Hewlett Packard: Leadership Crisis

Case prepared by Rajgopal Iyengar. In the recent years Hewlett Packard (HP) board of directors have been in the limelight for wrong reasons. Four CEO’s were hired and replaced in the last decade and three CEO’s changes were within a span of 1.5 years. The board has not been able to find the right leader to fit into the HP’s Cultures of doing things. The uncertainties in leadership has led to a huge loss for HP in terms of decreased market value, dissatisfied shareholders and blurred strategic vision. In this paper we study the HP CEO’s since 1999, their leadership style, their vision and things that went wrong leading to their ouster.

Hewlett Packard History (Till 1990’s)

The company was founded in a one-car garage in Palo Alto by William (Bill) Redington Hewlett and Dave Packard. HP is the world’s leading PC manufacturer. The company focussed on manufacturing of networking and data storage components in addition to designing, development and delivery of software. The key products manufactured were personal computers, enterprise servers, network and storage products, printers and imaging products. HP marketed its products directly and via online to its customers that included individual consumers, SME (Small Medium Enterprise) and large enterprises. HP also had a solid presence in the service and consulting business for the products it manufactured. HP’s culture and management practises know “HP Way” was based on teamwork, transparency, open door management policies and flexibility in work place. HP treated the employees as assets and strived to provide a better work life balance to the employees. The business goals were profit oriented rather than increasing revenues. In late 1980’s, HP started building low margin PC’s contrary to the companies principle. By 1990, HP was the one of the top technological companies in the world, a market leader in both printers and UNIX based servers, with a growing presence in PC business. HP had a strong leadership under the founder’s Bill Hewlett (till 1987) and Dave Packard (till 1994).

Hewlett Packard History (In 1990’s)

In the early 1990’s, HP focussed on three major businesses: The test and measurement instrument business, the UNIX server business & the HP Printers & Computer business. The test and measurement business & UNIX Server business provided high margins that were in line with the HP Way of working. However the printer business sold low cost printers at high volume and derived high profitability from the ink cartridges. HP’s sales grew by 20% between 1992 & 1996 with an increasing dependency on the low margin PC & Printer business. By 1997, HP was among the top 3 manufacturers of PC. HP faced severe competition from Dell and the Asia crisis in 1998 made HP loose margin on PC business. Lewiss Platt the then CEO of HP hired consultant to determine the problem HP was facing. The consultant suggested hiring an outside CEO with a marketing and sales background who can exude Charisma and increase the company’s profile. In May 1999, the board decided on Carly Fiorina.

Carly Fiorina (1999-2005)1

Carly Fiorina was born in Austin, Texas, on the 6th of September, 1954. Her father Joseph Tyree Sneed III was a very talented and multifaceted person. He was a law school professor, dean, and federal judge. In addition he was also an abstract and portrait artist.

Fiorina attended Channing School in London, and later attended Charles E. Jordan High School in Durham, North Carolina, for her senior year. She received a Bachelor of Arts in philosophy and medieval history from Stanford University in 1976. Fiorina received an MBA in marketing from University of Maryland, College Park in 1980 and later received a Master of Science in management from the MIT Sloan School of Management under the Sloan Fellows program in 1989.

AT&T and Lucent

In 1980 Fiorina joined AT&T as a management trainee and rose to the level of senior vice president for the company’s hardware and systems division. Fiorina led the spin-off of AT&T and Lucent; she also played a key role in planning and implementing of the 1996 initial public offering of stock and company launch strategy. In late 1996 she became the president of Lucent’s consumer products business. In 1997, she was appointed as chairman of Lucent’s consumer communications joint venture with Philips consumer communications.

Changes under Carly Fiorina Leadership

Carly Fiorina moved in quickly and tried to revitalize the HP environment.

