Is HP permanently broken?

Is HP permanently broken?

Summary: Of course Ms. Whitman won't succeed as HP CEO. But why is HP's board so confused as to hire her?

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The continuing soap opera that is Hewlett-Packard's boardroom and executive suite raises the question: is HP permanently broken?

Devices vs systems HP started building devices (an audio oscillator) in the 1930s. They remain largely a device company – even after spinning off instrumentation and test equipment - to this day with printers and PCs.

As a device company HP was characterized by strong product divisions building premium quality and, often, market-leading products. HP pioneered the programmable calculator business in the early 70s and the HP 12C business calculator has been a top seller for decades. And they've done well with printers.

But the computer business is about systems, not devices, and here HP has had a harder time finding its way. For example, its early PCs and minicomputers used instrument buses to connect peripherals rather than more standard computer buses: handy for the instrument business but not so good for users.

With the collapse of the minicomputer industry in the late 80s, and the success of HP's printer business, HP was almost the only minicomputer maker able to survive the transition to a PC dominated era. But it wasn't until they acquired Compaq – who had earlier acquired the leading minicomputer maker DEC – that HP got engineers with a serious system and storage focus. And it wasn't until Cisco entered the server business that HP got serious about networking.

HP's big problem While there is plenty of grist for the tabloid mill in HP's executive circus – why does a millionaire CEO fiddle expenses for dinner with a woman who isn't his wife? – the board's lack of a strategic vision keeps them from setting priorities for the CEO. In other words, when you don't know where you want to go, any CEO will do.

In 1999 HP divested its multi-billion-dollar test equipment business to better focus on its systems businesses. That was a good start but it did not go far enough.

Going forward The company needs to go all in on systems. This means:

  • Spinning off the remaining non-systems businesses including printers, calculators, imaging and PCs.
  • Focus on quality systems solutions to major business problems, instead of raw devices spackled together with professional services.
  • Committing to massive disruption of the storage and networking businesses by moving to 40% gross margins from the current 60+% range through the use of volume and scale out technologies, open source software and targeted innovation leveraging the latest technology.

Can HP compete with 40% gross margins? Well, Apple has done pretty well.

New franchises in the IT industry are built on major disruption of existing markets. Storage and networks are ripe for disruption and HP is well-positioned to remake the economics.

The Storage Bits take These issues are why HP's board appears to be riven by intractable disagreements and hamstrung by the enormous sprawl of HP. The company lacks a strategic vision, but it is profitable enough that no one wants to shake things up.

Companies, like people, rarely make hard choices until they are in crisis. And HP is far from crisis.

But the current board – hardly a hardware systems exec among them – has no strategic vision for the company. And HP's portfolio of businesses will evade serious crisis for years.

It is other players that will force the issue.

  • Intel is powerful and highly profitable and continues to cast about for new ways to leverage its chipmaking prowess.
  • Apple has a huge war chest and a vision for consumers that will ultimately drive the systems business.
  • Cisco still wants into the server business and is increasingly desperate.
  • Storage vendor EMC's successful technology publishing model is sucking up a rising percentage of the highest margin sales.

Somehow, someday, these players and other secular trends will come together to bring an external crisis upon HP. That is when hard choices will be made.

Until then, enjoy the show.

Comments welcome, of course. I started watching HP in the early '80s when I worked at DEC. I wish they'd get their storage act together.

Topics: Printers, CXO, Hardware, Hewlett-Packard, Storage

About

Robin Harris has been a computer buff for over 35 years and selling and marketing data storage for over 30 years in companies large and small.

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25 comments
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  • RE: Is HP permanently broken?

    What? They have been taking 60% gross margins? And producing the pap they have? I thought business was all about finding the most efficient way to make the most profit, not simply about how to keep the shareholders in sufficient champagne and caviar in the short term.
    DarthCyclist
    • RE: Is HP permanently broken?

      @DarthCyclist - You only have part of the equation. Business is about finding the most efficient way to make the most profit, <b>with your available knowledge and resources.</b> There are a lot of businesses who make lower profit margins than HP (railroads and grocers come to mind), but they don't abandon their businesses and start selling "high-margin services" that they don't know how to deliver.

