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With Carly Gone, What Lies Ahead for HP and the Printer Market?

16 Mar, 2005 By: InfoTrends/CAP Ventures imageSource

With Carly Gone, What Lies Ahead for HP and the Printer Market?

When Hewlett-Packard CEO and
Chairwoman Carly Fiorina resigned on February 8, it was HP’s second major
organizational move in a little over a month. The first was the consolidation of
the company’s Imaging & Printing Group (IPG) and Personal Systems Group (PSG)
into a single business unit.

Patricia Dunn, the new
chairwoman of the board of directors, and Robert Wayman, interim CEO, wouldn’t
comment on the specifics of the disagreements between the board of directors and
Fiorina. However, Fiorina’s performance and decisions have been highly
scrutinized for several years. Driven largely by the contentions that the merger
with Compaq would never yield the results Fiorina promised, and disappointing
stock performance, it seems clear that these two issues among unforeseen others
were the drivers leading to this change in leadership.

“Carly was brought in to
catalyze a transformation of HP. She did that in a remarkable fashion, and she
executed the merger with her management team in a superior fashion,” Dunn said.
“Looking forward, we think the job is reliant on hands-on execution, and we
thought a new set of capabilities was called for.”

Wayman, who will continue his
role as HP’s CFO, emphasized that during his interim capacity he would continue
to execute against the established strategy, with a focus on improving
performance of existing business groups.

Combined, Fiorina’s resignation
and the creation of the IPSG unit could have a significant impact on the printer
market. Both developments are central to the calls by industry analysts about
breaking up the $80 billion-plus company into multiple businesses, a strategy
which the current HP board of directors has considered and rejected.

HP’s Strategy—Under
Fiorina’s six-year reign in which she became one of the highest profile CEOs in
the world, HP transformed its strategy from leveraging advanced research and
development (R&D) to create “killer products” to a “market coverage model,”
focusing on having a major presence across environments and application areas.

As a result, HP’s product
portfolio is now one of the broadest in the industry, including consumer and
personal computers, business and technical workstations running Windows and UNIX
variations, consumer and business imaging and printing devices, high-end digital
printing systems, digital cameras, storage and servers, and IT software and
services. HP serves a range of customers from retail consumers to SMBs to large
enterprises, competing with companies such as Canon, Dell, EMC, Epson, IBM,
Kodak, Lexmark, Ricoh, and Xerox in different segments of its business.

At the business group level, the
Imaging & Printing Group has been and continues to be the shining star in regard
to HP’s revenue and operating earnings. IPG contributes $24.2 billion in
revenue, which is 30 percent of HP’s total revenue, and $3.8 billion in
operating earnings a year. IPG revenue grew 7 percent in 2004, with the majority
of this growth coming from its printer supplies business.

The Personal Systems Group,
which is the personal computers division, was the company’s biggest revenue
producer with $24.6 billion—a revenue growth of 16 percent—but it only produced
$210 million in operating earnings, typical of this low margin business. While
operating earnings were relatively low, it was a significant increase from $22
million in prior years.

The rationale for the merging of
IPG and PSG was to build on existing collaboration/synergy in major initiatives,
such as digital entertainment and go-to-market programs in consumer and SMB
segments. In discussing this management change, Vyomesh Joshi, who now heads the
newly combined division, emphasized that HP wanted to demonstrate its commitment
to the personal computing space, and believed that it could provide more value
to all customer segments by combining these units.

Is HP Worth More in Pieces?—Some
financial analysts believe that HP would be worth much more as multiple,
separate businesses than as a single large entity with a wide portfolio of
offerings. Wall Street likes the idea of spinning off parts of HP, but while
that might be an attractive option for short-term financial gain to
stockholders, it’s not the strategy that HP is embracing. In December 2004,
Fiorina stated that the board considered the break-up option on three separate
occasions, but unanimously decided that it would be best to keep HP as a whole.

Some have argued that HP’s
competitive presence in many markets might actually hinder its ability to go
after higher margin opportunities such as printers and professional services
through strategic partnerships. For instance, the HP Services unit could
represent a major opportunity for placement of laser jet printers and Indigo
production presses, but a major strategic alliance with IBM is unlikely as long
as HP directly competes with IBM for professional services and software revenue.

Similarly, possible alliances
with Dell could result in significant volume of printing and related systems,
but the integration of Compaq into HP has made Dell a “mortal enemy” in the
brutal low margin Windows PC business.

InfoTrends/CAP Ventures believes
that one unified HP is better positioned to capture growth opportunities in
software and professional services to meet the needs of Fortune 500 companies
and compete with the likes of IBM Global Services. HP needs to leverage its
resources across business groups, offering hardware (printer, storage, server,
etc), software, consulting services, and outsourcing/managed services. HP’s
Total Print Management initiative is one example of such cross groups offerings.
HP has met with some success in this initiative and in our view has established
credible “lighthouse” accounts.

