The Decline of the HP Way - Research Paper Example

The Decline of the HP Way Introduction Hewlett-Packard was one of the pioneering technology companies of the Silicon Valley, which created a business model which was both profitable, and based upon egalitarian values. The HP Way, the companys distinctive corporate culture, lasted until the1990s, when changing market realities and the declining influence of the founders lead to a major re-orientation in business practices. The arrival of Carly Fiorina as CEO in the late 1990s marked the end of the HP Way, and her legacy was continued by Mark Hurd after her exit from the company. This paper presents a chronological account of the complete transformation of Hewlett-Packards business structure and management culture. 1. The Development of the HP Way Hewlett-Packard was created in 1939 by two Stanford University students, Bill Hewlett and David Packard (Beer 2). The company came to be recognized for both its management practices and its innovative and reliable electronic goods (Beer 2). Its corporate culture and management techniques came to be known as the “HP way” (Beer 2). The HP way was progressive and focused on profits more than on growth in revenues, team-work, open-door management practices, high levels of employment, egalitarian pay structures, and flexible working schedules (Beer 2). These practices were a reflection of the values of the founders who placed importance on both profits and people (Beer 2). 2. The Early Development of the Hewlett-Packard Group During its first four decades, Hewlett-Packard mainly sold test and measurement equipment, and it was during this time that the HP way developed (Beer 2). These test and measurement equipment products were based on cutting-edge technology which HP had developed, and could be sold at high profit margins (Beer 2). Hewlett-Packards clients were mainly engineers or other people from the technology industry who purchased these products for business applications (Beer 2). The first major transformation in Hewlett-Packards business came during the 1970s when the company launched computer and printer products, initially for business applications, and later for home use (Beer 2). The company struggled initially in the computer business, as the building of microcomputers and the development of UNIX machines demanded different skills to those required in the instruments business (Beer 2). The computer business needed large initial research and development investments, and required different company divisions such as chips, software and peripherals, to work in tandem, which was a change from the decentralized model which had succeeded in the instruments business (Beer 2). For this reason Hewlett-Packard did not get into the personal computer business until the middle 1990s, and up until that time most of its business was in high-margin, large scale computers (Beer 2). 3. The Move into Personal Computers Despite the reservations of the company founders over whether the low margin personal computer business was a good fit, Hewlett-Packard became one of the top technology companies in the world by the middle 1990s, a market leader in printers and UNIX systems, and a rising player in personal computers (Beer 2). By this stage the company had begun to earn the majority of its revenues and profits from its computer business (Beer 2). Bill Hewlett remained actively involved in the business until 1987, and David Packard until 1994, which meant that Hewlett-Packard retained continuity in its management culture (Beer 2). 4. The Three Major Businesses of Hewlett-Packard By the early 1990s, Hewlett-Packard focused on three major businesses (Beer 3). The original tests and measurements business sold a range of high margin instruments to technology industry professionals through independent Hewlett-Packard divisions (Beer 3). It conformed most closely to the original HP way, but was increasingly being overshadowed by the companys other activities (Beer 3). The burgeoning computer business designed and marketed high performance Unix machines to businesses that did not have the capacity to buy mainframes from Hewlett-Packards main competitor, IBM (Beer 3). The computer business was research and development intensive and operated at high margins, requiring high levels of co-ordination between the technical and business divisions of the company (Beer 3). During the early 1990s, personal computers for domestic use were beginning to enter a rapid growth phase but had not yet become a major part of Hewlett-Packards overall business (Beer 3). The companys other major business, printers, followed a divergent business model compared to computers and instruments (Beer 3). During the 1980s Hewlett-Packard sold premium printers which were manufactured by Canon, a Japanese Company, and low-end laser printers which used Canon technology (Beer 3). In the late 1980s and early 1990s, Hewlett-Packard marketed ink-jet printers using its in-house technology, which enabled it to become the leader in the printer industry (Beer 3). This market position lead to the soaring sales of high profit printer consumables including ink cartridges (Beer 3). The fundamental difference between the printer business and the instruments and computer businesses was that it sold high volumes at low costs (Beer 3). Due to its dominant market position, the printer business quickly became the largest source of company profits (Beer 3). This low-cost focus lead to some conflicts as engineers from the computer and instruments businesses felt that the printer business had strayed from the founders commitment to innovation (Beer 3). However, Dick Hackborn, the Head of the printer division countered this charge by stating that the innovation was in the business model as opposed to the technology, and that he had the blessings of the founders (Beer 3). 