HP finds itself in a complicated position. While the technology giant's second-quarter revenue increased by 3%, its relatively new CEO, Leo Apotheker, was forced to lower the forecast for revenue for the fiscal year. He blamed the Japan earthquake, the anemic PC market, and a troubled services organization.
Wall Street did not take kindly to the news. While HP was once the technology leader that could do no wrong, market watchers are now concerned that the company does not have a clear strategy to overcome its problems. Not surprisingly, the stock price has tumbled.
The technology market is the epitome of creative destruction. It can be easy to dramatically expand revenue and profits when you are the upstart in an emerging sector — but once you're on top, sustaining this leadership position isn't easy. Hewlett Packard is a case in point. To overcome three major challenges in particular, it will need both luck and smarts:
Challenge 1: HP needs to change its revenue mix to higher-margin offerings. HP has long been and continues to be the leader in personal computers. However, tablet computers and smart phones are challenging the PC market. Hardware remains the linchpin of HP's enterprise revenue. Software, on the other hand, is only 17% of the company's revenue. Services, strengthened by the acquisition of EDS several years ago, are both a blessing and a curse: While EDS has many lucrative deals, it also has time-intensive and costly outsourcing deals to manage.
What's the smart thing to do? Probably the most powerful decision HP could make to shift its revenue mix would be to transform its consumer business into a subsidiary. It's a strategy the company has used before, when it spun off its test and measurement business into a publicly traded company called Agilent. In the current case, the subsidiary company could include the tablet business, the printing and imaging business, and the low-end of the server market. It could also include sophisticated software based on the WebOS (the operating system HP leveraged from the Palm acquisition). The rest of the company would remain focused on the enterprise market, including software, data centers, cloud computing, servers, and storage — elements certainly complex enough to require significant focus. Assuming smart execution, creation of a subsidiary would allow a strong management team to own its success in the consumer market and build a strong competitor to take on Apple. But a lot would still depend on luck: in a market already crowded with strong brands, its timing would have to work out.
Challenge 2: HP needs a strong culture. HP's culture has gone through a transformation since it hired its first outside CEO, Carly Fiorina, and at least some of that change was necessary. The industry was getting more competitive and the unquestioned values the organization placed on teamwork, service, and engineering — the DNA it had inherited from its founders — were no longer keeping it ahead of the pack. But today, HP is characterized by fiefdoms. While there are many strong managers in place, they not only have different goals but different ways of pursuing them. It's a striking change for a company that once had a unifying philosophy to be at a point where people, both inside and outside the organization, can't say what it is known for. That is a real problem because, from customers' perspectives, the value to be gained from a vendor the size of HP is its ability to have a consistent method of executing to meet their broad range of requirements.
What is the smart thing to do? In this case, the good — but challenging — news is that luck has little to do with it. If HP puts its mind to cultivating a unifying culture, it is within its power to pull it off. It should resolve to tie all the pieces of its strategy together, create a management team that is in lockstep across the company (or perhaps two companies, as I mentioned earlier), and make HP at least the sum of its parts. The organization will have to go through a painful process of figuring out what type of company it really wants to be and what business problems it wants to solve for customers — and this won't happen without a cohesive leadership team setting the cultural tone for the entire company. But if all those parts are brought together, HP will be stronger than any set of smaller and less powerful companies.
Challenge 3: HP needs to revisit and energize its partnerships. HP's strategy for decades has been to not have a single approach to solving customer problems. Instead, it offers customers flexibility with regard to choices like operating systems and software. Taking that tack from the beginning was lucky; it's doubtful anyone anticipated how huge the partnering opportunities would turn out to be once other firms recognized the value of the platform HP was providing. It was something they could be part of without fear of being overwhelmed and undercut. Meanwhile, the approach allowed HP to expand revenue without having to reinvent what others had already accomplished. For example, HP abandoned its own processors to partner with Intel; for database, it had a strategic partnership with Oracle; and for networking it embarked on a strategic alliance with Cisco. These and other partnerships helped HP grow significantly, and helped its partners become powerful market forces. However, over the past several years these partnerships have shown signs of wear. Intel has moved on to other platforms while HP would like to continue to invest in a processor that is no longer as strategic to Intel. Cisco decided to compete in the server market against HP. In reaction, HP, through acquisitions, began competing with Cisco in the networking market. While HP continues to be a close partner with Oracle, the partnership has been strained as HP begins to move into the data management space and Oracle enters hardware with its Sun acquisition.
What's the smart thing to do? The next phase of partnering is going to be tricky for HP, and here again a dose of luck will be required. The ever-increasing variety of software, hardware, and services makes the whole ecosystem more complex, and outcomes even harder to anticipate. But partnering well is mainly a matter of smarts, and HP needs to return to its roots in this regard. One good approach would be to find new ways for its partners to leverage HP's intellectual capital in their marketing and selling efforts. For example, HP's consulting organization has gained deep expertise in some critical industries. It could focus partnering programs on helping partners enter new markets and grow revenue in ways they could not manage alone. In general, HP needs to think creatively about how its size and market strength can make partners more successful. The new partnering model can't be passive. It has to be well designed, well explained, and most importantly, well executed.
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It's hard to point to a company that has prospered in the technology sector that hasn't had some major lucky breaks as well as world-class smarts. (Indeed, that's why I was able to fill a book calledLucky or Smart? with their stories.) HP itself lucked out when its very early bet on calculators and small computers turned out to be extraordinarily well timed, and beat just about every other vendor in the world. That put it in the right place at the right time as the technology revolution was beginning. It was able to leverage the knowledge it gained in those early markets to develop more capabilities and build a powerful company.
Did its luck simply fail it when it came to software and services? While HP has purchased hundreds of software companies over many decades, the stars never seem to align into a comprehensive software strategy. It was arguably unlucky in its attempt to acquire PriceWaterhouse's consulting business — and doubly so, since that asset went to IBM, which turned it into its highly successful Business Services organization. Until HP purchased EDS in 2008, it had a very small services business.
It's hard, however, to claim that these were matters of luck. More likely, because HP had become so steeped in its hardware heritage, the company had trouble understanding the economics and dynamics of these other businesses. And then there's the fact that it is difficult to even recognize a lucky break when, from the inside, it appears that all is well and no luck is needed.
As markets change, and competitive threats increase, managers in well-established firms too often react by grabbing for power and looking for easy answers to tough questions. Older product lines that are a drag on the bottom line linger indefinitely because no one has the nerve to endanger the substantial revenues they bring in. Hot startups and technologies look like saviors but acquiring them is so expensive that the bottom-line payoff is a long time coming.
But companies can reinvent themselves, and many have. In my book, I track the fortunes of IBM and Apple, both clear leaders with huge revenue and market clout who — like HP today — faced the need to change in order to avoid extinction. It's true that, the bigger the company, the more complicated and painful that process can be. But I don't see HP heading into a tailspin. It just needs to think hard, and think as one, about the smartest future for HP and how to get there — and then capitalize on whatever luck comes its way.
Judith Hurwitz is President & CEO of Hurwitz & Associates and focuses on the business benefits of emerging enterprise technology including cloud computing, service management, and information management. She is the author of five books, including the recently published Smart or Lucky? How Technology Leaders Turn Chance into Success.