hewlett packard introduction - em360 · developed to reshape strategy, management, financials,...
TRANSCRIPT
----------- © 2012 Ptak, Noel & Associates LLC -----------
Hewlett Packard
Introduction
The analysis of HP that follows presents a typical example of analytical commentary about
current events in IT. Portions have been left out (e.g. only one possible scenario of several
potential scenarios is outlined here) as are most of the short term tactical moves etc. It has
been edited to preserve confidentiality. Hewlett-Packard neither paid for nor
commissioned this analysis. It is offered in the spirit of constructive criticism as we do not
think HP should be allowed to just disappear. HP has been shown an earlier version and
the current version has been amended in some parts following their comments.
We provide comprehensive research services to our clients. These include confidential
reports and commentaries commissioned by them to provide answers and make
recommendations. Utilizing our own research methodology, we apply our unique
perspective and experiences to provide insight into market forecasting and analysis to
discuss trends in such areas as markets and technologies, the impact of technology,
product and service strategies, competitive product analysis and positioning.
The contents and opinions are those of our staff and are protected by copyright.
A Brief Summary
Over its 73 years of operations, Hewlett Packard has become an American icon, a
foundation of Silicon Valley, embodying quality engineering and superiority in
management and products. However, HP’s latest analyst meeting on 3rd October 2012
spelled out difficulties in several key operating divisions with a “broad-based profit
decline” expected over the next year. Over the last 13 years the giant company has
struggled with market share and financial performance. Despite revenues of over $120
Billion, it seems to be losing its way with a progressive decline in market capitalisation,
share price and consistency of management.
Just why is this? And can it be reversed?
In 1999 HP had some $42 Billion in revenues growing at 7% per year driven by printing
for the consumer market as much as by its enterprise software, server, storage, PC,
microprocessor, workstation and IT services offerings. Its range of testing equipment,
semiconductors, medical systems and other electronics and optics had been spun off earlier
that year to form a separate company, Agilent, with $8 Billion in sales and 47,000
employees. In theory, the more focussed, higher margin computer operation, with some
84,000 employees in October 1999 should have thrived. It was a strong competitor in
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growing markets for servers and enterprise software as well as a market leader in printing
technology.
Following a proxy battle inside HP, the Compaq acquisition was completed in 2002. By
2005 HP revenue exceeded $87 Billion with near 150,000 employees, operating in 160+
countries. After the May 2008 EDS acquisition, net services revenues of the combined
companies (2007 end of year figures) were around $38 Billion. HP had 210,000 employees
in its services arm, after it added 139,000 EDS employees. Since then, HP has grown total
revenues to over $127 Billion (four quarters 2011). However, for the quarter ending 31
July 2012, they incurred a loss of $8.8 Billion on quarterly revenues of over $29.6 Billion,
while headcount reached 340,000. What went wrong?
Since 1999, HP had six different CEOs (including interim postings) and suffered constant
turnover in upper and middle management. It also acquired over 200 companies while
divesting itself of over 40 For HP, the acquisitions trail was marked by substantial
expenditures, an influx of new employees and initial market share gains – but an
unfathomable business logic.
Consequently, the HP business culture that produced 70 years of surviving and thriving
became highly diluted. Interestingly, Louis V Gerstner recognised the critical role of
culture in determining a successful turnround from his experience in IBM, possibly the
closest comparison to HP’s situation (although some may say IBM was in worse straights
financially, while HP is still profitable if income is summed over the four last quarters).
Culture is critical because, in practice, a company is no more than the collective capacity
of its people to create value. Thus the intangible, obscure and indeterminate concept of
culture becomes a prime driver and focus for success. It is the culture that defines how one
goes about creating value, as it shapes basic business factors.
Lessons learned from turnaround failures (Kodak, Nortel, Motorola, DEC, Xerox, etc) and
successes (IBM) show that culture is the key success factor in very large organisations.
This is simply because of its underlying influence on the basics of business - strategy,
management, financials, innovation and marketing. However, Gerstner further identified
the need for the culture to progress with the business environment, to avoid rigor mortis
while maintaining consistency across the organisation.
HP’s situation is somewhat different. Rigor mortis has perhaps been less destructive than
a decade of confusion at the levels of CEO, board, top and middle management. These
factors immobilized efficient operations and blocked the development of a clear, coherent
strategy.
By understanding those parameters, various scenarios of recovery for HP can then be
developed to reshape strategy, management, financials, innovation and marketing, to
create the conditions for transforming failure into success.
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In summary, we offer here an overview of what seems to be failing, and briefly outline
where the company is positioned in each market segment. Then, we propose a scenario of
what could be done to reverse the decline. We have also considered other scenarios not
covered here. This is a brief analysis of HP’s plight. We then outline one among several
potential solutions that should be evaluated and compared, in detail.
The Commentary
Hewlett Packard – where do we go next?
HP opened its 3rd October 2012 annual Securities Analyst Meeting with candid statements on the
company’s various failings and weaknesses. The company expects to continue major job cuts, into
2013, aiming for a total headcount reduction of 29,000, about 8% of its 340,000 worldwide staff.
Following this briefing, which was surely disheartening to HP executives and investors, the shares
sunk to a ten year low. Since 2010, HP has lost over 70% of its market value, falling from $104.5
Billion to $28.96 Billion, at this writing.
Significantly, the quarterly financial condensed statement of earnings of 31st July 2012 contains a
line item of ‘Impairment of goodwill and purchased intangible assets’, at a cost of around $9 Billion.
This represents a net loss for the quarter of over $8.8 Billion. Long term debt was around $24 Billion.
In response, HP laid out a five year recovery plan. The plan addresses various realities including
losing the lead position in PCs as a result of being unable to compete on price with Asian suppliers.
As a result, HP’s cost base was to be slashed – hence the job cuts.
To understand this plan and to identify a way forward, we have to ask a key question.
Just how did HP get into this state?
For a large corporation that has lasted 73 years, and until this quarter had debatably been the
world’s largest PC maker, in terms of shipments1 there are many reasons. But it is possible to
identify six key underlying trends that led to this situation. All ultimately depend upon the quality
of management, and especially recent management turmoil:
Cultural implosion
The business(es) that HP is in, with what business model
The vacuum in strategy
1 From Reuters, 11 October 2012, as total PC shipments fell 8% in Q3 to 87.5 million, see:
www.reuters.com/article/2012/10/11/us-lenovo-hp-gartner-idUSBRE8991RF20121011
However HP disputes this, quoting IDC which puts HP 0.5% in the lead in Q3 in global shipments (not value), although
IDC does note that HP’s market share fell to 15.9% in Q3 2012, from 17.4% a year earlier. With a shrinking global PC
market, PC sales by HP also shrunk 8% in Q3 2012 (WSJ, 06 Nov 2012).
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Acquisitions – their business logic
Innovation poverty
Quality of the board and the management
Let’s look closer:-
Cultural implosion – Culture is not simply one aspect of the failure of a very large company in
the computing technology industry, it is the key aspect. Culture is the primary factor in that it
underlies all the critical points of weakness. Comparing HP today with Apple’s turnaround from
1997 and IBM’s turnaround from 1993 amply demonstrates this. This factor caused HP to lose
its way, meaning it has lost its identity, sense of purpose, and with those, all the operational
standards formed over half a century to engineer and then produce solid winners.
The original culture was formed at HP’s founding, in 1939 in a Palo Alto garage. It was strong,
unique and built on competition in engineering quality with a high respect for staff. Later the
culture was embodied in a code of conduct called the “HP Way” that was not just hollow
corporate-speak. It starts by enshrining trust and respect for the individual; going on to say the
company will conduct business with uncompromising integrity. Its early culture actually enacted
this. It stimulated confidence and trust between engineers and management – and with
customers. One wonders how the current printing ink tactics and investigation of a CEO for
surveillance of HP’s own board members in 2005/6 would stand up to that code of conduct.
Going back to when things may have started to go adrift, the company lost a key part of that
valuable culture when the non-computing product lines, of electronic, optical, scientific and
biomedical measurement instruments, and associated technologies were hived off into Agilent
Technologies in 1999. It is instructive to compare the fortunes of Agilent (trading at around $38
at writing) with HP (trading at around $14 at writing). HP’s descent can be traced perhaps to the
changes in the company that immediately preceded that rupture. Destruction of the culture
followed, largely through a series of excessive CEO egos over the next decade, to create the
cultural vacuum today with all its negative impact on strategy.