5. Growth During the 1990s Hewlett-Packard experienced robust sales growth (over 20% per year) between 1992 and 1996, yet concerns increased over reliance on low margin personal computers and profits from the printer business (Beer 3). During the 1990s Hewlett-Packard jumped from just within the top 30 of personal computer makers, to the number 3 position behind the market leaders, IBM and Compaq (Beer 3). Being a Top 3 company was important because many retailers only sold two or three brands (Beer 3). Some executives felt that a leading position in the personal computer market would enable the marketing of different computer system components (Beer 3). They concluded that it would be increasingly difficult to maintain a dominant position in the printer market without without a strong position in the personal computer market (Beer 3). This created some debate, with some executives from the printer business claimed that the personal computer business restricted printer sales from other personal computer companies such as Dell (Beer 3). As the market leaders competed intensely for market share, prices fell, and Hewlett-Packards gross margins on personal computers fell from 31% in 1992 to just 19% in 1998 (Beer 3). 6. The Beginnings of a Fundamental Re-orientation In 1995 Hewlett-Packard began an internal debate over its role in the future of the computer industry (Beer 3). Much of this debate was about whether high-end computers or personal computers should be the main focus of the companys operations (Beer 3). High end computing would generate higher profit margins, and enable the company to continue playing a leading role in research and development (Beer 3). The high-end computer operation had grown by 25% per year during the first half of the 1990s, yet there were some reservations over whether the market would continue to grow into the future (Beer 3). Conversely, the personal computer market seemed to be locked into a “race to the bottom”, in which companies would compete to see who could provide the cheapest computers (Beer 4). If Hewlett-Packard succeeded in the personal computer market it would earn slimmer margins but far higher units sales (Beer 4). There was no question of exiting the high-end computer business, rather the debate was about the continued expansion of the companys personal computer business and the economic and cultural effects this would have (Beer 4). The result of this debate was clear, Hewlett-Packard decided to focus more on the personal computer business and made Rick Belluzo responsible for all computer operations (Beer 4). The CEO Lew Platt convened a team of executives to examine Hewlett-Packards increasingly huge size, and the problems which such scale may cause in the long term (Beer 4). Since the 1950s, Hewlett-Packards annual growth rate had averaged over 20%, a record which surpassed all competitors (Beer 4). The teams report, which cited the difficulties of other large companies worried Platt and the Hewlett-Packard Board, who had to confront major strategic choices over selling some businesses and the acquisition of new operations (Beer 4). 7. Adapting to a Changing Market In the late 1990s, the industry experienced two major shifts which had caused Hewlett-Packards competitors to change their strategies and organizations (Beer 4). Major commercial buyers began to demand that their suppliers provide technology solutions, which meant that suppliers had to have adequate co-ordination across commercial operations (Beer 4). IBM had successfully transformed its solutions strategy to meet the new market demand by bundling computers, software and related products to provide integrated solutions (Beer 4). Hewlett-Packard also had to meet the new demands of internet users (Beer 4). Besides products for individuals, there was a burgeoning demand for devices such as servers and routers which internet traffic was dependent on (Beer 4). Dell pioneered a business model for online business which enabled it to have a lower cost structure than Hewlett-Packard (Beer 4). In this environment, Hewlett-Packards performance began to suffer during the late 1990s (Beer 4). A combination of competition from Dell and the results of the Asian financial crisis caused it to miss its profit and revenue targets during 1997 and 1998 (Beer 4). Most of the companys profits came from its traditional printer business, whilst the computer business either broke even or made a loss (Beer 4). The original tests and measurements business continued to grow profitably but was changing its organization to deal with the shift in its business focus from the defense industry to the telecommunications industry, and from single instruments to systems (Beer 4). The companys lack of a presence in the internet business was a growing source of concern (Beer 4). 