by Adam Hartung | Oct 4, 2012 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Web/Tech
If you're still an investor in Hewlett Packard you must be new to this blog. But for those who remain optimistic, it is worth reveiwing why Ms. Whitman's forecast for HP yesterday won't happen. There are sound reasons why the company has lost 35% of its value since she took over as CEO, over 75% since just 2010 – and over $90B of value from its peak.
HP was dying before Whitman arrived
I recall my father pointing to a large elm tree when I was a boy and saying "that tree will be dead in under 2 years, we might as well cut it down now." "But it's huge, and has leaves" I said. "It doesn't look dead." "It's not dead yet, but the environmental wind damage has cost it too many branches, the changing creek direction created standing water rotting its roots, and neighboring trees have grown taking away its sunshine. That tree simply won't survive. I know it's more than 3 stories tall, with a giant trunk, and you can't tell it now – but it is already dead."
To teach me the lesson, he decided not to cut the tree. And the following spring it barely leafed out. By fall, it was clearly losing bark, and well into demise. We cut it for firewood.
Such is the situation at HP. Before she became CEO (but while she was a Director – so she doesn't escape culpability for the situation) previous leaders made bad decisions that pushed HP in the wrong direction:
- Carly Fiorina, alone, probably killed HP with the single decision to buy Compaq and gut the HP R&D budget to implement a cost-based, generic strategy for competing in Windows-based PCs. She sucked most of the money out of the wildly profitable printer business to subsidize the transition, and destroy any long-term HP value.
- Mark Hurd furthered this disaster by further investing in cost-cutting to promote "scale efficiencies" and price reductions in PCs. Instead of converting software products and data centers into profitable support products for clients shifting to software-as-a-service (SAAS) or cloud services he closed them – to "focus" on the stagnating, profit-eroding PC business.
- His ill-conceived notion of buying EDS to compete in traditional IT services long after the market had demonstrated a major shift offshore, and declining margins, created an $8B write-off last year; almost 60% of the purchase price. Giving HP another big, uncompetitive business unit in a lousy market.
- His purchase of Palm for $1.2B was a ridiculous price for a business that was once an early leader, but had nothing left to offer customers (sort of like RIM today.) HP used Palm to bring out a Touchpad tablet, but it was so late and lacking apps that the product was recalled from retailers after only 49 days. Another write-off.
- Leo Apotheker bought a small Enterprise Resource Planning (ERP) software company – only more than a decade after monster competitors Oracle, SAP and IBM had encircled the market. Further, customers are now looking past ERP for alternatives to the inflexible "enterprise apps" which hinder their ability to adjust quickly in today's rapidly changing marektplace. The ERP business is sure to shrink, not grow.
Whitman's "Turnaround Plan" simply won't work
Meg is projecting a classic "hockey stick" performance. She plans for revenues and profits to decline for another year or two, then magically start growing again in 3 years. There's a reason "hockey stick" projections don't happen. They imply the company is going to get a lot better, and competitors won't. And that's not how the world works.
Let's see, what will likely happen over the next 3 years from technology advances by industry leaders Apple, Android and others? They aren't standing still, and there's no reason to believe HP will suddenly develop some fantastic mojo to become a new product innovator, leapfrogging them for new markets.
- Meg's first action is cost cutting – to "fix" HP. Cutting 29,000 additional jobs won't fix anything. It just eliminates a bunch of potentially good idea generators who would like to grow the company. When Meg says this is sure to reduce the number of products, revenues and profits in 2013 we can believe that projection fully.
- Adding features like scanning and copying to printers will make no difference to sales. The proliferation of smart devices increasingly means people don't print. Just like we don't carry newspapers or magazines, we don't want to carry memos or presentations. The world is going digital (duh) and printing demand is not going to grow as we read things on smartphones and tablets instead of paper.
- HP is not going to chase the smartphone business. Although it is growing rapidly. Given how late HP is to market, this is probably not a bad idea. But it begs the question of how HP plans to grow.
- HP is going not going to exit PCs. Too bad. Maybe Lenovo or Dell would pay up for this dying business. Holding onto it will do HP no good, costing even more money when HP tries to remain competitive as sales fall and margins evaporate due to overcapacity leading to price wars.
- HP will launch a Windows8 tablet in January targeted at "enterprises." Given the success of the iPad, Samsung Galaxy and Amazon Kindle products exactly how HP will differentiate for enterprise success is far from clear. And entering the market so late, with an unproven operating system platform is betting the market on Microsoft making it a success. That is far, far from a low-risk bet. We could well see this new tablet about as successful as the ill-fated Touchpad.