Instead of conserving that culture, all too often, management goals appear to have focused on
the betterment of select managers, in the top and upper middle tiers, not the company, nor its
employees, nor the customers, nor quality and care in delivering products and services. Such
cultural implosion is possibly the most important factor in understanding today’s condition.
Eventually such failure has to rest with management. Here, HP is in no way unusual, but the
decline remains tragic.
HP’s cultural change manifested itself in several key areas, resulting in the loss of the original
cultural cohesion with little to replace it, due to upper management drift:-
With three different chief executives in so many years, each with different
personal motives, backgrounds (all from outside HP), ability to understand and
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operational style, the loss of culture and corporate identity is not surprising. Meg
Whitman is the sixth CEO since 2005. Over the years, HP has experienced the
promise of Carly Fiorina (appointed July 1999), the numbers focus of Mark Hurd from
the much smaller NCR (March 2005). Next came the former head of SAP from
Germany, Leo Apotheker (2010), and, finally in 2011 eBay‘s Meg Whitman, Each
has had quite different values, personal ambitions, experience and mental models of
what HP is and of what to do with it. A key question here is how much personal
power does and should the chief executive have in HP. Perhaps more importantly,
what did the board think it was doing steering the corporation into these CEO
choices?
Big vs small – lack of understanding the business of big business. Today,
(really ever since the Compaq merger) HP has had the problem of trying to win in
(too) many product markets with (too) many customer segments using a
management organisation that, at best, has seemed to struggle with HP’s size,
complexity and multiplicity of layers. A very strong culture is needed to ride such a
range of market segments. Only Apple (the largest company today in market
capitalisation) has perfected the process of embedding its culture across an
equivalently wide product and service range. However, even they are increasingly
focussed on one sector - consumer electronics with tied services in a verticalised
model. Google is also attempting to widen its range of offerings as it progresses from
search into advertising and media, with cloud services. In order to leverage its cash
mountain, Google is even moving into lending to those who advertise with it, so they
can advertise more. To a lesser extent, Amazon and Facebook are taking this
verticalisation route, by merchandising for others on cloud-based platforms. In
contrast, IBM reduced its range of market segments to focus on corporate business.
IBM has now completely exited from consumer products, shedding PCs (to Lenovo)
and printers (to Lexmark).
Internal processes that define culture - Inevitably, with over a decade of
drifting organisation, HP’s middle and upper management built up a bureaucracy and
inertia that make it difficult to return to its former productive culture, and so to
compete effectively. In the Autonomy acquisition, it is difficult to know what really
happened but the CEO claimed this as the main reason for his split with HP. Net HP
software sales for the second quarter slowed more than expected with the Autonomy
revenue.
How HP operates internally is crucial in order to compete with the likes of Apple and
Google, even with IBM. For its middle management, the use of offshore labour in
low cost locations is the current model. That may be cheaper, but it may result in a
middle management that struggles to comprehend the global complexities of its
many service and product lines and business units, with their operational interactions.
Marketing and sales vs engineering - A key part of the lost culture is the role
and weight of marketing and sales, as compared to the weight of engineering. Key
problems in companies such as HP are too often a compound of a culture dominated
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by sales and financials driven by quarterly numbers, at the expense of maintaining
the quality and range of products and services.
What business should HP be in? And, with what business model? - We deliberately put the
decisions on the choice of what business to be in first, before the problem of the strategic
vacuum. We believe that this decision is fundamental as it provides the basis of the overarching
strategy itself. Obviously the two are so closely linked that the order could be reversed. But, HP
is really defined by which business it is in - and the operational strategy should follow as the
product of that.
In our view, the real tragedy is that today HP does not quite seem to know what business it is in.
It delivers corporate IT services, business and consumer PCs and printing ink, plus enterprise
computing hardware and software, and a few smaller segments. Despite protestations of a well
articulated strategy, the history does not underpin this, emphasised by the CEO’s comments in
the October briefing on miscues strategically and the length of time for a turnaround. The result
is an amorphous range that provides no central idea of how to combine the diverse businesses,
in a logical way that justifies holding them all. HP’s strategy seems to have no unifying idea,
comparable to that which IBM has, with a clear focus on the business solution targeted for each
of its large corporate customers. HP appears to lack a clear understanding of the market spaces
it should be in, apart from all of the most popular segments. It shows a “me-too” position without
a unique selling point or business logic for the existing combination of offerings. Its current
declarations of a major focus on “Big Data”, security and cloud fall into this category.
The two original founders had strong ideas on what business they were in. For that reason Mr
Walter Hewlett, Bill Hewlett’s son, with David Packard’s son, robustly opposed the Compaq tie-
up, fearing being dragged down by a commodity business, the low end of the PC market. As it
turns out, they were right. HP’s PC business in the quarter ended 31 July 2012 produced a
4.7% operating margin, based on earnings from operations as a percentage of net revenues,
even though HP may be number one in shipments (or according to Gartner number two now).
Its PC business unit is shrinking in operating margins which decreased to 4.7% from 5.9% a
year ago. The PC business unit’s revenues at $8.6 Billion for Q3 2012 also decreased from $9.5
Billion in 2011, while average selling prices also declined as competition bit hard (all figures and
statements from SEC Form 10-Q filed for Q3, 31 July 2012).
The PC business, responsible for some of HP’s troubles, but also much of the revenues, is
shrinking. As tablets and competitor smartphones eat into its consumer space, HP appears
fairly oblivious, even as they project a fall in future PC profits. Notably Dell, a key competitor,
has acquired Quest Software for $2.4 Billion in order to move into that tablet and smartphone
space. HP’s acquisition of Palm (and with it, the originator of Apple’s iPod as Palm’s CEO) was
potentially a basis for HP’s smartphone entry but has led to little - except a formal
announcement in August 2011 of its exit from the smartphone/tablet market. HP seemed to fail
to take advantage of the assets brought by Palm.
Belatedly it has now taken a U-turn on tablets with Microsoft’s Windows 8, currently aiming to
re-enter the tablet market with its Windows 8 based ElitePad 900. The tablet is announced for
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delivery in 2013 in the USA, for business users. HP also has shown off its Envy X2 hybrid laptop
which converts to a tablet, out November 2012.
In addition, over the last decade, HP has relied heavily on the commodity printer business. It is
still the market leader in overall shipments in the mono-function inkjet and laser printer sub-
segments. But in the premium end of the mass market, the high-growth multi-function
printer/scanner/ copier market, HP’s 1990’s technology leadership has been lost to Japanese
rivals. HP has some 12% of this mushrooming sub-segment. For HP’s printer division, declines
have been seen in the revenues (down 12% since 2008), margins (down from 18% in 2009 to
13.7% for the 9 months ended 31 July 2012, from SEC Form 10-Q) and market share over the
last year (2Q12, 39.6% vs 41.5%, 2Q11, IDC, August 2012) while its rivals gained market share.
Moreover HP’s business model for printing – called the ‘Gillette model’ sometimes – of a cheap
printer and expensive replenishment ink or toner cartridges – is really about the ink and not
about the printer. Such models are open to margin erosion that no amount of product
customisation, electronic protection gadgets and ink replacement by newer pigments can shield
from third party retail competition. But the margins are shrinking although the CEO called
imaging and printing ‘the lifeblood of HP”, at the 2012 Annual Stockholder’s Meeting.
Interestingly, Kodak in trying to recover is going the opposite way – cheap inks and profits on
the inkjet printer, rather than selling it at cost price, or below. So Kodak is trying to reverse the
loss of its previous cash cow - the film market - by leaping into what in the past has been the
largest cash cow for HP – printing ink.
Strategic vacuum - CEO Meg Whitman told the October 3rd Securities Analyst Meeting in San
Francisco:
"The single biggest challenge facing Hewlett-Packard has been changes in CEOs
and executive leadership, which has caused multiple inconsistent strategic choices,
and frankly some significant executional miscues."
Depending on a series of inconsistent strategic choices eventually leads to a vacuum in forward
thinking about the business, i.e. overall strategy. In consequence, will HP‘s future be like
Motorola’s? That is, some quite interesting product lines but near complete loss of real market
traction in its key segments? Or, will it be more like Kodak? – A failure to keep up as the market
changes fundamentally around it. Moving from analogue silver oxide paper to digital imaging (or
from ‘argentique to numerique’2 - as a French Kodak executive neatly noted as early as the mid-
1990’s).
