27 Jun STRATEGIC CASE STUDY HP ARTICLE “STILL IN THE GARAGE”
Strategic Case Study HP Article “Still in the Garage”
Read the attached article, “Still in the Garage”, from The Economist, and develop a written evaluation of the strategic issues present for HP as suggested in the
article. It might be helpful to think of yourself as being tasked with reporting the strategic issues to your boss. What insights are you able to provide? Papers
should focus on the application of theories presented in class to the specifics of HP. Good papers will show a consistent and integrated understanding of the company
and related strategies.
You may also use the article “Split today, merge tomorrow” from The Economist, Oct. 7, 2014, as reference.
Please use the glossary as reference for terms to use with this textbook (this is an important step as applying terms to the article is key):
https://www.4shared.com/office/kJeMfb1dce/Strategic_Management_An_Integr.html
Strategic Management An Integrated Approach Edition 10 is the book name if you happen to have it on hand.
Hewlett-Packard
Still in the garage
Halfway through Meg Whitmans five-year recovery plan, the Silicon Valley
company still has plenty of work to do
Jun 14th 2014 | PALO ALTO | From the print edition
WHEN Meg Whitman became Hewlett-Packards chief executive in September 2011,
the company founded in a Palo Alto garage in
1939 looked fit only for the scrapyard. It had
ousted two bosses, Mark Hurd and Léo
Apotheker, in 13 months. Mr Apothekers
proposed change in strategy, which cost him
his job, had left a deep dent in HPs share
price.
What was under the bonnet was as bad as the bodywork. The market for personal computers,
which HP led, was showing signs of wear. Mr Apothekers plan, indeed, had been to get out
of PCs and push into software, by buying Autonomy, a British tech darling. The “channel”,
the army of distributors who sell 70% of HPs equipment to end users, was turning to other
suppliers. Mr Hurds remorseless cost-cutting had wearied many HP staff, and it had
stopped pleasing Wall Street. Investors had tired of boardroom battles.
By the time Ms Whitman had written off $8.8 billion of the $11 billion-odd paid for
Autonomy (mostly ascribed by HP to questionable accounting policies, allegations
Autonomys ex-bosses reject) and a similar amount in respect of EDS, an IT-services firm
bought in 2008, the old jalopy was more battered than ever. The Autonomy write-off pushed
the share price below $12, half what it was when Ms Whitman took over (see chart 1).
Revenue fell from $127 billion in the year to October 2011 to $120 billion in 2012 and $112
billion in 2013.
Lately HP, which this week held its main annual conference for business customers in Las
Hewlett-Packard: Still in the garage | The Economist https://www.economist.com/node/21604159/print
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Vegas, has been looking more roadworthy. Revenue in the three months to April was only 1%
lower than a year earlier (and only 0.1% down after stripping out changes in exchange rates).
Further cost savings have yielded higher profits and re-upholstered HPs cash cushion, to
$15.1 billion compared with $8 billion in late 2011. HP has also bought back shares.
It has put a lot of effort, too, into repairing relations with the channel. When HP said it might
spin off the PC business, says Cathie Lesjak, the chief financial officer, “We really hurt
ourselves with the channel.” Its partners worried that it might give up on hardware
altogether. It looked a less reliable supplier, and lost custom.
There were deeper faults as well, partly the result of years of acquisitions. No one can match
HPs breadth of products, says Jayson Noland of Robert W. Baird, an investment bank, but
this advantage has often been squandered because people from different parts of
Hewlett-Packard: Still in the garage | The Economist https://www.economist.com/node/21604159/print
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HP—servers and networking, say—have worked independently. Sometimes, says Mark
Starkey, managing director of Logicalis UK, the British arm of a global IT integrator, HPs
direct sellers even competed against his team to sell HP kit to the same customers.
HP ended up with a jumble of incentive schemes, with different names in different places.
Resellers might have no idea whether or not they were meeting targets—and due juicy
rebates—until the end of a quarter. “You could make as good or better money with HP than
with anybody,” says Sue Barsamian, who oversees indirect sales for HPs enterprise group,
“but it was just too complicated.”
In the past couple of years HP has been standardising its processes and has set up a single
(cloud-based) portal for channel sales. Its old arrangements had too many inconsistencies to
be automated—a remarkable state of affairs for a technology company. A new system for
managing marketing funds is in place in the Americas and Asia, and is due to be extended to
Europe, the Middle East and Africa in November. The new engine is not “firing on all
cylinders” yet, thinks Tiffani Bova of Gartner, a research firm, but “it is much more focused
on the collective success of the channel.” Mr Starkey agrees: “The mentality at HP is
definitely different now.”