- Ms. Whitman is betting HP's future (remember, 3 years from now) on "cloud" computing. Oh boy. That is sort of like when WalMart told us their future growth would be "China." She did not describe what HP was going to do differently, or far superior, to unseat companies already providing a raft of successful, growing, profitable cloud services. "Cloud" is not an untapped market, with companies like Oracle, IBM, VMWare, Salesforce.com, NetApp and EMC (not to mention Apple and Amazon) already well entrenched, investing heavily, launching new products and gathering customers.
HPs problems are far deeper than who is CEO
Ms. Whitman said that the biggest problem at HP has been executive turnover. That is not quite right. The problem is HP has had a string of really TERRIBLE CEOs that have moved the company in the wrong direction, invested horribly in outdated strategies, ignored market shifts and assumed that size alone would keep HP successful. In a bygone era all of them – from Carly Fiorina to Mark Hurd to Leo Apotheker – would have been flogged in the Palo Alto public center then placed in stocks so employees (former and current) could hurl fruit and vegetables, or shout obscenities, at them!
Unfortately, Ms. Whitman is sure to join this ignominious list. Her hockey stick projection will not occur; cannot given her strategy.
HP's only hope is to sell the PC business, radically de-invest in printers and move rapidly into entirely new markets. Like Steve Jobs did a dozen years ago when he cut Mac spending to invest in mobile technologies and transform Apple. Meg's faith in operational improvement, commitment to existing "enterprise" markets and Microsoft technology assures HP, and its investors, a decidedly unpleasant future.
by Adam Hartung | Aug 24, 2011 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
“You’ve got to be kidding me” was the line tennis great John McEnroe made famous. He would yell it at officials when he thought they made a bad decision. I can’t think of a better line to yell at Leo Apotheker after last week’s announcements to shut down the tablet/WebOS business, spin-off (or sell) the PC business and buy Autonomy for $10.2B. Really. You’ve got to be kidding me.
HP has suffered mightily from a string of 3 really lousy CEOs. And, in a real way, they all have the same failing. They were wedded to their history and old-fashioned business notions, drove the company looking in the rear view mirror and were unable to direct HP along major trends toward future markets where the company could profitably grow!
Being fair, Mr. Apotheker inherited a bad situation at HP. His predecessors did a pretty good job of screwing up the company before he arrived. He’s just managing to follow the new HP tradition, and make the company worse.
HP was once an excellent market sensing company that invested in R&D and new product development, creating highly profitable market leading products. HP was one of the first “Silicon Valley” companies, creating enormous shareholder value by making and selling equipment (oscilliscopes for example) for the soon-to-explode computer industry. It was a leader in patent applications, new product launches and being first with products that engineers needed, and wanted.
Then Carly Fiorina decided the smart move in 2001 was to buy Compaq for $25B. Compaq was getting creamed by Dell, so Carly hoped to merge it with HP’s retail PC business and let “scale” create profits. Only, the PC business had long been a commodity industry with competitors competing on cost, and the profits largely going to Intel and Microsoft! The “synergistic” profits didn’t happen, and Carly got fired.
But she paved the way for HPs downfall. She was the first to cut R&D and new product development in favor of seeking market share in largely undifferentiated products. Why file 3,500 patents a year – especially when you were largely becoming a piece-assembly company of other people’s technology? To get the cash for acquisitions, supply chain investments and retail discounts Carly started a whole new tradition of doing less innovation, and spending a lot being a copy-cat.
But in an information economy, where almost all competitors have market access and can achieve highly efficient supply chains at low cost, there was no profit to the volume Carly sought. HP became HPQ – but the price paid was an internal shift away from investing in new markets and innovation, and heading straight toward commoditization and volume! The most valuable liquid in all creation – HP ink – was able to fund a lot of the company’s efforts, but it was rapidly becoming the “golden goose” receiving a paltry amount of feed. And itself entirely off the trend as people kept moving away from printed documents!
Mark Hurd replaced Carly, And he was willing to go her one better. If she was willing to reduce R&D and product development – well he was ready to outright slash it! And all the better, so he could buy other worn out companies with limited profits, declining share and management mis-aligned with market trends – like his 2008 $13.9B acquisition of EDS! Once a great services company, offshore outsourcing and rabid price competition had driven EDS nearly to the point of bankruptcy. It had gone through its own cost slashing, and was a break-even company with almost no growth prospects – leading many analysts to pan the acquisition idea. But Mr. Hurd believed in the old success formula of selling services (gee, it worked 20 years before for IBM, could it work again?) and volume. He simply believed that if he kept adding revenue and cutting cost, surely somewhere in there he’d find a pony!