Cultural loss also signals a lack of underlying business philosophy that translates into a sound
strategy (able to support some failures along the way) and so lacking any backbone to support
long term strategy. The printer division is an example of this. It is a short-term business model-
relying for profits on the commodity replacement market for ink and toner cartridges. This makes
it highly vulnerable to third party challenges. Customers very soon understand that the printer is
cheap and that with a dozen sets of cartridges they have paid out the price of the printer many
times over. They tend to challenge such strategies. Moreover the inkjet and laser toner cartridge
2 From a basis in ‘silver’ to ‘digits’
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market might even face anti-trust problems over attempting to block use of cheaper printer
cartridges. Any strategy attracting such attention should be carefully avoided as Microsoft and
Google have discovered, as did IBM before them. Clear thinking about both these problems at a
strategic level appears absent.
The turnover in CEOs causes strategic drift as it creates a vacuum blocking execution of any
strategy, however sound or flawed. It is made worse when the board is effectively absent,
essentially leaving a headless conglomerate in which the CEO can play. Interestingly, HP when
founded was notable in having twin heads, which seem to have been better than one - Bill
Hewlett and Dave Packard, plus, in the early days, Stanford professor Frederick Terman to
guide and encourage. Perhaps in similar vein, DEC suffered at the top when the key venture
capitalist, General Georges Doriot (who originally owned 77% of the company) died in 1987,
leaving Ken Olsen to navigate alone as the head of DEC. The problems of an excess of ego in
the CEO in the computer industry are not unique to HP but its effects have been seriously
unconstructive.
So has HP wandered headless into a wilderness concerning its strategy and how to deliver on
it? Does it understand its future place across a highly fragmented set of markets - and how to
get there? Does it now need a Lou Gerstner, as IBM did in the mid-1990’s, to turn it round?
Somewhat similarly to HP, when Gerstner arrived at IBM, the stock was trading at $12 as
against $43 six years earlier and IBM’s prospects for survival were considered bleak. Gerstner
looked carefully at everything – management, business divisions, markets, global trends and
competition. He did not indulge an excess of ego as CEO but sought counsel internally as well
as externally with expert advisors. He actually purchased four strategy studies to guide him on
turning round IBM, especially to help him make the strategic choices on which businesses to be
in (we have to declare an interest here – one of our staff delivered a report on future
telecommunications impacts, which anticipated the web’s influence on the telecoms market).
Gerstner looked at the large cumbersome business units, the excessive management layers
and internal overlaps. He weighed that against future trends - and then took action, quite quickly,
to shape today’s IBM. He considered it would take five years at least for a turnaround, with
IBM’s ingrown and inbred culture – the interesting questions is will HP’s 5-year plan announced
on 3r October 2012 be able to deliver the same kind of recovery.
Acquisitions and their business logic – Over its life, HP has made some 233 acquisitions
and around 40 divestitures, including Agilent and the Wireless Systems Division. But just as
when Compaq’s Ekhard Pfeiffer purchased Tandem and DEC, there appears to be little vision of
how to integrate and profit from very major acquisitions. There is a strategic vacuum on where
HP’s place in the market really is. Thus, as HP grows through acquisitions, is much really
gained as it has little clue of where it is headed by doing this? As a result, HP appears as a
collection of many fragments rather a well-designed machine that makes business sense.
For instance, should its acquisitions emulate IBM (specifically its IGS services division) with a
me-too approach of supplying only the business segment, more with services than products
bundled as ‘solutions’? Presumably, that was the point of the acquisition of EDS. However,
EDS was light years away in culture, technology strengths, aims, markets and potential. It was
at best another ‘me-too’ acquisition, but also brought with it client contract controversies with
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significant costs for claims. Since acquiring EDS, HP has been endeavoring to emulate IBM
services’ tactics capturing repeatable processes/deliverables which increase profit margins as
opposed to unique, one-off projects, with creation of bespoke processes each time.
In emulating IBM, the theory was that service-led sales would pull more HP products into
projects. In reality, with the new services arm not generating the expected revenue (and product
sales), that became a problem. Moreover, as Mr Gerstner has pointed out, services sell
solutions to a client, who already has a good idea of the platforms needed. Clients would not
accept second best just because it came from IBM – and so in early days, the IBM sales force
was often the biggest barrier to overcome with this solutions strategy. HP is in a similar situation.
Thus, the business case for the recent capital expenditures on acquisitions of over $20Bn
seems difficult to justify. They fit no clear strategic pattern that is relevant to modern market
conditions. The buy-back of stock, priced at around $40, with up $10 Billion in fiscal 2010 and
another $10 Billion in 2011 is equally questionable. In its acquisitions and stock buybacks, HP
was ’buying’ into different businesses in order to solve symptomatic problems of low growth and
low margins, at a cost of over $40Billion. This is a scatter gun approach, as opposed to
proactively defining a strategy and only then acquiring companies and technologies that could
achieve those goals. Over the last decade, HP has repeatedly substituted short term gain for
long term thinking and planning. In consequence of its spending on acquisitions and their write
downs, at the end of the Q3 2012 quarter, HP had $9.5 Billion in cash and over $24 Billion in
long-term debt. In contrast, rivals in some of its key segments have far more cash than debt,
such as Cisco with $49 Billion in cash and Oracle with $ 32 Billion3.
In essence, HP seems to have gone in for a few train wrecks (quite unconsciously) rather than
smooth positive value expanding mergers. Other contributors to current problems are the failure
to build on acquisitions, and the high costs of those purchases - notably EDS for $14Bn in 2008,
with an $8Bn write-down on that in August 2012 and now Autonomy for $10.3Bn.These recent
events are strongly linked to its cultural problems.
They follow on the pattern of the acquisition of Compaq, for $24.2 Billion (which included $14.4
Billion for goodwill). At that time, it appeared that HP was driven by trying to understand how to
be far more than a printer company - and on the software side more than HP Network Node
Manager. Moreover, at that point, the company was confused with positioning the product line,
and the various overlaps. So, top management went on an acquisitions spree to try to fix all that.
The lack of policy on acquisitions is a symptom of the absence of any comprehensive business
logic for long term success.
Compaq brought with it the remains of its own large acquisitions - DEC (remember VAX, VMS,
Alpha?), as well as Tandem (remember non-stop computing), and Apollo (remember the Apollo
Domain?). Other more recent HP acquisitions include the addition of 3Com in April 2010, also in
that month Palm (remember PalmOS?) for $1.2 Billion, and 3PAR in September 2010 for over
$2Billion. Recall that in Q3 2012, HP also took a $1.2 Billion charge due to impairment of the
value of the Compaq brand name from its acquisition. The Compaq name is now to be used
only for low-end products.
3 Wall Street Journal online, Ben Worthen, 06 November 2012, What’s gone wrong with HP?
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Let’s compare and contrast the train wrecks with the earlier acquisitions. Two of these early
purchases were relatively successful – Apollo and Tandem, the latter which came with the
Compaq ‘merger’. Apollo was acquired in 1989 for $476 Mn by an HP management that still had
a clear strategy backed by responsible senior management, which came largely from
engineering, plus an engineering-led middle management. Apollo was progressively closed
down over 1990-97, as HP absorbed its workstation technology in the HP 9000 series.
Meanwhile, ex-Apollo engineers took over designing HP’s workstation line for its own
microprocessor, the Precision Architecture (PA) RISC chip, a successful foundation for HP’s
next generation of workstations.
The second relative success, Tandem, was founded in 1974, by HP engineers. Tandem
provided mid-range fault tolerant ‘non-stop’ systems for banks and utilities. Thus, the product
and people were well understood and perhaps slightly closer to HP’s executive culture. Compaq
acquired Tandem in 1997, but had little experience in the larger systems market and its sales
cycles, as little as it had of DEC’s markets and cycles which it acquired in 1998.
With the HP merger with Compaq, both these acquired companies in their remaindered state
were absorbed, with Tandem bringing non-stop systems based on Intel microprocessors so HP
began to abandon its own PA-RISC processor. In the cases of Apollo and Tandem, to varying
degrees, HP management could understand what to do with its acquisitions and with their
technology. They became positive additions to a core product line.
If acquisitions were absolutely necessary to expand market reach, then EMC might have been a
more logical and fruitful choice of acquisition matching HP’s knowledge of technologies and
markets and its culture. Another contender might have been Teradata, with its highly technical
culture, which could also have driven HP back in the right direction.
Innovation - and size in a nanosecond world – A poverty of innovation due to large company
size is a general and major problem in the IT industry. This is because increasingly the major
advances come from two sources – firstly start-ups, and secondly those large companies who
have an intense culture of innovation based on industrial design combined with new business
model design. Only HP’s near neighbour, Apple, really belongs in the latter category. Apple’s
competitors are overwhelmingly me-too players. HP had this gift of innovation once - from the
1940s through the 1980’s.
