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IBM and HP: Different Strategies in a Changing World

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In looking at the financial results from last quarter, you increasingly see a growing difference between HP and IBM, except in one area: services. Both companies are generally, with the consistent exception of marketing, well run, but the goals from the outside are decidedly different. Sam Palmisano appears to be increasingly channeling Steve Jobs in terms of management style; simpler is better and this is helping more on bottom-line performance, but trading off market control. HP is after market control, but the complexity of the effort is starting to show a drag on bottom-line performance.

 

Either path can be seen as successful, with widely different risks. For IBM, the risk is losing too much breadth too quickly and missing out on opportunities to strengthen an existing position, like the Sun acquisition (though I think the executive payouts would have been a nightmare for IBM). For HP, the risk is getting to a complexity level that is unmanageable; the Printing and Imaging division is showing symptoms of this.

 

Let's talk about both companies' directions and the advantages and disadvantages of each.

 

IBM the Enterprise Apple

 

When Steve Jobs took over Apple, it was unmanageable. He was the latest in a string of CEOs, and his predecessors, from John Scully on, failed largely because their skills were not up to managing the company. So he cut and cut deeply to remove the company's complexity and bring it down to a size and level he could manage. He ended the string, eventually, of unsuccessful CEOs.

 

IBM's name often is used synonymously with complexity and bureaucracy. Sam Palmisano has been working very hard to trim it down to fighting weight. This paid off in the market downturn as IBM didn't have to lay off as many people as HP apparently did; it also didn't need to cut executive pay. From a bottom-line standpoint, at least in the previous quarter, IBM did comparatively well. It is actually being compared favorably to Google.

 

However, there is a long-term strategic risk to this approach, and you can see it in Apple. For, while Apple has financial results that are enviable, its market power in its core business, PCs, is still that of a niche player. Current trends would indicate that its position is actually weakening at the moment. With Cisco's entry into the server space, all players are, on paper, weakened. IBM doesn't have a way to take the fight back to Cisco, which is focused like a laser on the emerging cloud computing opportunity. The acquisition of Sun could have helped some here and, potentially, prevented another IBM competitor, Oracle, from gaining more power.

 

So the advantage of the approach is bottom-line performance, the disadvantage is the potential for reduced relevance. In general, Palmisano, from my read, is balancing between the two reasonably well, but Cisco and Oracle now represent a growing risk and he will likely have to adjust the balance to effectively respond to it.

 

HP Building a Superpower

 

Mark Hurd's strategy is to turn HP into the new technology superpower. Partnering in software but with the broadest portfolio of products of any U.S. technology vendor, HP is trying to own the concept of account control. Recently, it purchased EDS to better match IBM services and raised its excellent -- though historically non-strategic -- ProCurve networking products to strategic status to better compete with IBM and Cisco. While it leads in a number of segments, it only dominates in one: printing. This last quarter was hard on HP. The drop in consumer spending hit its PC unit hard and it took a merger hit in services, which was actually much milder than I expected.

 

The big problem was Printing and Imaging, which took a sharp drop and, up until recently, had been comparatively stable -- not going up with the market but not falling either. This division is becoming one of the big problems in HP, largely because the unique market it occupies provides very little synergy to the rest of the company and because that market, in general, appears to be going into a declining phase. Increasingly, things that used to require printing are using electronic means, and you can see the impact on traditional publishing and printing companies. Yet HP, the dominant printing vendor, is almost non-existent in electronic display technology; imaging to the company appears to only relate to printing and HP seems to ignore the now vastly larger electronic imaging market.

The inability to respond in a timely manner to this threat may be an indicator that HP is becoming too complex to manage, though Mark Hurd and Shane Robison have already demonstrated a skill in managing complex companies that is unparalleled, given HP's performance through last year. However, in this game you are only as good as your current quarter, and this last one was clearly tough. On the other hand, in what has been a tough quarter across the industry, HP actually did reasonably well and the fact that it took such a small revenue hit from Services indicates that its merger skills rival some of the best in the industry. In addition, it is the only server vendor that can take the fight to Cisco.

 

Marketing

 

Both IBM and HP are under marketing at the moment, which I believe is having an adverse effect on their financial performance. If you look at vendors like Microsoft and Apple, which are aggressively marketing during the downturn, both are showing benefit from the marketing efforts. Apple continues to maintain margins higher than anyone else in its segment. Microsoft's efforts are actually having a strong offsetting effect on consumer sales behavior. PCs are actually doing substantially better than they should and products that are not as well marketed in similar segments, like TVs, are taking it in the shorts. Under Louis Gerstner, IBM marketing was second to none in its class. HP's PC marketing has historically come very close to Apple levels. Both are off the mark and I think that has adversely affected both companies' results. Cutting marketing in a downturn is a classic textbook mistake, and Apple is one of the few companies that doesn't make it.

 

Wrapping Up

 

When it comes to CEOs and complexity, I've often thought a variant of "The Peter Principle" applied. The principle refers to managers rising to a level of incompetence. With CEOs, what I've observed is that they build out a company until that same incompetence level is reached and then take it to that next step: failure. Palmisano is actively fighting this trend but he may be too conservative and may be missing growth opportunities. HP is aggressively growing but this last quarter may indicate that it is dangerously close to proving my point. Both companies are in surprisingly good shape today, given the economic conditions, but this is a year of opportunities and changes. How both CEOs will be remembered will be not how they played the game so far, but how they play it over the next 18 months. Neither path is wrong and both have huge advantages. Their contrast is what is interesting.

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