Parsing HP's Strategic Shift

Arthur Cole

Change isn't always easy - just ask Leo Apotheker and the rest of HP's top brass.

The company announced this week a number of shake-ups, including exiting both the tablet/smartphone and PC markets and the acquisition of business analytics firm Autonomy Corp. for $10.3 billion. Apotheker couched the moves as an effort to drive shareholder value by focusing on trends like cloud computing and services. Things like PCs and tablets, while useful, are low-margin elements in the data universe that are best suited to firms that can cut production costs to the bone.

Financial markets immediately took HP to task, throwing nearly 20 percent of the company's market value into the wind and pulling down the S&P and Dow Industrials with it.

At the same time, conflicting analyses painted a picture of either a brilliant move that will position the company for the next generation of information technology or a major stumble that will cut billions out of the company's revenue stream. Comparisons to IBM's sale of its PC business to Lenovo were touted by some as evidence of a brighter future for HP. The thinking goes that what little PCs were contributing to IBM's bottom line in 2005 are even less for HP now and will grow ever smaller in the future. Of course, much of that erosion has come at the expense of tablets and smartphones, so the end of those lines represents the acknowledgement that the TouchPad simply cannot compete with the iPad.

IBM is one analogy for HP, says The Register's Gavin Clarke, but so is Sun Microsystems. Like HP, Sun was once a hardware-centric firm that, after a few bad bets on the direction of technology, tried to re-invent itself as a software company through the purchase of MySQL and other products. The strategy failed due to integration issues and a loss of focus, and Sun was finally bought out by Oracle last year. It's too early to say whether HP will follow this same trajectory, but it is interesting to note that Apotheker has a lengthy background at software firms like SAP. Could it be that this new software plan is being driven more by his comfort level rather than on market realities?

As far as the PC goes, the reality is that it is a sinking ship, according to ZDNet's David Cherticoff. If you look closely, HP is ditching the old architecture in favor of the new virtual desktop - and not a moment too soon. VDI has been slowing gaining ground for a number of years, but adoption is ramping up quickly. Once enterprises have centralized their desktop infrastructures, the need for full PC clients will evaporate and the only things knowledge workers of the future will need are a good display and a solid network connection. The company is actively pursuing this strategy by revamping both its client and core network architectures to ensure broad compatibility with enterprise operating systems and infrastructure platforms.

In that sense, then, HP's move is neither right nor wrong, but inevitable, says ZDNet's David Gerwitz. PCs are quickly transitioning over to mobile devices and HP simply does not have the chops to compete with Apple in that field. The business community at large can talk about what HP could have or should have done, but Apotheker needs to take a hard look at the business climate and decide where HP can be most profitable. Like all strategic decisions, this one is a gamble. But at least it has a chance of paying off big as opposed to the doomed-to-fail course the company was on.

Looking back at IBM again, there was a time when Big Blue owned the business technology field. As the universe grew more diversified, the company had to face the stark realization that it could not maintain absolute dominance forever. It may not be the biggest dog on the block anymore, but it is one of the most profitable.

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