Meg Whitman has to roll up her sleeves and get to work. In fact, she may want to do the trouser legs as well, given the depth of the mess she’s stepped into. In Hewlett-Packard’s just-reported quarter, four of the company’s five-biggest segments – personal computers, services, printing and datacentre hardware – had operating earnings declining by a third or more. Mrs Whitman puts her problems into three categories: poor execution, under-investment in existing businesses, and adopting to a changing technological environment.
The execution problem is obvious: during the past year HP has lost significant market share in PCs, servers and printing, according to research houses Gartner and IDC. This issue should be the easiest one to start on – HP simply has to do the basic things right, which should be simpler now that the leadership transition is over.
HP spent an average of 2.5 per cent of revenues on research and development in the past three years, half of IBM’s level. Spending more on innovation (and on marketing) will help goose sales long-term, but only if HP can protect enough short-term profits to fund it.
The third issue is the trickiest. IBM famously transformed itself, but had big software and services businesses before it bet everything on those segments, and won. It is less clear what kernel HP should rebuild itself around. The company’s transformation is likely to look more like the one at Dell, where gross margins have ground upward by six percentage points over five years as it has slowly shifted from PC’s to corporate computing and services. Bargain hunters tempted by HP should note how tough it has been for Dell investors: while Dell’s shares have more than doubled since bottoming three years ago, they remain 60 per cent below their highs of late 2004.
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