by Adam Hartung | May 25, 2012 | Defend & Extend, In the Whirlpool, Leadership, Web/Tech
Things are bad at HP these days. CEO and Board changes have confused the management team and investors alike. Despite a heritage based on innovation, the company is now mired in low-growth PC markets with little differentiation. Investors have dumped the stock, dropping company value some 60% over two years, from $52/share to $22 – a loss of about $60billion.
Reacting to the lousy revenue growth prospects as customers shift from PCs to tablets and smartphones, CEO Meg Whitman announced plans to eliminate 27,000 jobs; about 8% of the workforce. This is supposedly the first step in a turnaround of the company that has flailed ever since buying Compaq and changing the company course into head-to-head PC competition a decade ago. But, will it work?
Not a chance.
Fixing HP requires understanding what went wrong at HP. Simply, Carly Fiorina took a company long on innovation and new product development and turned it into the most industrial-era sort of company. Rather than having HP pursue new technologies and products in the development of new markets, like the company had done since its founding creating the market for electronic testing equipment, she plunged HP into a generic manufacturing war.
Pursuing the PC business Ms. Fiorina gave up R&D in favor of adopting the R&D of Microsoft, Intel and others while spending management resources, and money, on cost management. PCs offered no differentiation, and HP was plunged into a gladiator war with Dell, Lenovo and others to make ever cheaper, undifferentiated machines. The strategy was entirely based upon obtaining volume to make money, at a time when anyone could buy manufacturing scale with a phone call to a plethora of Asian suppliers.
Quickly the Board realized this was a cutthroat business primarily requiring supply chain skills, so they dumped Ms. Fiorina in favor of Mr. Hurd. He was relentless in his ability to apply industrial-era tactics at HP, drastically cutting R&D, new product development, marketing and sales as well as fixating on matching the supply chain savings of companies like Dell in manufacturing, and WalMart in retail distribution.
Unfortunately, this strategy was out of date before Ms. Fiorina ever set it in motion. And all Mr. Hurd accomplished was short-term cuts that shored up immediate earnings while sacrificing any opportunities for creating long-term profitable new market development. By the time he was forced out HP had no growth direction. It's PC business fortunes are controlled by its suppliers, and the PC-based printer business is dying. Both primary markets are the victim of a major market shift away from PC use toward mobile devices, where HP has nothing.
HPs commitment to an outdated industrial era supply-side manufacturing strategy can be seen in its acquisitions. What was once the world's leading IT services company, EDS, was bought in 2008 after falling into financial disarray as that market shifted offshore. After HP spent nearly $14B on the purchase, HP used that business to try defending and extending PC product sales, but to little avail. The services group has been downsized regularly as growth evaporated in the face of global trends toward services offshoring and mobile use.
In 2009 HP spent almost $3B on networking gear manufacturer 3Com. But this was after the market had already started shifting to mobile devices and common carriers, leaving a very tough business that even market-leading Cisco has struggled to maintain. Growth again stagnated, and profits evaporated as HP was unable to bring any innovation to the solution set and unable to create any new markets.
In 2010 HP spent $1B on the company that created the hand-held PDA (personal digital assistant) market – the forerunner of our wirelessly connected smartphones – Palm. But that became an enormous fiasco as its WebOS products were late to market, didn't work well and were wholly uncompetitive with superior solutions from Apple and Android suppliers. Again, the industrial-era strategy left HP short on innovation, long on supply chain, and resulted in big write-offs.
Clearly what HP needs is a new strategy. One aligned with the information era in which we live. Think like Apple, which instead of chasing Macs a decade ago shifted into new markets. By creating new products that enhanced mobility Apple came back from the brink of complete failure to spectacular highs. HP needs to learn from this, and pursue an entirely new direction.
But, Meg Whitman is certainly no Steve Jobs. Her career at eBay was far from that of an innovator. eBay rode the growth of internet retailing, but was not Amazon. Rather, instead of focusing on buyers, and what they want, eBay focused on sellers – a classic industrial-era approach. eBay has not been a leader in launching any new technologies (such as Kindle or Fire at Amazon) and has not even been a leader in mobile applications or mobile retail.
While CEO at eBay Ms. Whitman purchased PayPal. But rather than build that platform into the next generation transaction system for web or mobile use, Paypal was used to defend and extend the eBay seller platform. Even though PayPal was the first leader in on-line payments, the market is now crowded with solutions like Google Wallets (Google,) Square (from a Twitter co-founder,) GoPayment (Intuit) and Isis (collection of mobile companies.)
Had Ms. Whitman applied an information-era strategy Paypal could have been a global platform changing the way payment processing is handled. Instead its use and growth has been limited to supporting an historical on-line retail platform. This does not bode well for the future of HP.
HP cannot save its way to prosperity. That never works. Try to think of one turnaround where it did – GM? Tribune Corp? Circuit City? Sears? Best Buy? Kodak? To successfully turn around HP must move – FAST – to innovate new solutions and enter new markets. It must change its strategy to behave a lot more like the company that created the oscilliscope and usher in the electronics age, and a lot less like the industrial-era company it has become – destroying shareholder value along the way.
Is HP so cheap that it's a safe bet. Not hardly. HP is on the same road as DEC, Wang, Lanier, Gateway Computers, Sun Microsystems and Silicon Graphics right now. And that's lousy for investors and employees alike.
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.
by Adam Hartung | Jul 23, 2010 | Current Affairs, Innovation, Leadership, Lock-in, Web/Tech
Are you prepared to implement tablets in your business? More specifically, how have you adjusted your hardware spending plans, your software purchase plans, your IT development plans, your field technology deployment plans and your staffing plans to spend less on servers and PCs while spending more on tablets? Unfortunately, far too many companies are stuck in their Microsoft/PC relationship – effectively waiting on their vendor to bring them a solution – something specifically CIO Magazine warns against in “You are Not Your Vendor.”
We’ve watched the unprecedented explosion in iPad adoption. in just a few months iPad sales have become as large as iPod – the product that turned around Apple’s fortunes.
Source: Silicon Alley Insider
Cisco has launched a tablet according to Channel Insider “Cisco Cius: The iPad Killer.” Hewlett Packard (HP) is launching a tablet using the WebOS operating system from its new acquisition Palm according to Channel Insider in “Microsoft – HP Tablet War.” As new tablets are launched without using Microsoft products the software giant increasingly looks like it’s missed the boat – even as Channel Insider offers up 10 ideas for how Microsoft could try to get in the game in “Windows 7 vs. Cisco Cius.”
So, have you started developing future scenarios – both business and technical – that incorporate using tablets? CIO Magazine recommends “Use Scenario Planning to Get Beyond Legacy Systems.” Have you started testing different tablets to learn how they can improve your business – and what the differences are between vendors? If you aren’t, then your legacy investment (and your legacy vendor) will keep you using old technology. If you’re stuck with PCs while others adopt the next wave you will find yourself wandering around in the Microsoft Lock-in – while the market moves rapidly in a different direction! While this may seem fine today, and cheaper than changing, what you risk is losing business to competitors who move quicker, adopting tablets and their applications to improve performance and lower cost.
