Saving a ‘Fundamentally Flawed’ Business

John Chambers believes {complink 2376|Hewlett-Packard Co.} is on the ropes and is unlikely to recover strongly enough to regain its old glory. The CEO and chairman of {complink 1131|Cisco Systems Inc.} believes Meg Whitman, his counterpart at HP, may not succeed in turning around the company. He may be right; at best, Whitman will succeed in whittling down HP's cost structure enough to improve its margins, but she will also eventually preside over a much smaller giant.

Chambers advanced two reasons for his conclusion. First, “there's not been a company ever turned around by the fifth CEO on the job,” he told Reuters in an interview, referring to the succession of senior executives who have been appointed to lead HP over the course of the last seven years. I checked, and HP has indeed had five CEOs in substantive or acting capacities since Carleton Fiorina left in 2005.

Chambers's second reason for his pessimism about HP's future resonated with me. The Cisco boss said rivals, including his company, which competes against HP in the networking equipment market, are hacking away at HP's market share while the Palo Alto, Calif.-based company is busy with cost-cutting and reorganization actions. He said Whitman has a “tough hand to play, but… I like competing against that hand, and we are going to try and accelerate that while they are struggling.”

HP's “weak hand” isn't merely due to the revolving CEO door the company has had in the last decade. Like many other tech enterprises across the global economy, HP is a flawed company whose competitiveness has been compromised due to its failure to recognize and respond to shifts in its markets. The company, says short seller and hedge fund manager Jim Chanos, “missed the fundamental shift from personal computers” to tablets and phones, according to an article in the Insider Monkey. Turning HP around won't be achieved by simply cutting costs, he says.

I agree. But now that we understand a “fundamentally flawed” company cannot recover simply by shaving costs, what are the options open to the management of such an enterprise? This is an important question for the high-tech industry especially because of the seismic changes taking place in many segments of the market. The tech sector is awash in cash and on the surface seems to be thriving — but that perception is deceptive. Below the surface, many technology companies are struggling to maintain market share, improve margins, and in some cases even justify their presence in certain sectors.

In the last decade alone, many chip suppliers, distributors, OEMs, and contract manufacturers have disappeared, gobbled up by rivals for a fraction of their valuation at the beginning of the century. The turmoil continues today; companies like Research in Motion, Flextronics, Nokia, HP, and Dell are thrashing about in a never-ending search for market validation and growth. All have evaluated, or are in the process of evaluating, their presence in markets that propelled them to the top of their sectors but which have since gone soft.

Even {complink 2657|Intel Corp.}, the perennial market leader in the semiconductor industry, is searching for its soul. It has spent billions on acquisitions it hoped would help transform its operations and reduce its dependence on the PC microprocessor business. It has faced stiff headwind, although unlike others caught in the same position, Intel has pressed ahead with both acquisitions and increased investments in R&D as well as next-generation manufacturing technology in the conviction these moves will help it beat the odds.

Others that were not as blessed with huge cash resources haven't been as fortunate. {complink 103|Advanced Micro Devices Inc. (AMD)}, for example, finally threw in the towel and sold its semiconductor manufacturing division after decades of toe-to-toe slugfests with Intel. Its sales and capitalization reflect the disappointing performance. AMD's annual sales are forecast to sink to $5.8 billion this year, down from $6.6 billion in 2011, while its market value of $2.4 billion makes one wonder why it ever was seen as a serious rival to Intel (market cap $113.3 billion).

What many of these companies share is failure to anticipate change or spearhead innovation in their markets. This is the definition of a “fundamentally flawed” company. Turning companies so seriously flawed around will be extremely difficult, and businesses that can be safely placed in this category will not even survive, no matter how savagely executives cut costs.

6 comments on “Saving a ‘Fundamentally Flawed’ Business

  1. tibbyracer
    October 1, 2012

    Not totally convinced – HP is clearly heading into the mobile/tablet strategy and their product offerings are very impressive. To say that they're a flawed business would mean that Apple, Google and Samsung are flawed as well since they're in that space. PCs are not a dying piece of technology as tablets are not at that level yet. It's unfair to bash HP if you don't consider their entire strategy..

  2. Barbara Jorgensen
    October 1, 2012

    Chambers is taking advantage of HP's weakness and who can really blame him? I agree, cost-cutting isn't enough, and it's difficult to execute on growth strategies while keeping the company afloat. HP should try to make more headway in its enterprise business and specialize in niche PC products such as ultrabooks. I think the tablet and smartphone markets are already saturated and being an also-ran may not be worth the expense.

  3. bolaji ojo
    October 1, 2012

    tibbyracer, I weighed the company's entire strategy before agreeing the problems facing the company won't be easily resolved. You focussed in your response on HP's planned debut of tablet PCs. The company is also believed to be planning to introduce smartphones. This is a “me-too” policy that won't take the company very far in a crowded market.

    That's not the biggest problem facing HP, though. The continued rotation in CEO appointment has weakened the company and negatively impacted market image of the company. Continuity of programs has been affected and the management rank has also been impacted. Further, there are many legacy products that are being reviewing for ongoing viability. Not surprisingly, this includes the company's printer ink business, one of its higher margin divisions. HP also wants to transform itself into a consulting business, similar to IBM. That's another work in progress. I could go on.

    HP is a big company with a lot of value in its service and product offerings. Turning its numerous units into growing and highly profitable operations is not impossible but neither will it be easy. Meg Whitman may do it and I wish her well. Accepting that some of the businesses are “flawed” is a good starting point.

  4. bolaji ojo
    October 1, 2012

    Barbara, One thing many of us forget when admiring Apple's turnaround and success is that the company didn'wasn't very big when Steve Jobs took over and he could quickly kill off unprofitable products without necessarily hurting sales or margins. HP is in a different position. It is a big company with $127 billion in annual sales. In 2001 when then CEO Steve Jobs started trying to turn Apple around, the company's annual sales were about $5.4 billion. That's a small ship to turn around compared with the HP armada.

  5. prabhakar_deosthali
    October 2, 2012

    As far as I know, HP was also quite strong in the middle level server market. Is this division still making money? Could they take advantage of their one time strong position in the server market to enter in a big way in the servers required in the cloud environment>, while trying to consolidate their position in the emerging segments – tablets?

  6. Barbara Jorgensen
    October 2, 2012

    Bolaji: True enough: we know what happened when they tried to turn the Titanic. I wonder if HP could spin some if its more valuable businesses off–as Motorola did–to keep the brand alive?

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