      The only valid reasons for HP to sell off the PC business were if they sold it to someone who could run it even more profitably (there isn't anybody) or if they urgently needed the capital and had no other way to raise it. Both of these conditions are false, so it was a stupid decision.
      terry flores
      • RE: Is HP permanently broken?

        @terry flores
        +1
        You must not be a CEO, you have a clue.
        crazydanr@...
      • RE: Is HP permanently broken?

        @terry flores
        PCs aren't all that profitable - unlike printer ink - and HP doesn't have much flexibility to innovate since they outsource the OS and CPU. Nor are they a growth industry. WebOS might have changed that, but I'll guess we'll never know.

        IBM got rid of PCs and printers years ago and are doing very well. HP could too.
        R Harris
      • HP aren't IBM

        @ R Harris<br><br>Comparisons of HP's and IBM's PC businesses aren't very meaningful. By the time they left the market, IBM had fallen to third place and their PC business was making losses. HP are the market leader (how they manage that with the hardware they offer is a mystery to me) and their PC business is profitable.<br><br>I doubt that outsourcing the OS and CPU is to blame for HPs low margins either. Back in the 90s, Apple controlled both the OS and CPU (as part of the AIM alliance), and nearly became insolvent. Giving up control of the CPU to Intel has helped rather than hurt their business. Partly giving up control of the OS, in allowing Mac users to run Windows, seems to have helped too -- it's certainly increased the potential customer base.<br><br>Like Apple's Mac business in the 90s, HP's PC business today is characterised by poor industrial designs, poor quality and complex/confusing product lines. Without any clear reason to buy one product over another, buyers simply choose the cheapest ones, which destroys margins. If HP streamline their PC business and match Apple in the areas that matter: industrial design, quality, reliability, feature set, sales guidance and support, then there's no reason they can't move margins closer to the levels Apple enjoy.<br><br>With HP's volume (they account for 21 per cent of Intel's sales, compared with 17 per cent for Dell and less than 10 per cent each for all others, including Apple), they ought to be able to make a machine similar to the MacBook Air for less than Apple. For a lot of potential MBA customers, bundling Windows instead of Mac OS X would make it even better.<br><br>Having just looked at HP's website, if any of the 35 bland, similar-looking notebooks shown when I clicked on 'Products / Home / Notebooks' is competitive with a MacBook Air, it's far from obvious which it is. The product selector doesn't even include SSDs as an option, and a search for 'thin light' returned a few dead links to discontinued products. Do they really wonder why their margins are low?
        WilErz
    • RE: Is HP permanently broken?

      @DarthCyclist
      The storage and networking industry run on 60+% gross margins. HP may not be doing that well in storage despite selling half of all disk drives produced because they don't have a strong franchise or a clear strategy.
      R Harris
      • RE: Is HP permanently broken?

        @R Harris For real, what is HP doing in storage outside of 3PAR? I am not even exactly sure what they are doing with 3PAR. 3PAR, according to HP, is the greatest storage array in the world. If that is the case, it scales down and up pretty well, why are they still selling EVA and XP? Especially XP, why settle for HDS VAR margins when you can get OEM margins? I do not see EVA and XP lasting very long. <br><br> You're right, they sell the hard-drives, but not the systems. PC drives, JBOD drives, x86 rack server drives, but no killer storage system... other than maybe 3PAR. The problem is that, even though 3PAR is good stuff, everyone expects it to not evolve inside HP like EVA and all of those server platforms. No confidence in future R&D.
        adams14
  • What the board is looking for is STAR power.

    They want a Bill Gates and or Steve Jobs so they went for Meg cause of the success of eBay. I don't think they asked themselves if eBays success was because it was the right business at the right time or was it Meg?

    Pagan jim
    James Quinn
    • RE: Is HP permanently broken?

      @James Quinn
      I totally agree, and I think they should have at least brought Carly Fiorina back.
      Ram U
  • RE: Is HP permanently broken?

    @ Robin Harris
    You pretty much summed what HP needs to do. Quality solutions paired with quality hardware are what customers (consumer and enterprise) want. If HP decides to keep the personal systems group and printer business, they need to reduce the number of models they manufacture and focus on quality. I'm still using my HP 11C scientific calculator some 27 years later.

