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 Whitman’s 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-Packard’s 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 Apotheker’s proposed change in strategy, which cost him his job, had left a deep dent in HP’s 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 Apotheker’s 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 HP’s equipment to end users, was turning to other suppliers. Mr Hurd’s 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 Autonomy’s 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 1 of 5 11/18/14 17:03
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 HP’s 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 HP’s 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 2 of 5 11/18/14 17:03
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, HP’s 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 HP’s 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 HP’s 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 Microsoft’s support for its old Windows XP operating system. HP’s 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/print3 of 5 11/18/14 17:03
much fatter margins than PCs, thanks to all those ink cartridges, but “with screens everywhere”, says Mr Noland, “we just don’t 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 Blue’s PC division in 2005. So, over the next 12 to 18 months, says Ms Lesjak, HP has a chance to woo IBM’s unsettled customers. But the window will close: Big Blue did not see much profit in the business; and Lenovo, which has already pinched HP’s top spot in PCs, will be a fierce opponent.
A venture announced in April with Foxconn, a Taiwanese company best known for making Hewlett-Packard: Still in the garage | The Economist https://www.economist.com/node/21604159/print4 of 5 11/18/14 17:03
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 HP’s low-energy Moonshot servers, for which it has high hopes. HP’s 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 HP’s data centres and at those of third parties. Bill Hilf, recruited last year from Microsoft to run HP’s 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 HP’s determination to behave like one company rather than several. But it is another young market that is expected to grow fast. Despite Cisco’s big lead in networking, Mr Starkey of Logicalis says that HP “has got a really good story”.
HP’s 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/print5 of 5 11/18/14 17:03