HP – Where Do We Go Next?

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 capitalization, 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 focused, higher margin computer operation, with some 84,000 employees in October 1999 should have thrived. It was a strong competitor in 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 recognized the critical role of culture in determining a successful turnaround 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.

In our paper (available here), we offer 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 in the paper as this is intended to be a brief analysis of HP’s plight. We then outline one among several potential solutions that should be evaluated and compared, in detail.

Ptak, Noel & Associates LLC (www.ptaknoel.com) helps IT organizations become “solution initiators” in using IT management technology to business problems.

 

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