    Agilent has continued to do well in the instrumentation and test equipment business. When this was spun off, we, in the scientific community, thought Agilent would become synonymous with mediocre instrumentation and poor innovation. By focusing on quality products and support services, Agilent remains the instrument maker of choice. And, BTW, HP workstations and desktops are the systems of choice since they interface very well with Agilent instruments in a fully-automated lab environment.
    DR533
  • They were a multi-headed monster.

    The reason they didn't have any ONE mission or sense of purpose was because they were several unrelated divisions under one name. They could go on like that, but to do so, each division must survive and be profitable and do enough R&D to sustain itself. So, don't be be distracted by who is the CEO - this person is just a figure-head. The people who really have to be leading edge skilled managers are the next layer down - the people who steer the upmteen divisions. The overall shapelessness is very similar to Microsoft.
    peter_erskine@...
  • RE: Is HP permanently broken?

    HP has a pretty good balance sheet right now. They are not in trouble. The only real question is where are they going to concentrate their efforts in the future.
    hayneiii@...
    • RE: Is HP permanently broken?

      @hayneiii@... Come again. Who's not in trouble? The board has no clue what they wanted to do. They are the ones voted for Leo to get rid of webOS division. They are the ones who uses that as an excuse to get rid of Leo. In this era of fly-by-night CEO's, they let 1 guy making all the decisions with no sucession plan. If that is trouble, take a look at a recent stock price.
      giadich@...
  • RE: Is HP permanently broken?

    Why do they have to divest themselves of their "devices"? Just start a systems department, and start R&D and innovation. But, DON'T give up any profitable business! If you need a manager to direct the devices, then get one, and let the CEO and board concentrate on systems.

    But, they may find the demise of calculators, printers, PCs and monitors is a little premature. If that's so, then they didn't be the farm on it.

    The smart businesses use their profitable business to pay for the future, and hedge their bets.
    Hameiri
  • RE: Is HP permanently broken?

    Interesting headline to this article. It, " of course " assumes that he knows more than anyone else, including Meg Whitman. HP & Meg may do just fine going forward, let's give her more than a week to solve some issues at this fine company.
    mytake4this
  • But seriously...

    When execs propose mergers (eg: Compaq) the jargon is full of buzzwords such as "synergies, consolidation, operational savings, etc ..."

    Here, the spin off jargon involves: "shareholder value"...

    But seriously, what's the problem here? Is HP too big, and therefore too hard to manage? The WebOS/tablet fiasco shows a lack of coordinated vision, and an unwillingness to invest enough to follow through on a wise vision. The tablet bandwagon reaction from many companies shows a reactionary process of product design -- which is always a difficult strategic position. Hardware only manufacturers are weak on software, and thus many of their offerings don't have the software critical infrastructure, vision, and quality that has added value to the iOS platform.

    However, HP does have a significant software division, but it doesn't leverage that to its potential in their consumer PC/tablet product design, and instead has tied one hand behind its back by running that business like any other hardware OEM.

    Well then, the CEO, whoever it is, has to shake things up, and inspire and motivate the brains of the tech people and visionaries within the company, and coordinate vision and direction.

    Relying on the WinTel platform is a hindrance in terms of product deseign for any company, since they are critically dependant on the whims (and hurt by the mistakes) of Microsoft and Intel for technical architecture. But there is still room for (hopefullly leanly written) value-add software features that tightly integrate onto proprietary pc hardware addons on top of the platform.

    Of American WinTel PC manufacturers, the HP brand has a bit more "gravitas" and value-add R&D potential than Dell, and it'd be a waste if HP cuts away its PC business. Personal feelings: while Dell makes just-ok-low-price pcs, don't leave America with just Dell and Apple as the major players -- that prospect is troubling.
    voltrarian
  • But seriously

    When execs propose mergers (eg: Compaq) the jargon is full of buzzwords such as "synergies, consolidation, operational savings, etc ..."

    Here, the spin off jargon involves: "shareholder value"...

    But seriously, what's the problem here? Is HP too big, and therefore too hard to manage? The WebOS/tablet fiasco shows a lack of coordinated vision, and an unwillingness to invest enough to follow through on a wise vision. The tablet bandwagon reaction from many companies shows a reactionary process of product design -- which is always a difficult strategic position. Hardware only manufacturers are weak on software, and thus many of their offerings don't have the software critical infrastructure, vision, and quality that has added value to the iOS platform.

