Advertisement
Business

Hewlett-Packard, the slow-change artist

Austrian economist Joseph Schumpeter is usually credited with using the term “creative destruction” to describe how capitalism evolves by supplanting the old with the new. But it’s a fair bet that Schumpeter never could have imagined how creatively Hewlett-Packard Co. has managed its own destruction.

Arguably the founding engineering firm of Silicon Valley when it was created by Bill Hewlett and David Packard in 1939, HP has been on a more than decade-long stumble dating back to before the appointment of the glamorous Carly Fiorina as chief executive in 1999.

Fiorina was ousted in 2005 and replaced by Mark Hurd, who was the un-Carly, charisma-wise. Hurd’s command of financial spreadsheets was a byword but his answer to the company’s financial stress and strain was to cut the budget for its fabled research and development program.

Meanwhile there were boardroom intrigues and scandals galore. When Hurd was ousted last year, purportedly as the result of an extremely baroque and still not well-explained scandal involving maybe sex and maybe not, he was replaced by the third outsider in a row, Leo Apotheker, who had been looking for a job months after having been ousted from a top-level post at the German software company SAP.

Advertisement

Since Apotheker’s appointment last fall, HP has given the impression of a company that doesn’t know if it’s coming or going, to quote Billie Holiday. The shares are down about 17% since the beginning of this year; they lost about a fifth of their value in the week after HP announced it would dump its PC business and double down on business services through the $10.3-billion purchase of the British software company Autonomy.

Plainly, HP is grappling with some unique corporate issues. But there’s another phenomenon at work, related to Schumpeter’s insight. And that’s the difficulty all businesses face in managing technological and social change.

Even the most dynamic, best-managed juggernauts can get blindsided by what the future conceals just around the next corner. Google is just now catching up with social networking, and Microsoft had to remake its corporate strategy around the Web in the mid-1990s.

As Marc Levinson documents in a new book, the Great Atlantic & Pacific Tea Co., or A&P, became the biggest retailer in the world in the 1920s and maintained its domination for decades, but didn’t see Wal-Mart coming. It’s since been reduced to a regional supermarket chain in bankruptcy. Whole industries can be threatened by technology -- in our day, think of broadcasting and, ahem, newspapers and magazines.

Advertisement

In fact, companies that can survive upheavals of the type faced by HP are the exception, not the rule. Of the original 12 components of the Dow Jones industrial average as established in 1896, only one is still in the index: General Electric. Indeed, of the 30 companies that composed the Dow in January 1987, when the index crossed the 2,000 threshold for the first time, nine don’t even exist in their 1987 guise anymore.

The roster of companies that have survived multiple technological upheavals, transforming themselves over and over again, is even shorter. IBM is one, and GE another (though GE has been looking a bit green around the gills lately).

Apple had a near-death experience before Steve Jobs came back in 1996 to the company he had co-founded, after a decade in exile. Jobs saved Apple in part by steering it away from PCs and toward a future of profits from mobile devices and content. What is the iPad, after all, if not a shiny, touch-screened invoice for digitally delivered music, movies, words, and applications?

But Jobs’ crystal ball has not been flawless. In 1996 he delivered a public harangue about how Xerox botched the opportunity to dominate the business of personal computers, which had been invented at its Palo Alto Research Center, known as PARC.

Xerox “could have been the Microsoft of the ‘90s,” he said. Yet, even though Microsoft appeared to be heading for world domination at the time, it’s questionable whether even Microsoft was the Microsoft of the ‘90s; it’s certainly not the Microsoft of the 21st century. By the same token, Google today looks unbeatable, but so did Yahoo, once.

One would have expected HP, with the tradition of first-rate engineering bequeathed by its founders, to be more nimble than most. But somewhere along the way it got lost. When I wrote about Fiorina’s ouster in 2005, I did so on an HP desktop personal computer, with my HP laptop and HP laser printer near at hand. But I asked the question then: Why was HP in the PC business at all?

HP finally asked that question for itself and concluded: No reason. But this has the aura of almost a deathbed epiphany. Personal computer hardware has been a commodity business for years. HP’s operating margin on PCs was about 2.5% in 2005, a few years after Fiorina bet big on the business by acquiring Compaq Computer, which was gasping for breath. Last year the operating margin for HP’s personal systems group was 5%. That’s better than it was, but still not much more than HP would earn if it were selling groceries, like Safeway.

HP’s announcement of its planned Autonomy acquisition said that “this bold action will squarely position HP in software and information to create the next-generation Information Platform.” That same week, Marc Andreessen, the co-founder of Netscape and an HP board member, published an op-ed in the Wall Street Journal proclaiming that “software is eating the world.” He was referring to the rise of hardware-neutral companies such as Amazon, Facebook and Google.

Advertisement

But the notion that software trumps hardware is certainly not new; it was codified at least as long ago as the early 1970s by Alan Kay and his compatriots at PARC.

And in shedding its PC division as a hopelessly low-margin business, HP is following by a full six years the model of IBM, which all but invented the PC business in 1981 but got out in 2005 by selling its Think Pad and other PC lines to the Chinese company Lenovo.

In the interim, HP became the world’s leading manufacturer of PCs, only to discover that it hadn’t won a gold medal in that race, but a block of lead.

So now it’s trying to remake itself again. It’s impossible to say today whether HP’s new strategy will amount to “transformation,” as Apotheker promises, or just another creative stab at destruction. But history tells us how to bet.

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.


Newsletter
Get our weekly Business newsletter

A look back, and ahead, at the latest California business news.

You may occasionally receive promotional content from the Los Angeles Times.
Advertisement