What lies ahead for HP?

What lies ahead for HP?

Now that new HP CEO, Mark Hurd, has taken the first step in his plan to improve the company's uneven performance in recent quarters, he must decide what kind of company HP will become as it approaches its 70th birthday at the end of this decade.

Should it become a lean, efficient, commodity-product supplier, or perhaps an innovative consultant to the major IT departments of the world? Can HP attempt to do both, as it has done since its acquisition of Compaq in 2002, while fending off challenges from Dell and IBM?

Those questions were not addressed when Hurd unveiled a much-discussed restructuring plan that keeps the company's sales and research and development teams largely intact, while heavily cutting jobs in IT, human resources and finance.

The cuts will improve HP's profitability to the tune of $US1.9 billion in cost savings by its 2007 fiscal year, which begins in late 2006.

Hurd also dissolved its Customer Solutions Group and moved those sales staff into the product groups they already serve. This is in line with several of Hurd's initial operational moves to give executives and employees focused roles, such as the separation of IT and the company's global supply chain. Financial analysts and shareholders were initially unsure of what to make of Hurd's actions, sending HP stock (HPQ) up slightly in early trading on the New York Stock Exchange, but those gains were erased by mid-afternoon. The financial community might have been hoping for larger cuts, according to senior analyst with Moors & Cabot, Cindy Shaw.

"This whole year has been internally focused for HP," senior analyst with Current Analysis, Sam Bhavnani, said. "Now they can focus on executing."

Even before Hurd arrived at HP, the management team had begun to address the need for cost-savings and improved efficiency, he said.

"There is a perception that I came in and did the work. But I came here and asked questions, and [the management team] would say, 'Interesting question, and here's some work we've done on the subject'," Hurd said.

The long-term strategic issues would need to be publicly aired at some point soon, principal analyst with Pund-IT Research, Charles King, suggested.

"What seemed to me that was missing was an overarching sense of what the company is doing strategically," he said.

"This was more a matter of, 'We are cutting staff, getting expenses under control and moving forward'. But 'where are you going?' was pretty much unaddressed," King said.

After Hurd's predecessor, Carly Fiorina, brought Compaq into the fold, HP became the market-share leader or second-place competitor in a broad array of categories across PCs, servers and printers. But the company has thus far been unable to translate that market share into consistent profits amid multiple structural changes and repeated layoffs.

Fiorina created new groups, combined old groups, and eliminated others in hopes of finding the right mix of people and products.

HP's board ultimately decided that she was not the best person for that job, and hired Hurd in late March to focus on creating an execution-oriented culture.

In the language of business-speak, that basically means a company that gets things done without making mistakes.

HP did not release many details about layoffs within specific product groups, making it hard to judge the impact of the layoffs on customers. Hurd promised to leave sales and research largely intact.

"We are one of the few remaining hardware companies that deliver innovation that customers value and we will continue to invest in compelling products that can be differentiated in the market," Hurd said.

And he reiterated his commitment to HP's current strategy of offering a broad portfolio of products to businesses and consumers.

However, there will be at least a few cuts to product development groups.

"With the loss of two or three people from the wrong team, you can hobble product development," King said.

What is unavoidable is the impact of additional layoffs on the battered HP workforce. The company has seen several rounds of layoffs, reorganisations and executive departures since 2002, but many current employees are willing to give Hurd the benefit of the doubt in his early days of steering the ship, according to one HP insider.

"Obviously, deep, deep cuts are never going to be that popular," said one HP employee who requested anonymity. Hurd seems to be holding those around him to accountable standards, the employee said: "I think that's what largely made him most popular."

That popularity will be tested as HP moves forward with the cuts, according to senior analyst with Illuminata, Gordon Haff.

"This kind of thing does take a morale and energy toll on a company," he said. "Which isn't to say this isn't something he has to do, but it doesn't come without an intangible cost to pair with the tangible savings."

(Robert McMillan in San Francisco contributed to this report.)

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