A further, perhaps more useful role model is IBM’s R&D, more relevant as it is also very large.
In the mid-1990’s it was forced to abandon its unfocussed approach, to concentrate on what
was most relevant to sales, not short term, but aligned with IBM’s strategy and focus. Google
has innovative resources as well, especially with its private projects policy. But its major
innovation is in business models that range from leveraging its cash surplus to become a bank,
to its advertising platforms, to creation of a rival mobile operating system to iOS, Symbian and
Windows, with its conception and support for Android. Both Google and IBM are well focused on
their markets in their R&D. Apple’s kind of innovation can be identified as complete design and
near-perfect delivery of a ‘user experience’, just as Jobs pushed for. Apple’s acquisitions are
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also highly focussed to support innovation. Witness its acquisitions of fabless integrated circuit
producers to customise its ARM-based processor series, A4, A5, etc, to get leading edge parts.
The last time HP had real innovative prowess was when it took the lead in inkjet printing in the
early 1990s, or perhaps when it had the Apollo engineering team that further developed the PA-
RISC based workstation. Since then HP has become a moderately successful “also ran” in most
categories, middle of the road, based on industry standard parts such as Intel processors and
OEM buy-ins, as in its storage range. Happily it does have some exceptions such as the 3PAR
storage acquisition. In consequence, HP relies increasingly on the innovations of the major
companies in its supply chain. The company is most dependent here on the advances, from
Microsoft and Intel, for their Wintel model of computing for the PC and low-end server market.
But it also depends on its OEM tie-ins, such as storage systems from the likes of Hitachi with
storage networks from Brocade and others.
Thus, for example, if the next version of the Windows operating system (W-8 for touch screens
and mobile devices) does not gain rapid market take-up, then HP suffers. HP’s fortunes depend
on Microsoft’s fortunes - and equally on Intel’s. The reliance on others to support its Itanium
microprocessor design (not just Intel for the hardware) but also the software publishers such as
Oracle, Microsoft and Red Hat (for Linux) is also suffering. All three have withdrawn their
software utilities and applications for Itanium. In fact HP sued Oracle in 2011 (and eventually
won) over Oracle’s withdrawal of its database products from this platform.
Again, this innovative vacuum is closely linked to the cultural implosion. Today the innovation
bar is set much higher, for instance, the iPhone, iPod and iPad have redefined consumer
electronics in terms of what is sold through those devices. This is a business model that forms a
vertical service offering. Hence, Apple has a much stronger strategic intent behind their device
design as one element in a value chain that stretches into content, with its media content server,
iTunes and the App Store to sell third-party applications for the iPhone and iPod Touch (within a
month of its 2008 launch, the store sold 60 million applications and brought in $1 million daily on
average). If HP wants to be in that segment, competition has become an order of magnitude
tougher than even five years ago.
The quality of the board and the management – it would be logical to label the operational
behaviour of HP’s main board as the real reason for the current situation due to the past turmoil
in both management and strategy. All the above crisis points can be put down to a dysfunctional
board. As an illustration, there are the events and disputes of 2005 and 2006 at board level. The
investigation of the interim HP CEO and certain company officers by the US House Committee
on Energy and Commerce and the Federal and state legal processes relating to these cases
generally indicated a board acting dysfunctionally. Over the terms in office of the various CEOs,
the strategic weight has changed from an engineering focus to a sales/marketing approach and
then to an over-concentration on cost cutting (Hurd). Cost cuts applied especially in R&D and on
the IT services side. Hurd’s replacement, Leo Apotheker, when he arrived, noted that the IT
services business did not have the skills left for high-end contracts. Certainly this turmoil within
the board does not seem to have given the leadership necessary on what is really HP’s basic
mission. Just why did this all occur?
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Possibly the first question is why the various boards chose a series of external CEO candidates
who were unlikely to successfully lead a company of HP’s size, unique strengths, complexity
and culture. HP’s board needed the strength and experience to cast a wider net for candidates,
but seemed incapable of finding and then carefully evaluating the more suitable contenders.
This reflects on the quality of board and its constitution.
Also there is a possible feedback loop. Undoubtedly in the IT sector, it is quite difficult to get a
functional board if the CEO has a very strong ego. This is especially true if he or she effectively
controls the appointments committee and the CEO tends to disapprove of board candidates with
independent views who will question strategy. A board that does not have enough experience or
drive, either in understanding the direction being taken by that CEO, or knowing when to rein in
that direction will preside over failure, sooner or later. Boards that have the strength of character
to intervene effectively do exist in the IT sector. But there are too many examples of weakness
and eventual breakdown, perhaps due to the gap in executive oversight of the operational side.
This may be symptomatic of the inherent complexities in the IT business, which mixes
technology, services and multifaceted business processes, with a headcount that can grow into
the hundreds of thousands of high-tech knowledge workers.
Combining CEO and chairperson roles can be a first signal of possible trouble. The level and
conditions of compensation of the CEO and linking that to long term performance should be
considered by the board. To align compensation with the enduring success of the company,
attention should be paid to the balances and checks on compensation. Especially important is to
avoid financial games with share buy-backs, often used to increase the value of top
management’s options, rather than investing those many tens of Billions in the business.
Two strategic and expensive examples of this dysfunctionality were on HP’s acquisition trail.
Firstly with Compaq, when there could have been some logic to what Carly Fiorina pursued -
perhaps trying to find a quick fix for a revenue/growth problem by acquisition. But there seemed
to be little real appreciation of the true state of Compaq and the internal dilemmas posed by its
major acquisitions. Whether greater size was just an ego thing or not, the board as a whole
needed to remind the CEO and operational management that the goal was to maintain the long
term value of HP and not a short-term leap in size into a commodity PC market. Therefore, HP’s
$24 Billion purchase should have exhibited sustainable value.
The EDS acquisition was equally deserving of a stronger board review and intervention. As
noted, obviously the idea was to move further into services specifically into business process
outsourcing and systems integration, in a ‘me-too’ move to rival IBM. But a bolt-on acquisition to
run outsourced business processes is a very different challenge to an internal migration as IBM
accomplished. Things were made exponentially more difficult by the cultural chasm between
EDS and HP, along with the drag of problematic legacy contracts and high competition from
Asian IT service providers.
The board should have recognized such a move as long term – it took IBM, using internal
resources already imbued with IBM’s culture, from 1992 to 2001 to implement, ie, to move away
from selling products (75% of 1992 revenues) to selling far more services (43% of 2001
revenues) so it could build, integrate and run ‘business solutions’ for large corporate customers.
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Moreover the skills required to run the business processes of a services operation are quite
different to the successful product company, which manages manufacturing, factories, supply
chains, distribution, inventory and understands the costs of goods.
HP, to really integrate EDS successfully, would have to have quickly leveraged a highly labour-
intensive existing business within its more assets-intensive operations, integrating HP products
with those from many other suppliers. The CEO may not have known that, but the board should
have known better and emphasised it. (This is based on our experience of having worked in
diverse IT services companies, including pure systems integrators and IT product companies).
At the operational management level, the board would usually be only responsible for an
overarching view. But, if there is an absence of an effective (and stable) board leadership, top
management sets the complete agenda and motivations for all levels of the organisation. This is
where the cultural factors again dominate. Upper middle and top management lay down the
operational conditions for the hundreds of thousands in the work force, through their creation of
hierarchies, processes, values, goals and incentives. These are the five contributing factors that
together spell culture - and can transform the culture into one that is productive, or negative.
Worse, as HP acquired new companies at a rapid rate, HP’s existing executive ranks were
frequently replaced with an infusion of executives from those companies. Each year at its
industry and public events, a whole new group of executives appeared as the leaders of the
major business units. In consequence, the lack of continuity makes strategy into a quicksand of
short-term directions and priorities with no firm course for the future. While CEO turnover has
been a major aspect, HP’s underlying top and middle management suffered even more frequent
change. This lack of continuity in execution has been disastrously unsettling for the organisation
as it negatively affected HP’s strategy and culture.
The dangerous question is whether HP management has subconsciously become so pre-
occupied with its internal processes, new acquisitions for their own sake, fixations on cost and
not value, unrealistic goals, balkanisation and bureaucracy – all with the potential to foster
internal political conflicts - that it failed to see the market slipping away or the destruction of its
own internal centres of excellence and the failures of these investments. Talking with managers
from one ‘very large systems supplier’ in the early 1990’s, when working on some new software
products, they ruefully admitted “We have met the enemy – …….and it is us”.
