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The refashioning of HP

CEO Carly Fiorina has big ambitions for taking on Dell and energizing her company's corporate culture. But can she reinvigorate sales while IT demand remains in the dumps?

When Hewlett-Packard announced its intention to acquire Compaq Computer, critics attacked the plan as a lamebrained idea and said CEO Carly Fiorina was stepping into a tar pit that would swallow up both companies. History unfolded differently. The $19 billion deal, which came in under budget and ahead of schedule after a bitter proxy fight, is expected to result in a bigger-than-expected $3 billion in cost savings. What's more, HP has been able to hold its own during the transition and now finds itself in a neck-and-neck race with Dell for the lead in global PC market share.

In retrospect, that may seem like the easy stuff.

Before Fiorina can run a victory lap, HP will need to prove to Wall Street that the company can generate sustained revenue growth. HP has been unable to replicate the consistent double-digit sales increases of Dell. What's more, there are recurring questions about whether the company can execute as nimbly as its Texas rival, which now resells printers.

For her part, Fiorina bristles at suggestions that the merged company is essentially a cost-cutting story. Even amid a still-desultory IT market, she says HP is taking PC share from the competition and not feeling any pinch on its printer sales from Dell.

All the while, Fiorina is going about the refashioning of HP's company culture, a process that picked up steam with the Compaq merger. Her ambition: accelerate the corporate metabolism while still retaining the positive legacy embodied in the famed "HP Way."

She recently spoke about her plans with CNET News.com editors and reporters.

Q: Looking over the horizon, what are the technologies that you think will be strategic for HP and change the current constellation of forces? Or is there one? Is it going to become more of a gradual improvement year by year?
A: One of the things we have to let go of is this notion that growth in the technology industry will be driven by the next big thing, by the next "killer app" or hot box...The real big thing in technology is that all this stuff has to work together. And when all this works together, what do you have to think about? Security, liability, mobility, rich media, total cost of ownership--all these things matter.

But that's boilerplate. All those things have been around for the last few years.
No, I don't think that's true at all.

What you are saying sounds as if you're agreeing with the gist of that Harvard Business article of a few months ago that said--and I'm simplifying--that--
That innovation doesn't matter.

That innovation doesn't matter and that IT is no longer strategic.
I think that HB article was dead wrong, and I don't agree with it at all. What I'm talking about is not that innovation doesn't matter, but how it gets applied...As a customer, I have to have lower (total cost of ownership), better reliability, greater risk mitigation--and oh, by the way, I have to get mobility security. Those require real innovation. But I'm not willing to trade off innovation for reliability; I'm not willing to trade off flexibility for quality; I'm not willing to trade off ease of doing business with price--I want it all.

And that's why technology has turned into a scope and scale business. Delivering all of that requires sustained investment, and sustained investment takes balance sheets and cash and the ability to make multiyear investments. It is actually because innovation is more important, not less important, that not every fly-by-night is going to make it.

For most of the last year, HP has been a cost-cutting story. Wall Street's been surprised at your progress, but when does this become more of a growth story rather than the reduction of overlap?
I wouldn't completely agree with your characterization. Certainly, in our first year we were quite clear that we needed to complete the HP's Carly Fiorina; News.com's Charles Cooper integration...On the other hand, it's also true that during the same period we have been growing share in virtually every category in which we compete...What we said in June at our analyst meeting is that growth for us now doesn't depend upon the technology spending environment improving. And we, like others, don't see evidence of a tech spending rebound yet--I said that in June and now others are now saying it. But what we think we can look forward to is taking more of our customer's share of wallet.

How do you see the evolution of the printer market as others--such as Dell--enter the business?
(Dell) has made a lot of noise. They've made zero impact. If you look back at what they said they'd do last summer and what they've actually done, the difference is fairly startling. What they said they'd do last summer is drive down margins. They introduced four private-label Lexmark printers and candidly, they've had no impact.

How do you keep printing business going? No offense, but when people look at printers, it's like fax machines. They don't look too deeply. They only care when it breaks down. Are customers showing interest in value-added features, and how do you fit it in with your other businesses?
If you think about the last year, we got into the low-end of the business--sub-$100, sub-$50--and took virtually 20 points of market share in the first quarter. We are now playing across the board--sub-$49.99 all the way up--and our margins have improved...Our $49.99 printer took 100 patents. People buy them because they work better than anybody else's--and they keep working.

People tend to think sometimes of printers as a commodity...when we introduced the first inkjet cartridge in the 1983-84 time frame, it deposited 1,000 drops of ink per second. Today it deposits 18 million drops of ink per second. When I came to HP four years ago, it deposited 12 million drops of ink per second. That is faster than Moore's Law. Every one of those drops of ink is heated to three times the temperature of the sun for two milliseconds. This is rocket science, truly. It is a precise, microprocessor-controlled piece of technology with a ton of intellectual property in the development and the manufacturing. And we manufacture millions of these things. So it's not just ink and plastic.

But how do you leverage that rich legacy of IP to grow your business faster than Dell?
OK, let's look at notebooks as an example. We're the largest notebook player in the world, bigger than Dell and growing faster than Dell...The reason Dell is No. 1 today (in PCs) is because they're bigger in commercial desktops in the U.S. Commercial desktops is a big business; it's a good business but it's not where the growth is. The growth is in mobility. And there we lead, and are growing faster...Mobility is a place customers are willing to want some innovation.

That also was Toshiba's claim in the 1990s. Nowadays Toshiba is somewhere down the food chain.
Right. Because it's not about innovation or low cost. It's about both. Our fundamental value proposition is high-tech, low cost. You gotta have both.