8. The Lew Platt Years Lew Platt became CEO after the company founders removed John Young from the position in 1992 (Beer 5). Platt had held technical and executive positions at Hewlett-Packard for more than 25 years (Beer 5). Platt was a strong advocate of the HP Way and spent the early years of his stint redefining the HP Way as a value system rather than as traditional management practices which technology and competition had made redundant (Beer 5). Some executives within the company complained that Platt was too focused on values and not focused enough on profits (Beer 5). Platt delegated the setting of strategic directions to the heads of the key businesses (Beer 5). However, these business heads could not agree on the best direction for Hewlett-Packard (Beer 5). This lack of consensus on strategic issues lead to a sense of drift over the companys presence in the personal computer market, and delayed the response to the emergence of the internet (Beer 5). Platt appointed Rick Belluzo Head of the Hewlett-Packard personal computer and printer businesses (Beer 5). Belluzo then became a leading advocate of change and made efforts to address the lack of strategic direction of the company (Beer 5). Under Belluzos direction Hewlett-Packard acquired Verifone, a hardware and software funds transfer company, to kick-start its internet business (Beer 5). The company restructured its computer sales operations into a unified organization to avoid each division pursuing its own customers independently (Beer 5). However, Belluzo wanted more radical change which Platt did not agree to, which forced him to resign and join a competitor, Silicon Graphics (Beer 5). In response to advice from McKinsey and Company, Hewlett-Packard sold off its instruments, the new entity became known as Agilent Technologies (Beer 5). In late 1998, Platt intimated to the Board that he did not have answers to the companys problems, and the hunt for a new CEO began (Beer 6). The Board sought an outsider who had charisma, marketing skills, ability to increase the companys profile, and the strength to challenge the HP Way (Beer 6). The new CEO would regain the confidence of the critics in the media and on Wall Street who had been unrelenting in their criticism of Hewlett-Packard during this period (Beer 6). 9. Carly Fiorina and the Death of the HP Way In July 1999, Hewlett-Packard named Carly Fiorina the companys bold new CEO (Beer 8). As expected, Fiorina began to make large changes at the company (Beer 9). She changed the companys logo, and pruned the number advertising agencies the company used in order to better communicate the companys total solutions offerings” (Beer 9). A new advertising campaign projected Fiorina in front of old footage of the founders at work in their garage, in an effort to project an image incorporating both traditional values and a new strategic direction (Beer 9). Within months of her arrival at Hewlett-Packard, Fiorina re-organized the company into a front-back structure (Beer 9). She combined over 80 independent product centered operating divisions into just two front-end marketing and sales operations, and two back-end research and development and manufacturing operations (Beer 9). One front end operation dealt with corporate customers and the other with individual consumers, whilst one back-end operation developed and manufactured computers and the other focused on imaging equipment and printers (Beer 9). The basis of this re-organization was a desire to focus more on systems solutions rather than single product items and the need to make it more convenient for customers to buy from Hewlett-Packard (Beer 9). Fiorinas plan aimed to address the strategic issues facing the company by allowing the front-end operations to gain a better view of the customers needs and then communicate that information to the back-end operations to develop appropriate products (Beer 9). This re-organization created a backlash, with many managers complaining that no company with as broad a product offering as Hewlett-Packard had attempted a front- back organization, and that it was difficult to understand who had ultimate responsibility for co-ordination issues (Beer 9). In a major departure from the HP way, Fiorina began to more tightly link pay with performance, providing small bonuses for achieving lower publicly stated goals and larger bonuses for reaching higher internal goals (Beer 10). The new pay-for-performance scheme replaced a profit sharing plan which had been in place for many decades (Beer 10). Fiorinas interpersonal style and flamboyant ways were felt to violate the egalitarian values which were the core of the HP Way (Beer 11). In a further departure from the HP Way, Fiorina used acquisitions as a strategic instrument (Beer 11). Acquisitions had previously been avoided due to the feeling that they would dilute the Hewlett-Packard corporate culture (Beer 11). In contrast to the priorities of the founders, Fiorina emphasized the importance of generating revenues over earning profits (Beer 11). During the six decades prior to the arrival of Fiorina, the managers of the company had put profits before revenue in order to self finance the companys growth (Beer 11). This limited the companys growth only moderately, while protecting the company from the pressures of the capital and credit markets (Beer 11). This core value had enabled the company to invest in technical innovation and avoid dilution of the HP Way (Beer 11). 