In these extraordinary circumstances (of rapid CEO turnover and previous board failures to
deliver success, with a rapid financial decline) the eleven members of today’s board will
certainly have to take on a far stronger participative role in management than may be
considered normal in a company of this size. Then the real question is whether they are able or
willing to do the work necessary. Linked to this is the further question of whether the five board
level committees that currently run audits, preside over governance and investments, as well as
the more operational side of markets and technology, are appropriately weighted. Obviously, the
board needs a majority of cold-eyed, well experienced non-executives who are open in their
views and can drive change while ensuring that no one person (read CEO) has unfettered
powers of decision. They need to direct HP management for the long run, which remains quite a
challenge.
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Interestingly when we look at many successful early IT and later web services companies, the
most flourishing parts of their history often is (or was!!) with a dual or even triple partnership at
the top, plus a strong board. Apart from HP in its early days, we can see Microsoft (Gates with
Allen, replaced by Balmer), even Apple (Jobs, Wozniak and Markkula, and later, Jobs and Ive),
Google (Brin, Page and Schmidt), Facebook (Zuckerberg and since 2008, Sandberg), DEC
(Olsen and Goriot), Skype (Zennström and Friis) and Sun (McNealy, Schmidt, Joy) all having
this pattern. And failure has often occurred after it was disrupted, as in DEC or Sun for instance.
The pattern seems to temper IT CEO egos; possibly a board should deliberately set it up.
Obviously there are exceptions (IBM with Gerstner, Oracle with Ellison and Amazon with Bezos).
Perhaps HP needs to return to duality.
2 What is the current state?
Over the last 12 months since September 2011, the stock has fallen about 35%. Moreover,
nothing really very new was said in terms of strategy at the annual Securities Analyst Meeting.
Therefore, the lack of investor confidence in the current strategy may continue. The keynote
speech from the CEO claimed a repositioning into what HP sees as the major trends driving IT
investment - cloud computing, information optimisation and data security. A five-year strategy
based on today’s bandwagons.
Yet, from its history, HP should be among the most technologically innovative companies in the
world. Instead, the company over the last decade and a half has become just a brand name for
a nebulous range of standard commodity products, with a hefty IT services division gained by
acquisition that has taken a significant write-down in value.
Thus in summary, HP appears to have nothing spellbindingly new. As noted, today it has a wide
range of products and services across fragmented markets. Few computing companies can
successfully manage such a wide product and services portfolio, apart from IBM which pares
down its key markets very carefully. Let us look more closely at HP’s main market segments:-
Product/ service
category, &
revenues
Own competitive Prospects Outlook for segment
Printing
(and imaging)
$18.4Billion for
9months to
31 July 2012
One of the largest revenue and profit
streams, until recently, with some 20%
of revenues (approaching $25 Billion
last 4 quarters) and over 35% of
annual profits. Future growth sub-
segment is in combined printer, copier,
scanner (or multifunction category)
where HP has only 12% of market
share. Large number of models – over
2000 laser printers – making product
strategy questionable. Its ink cartridges
are often seen as expensive, against
Commodity market with strong and
increasing competition. The ‘razor
blade’ model of high margins on inks
and toners is under attack from all
kinds of alternative offerings, so the
strategy may be due for a complete
replacement. Margins in this
commodity market are likely to decline,
especially for inks and low-end toner.
There may also be a trend to printing
less as users read more documents on
line.
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‘white label’ inks, especially if life cycle
of printer is considered. This is a point
of sensitivity (a ‘Kodak syndrome’) as
operating margins on printing and
imaging, much from cartridges, in Q3
2012 were 16%. That is double most
other HP business units.
HP’s own printer products are losing
traction on quality against Canon and
others. HP printer sales slid 3% in Q3
2012. Much of the printer line is seven
years old, probably as R&D has been
cut. Doing better in Indigo high end
printing press operations and
professional print services. Has some
traction in new 3D printing but just
ended agreement with its manufacturer
of 3D printers, Statasys.
The high-end professional printing
business may be the place to aim for
but its volume of sales even at high
margins may not compensate for the
loss of sales and profits at the low end
for HP.
Another sub-segment that promises
growth is 3D printing, for prototyping in
the design industries, and for medical
and dental applications. But HP
strategy is unclear and it is dominated
by start-ups today.
Cloud:
Yet to be
provided.
Offerings are a mix of some software,
on OpenStack platform, with servers,
storage and networking plus services.
Strong competition, especially from
Oracle, Amazon, Google, IBM, and
specialists. No real differentiation
evident.
Becoming crowded so margins will
erode. Market failure possible if hit by a
critical security event or significant
disaster, so that its clients’ businesses
suffer (the ‘black swan’ syndrome).
PCs
(all types)
$27 Billion for the
9 months to
31 July 2012
The PC operation is among the largest
globally in shipments, due to the
Compaq heritage. No outstanding new
products – the most recent W-8
announcement, the EnvyX2 convertible
hybrid PC and its ultrabooks are rivaled
by similar offerings from Samsung,
Lenovo, Asus etc and of course Apple.
Large number of PC models, which HP
hopes to cut by 25% by 2014. HP’s PC
margins eroding as competition bites
(SEC Form 10-Q for Q3, 31 July 2012).
Revenues declined 10% over last fiscal
year. Future depends on Microsoft
Windows 8 selling well, and for future
touch screen markets. China’s Lenovo
may take first place from HP during Q4
2012 in numbers of PC shipments.
About to be hit by tablets bringing a
structural change to this market. High
competition from Lenovo, Dell, Acer,
Asus etc. Margins could reduce even
further as average selling price of PCs
declines. Bucking this price trend in the
immediate term is the move to touch
screens (which add at least $100 to
costs) with Microsoft Windows 8; also
ultra books with aluminium/titanium
cases and ‘thin technology’ which may
drive prices beyond $1300. Going
beyond the average selling price (ASP)
of Apple’s Macintosh and the critical
ASP of $450 -$600 for a Wintel laptop
PC could spell faster market decline,
especially when considering the macro-
economics of future developing
markets (the key sales area to 2025).
Note that for the consumer segment,
Google has released a $249
Chromebook and Apple a $329 iPad
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but HP cannot really compete here due
to its quite different business model4.
Thus some expect the PC market to
expand less than 1% in 2012. This is
the lowest since it shrank, back in
2001, which might occur again in 2013,
complicating any dependence on this
revenue stream. In Q3 2012, global PC
shipments shrunk around 8%
compared to Q3, 2011.
Smartphones:
No presence
Despite the Palm acquisition in 2010
for $1.2 Billion with its promising
webOS, HP announced it would exit
the smartphone market in August 2011
and abandon Palm’s Pre 3. No
presence, or apparent aims, ambitions
or initiatives, apart from a promise to
return - but not till after 2013. The iPAQ
PDA comes closest to a Palm
alternative as an existing potential
hardware platform. Unless HP can
come up with something radically new,
it may be too late to enter the market.
Obviously a Microsoft mobile Windows
8 device could be HP’s possible
preferred direction- not radically new.
High growth, with Apple iPhone and
Samsung Android products taking most
revenues and margins. Difficult to
enter, difficult to succeed against
players who have grown up in this
market. Requires dedicated high
innovation, design (at the level of a
Jonathan Ive) and clever new business
models to succeed with mobile network
operators and web services providers.
Tablets:
yet to form a
tangible separate
contribution
In 2011 the TouchPad was launched. It
was withdrawn less than 2 months later
when HP announced it would exit the
tablet market, in August 2011. In a
reversal from the PC operation, HP
now has made public its first MS
Windows-8 tablet, the ElitePad 900
announced for sale in the USA in 2013
as a high end business tablet. Take-up
yet to be proven, with launch expected
in 2013.
A growth market, but the Windows-8
touchscreen operating system not
proven yet against the market-leading
Apple iOS and Google’s Android, as in
the Samsung offering, or the Amazon
Kindle, or the Google Nexus. Mobile
Apps available are limited compared
with Apple and Android. A W-8 tablet
must also compete with Microsoft’s
own contender, Surface, as well as
myriad Asian W-8 products. Moreover,
Android based products with LTE
connectivity are selling in China around
$100 such as the Ainol Novo.
