HP Could Use a Cup of Apple Magic

Rob Enderle

HP's analyst conference is this week, and midday on the West Coast, financial analysts will get their first broad look at HP's new top executive and hear his vision for the company. A lot is riding on this as during a similar event last week, NVIDIA's CEO drove the company's stock price down. This is because he didn't make an anticipated major announcement even though NVIDIA never indicated it was planning on making one.

 

The rampant speculation leading up to the selection of Leo Apotheker, which put him on no one's short list, has led analysts to go into this conference looking for reasons to find him wanting. Last week, he came out early with what may be his primary platform: to restore HP from the nearly drained company that Mark Hurd left to one that once again has a soul. This reflects solidly on the problem with management style that Wall Street seems to favor and Mark Hurd represented: One that focuses excessively on short-term profits and eliminates over time the firm's ability to survive by slowly bleeding it dry of such key assets as people and R&D.

 

The CEO Ponzi Scheme

 

You know how a Ponzi scheme works: Basically the first folks in get paid by money from those that come after and the folks at the end, when this all collapses, get screwed. This is the same behavior that went to the core of the sub-par mortgage-led financial collapse and it is at the core of HP's problems. Mark Hurd, HP's ex-CEO, focused solidly on the quarterly results that the financial market wanted and downsized staff, cut income and benefits to employees (employees cheered his ousting), cut R&D, closed sites and cut marketing to the bone.

 

The end result was a firm that looked good on paper with very low operating costs, but had a cancer of employee dissatisfaction and lack of investment in the future growing inside. It was also one that was increasingly fighting for relevance with fewer and fewer tools. These kinds of practices typically continue until the CEO driving them leaves, and eventually the problems land on some new guy's desk. And we give the new guy a hard time because he can't fix, in months, problems that were years, if not decades, in the making.


 

And this time around Leo Apotheker is that guy.

 

Apotheker's Problem

 

Apotheker's problem is he now has to restore a lot of investment that Hurd cut from employee compensation, marketing and R&D in order to position HP for sustained growth again, which means profits short term are likely to get squeezed. On paper this looks like he is taking a successful company and making it less successful, but in reality he is trying to cure the firm from what could be a terminal disease. He has to convince the financial analysts and institutional investors that what he has in store for the company is worth riding out and that the ends will justify the short-term expenses.

 

The Key Will Be Vision

 

This kind of event haunted Louis Gerstner when he took over IBM under even harder conditions because IBM's problems at that time were far greater than HP's today. The situation requires a vision that investors, customers and analysts can wrap their heads around and agree is the best future for the company. Going into this event, there is speculation that HP will spin off certain divisions, fire certain executives and discontinue a number of products. All of this works against HP because it can be successfully used by competitors until HP's CEO articulates what the real vision is and can demonstrate that the rest of HP will follow it.

 

That's really the purpose of this week's analyst event: to point out the direction the HP train will be put on by its new CEO, and to get every critical person on board and everyone blocking progress, from the investor community, out of the way.

 

Wrapping up: The First Day of the Rest of HP's Life

 

Inside HP, the transition from what the company was to what it will become has already begun. But for those of us watching from the outside, this will be our first view of what HP intends to become. In effect, this is the first day of the rest of HP's life. It starts this day with a new board and some unique controversy, but it also starts it with the hope that what HP will become can once again aspire to the dreams of the founders. Maybe Steve Jobs will loan Leo Apotheker a cup of magic since he'll need it.



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