    However, HP does have a significant software division, but it doesn't leverage that to its potential in their consumer PC/tablet product design, and instead has tied one hand behind its back by running that business like any other hardware OEM.

    Well then, the CEO, whoever it is, has to shake things up, and inspire and motivate the brains of the tech people and visionaries within the company, and coordinate vision and direction.

    Relying on the WinTel platform is a hindrance in terms of product deseign for any company, since they are critically dependant on the whims (and hurt by the mistakes) of Microsoft and Intel for technical architecture. But there is still room for (hopefullly leanly written) value-add software features that tightly integrate onto proprietary pc hardware addons on top of the platform.

    Of American WinTel PC manufacturers, the HP brand has a bit more "gravitas" and value-add R&D potential than Dell, and it'd be a waste if HP cuts away its PC business. Personal feelings: while Dell makes just-ok-low-price pcs, don't leave America with just Dell and Apple as the major players -- that prospect is troubling.
    voltrarian
  • But seriously...

    When execs propose mergers (eg: Compaq) the jargon is full of buzzwords such as "synergies, consolidation, operational savings, etc ..."

    Here, the spin off jargon involves: "shareholder value"...

    But seriously, what's the problem here? Is HP too big, and therefore too hard to manage? The WebOS/tablet fiasco shows a lack of coordinated vision, and an unwillingness to invest enough to follow through on a wise vision. The tablet bandwagon reaction from many companies shows a reactionary process of product design -- which is always a difficult strategic position. Hardware only manufacturers are weak on software, and thus many of their offerings don't have the software critical infrastructure, vision, and quality that has added value to the iOS platform.

    However, HP does have a significant software division, but it doesn't leverage that to its potential in their consumer PC/tablet product design, and instead has tied one hand behind its back by running that business like any other hardware OEM.

    Well then, the CEO, whoever it is, has to shake things up, and inspire and motivate the brains of the tech people and visionaries within the company, and coordinate vision and direction.

    Relying on the WinTel platform is a hindrance in terms of product deseign for any company, since they are critically dependant on the whims (and hurt by the mistakes) of Microsoft and Intel for technical architecture. But there is still room for (hopefullly leanly written) value-add software features that tightly integrate onto proprietary pc hardware addons on top of the platform.

    Of American WinTel PC manufacturers, the HP brand has a bit more "gravitas" and value-add R&D potential than Dell, and it'd be a waste if HP cuts away its PC business. Personal feelings: while Dell makes just-ok-low-price pcs, don't leave America with just Dell and Apple as the major players -- that prospect is troubling.
    voltrarian
  • Of course, she won't succeed?

    I think I'd give Ms. Whitman at least 6 months before deciding that. What has to happen before *any* CEO can succeed, however, is for the Board of Directors to come up with a vision of where they want HP to go and then commit to it. As of yet, I see little evidence of that.
    John L. Ries
  • RE: Is HP permanently broken?

    As has been written, saying that HP should get into the systems business, by which you presumably mean software paired with hardware, has the same problem as HP getting into the software business. 1) They do not have the expertise. 2) There are sharks in those waters by the names of IBM and Oracle who will own HP if it turns into an arms race. <br><br>What components of a "system" does HP have in-house today? Chip-set, nope. Unique board for I/O, alright, I will give that one. Operating system, not really (HP-UX would be a poor start to a new system business). Database, nope. Application server, nope. Business applications, nope. They would be starting from close to scratch.<br><br>Supposing they build an awesome system through the OS. What are they going to run on it? Oracle?<br><br>You seem to have an idealized picture of the systems world. Yes, "systems" as opposed to the x86 component slap together process makes for much better enterprise computers. It has always been true. There is no more stable, secure, resilient, and efficient system in the world today than the IBM mainframe. Why, then, doesn't everyone run a mainframe? If you want pricing flexibility, having one provider own that stack is troublesome. If you want to take advantage of the latest innovations, having one provider own the stack is troublesome. The mainframe is probably not the best example because it is fairly open today, choice of OS, choice of DB, choice of systems management, choice of applications, as compared to others. Oracle Exadata is probably a better example. It is probably more efficient and requires lower administration than x86 roll-your-own, but you are locked-in to Oracle software. If someone comes out with some great new innovation, you have to wait for the Oracle version to come out.
    adams14