Does the HP board know what business HP is in?
What should we make of HP CEO Leo Apotheker’s recent announcement that HP is spinning off its PC business for a future sale, despite holding worldwide market share leadership? Here are three potential answers.
- HP understands portfolio management. The PC industry as traditionally defined is maturing, with growth mostly in the developing world. HP has higher growth businesses in which to invest.
- Apotheker’s copying another company’s winning strategy. In 2005, IBM sold its PC business to Lenovo to focus on its Smarter Planet B2B solutions business. HP’s recent announcement that it is buying British enterprise software maker Autonomy Corporation at a 60-80% premium (depending on the analyst) suggests a copycat strategy. Autonomy provides unstructured data analytics and data management software, positioning HP for the $20 billion enterprise information management market and $55 billion business analytics software and services market.
- HP can’t compete. Computing has gone mobile and HP keeps showing up late to the game. In fact, HP is discontinuing its recent entries into the mobile computing market – its two-month old TouchPad tablet as well as its Veer and Pre3smart phones. Apple holds a commanding 21% share of the mobile PC market, with 80% of these shipments IPad tablets. HP’s second-place mobile market share is 15%.
All three explanations are true and here’s my outsider guess about why they co-exist. HP’s board lacks a clear and evolving sense of what its business is or should be all about. A string of CEOs, each with short tenure and a different core strategy, created a mess that destroyed 20% of shareholder value overnight.
When HP thought of itself as a computing company, then CEO Carley Fiorina fought an ugly public battle with HP investors to acquire PC hardware company Compaq. But the CEO to follow, Mark Hurd, was so busy cutting costs to raise profits he waited too long to make investments HP needed (e.g., the acquisition of Palm for $1.2 billion) to catch the mobility wave in computing, a wave Apple is riding to replace Exxon as the world’s most valuable company. A wave of riches that HP missed.
Hurd’s replacement, Apotheker, is staring at two endless pits in terms of investment requirements. One is a consumer goods business with Apple dominating the top end. Certainly Google’s acquisition of Motorola’s phone patents and hardware business made this pit seem even deeper. The other is the business customer market, where HP will now place its primary focus. (Will printers be sold next?) More focused companies like IBM, Siemens, Oracle (where Hurd landed), Microsoft and Accenture have advantages that forced HPs acquisition of EDS in 2008 and now Autonomy. In both consumer and business markets, Dell and off shore competitors offer cutthroat prices that an upscale company like HP will struggle to match. “Select business or consumer, and by the way we are way behind in both,” was likely management’s message to the HP board.
A measure of HP’s rush to find a marketplace-winning strategy is the extraordinary price it will pay for Autonomy. Autonomy will contribute 0.7% to HP’s revenues (2.7% to earnings) yet cost one-fifth of HP’s market capitalization. Will yet another “must have” major acquisition turn out in retrospect to be wasteful? While HP was consumed acquiring and integrating Compaq, Apple built its iPod/iTunes business, paving the way for the iPhone then iPad and Apple’s huge run-up in stock price.
How did HP end up in this predicament? My sense is that HP mistakenly defines its business by products. Apple on the other hand defines its business around a value promise – making access to and management of electronic information effortless. IBM has always been a solutions business as well. With its product lens, HP misses the waves that drive new business opportunities while Apple and IBM, with a broad lens, keep finding and realizing them. Had HP caught the mobility wave in time, it would remain in both the consumer and business market.
Why? Because HP is one of the few companies with a strong consumer and business brand. Serving both markets has supply chain, technology and (for small businesses) channel synergies. I suspect that mobile cloud-based computing, coupled with eroding boundaries between work-life and home-life will make the consumer and business markets even more synergistic than they are today. The growing demand for iPads in the business world is the tip of the iceberg. If I’m right, HP exiting the consumer computing business is a huge missed opportunity.
One of the most critical questions a leadership team and its board must answer is, “What business are we in?” The more perceptive they are in framing their analysis, the more profitable the business model innovation insights will be. (For a great blog on how to answer this question see Patrick Stähler’s business model innovation blog.)
Companies that take a broad view of their business are rarely fooled by substitutions of one technology for another (tablets for PCs) and collapsing industry boundaries (phones and computers). It’s sad for HP shareholders and employees that the HP board forgot this basic premise of sound strategic thinking.
What business are you in?
One question that I’ve been wondering about – is there any strategic reason for holding onto printers other than their current profitability?
Great question. They’ll hold onto ink for the cash I suspect and maybe printers head for the cash. Printers no longer strategic. Not sure they ever were. Does Apple have printers?
Good article. Short tenure means no deep perspective. The trust in HP, the investment in the brand, the loyalty in what we touch and use everyday has just been thrown overboard. No different from Nokia. Slashing and burning heritage may resolve a ‘burning platform’ but you end up with a twisted wreck, a misshapen end result that is not recognised. This need for radical moves like HP’s has not learnt the lessons from other industries where commodities are valued (up to a point) in what they provide in leverage, presence, ability to cross promote, as part of a portfoilo of products, some more profitable than others. Look no further than the consumer business for lessons on managing a portfolio of varying value in returns but offer value to the consumer’s total experience.
I beleive the unwealdly culture, structure and politics of HP have more to play in the reason why they can’t see a decent future in PC’s, even if it is managing a maturing industry. The recent (obviously out of fashion) was to split or spin off parts to focus them in given areas. All HP seem to be doing is breaking up the parts that when combined offered lasting value in the minds of the HP consumer, and thus destroying itself. Lets wait for the next CEO and his/her attempt. Radical thinking, ripping down structures is one thing but the risk multiples and the shareholder needs to reevaluate the future ride as one they want to be part of or not. If I was on the HP train, I think I’d be looking to jump off fast.
Kay,
I think HP are making a terrible mistake, I gather from insiders it was a total shock, can you imagine what they will do internally or to sales going forward within the PC area. It introduces such uncertainty. This decision is still a mystery for me.
Good article. Short tenure means no deep perspective.
Your description of HP’s powerful brand yet losing products reminds me of Jim Collin’s story about Kimberly Clark in Good to Great.
Darwin Smith (KC’s CEO at the time) had to decide if they would remain a paper mill business or if they would become a consumer brands business. His decision to sell off paper mills was harkened as complete stupidity at the time. He had to take on the likes of P&G to win in a business they were fairly new at. The results were that consistently staying on the path led to becoming the no. 1 consumer paper products company in the world.
I do hope HP is taking Collins’ “Three Circle Test” right now to determine what business they should be in. I also hope they stick with a CEO with the guts to see the company through the tough journey of change. We may be seeing their transition process, and not realizing they already have an end in mind. We can hope.
I have helped many a company leave its old business concept and enter a new one, exiting old businesses. So I’m not against what HP is doing in theory – it’s just that it’s so darn reactive without any indication of how it can best the handful of companies already well down this path. Darwin Smith let go of a true commodity company. My sense is that what HP is letting go of is not commodity nor need not be commodity and its presence might give it a way to play in the information game differently – appealing to different segments or with a different value promise – than IBM, Oracle, etc. Hence my criticism. Time will tell. I hope I am wrong. Meg Whitman may be the steady leader HP needs to move forward, uniquely.
I think HP are making a terrible mistake, I gather from insiders it was a total shock, can you imagine what they will do internally or to sales going forward within the PC area. It introduces such uncertainty. This decision is still a mystery for me.