The Cloud

Why HP’s Strategy Fell Apart

Back in 2008, Hewlett-Packard had a decent strategy. But the seeds of its break-up were already sown.
John ParkinsonJune 6, 2016
Why HP’s Strategy Fell Apart

Back in 2008, while I was still a senior corporate IT executive in Chicago, I attended a lunch hosted by the CEO of CDW (the big Chicago area based value-added reseller and at the time one of my suppliers) where the guest speaker was Mark Hurd, at the time the chief executive of Hewlett-Packard. Over lunch, Hurd laid out the rationale for his strategy for HP’s future, more or less as follows (this is from a combination of memory and my notes from the lunch):

  • Be in both the consumer and corporate PC and printer business for volume at admittedly low margins (3%-5% overall as I recall, although printer supplies and accessories had much higher margins). However, use the volume leverage to get significant procurement and supply chain efficiencies for everything from components to original design manufacturer manufacturing capacity and shipping costs. At the time, IBM was out of the PC business and Dell was struggling. Lenovo was certainly going to be a threat, but not yet the force it would become. No other PC vendor was a significant marketplace presence in HP’s key markets. HP could be number one by a wide margin.
  • Use these procurement and supply chain efficiencies to dominate the small business and enterprise server, networking, and storage market segments through aggressive pricing in all channels. Use component pricing power to aim for 14% to 20% margins, but build a strong VAR ecosystem through attractive volume discounts. Restrict the direct channel to a limited number of very large enterprise accounts to encourage VARs to build market share.
  • Use this significant presence in the server and related technology segments to build a focused data center software business at better margins (40% to 60%), filling in portfolio gaps with acquisitions as needed and when “good deals” were available.
  • Use the resulting data center “operational platforms” to build a managed services and systems integration business, also at decent margins, covering everything from facility design to equipment installation services to information technology outsourcing and business process outsourcing.

Hurd admitted that most accounts wouldn’t want to buy everything from HP, so the software and services elements would have to be “standards-based and vendor agnostic,” but he expected that there would be sufficient “natural” synergies to make HP an attractive partner for a larger proportion of business IT spend.

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As an existing HP customer (for desktops, printers, servers, and storage) this all made a lot of sense to me, even though I had no immediate intention to switch laptops (from Lenovo) or data center management software (from CA) and I could see the overall strategy reflected in the account support we were getting from HP. It made a lot of sense and most of HP seemed to “get it.” HP’s major (and minor) acquisitions (including those that pre-dated Hurd) had a place within the strategy. What was not to like?

Yet the seeds that would eventually derail this kind of “technology superstore” synergistic strategy were already planted, even in my own IT shop.

  • We were already using Amazon Web Services for some capacity offload and for development and testing and had embarked on an aggressive virtualization deployment to improve on-premise server utilization. Over the following several years our Intel-based on-premise compute capacity would continue to grow (in terms of production workloads) but would reduce in actual numbers of deployed servers, as a combination of Moore’s Law improvements in processing power and virtual machine efficiencies reduced the need to buy more physical hardware to support our growth
  • We were redesigning our data center and wide area networks to be more “carrier” like – and looking to a carrier to manage them for us as we were increasingly focused on flexible capacity to move large volumes of data around. HP’s network products didn’t yet support much of what we were moving towards
  • We were experimenting more and more with open source software rather than proprietary products, especially for data center management and workload automation, reducing the attractiveness of expensive enterprise licenses and maintenance charges
  • We were moving away from onshore managed services to alternative – and lower cost – near-shore service providers
  • We were increasingly reluctant to pay the significant costs for enterprise storage refresh cycles and were looking for better-large scale data storage options, including some do-it-yourself approaches

We weren’t alone. Trends that were embryonic in 2008 accelerated rapidly over the following five years until they combined to tear down HP’s strategy and eventually drive the breakup of HP into multiple parts.

So what can we learn from all this?

First, HP’s 2008 strategy wasn’t necessarily wrong, but it didn’t execute fast-enough initially (there were distractions of course) and then didn’t adapt fast enough as external conditions and drivers evolved. To paraphrase Jack Welch, the market evolved faster than HP did.

That’s happening more and more and it calls into question whether the economies of scale that underpinned HP’s approach are workable foundations any more. Perhaps if they can pay off in the short term, they’re worth it, but if not, the inertia they represent precludes the agility that’s now an essential ingredient of success. For years, I’ve told people that one of the keys to long-term success is to minimize the number of irrevocable decisions – and if a decision is irrevocable, make sure it pays off quickly. If not, you’re sure to regret it later.

How’s your strategy looking?

John Parkinson is an affiliate partner at Waterstone Management Group in Chicago and a regular CFO columnist. He has been a global business and technology executive and a strategist for more than 35 years.