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Friday, September 23, 2011

HP: A silicon valley tragedy in four acts

I have had considerable experience working with (and against) HP over the past 20 years - as a partner, competitor, plaintiff, and, sadly, shareholder. I am often asked what I think regarding changes that  have taken place at HP.

The turmoil at HP really began some years ago when Carly Fiorina became CEO.  With her tenure began the endless shifts in strategy and boardroom follies that continue to this day. When Mark Hurd became CEO -- after a board-inspired  coup d'├ętat -- tensions in the company were suppressed, as were the investments necessary to sustain the tech titan for years to come. Poor Leo Apotheker never had a chance: by late 2010, HP's years of changing directions and ineffective execution on a corporate direction had put it into a strategic corner.  HP had to act decisively and cohesively, as competition from IBM, Apple, and Oracle whittled away at their market share and prospects for growth. (You grow or die in the tech  world.)

The lack of company unity behind a strategy has resulted in wasted billions in contradictory acquisitions.  Carly bought PC manufacturer Compaq for $25 Billion (shortly before IBM decided to divest itself of its PC business). Mark Hurd bought consulting vendor EDS ($14 Billion) and smartphone maker Palm ($2 Billion). And Leo just bought content discovery vendor Autonomy for $10 Billion or 10x revenue! What were they thinking!

The latest HP strategy is to focus on the higher margin enterprise business and away from consumer electronics, effectively throwing in the towel to Dell and Apple. This means they will compete toe-to-toe with IBM and Oracle, with a former internet queen, CEO No. 4 Meg Whitman, at the helm. This my friends will be the final act of HP as we know it.

The strategy is not a bad one, but all signs are that execution of the strategy will be smothered by infighting within the board and within competing interests at the company (yes, what happens in the board at HP also reflects the lack of cohesion within HP).  This is also a risky strategy because HP does not have the enterprise software portfolio to compete against IBM and Oracle at once. It also carries with it the risks inherent in any large-scale transformation of a massive company. Many of us saw IBM accomplish a stunning turnaround in the early 90s, after it experienced the beginning of the decline of its mainframe monopoly. In many ways, HP faces the same challenges as IBM did then, when tech outsider Lou Gerstner took over from American Express.  And Apple has done the same, emerging from obscurity to leadership in the second reign of Steve Jobs. 

My advice to Meg Whitman?

  1. Learn what HP is good at. HP excels at building products that both consumers and businesses like, making products with great quality at the right price. Using this flair for product design is a great way to compete with IBM in the enterprise.
  2. Align the organization and market around the new strategy. This may take time, but the "shooting-from-the-hip" tactics of Leo confused employees and customers.
  3. Lay down the law with the HP board. Make sure your new contract contains severe penalties for boardroom malfeasance. 
  4. Make peace with Larry Ellison. Signs are that Oracle is struggling with their Sun server business, and you could use Oracle to gang up on IBM. Who knows, maybe something could be worked out here?
  5. Take the time to do it right. Investors will howl, but it takes time to change the course of the supertanker HP.
  6. Punt the Autonomy acquisition and pay the break up fee. Even if there were a fit here, integrating a business in a time of turmoil is a recipe for disaster. If you are dead set on content management, Open Text would be a far better fit.

As for my HP shares? I will wait and see...

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