Servers*
Me-too products despite inclusion of
ARM and Atom low power versions
and the Moonshot project (R&D for low
power servers). High end uses Itanium
VLIW multi-core microprocessor,
developed with Intel, which other
suppliers have largely stopped using
Corporate market increasingly
competitive. So overall server market
revenue shrunk 2.9% Q2 2012 over Q2
2011 while volume of shipments
increased 1.4% in Q2 2012. Becoming
more of a commodity market as blades
and x86 increase numbers, with
4 Both Google and Amazon (the latter with its $199 Kindle Fire) and also Apple, to a different extent, profit from a
verticalisation model that subsidises the device through selling content, examined in our value chain analysis carried out
for a recent European Commission study (HP targets the enterprise / business segment, not open to this form of subsidy).
Hewlett Packard – where do we go next? Page 17
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(Itanium was a supposed replacement
for the Intel X86 architecture; chip
sales of $40Bn were projected, but
actual sales have been far lower; also
has suffered delays). Since its PA-
RISC chip is being run down, high end
customers are forced to migrate
software. Strategic dependence on
Intel. Little price advantage. Server
pricing is in middle of range, to high.
For server positioning in commodity
sub-segments of the server market,
such as blade server and x86, HP has
global leadership by revenue.
But IBM has challenged HP since Q3
2011 in overall global server revenues
although HP was number one
according to some, tied with IBM
according to others on revenues in
2012. Generally HP portion of server
market has shrunk in the low/mid range
over last 3 years as competition bites.
HP’s server shipments decline as
global demand reduces.
standard parts, while RISC/Itanium
servers. For very large users (for web
farms- Amazon, Yahoo, Google, MS,
Apple, etc) HP is largely locked out as
such web players design and
commission own custom server
designs. If cloud computing does take
off for the enterprise, then the very
large web farms from Amazon, Google,
etc, would tend to substitute for
corporate-owned servers in the
enterprise market and could shrink the
server market in the longer term.
Dell and Lenovo are moving in at low
end from PC segment, with higher
power servers, as well as Cisco UCS
with 10% of the x86 blade server
markets in 2011, while IBM and Sun
(Oracle) compete at the top end. Also
the switch to the Itanium-based server
from the PA-RISC has suffered from
the programmes of IBM (with Migration
Factory) and others encouraging high
end users of HP Non-Stop and HP
Superdome servers to change supplier.
HP Storage
Systems* with
management
software
HP Storage – hardware and software
range for disk and tape with direct
attachment and NAS and SAN. Resells
Hitachi high-end storage hardware.
Increased the range with acquisition of
3PAR after a bidding war with Dell
driving the offered price from $1.1 to
$2.4 Billion. Resells rebadged storage
networking from Brocade, QLogic,
Emulex and Cisco.
A growth segment as the web (& cloud)
drives data volumes for web service
providers and enterprises, for
structured and unstructured data. This
is a highly competitive market strongly
contested at every level by EMC, IBM,
Hitachi and now at the low end Dell
with its PowerVault line and in the mid
range by Oracle (ex Sun).
IT services (HP
Enterprise
Services and HP
Technology
Services)
for enterprise and
public sector,
$26.2 Billion,
revenues for the 9
months to
31 July 2012
HP originally had a high reputation for
its consulting technical staff, expanded
by the tie-up with Compaq that brought
the remnants of DEC’s technical
teams. Acquisition of EDS, in 2008 with
139,000 staff has incurred a major
write-down in 2012. Note, much of
EDS history /experience is with IBM
mainframe. There is a history of EDS
problems and disputes. Some large
contracts coming to an end and some
losses associated with them, both
financially and in reputation, with four
large contracts not being renewed.
Cultural gap for EDS with other HP
Difficult market becoming more difficult
– existing large contracts now under
scrutiny and new ones in current
economic conditions are fewer, lower
margin and heavily competed for. More
generally there are increasing
questions over the margins to be made
from large corporates offshoring
business processes to Asia, etc, due to
heavier competition. Also, some
reversal of the outsourcing trend, owing
to quality of service problems for clients
and their customers. Strong
competition from IBM’s IGS and Asian
and European players. (Again, we
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service arms which are more technical.
Operating margins have shrunk from
16% in 2010 to under 12% in 2012,
year to date (HP 10-Q form, 2012, Q2).
In the October 3rd
2012 presentation,
HP anticipated revenue declines of
11% to 13% in fiscal 2013 with
operating margins between 0% and 3%
for the HP Enterprise Services
Division.
have to declare an interest – have
acted in a team offshoring software
development for a large mobile
operator - prepared shortlists of
candidates, contracts, SLAs, etc, and
have also acted as the CIO for new
development, for a large European
utility which outsourced much
development).
Software
$2.9 Billion
revenues for the
9months to 31
July.
Usually margins are higher than in
some other divisions but HP has
lacked strong commitment to software
(and a general move to higher margin
sales). Acquisition of Autonomy, in
corporate search engines, for over
$10Bn was aimed at taking HP further
into enterprise software, Big Data and
SaaS.. HP has a systems management
suite (Open View). But software
accounts for a lesser portion of HP
revenues despite it being in the top six
in combined software sales worldwide,
and third behind IBM and Microsoft in
enterprise software sales.
Possibly a growth market but this
depends on global economic outlook
for sales in the large-enterprise
segment, which is the main attraction.
If margins can be maintained, this is
promising but competition is fierce with
Oracle, IBM and Microsoft particularly,
as well as with CA, Symantec, BMC,
SAS, etc, and other specialists such as
SAP and now SaaS suppliers.
Offerings in the future may be linked
with Cloud platforms more.
Network
products*
Has networking business for Ethernet,
routers, wireless access points and
network switches to complement the
server and storage lines; sales from its
Networking business unit and has
integrated 3COM products from the
3COM acquisition in 2010.
HP competes in the enterprise
segment with a variety of larger
players, many of whom have strong
ranges of products and services,
including Cisco, IBM, Alcatel-Lucent,
Huawei, Juniper, Avaya, ZTE, etc
Networking has stable growth
prospects, in terms of units sold and
capacity or ports/unit but revenues over
the long term may decline, as new
technology is inevitably cheaper.
Moreover the biggest growth markets
are likely to be in the developing
regions, where generally competition is
strong and pricing tends to be at lower
levels. Such pricing is reflected
eventually back in the developed
markets.
Semiconductors:
Little significant
activity
Largely exited as relies on processors,
RAM and specialist chips from others,
usually industry standard suppliers
such as Intel. Research in ink bubble
and jet electronics and chips.
Highly competitive market but
becoming a segment that some major
computing players such as IBM still
pursue for limited specialist chips, while
Apple is quickly building its own in-
house processor design and fabless
capability through several acquisitions.
Diverse other
products/services
Has interest in data centre design and
equipment, high efficiency power
distribution etc. HP has made some
interesting claims here – in May 2012,
for instance - for a net zero-energy
data centre, based on solar power and
The data centre market is certainly a
focus of attention for energy efficiency
with long term prospects. High
competition from IBM and many other
specialists.
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other renewable resources.
Also has HP Financial Services, with
$2.8Billion revenues over 9 months to
31 July 2012
Pushing into security offerings, but
cannot afford to be left behind.
Security market will flourish but long
term success depends on strategy
taken as competition and depth of
expertise required will increase
significantly as specialists raise their
profile, such as RSA, acquired by EMC
for $2.1 Billion.
*Total of enterprise hardware in 9 months to 31 July 2012 for servers, networking and storage was $15.3
Billion. (All figures from statements in Hewlett-Packard Company and Subsidiaries Consolidated
Condensed Statements of Earnings, to 31 July 2012, Unaudited). Earning from operations for Enterprise
servers, storage and networking declined, in the 9 months to 31 July, from 13.8% of revenues in 2011 to
10.9% in 2012 (SEC Form 10-Q, for 31 July 2012).
Looking at the above list, HP too often appears at the low-end of commodity high-tech
businesses, or in the mid-range of some enterprise markets - a ‘scatter-gun’ approach
potentially hazardous for the future if it continues.
3 What can HP do?
HP’s CEO at the annual Securities Analyst Meeting noted that the company lacks a “sharp
competitive focus” and that:
“The recent financial performance of HP has not been good. …It’s going to take
longer to right this ship than any of us would like.”
The internal strategy today in the five-year plan is to say ‘cloud’ or ‘security’. Simple and
straightforward, but is it somewhat too much of a ‘me-too’ approach? It is quite predictable. But
what implementation of this really means in business terms remains unclear.