She pruned the reporting units from 82 to 12 and amalgamated back-office functions. She modified the HP’s profit sharing program to a performance based incentive program to motivate individuals. She completely rejigged the sales and marketing function. She topped the “50 Most Powerful Women in Business” list from Fortune magazine for 5 consecutive years. However her leadership style was controversial and many HP employees disliked her. She was regarded as self-centred, demanding leader who completely destroyed the HP culture. Carly spearheaded the merger of HP & Compaq that was opposed by the analysts and board members. These differences lead to a public spat between the board members and the CEO. Eventually the deal was approved with a slight majority of 2.1% where 49% opposed the decision and 51% agreed. The Compaq acquisition did not go well as envisaged by Fiorina. Operating margins dropped from 9% in 2000 to 4% in 2005 (Refer Exhibit1 ). Share prices also continued to drop from $34 in 2000 to $21 in 2005(Refer Exhibit2). Following a string of disappointing financial results the board eventually asked Fiorina to resign on Feb 2005.

Mark Hurd (2005-2010)8

Mark Vincent Hurd was born in Flushing, New York USA on January 1, 1957. He graduated form Baylor University in the year 1979 with a BBA degree. Hurd was the CEO & President of NCR Corporation when he decided to move out and join HP. Mark Hurd increased the revenue of NCR by 7% and net income by five times from the previous year by taking a gamut of operational efficiency initiatives. At NCR Mark Hurd held a variety of positions in general management, operations, and sales and marketing. He also served as head of the company’s Teradata data-warehousing division for three years. Hurd was a member of the Technology CEO Council, a consortium of chairmen and chief executive officers of IT companies that develops and advocates public policy positions on technology and trade.

Changes Under Mark Hurd

This time the HP board decided to hire a person with a strong operational experience and hands on execution capabilities. Mark Hurd was well known in Silicon Valley for operational and cost cutting capabilities. Although Mark had never managed a very large company the size of HP, he had a very good success rate. Mark believed in Management by involvement.

He tried to get a deeper understanding of the business by dirtying his hands. Mark believed in the concept of “management by walking around.”. He would stroll through multiple levels of the company and try to get an understanding of the environment. He strongly believed a company can become great if the CEOs ,boards, and management all think alike. Mark Hurd said:

“I believe in the principle that Company comes first, Employee second and Self is last”

Mark Hurd was very aggressive in his approach. Within few months of joining he announced broad restructuring initiatives and laid off 14,500 employee. He reorganized the corporate sale group by reducing the group size and assigning the sales team to specific products. He believed a strong knowledge of the product was essential to sell the product.

He gave executives lot of flexibility in managing their budgets and held them accountable for their performance. During the 2008-2009 recessions he deducted 5% from the employee salary and 20% from the executive salary to meet the targets. These cost cutting initiatives helped in boosting HP’s share value and profitability. The operating margin increased from 4% in 2005 to 9% in 2010(Refer Exhibit3). Share value of HP rose by 129% under his tenure(Refer Exhibit4). The profit generated was used by Mark Hurd to acquire companies in the software and service space like EDS, Mercury Interactive, Peregrine Systems & Palm.

Things were not completely fine under the leadership of Mark Hurd. Although the company performed well, the employee morale was down. The cost cutting and tightened management completely killed the “HP Way” work culture.

The R&D spending plummeted from 4.5% in 2004 to 2.3% in 2010(Refer Exhibit5). The number of patent applications also plummeted during Mark Hurd’s tenure resulting in loss of strategic advantages for HP.

In 2010, HP was mired in controversy and scandal that led to the resignation of Mark Hurd. A company contractor by the name Jodie Fisher filed a sexual harassment case against Mark Hurd. Investigations revealed Mark Hurd had filed inappropriate expenses to skirt the relationship with the women that violated the HP Code Of Conduct. Mark Hurd was asked to resign by the board of directors. HP was again without a leader.

Leo Apotheker(2010-2011)4

Leo Apotheker was born in Aachen, Germany on Sep18 1953. Apotheker studies economics at the Hebrew University in Jerusalem. Apotheker worked in finance and operation function of several European companies before joining SAP in 1988. At SAP, his growth was phenomenal. In 1995, He became CEO and founder of SAP Belgium and SAP France. In 1997, he was made the president of SAP’s South West Europe region and by 1999, the president of SAP EMEA sales region.

