posted by Terry Shannon on Mon 7th Mar 2005 07:48 UTC
IconWith HP's high-flying CEO Carly Fiorina departing, the company's woes are well known. But how did a firm with such a storied history and vast assets get headed down the wrong path, and what do they need to do to set their course straight?

Introduction

As the author of this piece, I'll state that I have never worked for HP or for any of its acquisitees, but I've kept a close eye on the firms for more than 20 years. I've delivered hundreds of presentations at user group events worldwide, written reams of copy on the firms, and have gone out of my way to be fair and objective when dealing with the companies. I've also invested substantial time and effort in the process. People inside HP may view things differently, but here's what this expert outsider opines about HP and its current state of affairs.

The Coronation -- and Abdication -- of Queen Carly

Carleton Sneed Fiorina took the helm at HP in 1999, having been deemed "Perfect Enough" for the job. Six years later, the decision proved to be a definite "backfire." On 9 February 2005, HP's Board of Directors requested Fiorina's immediate resignation, allegedly for her failure to execute her corporate strategy in a timely manner. Since she resigned rather than being officially terminated, she received $45M USD worth of stock options and severance pay on top of her regular salary and cash bonuses after five years at the company, an HP spokeswoman said.

During her tenure at HP, Carly drove the share value of HP stock down by ~58 percent, and failed to return the firm to growth mode. She also blithely ignored the rationale that led to HP's acquisition of Compaq. In early June 2001, about two weeks before the "Alphacide," then-Compaq-CEO Michael Capellas penned a three thousand word missive advising the entire Compaq workforce that in order to compete with IBM at the high end and Dell at the low end, Compaq would have to "reinvent" itself in a 180-day timeframe. The emphasis of the memo was on commoditization, industry standards, focus, and agility.

Two months later, Michael and Carly started talking seriously about a merger. Only by combining forces could the firms create a corporation endowed with the size, scope, and clout to take on IBM. The negotiations took place in deep secrecy, and in a September 4 teleconference the two companies announced what they termed a "definitive merger agreement" that would create an $87 billion technology colossus -- an entity capable of competing on a more equal footing with IBM. The Silicon Valley Soap Opera began, and the acquisition of Compaq was successfully completed on 7 May 2002. May 7 represented the day a good idea was cast in stone. It also represented the initiation of an absolutely atrocious execution strategy.

Invent -- or Repent?

Capellas and Fiorina agreed that achieving parity with IBM was instrumental to the consolidated firm's long-term future. Compaq invested very little in R&D; HP spends close to $4B USD on its HP Labs operations. According to one former HP Labs engineer (name withheld by request) who bailed out in 2003, competing with IBM slipped Carly's mind. "I remember the first time [Carly] walked into the HP labs. She said that our new company slogan was "Invent." Then she told us that the technology industry would never again be as exciting and profitable as it was in the '90s -- I knew from that moment that HP's best days were behind us," the engineer lamented. Carly was a marketing person put in change of engineers, a person who cared nothing about the art and beauty of technology. She just wanted saleable stock to bring to market, the engineer opined. And we all know what happened to HP's share value during the Fiorina Fiefdom.

Blown Away By Big Blue

IBM sells servers, storage, software and services. And they do a damn good job of it. One would expect that HP would attempt to emulate IBM in this regard, but such expectations proved way off base. Instead of jettisoning a flagging PC business and concentrating on emulating IBM, HP let the StorageWorks franchise spin down (Eckhard Pfeiffer did a good job setting StorageWorks up for failure.) Things went from bad to worse when HP took over.

HP pressed on with the Compaq strategy, which involved trying to duke it out with Dell in the PC space. Concurrently, HP branched off into bold new "ready, shoot, aim" ventures replete with daunting entry barriers. IBM built servers, HP tried to build a home entertainment franchise. HP resells iPods and is now a player in the plasma TV business: a realm replete with well-entrenched rivals, while IBM continues to dominate its carefully chosen and well-defended turf.

Building the Perfect Bureaucracy

HP has succeeded admirably in one regard: the firm has demonstrated an uncanny ability to build a bureaucracy more rapidly than the United States government. For all its talk about business agility and adaptive enterprise technology, HP can make prudent midcourse corrections at the speed of an aircraft carrier, not a BMW. The firm can, however, reorganize at a moment's notice, and has honed this skill to the same extent that Digital and Compaq once possessed.

Marketing: Style over Substance

The firm has also imposed rigid consistency where it is needed least. Where HP should be dynamic, it is static. Take marketing communications and message delivery: HP spends some ~$300 million per annum on marketing and marketing communications. Where these marketing dollars go is only known to HP. The firm just sacked an employee who was without a doubt the firm's most effective message delivery system, which probably saved HP $150K or so per year. The opportunity cost inherent in lost sales opportunities is impossible to quantify, but the price will likely exceed the $150K figure by several zeroes. Perhaps the sacking was due to the fact that the employee in question failed to adhere to every aspect of the 132-page document HP created to instruct presenters on how to create a "One Voice" PowerPoint presentation that emphasized style at the expense of substance.

Change in the Wind?

Effective 14 February, and in a personal decision totally unrelated to Ms. Fiorina's ouster, HP's senior VP of marketing Allison Johnson announced that she was leaving HP to take a top marketing post at Apple Computer. She will become VP of worldwide marketing communications, reporting to CEO Steve Jobs. At Apple, Ms. Johnson will be responsible for Apple's global advertising and related efforts. HP Chief Marketing Officer Mike Winkler said that for the time being, the leadership of HP's corporate marketing team will report to him until a successor is recruited.

At HP, Ms. Johnson served as VP of global brand and communications, before being named senior VP as HP launched its plans to buy Compaq. At HP, Ms. Johnson's role stretched beyond marketing under Fiorina. One former co-worker described her as the "prime minister" of HP. Ms. Johnson was one of Fiorina's closest advisers at the company, having led the firm's PR campaign during the turbulent proxy battle over the acquisition of Compaq Computer Corporation She also engineered the "+HP = everything is possible" advertising campaign that followed HP's acquisition of Compaq. It will be interesting to see if Ms. Johnson's successor takes a new approach, Case in point: HP's Business Critical Systems (BCS) franchise, which builds high-end enterprise servers based on the Itanium architecture, reported a whopping 1.8 percent profit margin in 1FQ05. That's a half percent lower profit margin than the PC Group reported in the same period. If HP and Intel don't get their Itanium act together right now, market as if the firms' mutual success depends on getting into customers' faces, using a pair of pictures to explain why Xeon64 and Opteron are recent upgrades to 25-year-old technology, and educating customers about the added-value of Itanium, the companies will learn a very painful lesson and HP may well be forced to abdicate the high-end space dominated by IBM. Time will tell if HP opts to take an aggressive, proactive, FUD- busting stance.

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