And patent applications just kept falling. By the end of his cost-cutting reign, the once great R&D department at HP was a ghost of its former self. From 9%+ of revenues on new products, expenditures were down to under 2%! And patent applications had fallen by 2/3rds
Chart Source: AllThingsD.com “Is Innovation Dead at HP?“
The patent decline continued under Mr. Apotheker. The latest CEO intent on implementing an outdated, industrial success formula. But wait, he has committed to going even further! Now, HP will completely evacuate the PC business. Seems the easy answer is to say that consumer businesses simply aren’t profitable (MediaPost.com “Low Margin Consumers Do It Again, This Time to HP“) so HP has to shift its business entirely into the B-2-B realm. Wow, that worked so well for Sun Microsystems.
I guess somebody forgot to tell consumer produccts lacked profits to Apple, Amazon and NetFlix.
There’s no doubt Palm was a dumb acquisition by Mr. Hurd (pay attention Google.) Palm was a leader in PDAs (personal digital assistants,) at one time having over 80% market share! Palm was once as prevalent as RIM Blackberries (ahem.) But Palm did not invest sufficiently in the market shifts to smartphones, and even though it had technology and patents the market shifted away from its “core” and left Palm with outdated technology, products and limited market growth. By the time HP bought Palm it had lost its user base, its techology lead and its relevancy. Mr. Hurd’s ideas that somehow the technology had value without market relevance was another out-of-date industrial thought.
The only mistake Mr. Apotheker made regarding Palm was allowing the Touchpad to go to market at all – he wasted a lot of money and the HP brand by not killing it immediately!
It is pretty clear that the PC business is a waning giant. The remaining question is whether HP can find a buyer! As an investor, who would want a huge business that has marginal profits, declining sales, an extraordinarily dim future, expensive and lethargic suppliers and robust competitors rapidly obsoleting the entire technology? Getting out of PCs isn’t escaping the “consumer” business, because the consumer business is shifting to smartphones and tablets. Those who maintain hope for PCs all think it is the B-2-B market that will keep it alive. Getting out is simply because HP finally realized there just isn’t any profit there.
But, is the answer is to beef up the low-profit “services” business, and move into ERP software sales with a third-tier competitor?
I called Apotheker’s selection as CEO bad in this blog on 5 October, 2010 (HP and Nokia’s Bad CEO Selections). Because it was clear his history as CEO of SAP was not the right background to turn around HP. Today ERP (enterprise resource planning) applications like SAP are being seen for the locked-in, monolithic, buraucracy creating, innovation killing systems they really are. Their intent has always been, and remains, to force companies, functions and employees to replicate previous decisions. Not to learn and do anything new. They are designed to create rigidity, and assist cost cutting – and are antithetical to flexibility, market responsiveness and growth.
But following in the new HP tradition, Mr. Apotheker is reshuffling assets – closing the WebOS business, getting rid of all “consumer” businesses, and buying an ERP company! Imagine that! The former head of SAP is buying an SAP application! Regardless of what creates value in highly dynamic, global markets Mr. Apotheker is implementing what he knows how to do – operate an ERP company that sells “business solutions” while leaving everything else. He just can’t wait to get into the gladiator battle of pitting HP against SAP, Oracle, J.D. Edwards and the slew of other ERP competitors! Even if that market is over-supplied by extremely well funded competitors that have massive investments and enormously large installed client bases!
What HP desperately needs is to connect to the evolving marketplace. Quit looking at the past, and give customers solutions that fit where the market is headed. Customers aren’t moving toward where Apotheker is taking the company.
All 3 of HP’s CEOs have been a testament to just how bad things can go when the CEO is more convinced it is important to do what worked in the past, rather than doing what the market needs. When the CEO is locked-in to old thinking, old market dynamics and old solutions – rather than fixated on understanding trends, future scenarios and the solutions people want and need bad things happen.
There are a raft of unmet needs in the marketplace. For a decade HP has ignored them. Its CEOs have spent their time trying to figure out how to make old solutions work better, faster and cheaper. And in the process they have built large, but not very profitable businesses that are now uninteresting at best and largely at the precipice of failure. They have ignored market shifts in favor of doing more of the same. And the value of HP keeps declining – down 50% this year. For HP to change direction, to increase value, it needs a CEO and leadership team that can understand important trends, fulfill unmet needs and migrate customers to new solutions. HP needs to rediscover innovation.
