"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 three 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, Apotheker inherited a bad situation at HP. His predecessors did a pretty good job of screwing up the company before he arrived. He is 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, thus creating highly profitable market-leading products. HP was one of the first Silicon Valley companies to create enormous shareholder value by making and selling equipment (oscilloscopes, 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 to buy Compaq for $25 billion. 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 HP's downfall. She was the first to cut R&D and new product development in favour 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 had sought. HP became HPQ, but the price paid was an internal shift, away from investing in new markets and innovation, and heading straight toward commoditisation 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 do even better. If she was willing to reduce R&D and product development well, he was ready to slash it outright! And all the better, so that he could buy other worn-out companies with limited profits, declining share and management misaligned with market trends like his 2008 $13.9 billion 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 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 per cent-plus of revenues on new products, expenditures were down to under 2 per cent. And patent applications had fallen by two-thirds.

Source: "Is Innovation Dead at HP?"

The patent decline continued under Apotheker, the latest CEO who is intent on implementing an outdated, industrial success formula. But wait! He is 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 ( Low Margin Consumers Do It Again, This Time to HP). So HP has to shift its business entirely into the B2B realm. Wow, that worked so well for Sun Microsystems.

I guess somebody forgot to tell consumer products lacked profits to Apple, Amazon and Netflix.

There's no doubt Palm was a dumb acquisition by Hurd (pay attention, Google). Palm was a leader in PDAs (personal digital assistants) at one time, having over 80 per cent market share. Palm was once as prevalent as RIM BlackBerries (ahem). But Palm did not invest sufficiently in the market shifts to smartphones. 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 technology lead and its relevance. Hurd's ideas that somehow the technology had value without market relevance was another out-of-date industrial thought.

The only mistake 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 think that it is the B2B market that will keep it alive. Getting out is simply because HP finally realised there just isn't any profit there.

But, does it necessarily mean that the company should 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 October 5, 2010 (HP and Nokia's Bad CEO Selections). Because it was clear that 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, bureaucracy-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 the new HP tradition, 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 a SAP application! Regardless of what creates value in highly dynamic, global markets, Apotheker is implementing what he knows how to do operate an ERP company that sells 'business solutions' and leave 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 who 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 are not moving toward where Apotheker is taking the company.

All three of HP's CEOs have been a testament to just how bad things can go when the CEO is more convinced that 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 is 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 favour of doing more of the same. And the value of HP keeps declining down 50 per cent this year. For HP to change direction, to increase value, it needs a CEO and leadership team that can understand important trends, fulfil unmet needs and migrate customers to new solutions. HP needs to rediscover innovation.

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