Can HP's New Leadership Create a Vision for the Future?Published: October 27, 2010 in Knowledge@Wharton
New Hewlett-Packard CEO Leo Apotheker and non-executive board chairman Ray Lane take over the reins at the technology giant November 1, and the to-do list is daunting. Apotheker, the former CEO of business software company SAP, will have to convince doubters he is the right leader for HP, do battle with rivals such as IBM, Oracle and Apple, and set the company's long-term strategy. In addition, Apotheker must maintain the efficiency the company enjoyed under former CEO Mark Hurd, while gaining the buy-in from employees that his embattled predecessor reportedly lacked.
"This is not a good situation for Apotheker," says Lawrence Hrebiniak, a management professor at Wharton. "He has to address really strategic questions, and there isn't a lot of low hanging fruit."
Indeed, HP has had a whirlwind few months. Hurd resigned August 6 over a sexual harassment probe and allegations about inaccurate expense reports. HP rival Oracle, which now competes with its former partner after the acquisition of Sun Microsystems, hired Hurd as co-president on September 6. In a letter to The New York Times prior to Hurd's appointment, Oracle CEO Larry Ellison described the HP board's move to force out Hurd as the "worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago." When Ellison hired Hurd as co-president of Oracle, HP sued over concerns that its former CEO would divulge trade secrets. The two parties later put aside their differences and reiterated that they are strong partners in corporate technology.
However, the Oracle-HP truce didn't last long. When HP hired Apotheker, Ellison told The Wall Street Journal he was "speechless" that his former rival at SAP got the job. Analysts had beein expecting the HP board to pick an insider like Todd Bradley, who runs the company's PC business, or Vyomesh (VJ) Joshi, who heads the printer unit, as a way of maintaining continuity. Instead, HP hired Apotheker in a move that could signal the company's intent to become more serious about software, a product line that currently accounts for 3% of its revenue. In addition, HP hired Lane, an Ellison rival and former Oracle president, to lead the board.
Meanwhile, Oracle plans to call Apotheker to the witness stand in a lawsuit against SAP. Apotheker was at the helm at SAP when the software company had a business unit called TomorrowNow, which provided maintenance and support to Oracle's software customers. Oracle later sued, arguing that TomorrowNow stole its intellectual property. SAP shut down TomorrowNow and acknowledged guilt. Oracle is seeking $1 billion in damages, while SAP hopes to pay significantly less.
Apotheker's history at SAP and the TomorrowNow connection led to a critical column in The New York Times questioning his ethics. In a letter to the Times leaked to The Wall Street Journal blog AllThingsD, Lane responded that Apotheker's ethics are fine and then proceeded to call Hurd a liar. Apotheker may be called to testify during the TomorrowNow trial, which is expected to start next month. The verbal duel with Oracle is "ugly and only adds to Apotheker's challenges," notes Hrebiniak.
Amid this backdrop is a fierce competition in the business technology market. Although companies like HP, Oracle and IBM used to have separate and distinctive roles in the market -- in hardware, software and services, respectively -- technology giants are increasingly encroaching on new turf to offer fully integrated systems, trying to cash in on the bet that "hardware and software will converge," says Dan Levinthal, a management professor at Wharton.
HP could find itself in a precarious position relative to the competition if Apotheker doesn't succeed, Levinthal states. "I worry about [HP's] lack of a distinct position." According to market research and analysis firm IDC, HP is the largest PC and printer maker in the world, with 41% of the global printer market and 17.6% of the PC market (Acer is second at 13%). But the company may not be able to compete with IBM on technology services, go toe-to-toe with Oracle on software and face off with Apple on its consumer business.
Navigating the Culture
On an October 1 conference call with analysts, Apotheker described the decision to accept the position as "an easy one," noting that "I don't think there is another company in tech that can match HP's opportunity in the marketplace or competitive advantages." But Apotheker is facing "a touchy situation" for a multitude of reasons, notes Hrebiniak.
During his introductory conference call, Apotheker made it clear that keeping HP's senior management team -- the people he competed against to be CEO -- was a top priority. "The first thing I did when I joined this company was to reach out to each member of the senior executive team; we have talked," said Apotheker. "These are great professionals. They have HP in their blood and I am sure that as a team we will be working together for many years and do a great job."
According to Hrebiniak, Apotheker is taking the right approach, but it remains to be seen if HP's top managers will stay. "The management team that was in the running for the CEO job has expectations," says Hrebiniak. "Apotheker has to get the team on board and working together." At this delicate juncture, his main goal should be not to make things worse, Hrebiniak adds. "His reputation is for being a nuts and bolts guy who can slam his fist. He could be more disruptive [than stabilizing]."
Wharton management professor Michael Useem agrees that Apotheker has to walk a tightrope. HP's last three CEOs -- Carly Fiorina, Hurd and now Apotheker -- have all been outsiders. That approach to hiring can sap morale, Useem says, and "even a CEO under good circumstances has a challenge making sure that top talent stays."
According to David Hsu, a management professor at Wharton, hiring Apotheker was a "gutsy move that signals a different longer-term direction for the company." However, the price may be that "all of the executives who were in line to be CEO may be snapped up on the labor market." That could leave Apotheker with the task of recruiting a new team that would need to be brought up to speed quickly.
Complicating matters is Apotheker's history at SAP. He had spent 20 years at SAP and was promoted from co-CEO to CEO in May 2009. In February, SAP's board of directors decided not to renew Apotheker's contract. He was blamed for poor customer and employee morale, as well as stalled revenue growth. Apotheker also pushed a price increase on customers for software maintenance and then had to backtrack. After Apotheker's departure was announced, SAP chairman Hasso Plattner noted that they were looking to become "a happy company again."
