Is HP permanently broken?

The continuing soap opera that is Hewlett-Packard’s boardroom and executive suite raises the question: is HP permanently broken?

Devices vs systems
HP started building devices (an audio oscillator) in the 1930s. They remain largely a device company – even after spinning off instrumentation and test equipment - to this day with printers and PCs.

As a device company HP was characterized by strong product divisions building premium quality and, often, market-leading products. HP pioneered the programmable calculator business in the early 70s and the HP 12C business calculator has been a top seller for decades. And they’ve done well with printers.

But the computer business is about systems, not devices, and here HP has had a harder time finding its way. For example, its early PCs and minicomputers used instrument buses to connect peripherals rather than more standard computer buses: handy for the instrument business but not so good for users.

With the collapse of the minicomputer industry in the late 80s, and the success of HP’s printer business, HP was almost the only minicomputer maker able to survive the transition to a PC dominated era. But it wasn’t until they acquired Compaq – who had earlier acquired the leading minicomputer maker DEC – that HP got engineers with a serious system and storage focus. And it wasn’t until Cisco entered the server business that HP got serious about networking.

HP’s big problem
While there is plenty of grist for the tabloid mill in HP’s executive circus – why does a millionaire CEO fiddle expenses for dinner with a woman who isn’t his wife? – the board’s lack of a strategic vision keeps them from setting priorities for the CEO. In other words, when you don’t know where you want to go, any CEO will do.

In 1999 HP divested its multi-billion-dollar test equipment business to better focus on its systems businesses. That was a good start but it did not go far enough.

Going forward
The company needs to go all in on systems. This means:

• Spinning off the remaining non-systems businesses including printers, calculators, imaging and PCs.
• Focus on quality systems solutions to major business problems, instead of raw devices spackled together with professional services.
• Committing to massive disruption of the storage and networking businesses by moving to 40% gross margins from the current 60+% range through the use of volume and scale out technologies, open source software and targeted innovation leveraging the latest technology.

Can HP compete with 40% gross margins? Well, Apple has done pretty well.

New franchises in the IT industry are built on major disruption of existing markets. Storage and networks are ripe for disruption and HP is well-positioned to remake the economics.

The Storage Bits take
These issues are why HP’s board appears to be riven by intractable disagreements and hamstrung by the enormous sprawl of HP. The company lacks a strategic vision, but it is profitable enough that no one wants to shake things up.

Companies, like people, rarely make hard choices until they are in crisis. And HP is far from crisis.

But the current board – hardly a hardware systems exec among them – has no strategic vision for the company. And HP’s portfolio of businesses will evade serious crisis for years.

It is other players that will force the issue.

• Intel is powerful and highly profitable and continues to cast about for new ways to leverage its chipmaking prowess.
• Apple has a huge war chest and a vision for consumers that will ultimately drive the systems business.
• Cisco still wants into the server business and is increasingly desperate.
• Storage vendor EMC’s successful technology publishing model is sucking up a rising percentage of the highest margin sales.

Somehow, someday, these players and other secular trends will come together to bring an external crisis upon HP. That is when hard choices will be made.

Until then, enjoy the show.

Comments welcome, of course. I started watching HP in the early ’80s when I worked at DEC. I wish they’d get their storage act together.

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