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With new CEO, H-P could face a major shift

The next chief executive of Hewlett-Packard Co. will need to decide whether to stick with Carly Fiorina’s two-pronged strategy of trying to beat the company’s rivals in what they do best — IBM in premium computers and services, Dell in business and consumer systems.
/ Source: The Associated Press

he next chief executive of Hewlett-Packard Co. will need to decide whether to stick with Carly Fiorina’s two-pronged strategy of trying to beat the company’s rivals in what they do best — IBM in premium computers and services, Dell in business and consumer systems.

Or the Silicon Valley icon could effectively concede defeat in its current multi-front war and break itself apart into separate businesses that can focus their employees, management and research resources on specific markets.

After showing Fiorina the door this week, HP’s board made its near-term intent clear: It wants to keep the strategy but change how it is executed. “The board is firmly committed to the business strategy that is in place,” said Patricia Dunn, HP’s new non-executive chairman.

Chief Financial Officer Robert Wayman is serving as interim CEO until a successor is named.

Though HP is giving no hints as to a permanent successor, observers have mentioned Michael Capellas, the current MCI Inc. CEO and former Compaq chief who helped arrange 2002’s HP-Compaq merger, and Ed Zander, the former Sun Microsystems Inc. president who now heads Motorola Inc.

It’s possible, but less likely, the new CEO will be pulled from HP’s ranks. Possibilities include Ann Livermore, who heads HP’s enterprise business, and Vyomesh Joshi, the printer division chief who was recently named to head the combined imaging and PC businesses.

Regardless of who is named, the new leader must face hard facts about HP’s growth and overall performance since Fiorina embarked on reinventing HP in 1999, particularly fallout from the $19 billion Compaq merger and its unimpressive stock price over the last several years.

HP, No. 11 in the Fortune 500, now finds itself in the position of trying to sell low-profit, commodity products while at the same time trying to be a respected player in the high-end businesses.

It’s not doing spectacularly well in either as its bottom line has been propped up by its printer and ink business.

“What it boils down to is HP is trying to do a straddle, and ends up as the filling in the sandwich of two competitors,” Frank Gillett, a principal analyst at Forrester Research, said Thursday.

The HP board considered breaking up the company on three occasions but rejected the idea each time, Fiorina said at an analyst meeting two months before her ouster.

Most often mentioned as a spin-off candidate is HP’s imaging division, which leads the printer market and brought in 73 percent of HP’s operating profits and 30 percent of sales in the fiscal year ended Oct. 31.

But such a move would be difficult given last month’s decision to combine the unit with HP’s inconsistent personal computer division, which attempts to compete against Dell Inc., the industry leader well known for its efficient, high-volume business.

In fact, HP’s acquisition of Compaq was intended to give it the volume and efficiency to beat Dell. At the time, critics warned that the company was diving deeper into a losing business. Sun Microsystems CEO Scott McNealy likened it to a collision of garbage trucks.

Since the contentious deal closed, HP and Dell have swapped position as the No. 1 PC maker in terms of global shipments. But Dell has remained consistently profitable while the HP unit has not.

Another reason not to split: There may be new opportunities for innovation in PCs, especially those that are designed to control living room entertainment centers, act as home servers and do other high-end work around the house. HP has already seen success with so-called Media Center PCs and is planning to launch additional products.

“The recent ’sale’ of its PC unit to the company’s imaging division seems to us to signify a belief that PCs are a vital opportunity for HP to enter the living room with advanced computer technology,” Mark Stahlman, a Caris & Co. analyst, wrote in a research report.

But there are other signs that the personal computer business may not have much potential as a growth engine, as evidenced by International Business Machines’ recent $1.75 billion deal to sell its PC division to China’s Lenovo Group Ltd.

IBM clearly sees its future in higher-end technology. And while it’s leaving PCs, it isn’t abandoning the market entirely. In fact, IBM is one of the three developers of a premium chip that power the next-generation Sony PlayStation 3 and another that will be used in Microsoft Corp.’s Xbox. Both will compete head-on with PCs for the living room.

Big Blue’s big moneymaker, however, will continue to be in selling both hardware, software and services to companies, governments and other organizations. It’s here that HP must persuade customers that it’s both a premium provider, even though it also sells commodity products.

“The basic challenge is how do you convince someone that one brand and one organization can do what appear to be diametrically opposite things,” Gillett said.

HP could differentiate itself by taking a middle-ground — separate from IBM’s full-service approach and Dell’s do-it-yourself mantra, he added.

Ultimately, business computing could turn out to be a growth engine — and that’s ultimately what HP needs most.

Given Wednesday’s statements by board members, it appears unlikely that any dramatic strategy shifts such as a corporate breakup are likely.

“It’s plausible that they will give themselves one more shot at the current form of HP,” Gillett said. “If they can’t make it work with a new CEO within roughly 12 to 18 months, then it really is time to reset on that idea.”