, but that the company now has learnt from its mistakes. Recent changes in management might also be beneficial, however, as a lack of diversity in the management structure and inefficient communication channels may also explain part of the reason for Palm's failure.

According to numbers from Gartner Dataquest, which are reported by the WSJ article, Palm's share of global shipments of hand-held devices fell dramatically in the second calendar quarter compared to the quarter before. While Palm's products represented around 50% of the devices received by distributors and retailers during the first quarter this year, the share is now down to 32%. In comparison, Compaq's share of the shipments doubled to reach 16,1%. These, in addition to the earlier mentioned numbers, show how Palm's tactical blunders have dealt a major blow to the company. Yet, additional numbers are needed to sufficiently show to what extent Compaq was able to move its market boundaries and capture customers from Palm. Microsoft's previous operating versions for hand-held devices have generally received negative reviews, although the recent launch of Merlin might pose an additional threat to Palm during these trying times. Nonwithstanding that Palm possesses much knowledge on manufacturing hardware and software for hand-held devices, Microsoft is not a company that can be expected to commit blunders similar to those of Palm. Still, it should perhaps give Palm some confidence that Microsoft has yet to make bigger inroads in the market for hand-held devices, though Bill Gates probably finds attacking Palm a more gratying task than he has before .

One strategy Palm should consider is to put its full concentration on making operating systems. In the same way as Microsoft is not in the market of producing computers, perhaps Palm should consider a similar strategy in the market of hand-held devices. If this were to work, an understanding would evidently have to be reached with Sony and the other users of Palm's operating system. In addition to improving its competitive position versus Microsoft, such a move would also raise cash for the company. As mentioned earlier, Palm earlier tried to acquire Extended Systems Inc., this due to the latter company's know-how on providing wireless software to corporations. While the deal was eventually scrapped due to Palm's dramatic decline on the stock market, the company will find it difficult to survive if its operating system is left in the backwaters of the technological development. As the WSJ journal article mentions, several competitors are making serious efforts to capitalise on Palm's mistakes. Henderson's views regarding the ability of failure to make sweeping changes in competitive relationships come to mind in this respect, but so does his warning about failure to react and then deploy and commit resources against the strategic move of a rival.

In conclusion, by focusing on its key strength, namely the company's operating system, Palm should be better able to face the competition of other companies entering the market of operating systems for hand-held devices. Sony and other dominating companies are unlikely to wish for Microsoft to gain the upper-hand in yet another industry, and it is likely that a combination of for example Sony's core strengths in marketing and production could be well combined with Palm's knowledge of operating systems. Instead of being beaten by stronger competitors in both the market for operating systems and the market for production, Palm should revitalise itself to remain a dominating player in the market for operating systems. In other words, while a weakened Palm might find it difficult to meet the competition from companies like Sony and Compaq in the hardware market, a strengthened Palm might be able to prosper by focusing on operating systems. While selling off its hardware division might prove one solution, licensing of Palm's brand name or join-ventures might also be alternatives.

The WSJ article ends by quoting Yankowski's ideas for a future agenda that totally ignores the company's weakened position. Yet, the WSJ also mentions that Palm has formed a separate subsidiary for its software division, and a potential spin-off could evidently be an alternative to those mentioned above. Henderson emphasises that a business needs to have a unique advantage over its rivals to exist, but notes that "Unfortunately, many businesses compete in important areas where they operate at a disadvantage, often at great cost, until, inevitably, they are crowded out". Palm Inc.'s remaining stockholders should sincerely hope the company's new management team take serious heed of this when drawing up a new strategy.