There are additional growth
opportunities in further developing cross group initiatives within HP’s
portfolio. Under Fiorina, HP had progressed in gathering the key ingredients to
deliver a strong enterprise play. As HP tries to differentiate itself as a
business solutions provider, there is still more work to be done in terms of
group integration, portfolio development, strategic partnerships, or even future
acquisitions. A break up would mean a step back. HP’s imaging and printing
market share in the consumer and workgroup is seriously under attack from
players such as Dell, Lexmark, and Xerox. The move toward higher value added,
diversified solutions is a necessity for HP.

What’s the Impact on IPG (now
Whoever comes in as the CEO will likely take a fresh, strategic look
at all divisions. A change in management could be the starting point for a
review of HP’s commitment to various markets. It could also result in a closer
examination of business units and current distribution strategies.

HP’s IPG currently uses several
distribution models:

  • Open Distribution:
    Includes two-tier distribution, corporate resellers and retail organizations
    typically targeting the SOHO or PC/Segment 1 products for personal and small
  • Limited Distribution:
    Includes all direct channels as well as the MFP VIP, IPG Elite and referral
    programs targeting Segment 2 & 3 MFPs focusing on mid-sized departments.
  • Closed Distribution:
    Includes limited direct channels, managed print services, PrintAdvantage for
    large corporate enterprises and large public sectors only, and MFP VIP Select
    for small and medium-sized accounts.

The majority of the IPG’s copier
and MFP equipment products are now sold through the retail channel, with the
exception of HP Indigo products, which are sold direct. IPG has also expanded
its distribution channel to include dealers such as IKON, Print Inc. and BTA
dealers. This distribution strategy will evolve as HP continues to combat the
Dell direct model.

The corporate line on merging
the two groups from HP is that it will be better for customers to have a more
cohesive look and feel to the product line. With consistency of product look and
feel, the company wants to make it easier for customers to set up and use all HP
products. With the merged group, HP expects to add more value for customers with
more bundled items. The expectation is that this will be a boon to sales for all
of HP products, including printers and supplies.

Analysts’ opinions are quite
divided on this move. Some view it as a positive move with many potential
synergies, while others see it as one last move to keep the low margin PC
business as part of HP’s portfolio and/or as a step closer to an HP break up.

In general, the proposed
synergies within IPSG seem promising. However, integration needs to happen
before those synergies can be realized. Prior to the merge, IPG by itself was
often viewed as being divided among its many groups such as the supplies, inkjet
and laser printer groups. The merge will certainly provide additional
complexities as IPG tries to align its structure, R&D effort and go-to-market
approach with PSG.

HP Moving Forward—HP
acknowledged Fiorina’s contribution in turning the company into a more
competitive, growing corporation. However, the uneven performance across the
various business groups remains a problem. IPG continues to carry the profit
load for the rest of the company.

Despite continued revenue growth
and profits over the last few years, IPG’s dominance in the printer market is
challenged by the likes of Dell, Lexmark and other low cost producers. PSG
remains a growth area for HP, but continues to have very low margins on the
front end of that business (i.e. printer hardware sales), as well as significant
capital costs in R&D and manufacturing. These costs are becoming increasingly
difficult to justify as major Asian producers and developers turn out generic
Wintel hardware that equals or exceeds its performance at a lower cost and price

The expected financial results
from the Compaq acquisition have not been realized after nearly three years of
trying to make it work, despite what appears to have been a well executed merger
from a logistical standpoint. The events of 9/11 and the downturn in the

economy clearly played a role in
this matter. Fiorina also took a politically polarizing position, attacking the
leading opponent to the merger, Walter Hewlett, in a highly publicized battle
which essentially pitted two Silicon Valley legends against each other in a
winner take all contest of personalities that left many inside and outside HP

History will judge Fiorina.
Picking a fair and objective point of view is difficult in the wake of her
resignation. The bottom line is that while many opposed the merger, it may be
too early to call it a failure. Walter Hewlett may have been right about his
intentions for HP to grow through innovation, but the company is clearly in a
stronger position to compete in broader markets on a global basis with the
combined resources.

The clash between Fiorina’s
decisive, take-no-prisoners style and HP’s traditional collaborative, R&D driven
culture—famously dubbed the “HP Way”—have been popularly judged to have
substantially changed HP.

Fiorina’s penchant for cost
reduction, layoffs, outsourcing, off shoring, and colorful comments such as, “No
job is America's God-given right anymore,” were course corrections that may have
been needed at HP.

The financial juggling act of
extracting adequate value from innovation and R&D, while achieving
cost-effective operations, is the challenge for the new HP leader. Under Fiorina,
HP has not adequately articulated specific strategies for leveraging innovation
to open new or untapped markets, nor has it provided clear market
differentiation in all marketplaces.

Looking ahead, the search for a
new CEO represents the potential for positive change. HP still has the resources
and engineering talent to develop innovative and life changing technologies. It
has one of the strongest brands in the market and is truly a global player.

Success may require HP to take
risks that challenge early adoption models and abandon the tendency of large
technology corporations to “play” excessively to Wall Street’s relentless
earnings growth expectations within maturing business areas. The company must
reaffirm its traditional commitment to research and development, which will lead
to new, innovative technology.

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