What should happen then? A range of alternative scenarios for HP’s successful future based on
more drastic strategies could be drawn up as way of trying to understand what is practical and
feasible for HP at this moment to survive in the short term and thrive long-term. These must be
long-run strategies that can survive the black swan events and also the ‘grey swan’ events of a
China downturn, or a continuing recession, etc, with a viability of 20 to 50 years, comparable to
HP’s history.
Here we should note that since the early 1990’s we have been examining the options for
operational strategy using a small number of contrasting scenarios, created with a specific
approach5 which is aimed at this level of situation. Such analysis has been performed for large
corporates in computing and mobile communications. Almost always, we are trying to answer
the most important questions, based on as much detailed and wide-ranging analysis we can
gather on:-
5 Our approach to scenario forecasting, ‘Scenario Construction for Forecasting’ (SCF) has been used for looking at the
structure of the Future Internet, for examining the demand for spectrum under various economic scenarios, one of which
considered the global meltdown of 2008, as part of a study carried out in 2004/5 for the European Commission to provide
an EU consensus for the ITU’s WRC-07 conference.
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- What will dominate customer demand and spend in the next 3 to15 years? Often this is not
the most obvious bandwagon
- Where will value shift, given the trends in demand? Again standard intuitive responses may
not be enough – (much) more work is needed
- How easy will (new) market entry be what is required and who will be the key competitors?
- Where will the strategic high ground be among these various trends?
For instance in one such early study we showed that for both technical and regulatory reasons,
the telecommunications market would open up through competition, so that telecommunications
tariffs would tend to fall very rapidly for data and voice. This would seed a global networked
computing market that could piggyback voice, if common standards could be adopted. The
obvious set was the Internet’s TCP/IP - with the Web on top for user interfacing and a server
configuration model.
So what should HP do? In the condition of HP today, one fairly evident option, is to break up the
existing company into a number of separate enterprises. There are several scenarios of how
that could be done. But first there is the question of justifying why this should this happen at all.
And, if HP is broken up - just how will this be done? Should it be ‘vertically’ - or ‘horizontally’ - or
both – or ‘diagonally’? These three possible scenarios of a break up can be briefly sketched as:
By ‘vertically’ what is meant is that the company could be divided into two
halves by market segment. One half would be a consumer-oriented standard
personal computing company – the PCs and printers – marketed through a strong
retail and internet / wholesaling distribution arm, probably with low to mid-range
margins. This would put it in the same market space as Lenovo, Dell, and other
Asian PC suppliers such as Acer and Asus – the same low margin space that IBM
exited. The remaining HP business units would be formed into an enterprise
segment IT supplier, with higher margins, aimed at corporates and large public
organisations. It would offer the combo of IT services (business process and
technical) and arrange of ‘enterprise computing systems and products’, with a direct
sales force and co-marketing partners. This would put it into competition with IBM,
Oracle, EMC, etc and to a lesser extent with CA, Symantec, BMC, etc as well as
Cisco and network suppliers if it remained in that network segment. This break-up is
fairly straightforward as the lines of demarcation are obviously those of the current
business units.
‘Horizontally’ would be rather different in that product and service lines would
have to be chosen carefully so that the high end, high margin products and services
could go into one company, with low-end and usually smaller margin products and
services into the second company. Thus a high-end laptop PC, at the level of quality
of the old, solid IBM ‘ThinkPad’ (pre-Lenovo) with its great keyboard would be in the
high end company, probably for dedicated business users, while the low-end
company would sell a quite different product, the mass market tablet PC, for content
consumption - watching TV, playing video games and reading e-books (if the screen
has the resolution). This would chop up some business units into two parts – high
and low margin.
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‘Diagonally’ implies shutting down all non-promising product/service lines and
cherry picking from the rest, to form a much slimmer company. Its divisions must all
be the leader or the strong number two, in each of its markets – be it corporate
search engines, or high end professional imaging with high volume printing, or
perhaps very low energy web servers. This is the standard turnaround artist
approach.
In reality, any form of break up has to be justified. Each of the separate pieces must have the
critical mass, access to finance, R&D resources, culture, market knowledge and quality of
management just to survive - let alone thrive. Naturally, there would be a major repetition of
functions and their resources between the various parts in order to make them autonomous. For
instance, both the high and low margin PC companies in the horizontal break-up would need
their own engineering staff, while in any of the above scenarios, each spin-off will require
complete accounting and back office operations as well as marketing, sales and R&D.
Alternatively, we might be inclined to reject these break-up scenarios - but if, and only if, a
scenario of transforming the operational units in an integrated fashion could make them into an
organisation much larger than the ‘whole’ they are today (no pun intended). Moreover the
business model must be a cleanly differentiated one for the long term.
This alternative path of not breaking up HP could take various different directions, each having a
unique scenario with its own theme, exploitation of the initial conditions, differing assumptions
on key trends with assertions of the future development trajectory. We have enumerated at least
three, which taken together would require comparative assessment. Here we explore just one in
a very brief outline, which runs as follows, below.
The theme in this scenario is that in order to revive and thrive, the original tech culture would be
recreated, so that the original dependence on conventional computing industry is augmented by
returning to high value high technologies.
Phase 1: for any scenario of a continuing combined operation there is a common first phase -
assuring the company’s short-term survival. Fortunately HP is in a strong enough position such
that the financial position may hold up long enough, probably using the printing income, to give
a suitable time window for any turnaround to take effect. To do this, it must use as much as is
practical of whatever cash is being generated to pay down its debts. That is the hardest part. It
will require stronger leadership from board level to express the urgency of the situation. It will
require looking the ominous financial results in the face, which calls for an accurate grip on the
reality of the internal budgets. Continuing with the existing sales in the face of their downturn will
be necessary, so getting the top management out there and meeting with their markets to make
new sales is paramount – be it the retail distribution chains, corporate customers, VARs or
dedicated channels for small business. The sales force and its processes must be made as
efficient and simple as possible and the $4 billion spent on marketing well spent. This means
working from the outside, that is, from the market, inwards. I always remember that DEC,
whenever there was a budget crisis, use to cut out sales visits – a great way to strangle cash
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flow by choking off new sales – which was working from the inside out. One further short-term
move should be to emphasise, wherever possible, the higher margin sales such as software.
Revising the internal bureaucracy – and its expense – is the next priority. Understanding true
costs in a ‘modern computer company’ be it for services or products is an art which requires
applying far more intelligence than the simple appearance of costs and revenues in the
divisional and departmental balance sheets. The layers of middle management behind that are
the real masters of the company’s day to day running and expenditure. Their disposition hides
those costs of bureaucracy, uninformed decisions and poor execution. Strongly questioning the
efficiency of decision-taking in operations (sales, marketing, production, development, research
and by geography) can cut out layers of delay and costs and so make the sales and production
forces more dynamic in the short term. Any internal fiefdoms which block cooperation through
vertical stovepipes be they by region, country, operational function or by product/service line
would have to be understood, mapped, revised and replaced.
Longer term, the whole business operation with its hierarchy, value chain and processes must
be reviewed and reworked. But this may well be for the second phase, to align with new
business models.
Phase 2: the second phase of the scenario contains its unique direction, following the theme
above, of returning to a former business model. Overall, this is not easy. The hardest part, the
basis of this scenario is returning to the track that HP wandered off in 1999 when it separated
from Agilent and built a pure computing company. That requires rebuilding the original culture. It
is worth trying though. HP was built on high quality focussed research and innovation across a
whole range of advanced technologies, not just computing, and it needs to return to that, if it is
to have future, perhaps some years from now. What are those high technology segments
requires far more work that must be carried out with urgency, in a full study project.
However, does the current management have the vision to understand that such a basic
transformation is necessary? This is the key question? And an even greater question is – if they
can contemplate it, could they successfully implement it?
Because what marks success today in the IT market is innovation, innovation and then more
innovation, in everything from the first technical concept to the business model to the
manufacturing process to revising the market structure. Hard to come by - harder still to turn
into commercial success. Innovation means ‘crossing the valley of death’ as start-ups and
venture capitalists term it, moving from a first conceptual prototype to first sales with an
industrialised version sold at a profit, possibly through a new business model and perhaps into a
new market structure. Is this completely beyond the bounds of possibility for HP?
HP needs someone to revitalise the innovation that has been lacking for the past decade. It
needs to start taking risks consciously, not unconsciously, which leads to today’s downward
spiral. It needs to return to an engineering tradition under a radically improved top management
and board. Going back to the sanity brought by products like medical instruments and specialist
semi-conductors is necessary, as well as the pure computing lines. It probably means exiting
those commodity markets where its cost base can never compete. Such a radical change needs
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the art of the long view in thinking combined with rapid implementation. More importantly, it
requires discarding the short-term thinking that leads to the ‘me-too’ strategy syndrome. It
means abandoning quick-fix marketing for instant profits, replaced by long-term quality and
rapid innovation, all driven by the traditional tech-based HP culture. After the radical sea-change
in management, it requires continuity of the new management, at the top – that is at executive
and upper middle management levels, using succession from within.
