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Unfortunately, this strategy was out of date before Ms.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.
(Adam hartung is the managing director at Spark Partners)