'A Big Ungainly Place'

Chaudhuri believes the decision to merge was sound. "H-P was caught in the middle and so was Compaq," he recalls. "If you think about it, H-P at the time was pretty strong on the consumer side but didn't have an adequate presence on the corporate side. So when Carly Fiorina came in she focused on why some areas weren't growing."

Rather than engage in a series of acquisitions to strengthen the company in areas where it could more readily compete with IBM, Fiorina opted to acquire Compaq, which, while best known for its PCs, also had enterprise businesses that it had built up through earlier acquisitions of its own. "It's not that the acquisitions didn't go so well, but they were underutilized because the critical mass was not there," according to Chaudhuri. "So, for [H-P and Compaq] it made sense to merge because of these complementarities."

But management professor George Day, who was critical of the planned merger in 2001, continues to have reservations about the decision today. "It's still a big, ungainly place. What is their positioning in the market? I think there's some ambiguity about that. People aren't sure what the brand stands for and how all this stuff fits together."

There has been talk that the sum of H-P's parts may be worth more than the whole, and that the company should be broken up. But Day says such a decision should not be talked about glibly since it would be irreversible. He says Fiorina still has an opportunity to achieve her vision as did -- irony of ironies -- another CEO (Louis Gerstner) at another tech firm (IBM), which in the 1980s was deemed a lumbering dinosaur that had seen better days and whose stock was a fallen star.

"Wall Street may say, "Break the damn thing up,'" Day notes. "Analysts [often] have good insights, but they made the same proposal in 1992 when Gerstner came on board. It's a nice parallel. Gerstner was confronted, when he first arrived, with the idea of, 'Let's break up IBM into six or seven different businesses.' Well, it would have been the worst possible decision for IBM." Gerstner went on to transform and resurrect IBM and is now considered a legendary figure in corporate America.

Day says IBM's experience offers both lessons and a cautionary tale for Fiorina. "If Carly's going to make this thing work, she's going to have to do something like Gerstner did: pull things together and create solutions at the level of market segments. Each part of the organization that reaches the customer should have the autonomy to pull together whatever the customer wants, supported by product groups. That's not a bad strategy. H-P is really a product-centric company. If they can move to become a customer-focused company, with the products feeding into those customer groups, then they may have a chance. But the problem with that strategy is we have a player [IBM] that's already done that. HP is trying to be cost competitive with Dell and be the same kind of integrated-solutions provider that IBM has become. If that doesn't work -- if it's clear IBM has too big a lead -- then HP, which has this hugely profitable printer business, has to think about breaking up."

Graham-Hackett of S&P, who downgraded H-P shares to hold from accumulate in August, says the company has been successful in several areas. It has, for example, boosted sales of low-end servers and wrung costs out of its PC business. In addition, the company has added to its staff in its information technology consulting business. But H-P will remain vulnerable until it beefs up its capabilities in services even more. "The argument H-P makes is it can participate in areas IBM focuses on, as well as Dell … But if you're looking out several years, it's hard to ignore the fact that, with the modernization of the hardware industry, you have to have a differentiated strategy and a competitive advantage. H-P doesn't have the services that IBM has."

Graham-Hackett adds that H-P remains heavily dependent on imaging and printing systems. These operations accounted for 31% of corporate revenue and 74% of total operating profits in fiscal 2003, while services contributed 17% of total sales. "One reason you would want to buy H-P is because of the lucrative cartridge business," she says, "but that wasn't one of the reasons for the merger."

Another challenge: ensuring that demand for its PCs stays high. The company has a huge installed base of H-P and Compaq customers. Graham-Hacket says it will be "interesting to see, as this equipment gets too old, if customers stick with H-P or if they switch to another vendor."

H-P has a stellar brand name that should help it battle any competitor, says Wharton marketing professor Xavier Dreze. "They're known as a technical company at the forefront of technology, so that's something that can be seen as common among all their segments."

source:knowledge.wharton.upenn.edu