In 2002 Apotheker joined the SAP AG executive board and became the president of global customer solutions and operations from. He was appointed deputy CEO of SAP in 2007; and promoted to co-CEO of the company in April 2008.

On February 7, 2010, the SAP supervisory board decided to terminate Apotheker’s executive board membership. This decision led Apotheker to resign from SAP.

HP Under Leo Apotheker

The search for the next CEO was riddled with pessimism from the outset. The dispute over Mark Hurds resignation made the task of search committee very difficult. The board was divided over the selection of internal versus external candidate. The resignation of Mark Hurd complemented with the sacking history of past CEO’s had created negative publicity about the company in the job market. Highly talented external candidates were not interested in the job. Leo Apotheker was appointed as the CEO of the company in Oct 2010. The appointment of Leo Apotheker received a gloomy response from the market because of multiple reasons. Firstly the credibility and track record of Leo was not great. An article in Wall Street Journal highlighted:

“Its very discomforting that Mr. Apoteker has never run the show alone. He abruptly resigned from SAP in less than a year “

Secondly Leo had no understanding of the HP hardware business. Hence he was a misfit for the HP job. The other disturbing fact was Leo was not interviewed by all the members of the board or even met them. Clearly the indifference of the board towards the selection was evident. Tenure of Leo Apotheker was short-lived and disappointing. Initially Leo worked on the strategy designed by Mark Hurd, but in a short time he started making drastic changes to the strategy. He terminated the initiative of HP’s venture into the Tablet market and suggested spin off of the PC division. He also suggested purchasing a business analytics company called “Autonomy” at 10 times the original price. These incoherent action and adhoc strategy was punished by the market. Stock prices plunged and HP lost 45% of its value(Refer Exhibit). Taking cue of the market dissatisfaction, the board of directors fired Leo Apotheker.

Meg Whitman (2011 – Till Date)5

Whitman was born on 4 August 1956 in Long Island, New York. She was the daughter of Margaret Cushing and Hendricks Hallett Whitman Jr. Whitman graduated from Cold Spring Harbor High School in 1974. Margaret took maths and science in Princeton university because she wanted to be a doctor. However, after a summer vacation stint in selling magazine advertisements she got inclined to marketing. She studies economics, and earned a B.A. with honors in 1977. In 1979, Whitman did her M.B.A. from Harvard Business School.

Whitman started her career at Procter and Gamble as a brand manager. She later worked as a consultant for Bain and Company and rose to the rank of Senior Vice President in the organization. She joined Walt Disney in 1989 and became the VP of strategic planning. She quit Walt Disney after 2 years and joined Stride Rite Corporation. In 1995 she was named the CEO of Florists Transworld Delivery.

Whitman joined eBay as CEO on March 1998. At the time the company had only 30 employees and revenues of $4 million. She grew the company to approximately 15,000 employees and $8 billion in annual revenue by 2008.Whitman resigned as CEO of eBay in November 2007, but remained on the board and served as an advisor to new CEO John Donahoe until late 2008

Whitman has received numerous awards and accolades for her work at eBay. On more than one occasion, she was named among the top five most powerful women by Fortune magazine.

HP Under Meg Whitman

The appointment of Meg Whitman was not taken well by the market. Analysts felt Meg Whitman was inexperienced in managing a complex hardware & software based business of HP that was already suffering from scandals, low morale, murky vision and unstable leadership. Meg Whitman’s strategy was to focus on strengthening the internal business of HP. She wanted to continue with some of the strategies initiated by Leo Apotheker except the spinoff business. Whitman decided to restructure the business by dropping 30000 jobs and using the money to fuel new product development and improvement of sales force6. She merged the PC & Printer business to improve the operational efficiency. Clearly Whitman has a strategy in place to get back HP on its feet. She is strengthening internal HP departments, spending money of new product development that are inline with HP Way of working. She has also managed to set a low expectation in the market for the setting low

Future

The leaders appointed by HP board were not able to align with the HP Culture and make the difference. It needs to be seen whether Meg Whitman will be able to recuperate HP and restore the past glory.