Apotheker has acknowledged his troubles at SAP. In a memo to employees released in February, Apotheker wrote that "the pace of change was rapid, probably too rapid for some," and admitted that his communication with employees was "not always optimal."
Can Apotheker revive HP's culture? Levinthal says he has a tricky task ahead. "HP has a distinct culture, but it keeps being beaten down. Some cultural elements still matter. Apotheker has to find them."
Another cultural issue worth watching as Apotheker and Lane take over is their relationship. On the surface, both executives are bonded by a common enemy: Oracle. Beyond that bond, it's unclear how the Apotheker-Lane partnership will play out.
Useem says Lane's role is to fix the governance structure at HP. The board has gone through three CEOs in a little more than a decade and has had more than its share of controversy. The HP board fought a proxy fight over the merger with Compaq in 2001. In 2006, the HP board came under fire for investigating certain members and reporters over leaks of sensitive information. More recently, the HP board was criticized after the company lost $8.7 billion in market capitalization following the resignation of Hurd.
Lane's role, then, is to shake up HP's board, while Apotheker's role is to run the company efficiently. If those roles don't conflict, the partnership will work. Useem, however, notes that split chairman-CEO roles are not very common. "There are a modest number of companies in the Standard & Poor 500 that have the CEO and chairman roles separated," Useem says. "The relationships can be challenged, but it may be a good model for HP at the moment. The two of them have to build a relationship and become good at knowing where the line is between governing and leading the company."
Managing a Massive Portfolio
Apotheker inherits a giant company that encompasses printers, PCs, corporate technology such as servers, storage and networking, and software and services. And HP has been rapidly adding to its slate with the acquisitions of networking company 3Com, smartphone maker Palm and 3Par, a storage vendor.
The challenge for Apotheker is to study HP's portfolio, find connections between product lines and be innovative, according to Hsu. On the October 1 conference call, Apotheker said that HP plans to begin by beefing up its software and services sectors. "We all believe that HP should be more valuable than the sum of its parts," Apotheker noted. "Software is sort of the glue to make that happen. Software is how we differentiate on our industry-standard platform. Software is how we can make sure that the various parts of our technology actually fit well together. It's not only software, though. Also higher value-added services are increasingly an important element."
But software accounts for only about 3% of HP's revenue. Hsu suggests that HP needs to make a bevy of software acquisitions to become more of a player. The problem is that Oracle has already acquired many software companies that would be likely merger targets, including PeopleSoft, Siebel Systems, BEA Systems and others. IBM has also bought into multiple software companies such as business intelligence firm Cognos.
Wharton management professor Saikat Chaudhuri was surprised by HP's plans to focus on software -- as well as the naming of Apotheker as CEO. "Why the focus on software? How will that differentiate HP?" he asks. "Even if HP wants to go after software in the enterprise, Apotheker didn't have a great stint at SAP."
Once Apotheker clears the initial hurdles, experts note, the real work begins to shape an overarching identity for HP. "HP needs leadership that says: 'IBM does this. Apple does that. Here's what HP is about,'" Chaudhuri notes. "HP is a bit of a hodgepodge. Hurd cleaned house and fixed operations. Now they need a vision."
Part of the company's long-term strategy may include focusing more on corporate technology. For example, IBM re-imagined itself by unloading its PC and printer businesses and is now concentrating on software, services and corporate hardware. "HP will probably move more toward the IBM direction," according to Wharton marketing professor Peter Fader. "Every product HP offers can become a commodity so focusing on software and value-added services is actually a smart idea."
HP's big marketing challenge is that it is widely perceived as a hardware company. "IBM stayed on message for decades. When it switched to focus on software and services, people took it seriously," Fader notes. "HP could announce a new focus tomorrow, but it's hard to portray a message that the company is a solutions provider and a gadget company. There's tension there. HP may have to pick one because Apotheker knows nothing about consumers or gadgets."
Experts at Wharton were mixed on whether HP should divest any businesses, notably the PC unit. "The consumer business isn't the most critical component for HP, but there's significant cash flow," Chaudhuri points out. "Until there's a strategy defining where HP is headed, its best bet is to hold onto all of its businesses."
This is not the first time that experts have debated the long-term viability of HP's personal computer business; similar talk came up when Hurd took the helm in 2005. Hsu says HP can't ignore its strong brand in the consumer market and the marketing value of being visible in stores like Wal-Mart, Best Buy and other retailers. Hrebiniak agrees. "Apotheker has to look at the entire portfolio and analyze it. It's tempting to say that HP should get away from the consumer side, but it is a cash cow that's funding a lot of other things. HP is complex, but it can work with the right structure."
Indeed, Hrebiniak adds that HP's decentralized organization can be an effective business model. "The divisions of HP have lots of autonomy and executives [are allowed to] do their thing. That structure can allow HP to focus on different markets." Hrebiniak points out that General Electric and Johnson & Johnson have similar structures. According to Levinthal, because technologies such as hardware and software are merging, HP's best move would be to keep all of its businesses as products become more integrated. "HP has the capacity to handle that business diversity," he says.
One thing is certain: Apotheker will need time to craft a big vision for HP. Useem suggests that IBM's experience with Lou Gerstner, who transformed the company in the 1990s, may be instructive. "When Gerstner came to run IBM, it was suffering, but figuring out what the problem was took months. When an outsider comes in, it takes a while to understand the real value driver for the company," Useem notes. "Once Apotheker catches his breath, he needs to sit down with his top team and Lane and take a big step back. What does HP want to be over the next five years? It's going to take a lot of investment bankers, intuition and consultants."