In the wake of the surprising announcement of Hewlett-Packard's radical corporate reorganisation, Dan Briody looks at the reasons behind the shake-up and how it will affect HP's years ahead.
When Bill Hewlett and David Packard set up shop to sell home-spun testing equipment out of their Californian garage one afternoon in 1938, the pair scarcely could have imagined the technology behemoth that would emerge.
Nor could these visionaries have predicted the wrenching changes that Hewlett-Packard began last week in order to compete in the age of the Internet.
The Silicon Valley giant, admitting that it has become slow and unwieldy, took the first steps to rejuvenate itself with a major corporate reorganisation.
The $US47 billion company said that it is spinning off a company focusing on measurement, which represents about 15 per cent of its revenue, from its computing and imaging business. And it will create a new Internet Business division aimed at catching up on lost opportunities.
"We are changing our corporate culture due to the 'Internet Effect'," said Nigel Ball, general manager of the Internet and Applications Systems division at HP. "We need to move faster and make decisions more quickly. We need to act more like a start-up."
The restructuring will go deeply into the company and will culminate in current chairman and CEO Lew Platt stepping down once a new CEO is found. HP is well regarded for clinging to its values of fair business practices in this age of cutthroat corporate warfare, but the moves show a realisation that drastic steps are necessary.
"They have some leadership issues right now," said Rob Enderle, senior analyst at the US-based Giga Information Group. "The market is changing very fast and they need someone to lead the company who is a lot more limber. Platt has a lot of integrity and tradition, but when you go through this amount of change, a traditional leader is no longer the right choice."
The split is intended to make each division more nimble and better able to react to market changes. But even with this move, HP still has a very large computing business with disparate strategies that can cause confusion for customers.
"There is a real split between platforms at HP," said Jim Nathlich, a Chevron Corporation technical analyst. "We are dealing with completely different organisations for servers, desktops, and notebooks. And each organisation has their own support structure."
The company hopes the shake-up will allow it to better serve its distinct customer groups - and launch a more aggressive strategy in the Internet arena. No other spin-offs are planned, but partnerships and acquisitions should be in the offing, according to a company representative.
Many of those partnerships and alliances will take shape in the newly formed Internet Business unit at HP, which incorporates the Internet and Applications Systems division as well as some software groups within the company.
Headed by veteran Joe Beyers and part of HP's Enterprise Computing Solutions organisation, the Internet Business division's vision is to not only enable companies to bring electronic-commerce solutions to market, but also to change the way business is done on the Internet.
"By enabling better integration of different applications on the Web, we can link together different services to create new services that work together," Ball said.
Ball described the technology as something that would transparently tie together multiple online services to the end user. Many analysts believe the company will need to acquire some Internet start-ups to compete.
But HP has been undeniably slow on the acquisition front. Often characterised as conservative to the point of being stodgy, HP has sat idly by while its competitors have marketed breakthrough technologies and made massive acquisitions to position themselves to compete at the dizzying pace of the Internet economy. On one side, there seems to be no end to IBM's market-altering technology prowess. On the other, Compaq continues to buy what it needs, snatching up Digital and Tandem, and setting its sights firmly on any company that brings it closer to delivering the total IT package.
Even Sun Microsystems, a whippersnapper by HP standards, was able to angle its way into the America Online-Netscape merger, confounding HP officials, and stepping up the sense of urgency within the company. In the past two years, HP had considered, but missed out on, opportunities to buy Gateway, Unisys, Netscape, and Lycos, driven by fears created by the company's less-than- successful acquisition track record.
"We've never been good at acquisitions - we're scared," said Eric Cador, general manager of HP's Commercial Computing division in Grenoble, France.
But changing the course of a ship the size of HP takes time, and with a corpo-rate culture that is fiercely loyal to its employees, analysts wonder if HP has the ruthlessness to get the job done.
"HP has not been able to demonstrate rapid movement in response to competitive threats in the past," Enderle said.
Getting the story straight
The general sentiment within the company is that it needs a unified message: a targeted, specific, strong message the marketing department can drive home to everyone from large corporate buyers to the occasional home PC buyer.
"They've never been clear on their message. They've never been good at that," said Steve Kleynhans, a Meta Group analyst.
Enter the latest from the sales force at HP: Electronic Solutions Now (ESN). In an effort to address the concerns of its large customers such as Chevron, HP hopes ESN will become the "one neck to choke" for HP accounts. By providing a customised Web site, HP is aiming to improve its customer interaction by providing a wealth of information and purchasing options online.
But don't expect the company to take on the flashy look of rivals such as Dell, or the winner-take-all mentality of Compaq. Make no mistake, this is still a "gentleman's" company.
"We have been very fair in the past. A gentleman is not stupid, but a gentle-man has rules," said Emilio Ghilardi, an operations manager in HP's business desktop division, in Grenoble.
But rules can have their drawbacks. In stark contrast to the way Compaq strung out its channel partners for two years while it built the infrastructure to move sales to the direct model, HP has coddled its resellers, consulting them on every move, and making its ongoing transition to a hybrid model as painless as possible. HP had hoped to contrast Compaq's brashness by positioning itself as the last loyal servant to the struggling channel. It has not worked out that way.
Instead of resellers returning the favour, HP has found that the channel has reached desperate times, selling brandless PCs at bottomed-out prices - in effect, competing with its former and current partners. But HP continues to treat the channel fairly, selling its PCs directly for the same price as it does in the channel.
"We have seen the channel become more volatile, selling whatever the low- est-cost PC is," said Jean-Luc Meyer, worldwide marketing manager at HP, in Grenoble.
As a result of the pricing bloodbath, HP has managed to gain market share in the PC market, but the company has not brought in the revenues it expected.
A home on the Net
The ESN announcement underscores another sorely needed element of HP's plans going forward: its portal strategy. After having missed the boat on both Netscape and Lycos, even HP realises that it will have to partner, and possibly acquire, to establish a larger presence on the Internet. Its recent cosying up with Yahoo, offering custom HP small-business services through the Yahoo portal, has analysts thinking that it may have found an answer.
At the same time, it's not as if HP has any dearth of big-league technologies coming out of its labs in Bristol, England. With InkJet, OpenView, and JetSend all on its resume thus far, the only criticism is that of not being able to capitalise on important technologies.
"We are still a bunch of engineers, and we need to do a better job marketing our products," Ghilardi said.
A good case in point is HP's nascent "image re-engineering tool", which would let IT managers quickly and easily transfer a software image from one PC to another, without requalifying the platform or ensuring hardware and software compatibility.
Because the product is not ready to be sold, HP is not yet willing to promote the technology. Meanwhile, IBM is readying a similar announcement for later this month and will likely steal any thunder HP had hoped to gain. By playing it safe, HP now runs the risk of not being associated with an important technology in the future.
So honest-dealing, straightforward Hewlett-Packard is learning late in the game that the rules are different in the Internet age. But there are still rules - scout's honour.