As regular readers will know, I am a Hewlett Packard alumnus and a longtime admirer of the company. I worked at HP in the eighties, and with hindsight it was one of the finest periods of my career. It was a GREAT place to work, as documented by books and case studies written about the company. My time there definitely had a major effect in shaping my management philosophies.
The more recent -periods at HP have seen a lot of change and a fair amount of turmoil not typical in the company’s first 60 years or so.
Let’s analyze some of the recent events and assess the overall strategic situation:
Firing of Leo Apotheker
What a disaster this was. To hire a new CEO with a major change in strategic direction in mind, then let him go in less than a year is not good. What isn’t known is was the new strategy totally conceived by Mr. Apotheker, or was he brought in to support a new strategy favored by the HP board. Either way, it’s an awful mess for such a major company, and the HP board has not distinguished itself in the last decade.
The new strategy itself while risky on the surface wasn’t the real problem, imo. The communication of the new direction was the real disaster, and smacked of incompetence. Don’t announce you’re “going to sell the business”–that does nothing for valuations. If you’re going to sell it, get on with it and sell it without premature public announcements. By most accounts Mr. Apotheker’s short reign was punctuated by missteps, retractions, chronically missing financial targets and general bumbling. My sources inside the company say that he had lost just about everyone’s confidence, from employees to shareholders to the board. It’s hard to say if that’s fair; new managers can be sabotaged by entrenched forces against change. And major changes were on the way. But the buck needs to stop with the CEO, and it certainly did in this case.
Planned Sale of the PC business
To be honest, I go back and forward on this one. Back in my HP days the PC business was a money-losing, also-ran business with tiny margins. The corporate line of thinking at the time was that HP HAD to be in the PC business, it was so central to everything else the company wanted to do, and the computing world revolved around PCs. I never bought it. In fact, the PC folks got in the way of many things we wanted to accomplish in the peripherals segment of the business, specifically connecting to and partnering with all the other PC makers.
The PC business remains a low margin one today, but one that HP has established a leading position in. I haven’t studied the balance sheet, but I doubt the PC business is so capital-intensive that it would prevent HP from having the money to adequately invest in a new direction. I don’t think selling it off is a stupid move, but announcing it as a first step seems extreme, and only served to make everyone involved nervous about what the future holds.
Eliminating the Tablets/WebOS
Another PR disaster and one that was totally avoidable. The problem was in buying Palm in the first place, and paying a billion dollars for a company that had almost completely failed in the marketplace. Then introducing a new line of tablet computers to great fanfare, almost immediately obsoleting them, and then announcing you’ll be making a few more because everyone love the fire-sale obsolescence pricing–it appeared that the left hand didn’t know what the right hand was doing.
By most accounts the WebOS is a nice piece of software. The problem is that this move was so very late to the game. If it had been done a few years earlier, it might have been a savvy deal, and allowed HP to make a major move into mobile devices with a differentiated product offering. But by the time of this acquisition, Palm was already discredited and Apple, Android and Blackberry had solidified the top leadership positions. And the price was completely ridiculous for as failed company. You can put this one on Mark Hurd, as it came on his watch.
Buying Autonomy
HP recently announced completion of the Autonomy acquisition, paying a dear price for this enterprise software company. Autonomy is a good acquisition if you’re intent on growing software as a share of revenue; the only issue is the price. It was very high, but one must remember that HP’s overall revenues are north of $125 BILLION. Autonomy adds less than $1B in revenue, which is a drop in the bucket relative to HP’s size. With a purchase price of over $10B, HP paid more than 11X revenues–pretty pricey even by today’s inflated SaaS valuations. Autonomy will have to be an exceptional growth in engine for this to pay off. Only time will tell.
Copying the IBM playbook
The IBM playbook was to sell off low margin, lower growth hardware business such as PCs (IBM sold its PC business to Lenovo, a shocking move at the time). Then focus on increasing software and services revenues relentlessly, for a long period of time. It’s worked extremely well for IBM, although I remember there were some tough times in the beginning. Would it work as well for HP, who appears interested in copying IBM’s strategy? I’m not a big fan of copying other company’s strategies, although on the surface the two companies are similar. The key to success or failure is usually execution in most cases of corporate strategy. Executing this strategy would also take a very long time to have an impact on HP’s financials. HP’s software share of total corporate revenue was less than 3% in 2010. There are only so many $1B+ software companies out there. Most software acquisitions on their own will have a minimum effect on HP’s overall revenues, unless they went after one of the few industry giants–which would truly shock me. HP has become strong in services after it’s acquisition of EDS in 2008, but is still much less prominent in services than IBM. So even with an aggressive acquisition program and strong organic growth, HP looks to be a hardware-dominated company for a long time in the future.