All this has helped the shares to treble since their nadir, recouping the ground lost after Mr
Apotheker unveiled his grand plan. Even so, notes Toni Sacconaghi of Sanford C. Bernstein,
also a research firm, HP shares are still among the very cheapest in the S&P 500 index.
That suggests that the market does not expect HP to convert stability into growth. Higher
earnings cannot be wrought endlessly from lower costs. In finding savings, “Meg has a
tougher hand than Mark did,” says Ms Lesjak, but she keeps doing so. Last month HP said it
would save a further $1 billion annually by shedding another 11,000-16,000 jobs by next
year. That takes the cuts announced since May 2012 to 45,000-50,000, or about one-seventh
of the workforce. In 2012 Ms Whitman predicted “real recovery and expansion” this year.
Now she sounds more cautious, but still insists that “sustained, profitable revenue growth
remains our top priority.” Where might it come from?
More screens, fewer printers
The wrong place to look is in HPs biggest business: PCs and printing (see chart 2). Recently,
as it happens, companies have at last been replacing ageing desktops and laptops, prompted
in part by the end of Microsofts support for its old Windows XP operating system. HPs sales
of PCs to companies were 12% higher in the three months to April than a year earlier. But
this is unlikely to endure, and HP missed the tablet and smartphone boom. Printing carries
Hewlett-Packard: Still in the garage | The Economist https://www.economist.com/node/21604159/print
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much fatter margins than PCs, thanks to all those ink cartridges, but “with screens
everywhere”, says Mr Noland, “we just dont need to print as often as we did.”
Servers promise a little more. In January IBM said it would sell its “industry-standard” (ie,
low-end) server business to Lenovo of China, which had bought Big Blues PC division in
2005. So, over the next 12 to 18 months, says Ms Lesjak, HP has a chance to woo IBMs
unsettled customers. But the window will close: Big Blue did not see much profit in the
business; and Lenovo, which has already pinched HPs top spot in PCs, will be a fierce
opponent.
A venture announced in April with Foxconn, a Taiwanese company best known for making
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iPads and iPhones for Apple, points to a bolder ambition: flogging servers, on a huge scale, to
owners of big data centres. Some of these, such as Facebook and Google, design their own
servers and have other Taiwanese firms build them. But Ms Lesjak says that still leaves a lot
of customers, such as Apple, Microsoft and smaller firms. This market, she adds, should suit
HPs low-energy Moonshot servers, for which it has high hopes.
HPs cloud-computing ambitions do not end there. It is investing more than $1 billion over
the next two years in a “hybrid” cloud, in which customers use a mix of servers on their own
premises, at HPs data centres and at those of third parties. Bill Hilf, recruited last year from
Microsoft to run HPs cloud business, thinks this will appeal to bigger, older businesses that
are still running lots of legacy systems from various suppliers—these are typical HP clients.
Companies adoption rate of cloud computing is still only around 5%, says Mr Hilf, and the
market is potentially enormous—$235 billion a year by 2017, according to IHS, another
research firm—so there should be plenty of room.
The company has other targets, from cutting-edge storage systems to “big data” and
software. Almost three years after HP bought Autonomy, software still provides just 3% of
revenue (though some of what is booked as hardware sales includes software). HP also has
hopes for “converged systems”: computing, networking and storage in a single box. HP is far
behind others in this game, such as Oracle and an alliance of three companies, Cisco, EMC
and VMware. As with cloud computing, this business will test HPs determination to behave
like one company rather than several. But it is another young market that is expected to grow
fast. Despite Ciscos big lead in networking, Mr Starkey of Logicalis says that HP “has got a
really good story”.
HPs troubles are an amplified version of those facing many big, middle-aged businesses. Its
shareholders are institutions prepared to accept steady rather than spectacular returns, but
now that the markets on which it has come to rely are declining, it has to find
replacements—or shrink. When revenues exceed $100 billion, those new businesses have to
be big. Ms Whitman has kept HP out of the scrapyard. Soon she must steer it back onto the
highway.
From the print edition: Business
Hewlett-Packard: Still in the garage | The Economist https://www.economist.com/node/21604159/print
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