We’ve noted that innovation is hard to find and even harder to bring to market. So how could HP
approach this? A final attempt at re-igniting real innovation could be based on an independent
research centre along the lines of Xerox PARC but without the fumbling. To gain rapid
innovation (this is not Apple, or even IBM) one way forward from the PARC-like centre could be
to use a strong, independent corporate VC organisation far more actively, to seed innovation,
much of it ‘crossing the valley of death’ outside HP.
The goal would be to enable good ideas to be first developed and hosted in an independent HP
research centre, then brought to fruition in start-ups with strong ties to HP. The current HP Labs
might be a starting place for founding such a centre but it would have to be restructured in
choice of disciplines, goals and management. The R&D centre would seed start-ups to be
funded by the corporate VC, which should be made analogous to the original Xerox Technology
Ventures (XTV) - an autonomous division of Xerox with powers to set its own agenda. If, and
when the start-up takes off, then it could later be brought into HP, or remain independent, to be
linked through a strong OEM reseller or investment tie-in.
If the final stage for the start-up is to be an ingest into HP, then such integration requires a lot of
thought and care if the fledgling operation is not to be stifled, forgotten and destroyed. So it is
critical to create a flexible business process for inducting high creativity start-ups into the
organisation.
This process’s goal is to create a pool of marketable products and services well beyond the
initial innovation. Overall this is a linked programme of three stages:-
a large-scale research centre - independent of the corporation as far as possible -
for early creativity, highly analogous to PARC, with its wide-ranging intellectual
spread into sociology, psychology, anthropology, physiology and neurology
then spin-off the best concepts into an autonomous start–up, for the first
industrialisation stage of the product or service funded by separate HP corporate
venture capital division that can fund a whole flock of such start–up operations. Each
start-up has complete independence, being a separate legal entity, able to recruit its
own CEO and staff, with purchasable share options, etc for employees.
and finally a safe and productive induction process to either enable HP to act as
OEM for the product/service or to absorb the start-up without crushing it.
This programme should also enable high-risk projects to get funding and industrialisation, even
long term ones (10 years and over – which are a major problem for the Silicon Valley patterns of
venture funding and therefore a potential competitive advantage).
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In parallel with this, the destiny of all the existing businesses would have to be considered, in
order to align with the high technology focus, only continued where they contribute. If not then
they will have to be transformed in new directions with new business models.
The Final Word
Based on HP’s recent history, such a radical chain of redevelopment may be far too
fundamental and singular for current management to consider and perhaps to really
comprehend. We hope not. Moreover, to complete and then evaluate this first outline sketch
further requires much more detailed analysis of the overall business model, in its assumptions,
assertions and hypotheses on projections. That would enable creation of the detailed models of
each component of the business. The whole business plan projection also needs to be
summarised with a consideration of its strengths, weaknesses opportunities and threats, which
would be put into a comparative analysis with the other scenarios.
If this first scenario is determined to be the best, operational detail comes next. For instance,
one initial litmus test for management could be the formation of an innovative research centre
with a PARC-like culture out of HP Labs! Or, the first radical step might be a return to the tech-
culture roots in a step-change through re-amalgamation with the original instruments business.
Perhaps the route forward involves purchase by Agilent, which is already working with Teradata.
Only further analysis will provide the answer.
Naturally there are other scenarios – we have considered at least two other contrasting courses
for a potentially successful future for HP, also with business lifespans of 20 to 50 years.
References
Naturally we have a number of references used for this research which include the following:-
General company references and financial statements:
SEC Form 10-Q, for 31 JULY 2012 return for Hewlett Packard: http://www.sec.gov/Archives/edgar/data/47217/000104746912008732/a2210845z10-q.htm
Hewlett-Packard Company and Subsidiaries Consolidated Condensed Statements of Earnings, to 31
July 2012, Unaudited
HP Annual Securities Analyst Meeting Report, 03 Oct 2012, News Release
Presentations, HP analysts meeting 013October 2012-11-12 and financials: http://www.hp.com/investor/home
Annual stockholder meeting, 21 March 2012, transcript:
http://seekingalpha.com/article/452821-hewlett-packard-s-ceo-hosts-2012-annual-meeting-of-
stockholders-transcript?page=4
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Hewlett Packard, HPQ, Q3 2012 Hewlett-Packard Earnings Conference Call, 22 August 2012 /
9:00PM, Thomson-Reuters, Edited transcript
HP performance and general comments:
http://www.webosnation.com/hp-warns-investors-expect-rocky-2013-stock-tanks http://www.theregister.co.uk/2012/08/22/hp_q3_2012_results/ http://www.channelweb.co.uk/crn-uk/news/2214627/whitman-lays-out-hps-fiveyear-journey http://www.guardian.co.uk/technology/2012/oct/15/hewlett-packard-meg-whitman?newsfeed=true http://online.wsj.com/article/SB10001424052970204755404578101943429107284.html?mod=googlenews_wsj http://www.stock-analysis-on.net/NYSE/Company/Hewlett-Packard-Co/Ratios/Profitability#Operating-Profit-
Margin
PC market:
www.reuters.com/article/2012/10/11/us-lenovo-hp-gartner-idUSBRE8991RF20121011
Storage market:
http://www.theregister.co.uk/2012/10/04/hp_analyst_day_3_oct_2012/
Server market share:
http://www.idc.com/getdoc.jsp?containerId=prUS23513412
http://www.zdnet.com/blog/btl/dell-picks-up-server-share-as-ibm-is-no-1-says-gartner/70383
http://www.icharts.net/chartchannel/total-ww-server-market-4q-2011-vendor-market-share-factory-
revenue_m3rvysxdc
http://www.gartner.com/it/page.jsp?id=2139315
http://www.eweek.com/c/a/Data-Storage/HP-IBM-Lead-Slowing-Worldwide-Server-Market-510122/
Printers and printer market:
http://www.zdnet.com/printer-shipments-fall-globally-in-q2-7000002702/
http://tech.fortune.cnn.com/2012/03/29/hps-printer-problem/
http://dawn.com/2012/10/03/hps-profitable-printers-to-buy-whitman-time/
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Publication Date: November 21, 2012 This document is subject to copyright. No part of this publication may be reproduced by any method whatsoever without the prior written consent of Ptak Noel & Associates LLC. To obtain reprint rights contact [email protected] All trademarks are the property of their respective owners. While every care has been taken during the preparation of this document to ensure accurate information, the publishers cannot accept responsibility for any errors or omissions. Hyperlinks included in this paper were available at publication time. About Ptak, Noel & Associates LLC
We help IT organizations become “solution initiators” in using IT management technology to resolve business problems. We do that by translating vendor strategy & deliverables into a business context that is communicable and actionable by the IT manager, and by helping our clients understand how other IT organizations are effectively implementing solutions with their business counterparts. Our customers recognize the meaningful breadth and objectively of our research in IT management technology and process. www.ptaknoel.com About the Authors Simon Forge applies over 30 years experience in information industries to his current projects in telecommunications and
computing, specifically exploring new software, wireless and computing technologies and potential futures, outcomes and strategies for markets, products, companies, countries and regions. Previously Simon was Director of IT Development for Consumer and Business Products for Hutchison 3G UK, managing creation of software applications for the latest mobile products, covering the whole range of multimedia apps. In former positions, he managed a wide range of teams and assignments – from acting as interim Director of IT development for the largest utility in the UK to developing one of the largest B2B e-commerce trading systems in Europe. Forge has a PhD, in digital signal processing, as well as MSc and BSc in Control Engineering, all from the University of Sussex, UK. He is a Chartered Engineer and M.IEE and sits on the editorial board of the Journal Info. Richard Ptak has over 30 years’ experience in systems product management working closely with Fortune 50 companies in
developing product direction and strategies at a global level. Previously Ptak held positions as senior vice president at Hurwitz Group
and D.H. Brown Associates. Earlier in his career he held engineering and marketing management positions with Western Electric’s
Electronic Switch Manufacturing Division and Digital Equipment Corporation. He is frequently quoted in major business and trade
press. Ptak holds a master’s in business administration from the University of Chicago and a master of science in engineering from
Kansas State University.