Meg Whitman appointed CEO
It’s hard to say what influence this will have on the corporate strategy. Ms. Whitman is a seasoned CEO who has been involved in great success, although one could argue that she was very fortunate to benefit from a snowball rolling downhill with Ebay. In addition, her background is heavily consumer products with almost nothing in the enterprise space, which is HP’s supposed new direction. HP’s business is only 25% consumer products, and if you eliminate the massive PC business, it becomes a whole lot less. I never underestimate smart people or their ability to adapt, and she definitely fits in the smart category. But experienced business people also tend to fall back on the comfort level of their past experience and what they understand best. It will be very interesting to watch as Ms. Whitman’s tenure evolves, especially how she affects the previously announced strategy.
What happens next?
I think that HP ends up keeping the PC business, while at least in the short term attempting to become more software and services intensive. You’ll see more software and services acquisitions. But I wouldn’t be surprised to see the flight away from consumer-oriented businesses to abate as long as Meg Whitman is CEO.
I also think that the original IBM-style strategy will be difficult–but not impossible–for HP to implement. For this approach to work, shareholders, employees and the board will all need to be very patient and supportive of the plan. Meg Whitman will really need to believe in it as well, and as discussed above, her background is far from a perfect fit for where they’re headed. My guess is that this strategy won’t be given enough rope for it to work and we’ll see another change of direction in the medium-term, but you never know. That’s what makes this kind of speculation so much fun!
What’s your take on the future direction of HP? Where are they headed, and does it end well or not? I’m interested in your analysis of recent events at the company; post a comment to share your views and continue the discussion.
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You obviously really have a handle on HP’s ops! I’ll ask my standard question of the business: where is it innovating? HP is a monster player…but is it inventing anything? Until the late 90’s or so, I thought of HP as THE most innovative big tech company. Ancient history now. They’re too big and entrenched to go away, but without inventing some new stuff their valuations must wither and then they move into the stalwart category. It happens to every company eventually!
Scott, you’re right, every big company reaches a point where innovation becomes very hard if not impossible. Usually innovation is replaced by acquisitions–buying small companies that have innovated. Cisco is a case in point. Whether or not this is an adequate replacement is a whole different discussion.
I agree with all of the comments here. Simply put, HP clearly have lacked an overall direction or strategy, and like you Scott, I simply cannot understand why. I’m hoping someone can shed some insight.
Kwan, you’re very right about the Netflix thing is quite a disaster. After quite a few years of really smart aggressive moves, he made a huge mistake. The HP PC thing is a bit counter intuitive. Both the HP PC and printer businesses are so large individually that they don’t need each other to have great leverage at retail. Even though HP is #1 in PCs, it’s a large splintered business with lots of large players. As I mentioned in the article, not having an in-house PC brand would allow the printer guys to more easily partner with all the other PC brands that now see them as competitors. With different circumstances my opinion would be different here, and there would likely be more to gain by having both categories under the same label.
I listened to Steve Jobs’ biography and what fascinated me was how Jobs was able to “fire” the whole Apple board when he came back. Jobs must have trained in Jedi mind trick.
For Whitman to succeed, the whole board must be fired and the whole strategy re-examined. HP is #1 PC mfg. I never heard #1 in any industry giving up the business because of low margin. And it was still making profit when Apotheker was hired. Without PC business, printer(ink peddling) biz will also suffer and HP will lose its greatest asset in the channel marketing and retail foot hold. And it is doing it in its own. And who approved such dumb strategy? The board.
I admired HP not only for their innovative products but how they treated their employees. Until about a decade ago, HP was known for not laying off its employees. I think HP was one of the last large corps in US to do that. I guess its hard to expect loyalty from corporations nowadays but that was the lasting impression of the company for many. And ditching PC biz is just another example of CFO types running amok. I wonder how Mr. Hewlett and Mr. Packard feels about what’s been happening to HP.
Kwan, you make many valid points, although I don’t believe the printer business would actually suffer from selling the PC business.
Actually I forgot to mention Netflix trying to give up their #1 spot this year. That was another disaster… Epson and Canon is doing fine without PC business so you may be correct, but I think it can only help if you have PC to leverage when dealing with retail chains.