10. The Hewlett-Packard Compaq Merger In September 2001, despite the reservations of Hewlett, the merger of Hewlett-Packard and Compaq was announced (Beer 12). After a bitter proxy battle between Hewlett and Fiorina, the acquisition was approved by the courts (Beer 12). At the time of the merger, executives at both Hewlett- Packard and Compaq felt that the merged company would be better able to handle changes in the industry, including advances in technology and increasing customer demands (Beer 12). In key areas where one company was weak, the other was strong, making the merger seem mutually beneficial (Beer 13). Hewlett-Packard sought to improve its position as market leader in enterprise computing for business applications (Beer 13). Hewlett-Packard aimed to use its strength in personal use devices to complement Compaqs strength in personal computers (Beer 13). In printers and imaging systems, Hewlett-Packard aimed to bolster its market strength and technological innovation, whilst benefiting from greater scale as a comprehensive solutions provider (Beer 13). The merged company was able to achieve major cost reductions, mainly stemming from the elimination of 10% of the combined workforce (Beer 13). In 2003 Hewlett-Packard began to win large outsourcing contracts which it would not have won before the merger (Beer 13). In the printer and imaging businesses, Hewlett-Packard maintained domination of the market, launching low-end ink-jet printers, which helped the business earn the majority of the groups profits (Beer 13). Hewlett-Packard did not do so well in personal computers and enterprise systems, being overtaken by both IBM and Dell in market share (Beer 13). The Fiorina era had completely destroyed the HP Way and its associated management culture within the ranks of higher management (Beer 13). Fiorina eventually came into conflict with the Board, with some Directors orchestrating an attempt to quicken her departure by continually leaking damaging information against her during early 2005 (Hyatt 6). 11. Mark Hurd Continues the Carly Fiorina Way Mark Hurd, since his appointment as Hewlett-Packard CEO in April 2005, transformed the company from an industry doormat into the largest technology company in the world, with revenues in 2008 of $118 billion, surpassing arch-rival IBMs $104 billion (Lashinsky & Burke 90). Hurd built on the breadth and depth created by his predecessor, Carly Fiorina (Lashinsky & Burke 91). He controlled the companys expenses, by continuing Fiorinas job cuts and research and development cutbacks, which allowed the company to experience a rise in profits despite a decline in sales during the global economic downturn (Lashinsky & Burke 91). Hurd also continued Fiorinas emphasis on revenue generation, which meant that Hewlett-Packard lost its position as a leading technological innovator (Lashinsky & Burke 92). Under Hurds management, Hewlett-Packard reduced the number of software applications it used throughout the company from 6000 to 1500, consolidated the number of data centers from 85 to 6, and reduced its information technology department from 19000 to 8000, in favor of hiring more sales people (Lashinsky & Burke 93). In October 2010, Mark Hurd was removed from his position as CEO of Hewlett-Packard after allegations of sexual harassment and dishonest expense claims (Swartz).The Board appointed Leo Apotheker, a German who had previously headed the business software giant SAP (Swartz). 12. Hewlett-Packard: The Present Scenario Hewlett-Packard won a bitter war with Dell for domination of the personal computer market, however the battle ground has already begun to shift (Poppick 64). Sales of consumer hardware have begun to slow down (Poppick 64). The larger potential for revenue growth lies in securing long term contracts to assist corporations in setting up and managing computer networks (Poppick 64). Fiorinas move to merge with Compaq in 2001 signaled Hewlett-Packards goal of being the worlds leading personal computer maker (Poppick 64). Under CEO Mark Hurd, Hewlett-Packard overtook arch rival Dell, and currently controls 17% of sales (Poppick 64). Yet I-pads and tablet computers have begun to threaten already slowing growth in the personal computer market (Poppick 64). Hewlett-Packard controls 41% of the printer market, and as competitors have begun to market cheaper printers, the company has begun top re-orient toward high-end machines for business customers (Poppick 64). Hewlett-Packard has acquired more than 50 companies since 2000, including 3Par, 3Com, and EDS (Poppick 64). The acquisition of EDS more than doubled the revenue which Hewlett-Packard earns from its network service business (Poppick 64). Conclusion The period since 2000 has witnessed a completed transformation of Hewlett-Packard in both business operations and management culture. In a sense, Carly Fiorina was hired by the Board to discard the HP Way in favor of new orientation. This new orientation, based upon revenue maximization, cost cutting, downsizing, and mergers and acquisitions is completely contrary to the vision of the founders of the company. However, this re-orientation has turned Hewlett-Packard into one the worlds leading technology companies, when many other businesses of a similar age have long disappeared. Thus, the decline and death of the HP Way can be justified given the current robust state of the company. Works Cited Beer, Michael, Rakesh Khurana and James Weber. “Hewlett Packard: Culture in Changing Times.”Harvard Business School Cases (2005): 1-20. Hyatt, Jim. “Lessons From Hewlett-Packard.” Board Leadership (2007): 6-7. Lashinsky, Adam and Doris Burke. “Mark Hurds Moment.” Fortune 159.5 (2009): 90-100. Poppick, Susie. “X-Ray: Hewlett-Packard.” Money 39 (2010): 64. Swartz, Jon. “HPs in a Position to Thrive, New CEO Says.” USA Today 4 October 2010. Read More