But if you're spending so much on R&D, the margins are going to be lower than Dell's. Meanwhile, the servers and workstations that Dell offers work perfectly fine from the perspective of corporate customers.

I am not in any way saying customers will always pay more for innovation.
I am not in any way saying customers will always pay more for innovation. In fact, that's why during the great controversy of the merger, one of the things that was said was, "Why does HP have to focus on low cost? Why don't they just focus on the high end?" It was fundamentally the opposition's strategy--to the extent they had a strategy. It was "You know, you don't need to care about these low-tech things like industry standards."

You do have to care. But on the other hand, do we have to make sure we are providing the right return on IT for our customers with industry-standard servers and Linux and PCs? Yes, which is why we think we're doing very well. At the same time, there's a big opportunity for us with a product like SuperDome...a product with very high innovation, very good margins--and SuperDome delivers, as compared with a mainframe, better performance at about one-third of the price.

Dell's been growing faster than HP for some amount of time. Does HP need to have that No. 1 spot?
I do not think an appropriate strategic objective is to get bragging rights to No. 1 on a quarter-by-quarter basis. What I do think is important is that we have enough scope and scale on the PC business to sustain competitive margins and lead in market segments where we choose to lead. The PC business is a scope and scale business; it's why you see the market consolidating between the guys who are going to pull ahead, a bunch of guys stuck in the middle and a bunch of other guys who are barely making an impact in the business. Those guys stuck in the middle are going to have a harder and harder time because they're not making money.

Dell doesn't innovate that much, but they're still growing phenomenally. In this quarter, their shipments grew 26 percent and yours grew 13 percent. You had a great quarter, but it was also the first one (post-merger) where you didn't shrink.
That's because we eliminated redundant product lines.

Yes, but Dell's still growing overseas, and they're growing faster than you in industry standard servers and desktops. Is it just because corporate customers see Michael Dell and go, "God, I'm dazzled. Sign me up?" Is it because their field sales team is especially good? Why should they be growing this rapidly when everyone knows it's basically commodity parts and a commodity product? What can you do to counter that?
I think the best answer to that question is to ask another question: Why is Dell trying to get into printing and networking and services and storage and a bunch of other things? I think they are doing that because their stock depends upon sustaining that level of growth. The businesses they are in today won't sustain that level of growth. That's why. Now they have to find new growth markets, which means going outside their core business.

By the way, while they're trying to get outside their core businesses they got a big competitor called HP banging them every day in their core business, day in and day out. And those new businesses they're trying to get into take a bunch of things they they've never done before. It takes a system sell, R&D, the ability to manage multiple businesses at the same time--things you don't learn in a day or two...(Dell's) a great company, but what they're trying to do now is not going to be as easy as what they've done for the last five years. And what they've done for the last five years is tune to perfection a single way of doing business around a relatively narrow product line.

But why does that narrow a product line sell?
Because they do a good job at it.

What is HP doing to build mind share? Part of your challenge (vis-a-vis Dell) is that you have a complex array of products.
There is no question that when we completed the merger, the biggest issue we had was ignorance about who we were and what we do. And a lot of the ad campaign that we started running the first 12 months was around introducing the marketplace to what this company was...There's no question we had--and continue to have--an education challenge. But candidly, our product line is no more complex than IBM's. It's different. It's no more complex than what Dell claims they're trying to do. It's slightly different. If you think about what Dell says they want to do--networking, printing, storage, services, PCs servers--actually, it's an even broader product line than ours is. Whether they are actually going to do all that stuff is something different but they've announced plans to get into all those businesses.

As Dell expands into other areas from storage to printers, they will have the benefit of their direct distribution model to help their profit margins. What are you doing to bolster your direct efforts as well as other areas of your business?
It's interesting. If you look at what Dell is doing, in addition to continuing to use their direct distribution, they are looking for channel partners. They made a foray into the retail market. You may remember there was a big announcement about them going into Sears. You may remember there was a less-noisy announcement about them exiting from Sears. The reality is they are trying to extend their channels of distribution and go to other channels than direct. We happen to be coming at it from a different angle. We have every indirect channel of distribution there is. We own 10 percent of the world's retail shelf space.

Most people don't know how to marry IT to their businesses. It requires a huge amount of information. How do they do it? Where do they start? That's a big problem for people to solve.
It certainly is. And I don't want to convey that the consulting companies that we partner with don't add real value. However, it is

There's been a lot of discussion that the HP Way meant nobody ever got fired. That's not true.
also true that we actually don't believe that this is so complicated that most people can't get it done...I think IBM's marketing message is, "Mr. and Mrs. Customer, you don't get it. You're not smart enough to get this, so please hand it over to us cause we'll make it all better."...I think most customers are quite smart. I think in many ways technologists have purposely tried to make technology very complicated. I think technologists purposively have marketed technology using technology terms, not business terms. Any businessperson can understand technology.

The role of a very fine CIO is not to be a geek about the technology...the role of a great CIO is to link the business requirement to the technology response. By the way, it doesn't have to be the CIO; maybe it's the person in process operations who is our main link. But you have to have someone who we interact with on a day-to-day basis who understands where is it that (the company) is trying to go on a business basis.

Do you think SCO has any rights to claims against HP or IBM?
I don't know whether they have any rights to claims to IBM. I am only speaking for HP.

You do distribute Linux to your customers?
Yes.

And it sounds like SCO is saying that any commercial distribution of Linux would be subject to litigation potential.
SCO's actions to date have been based on their readings of Unix patents, as you know. And we think our position is different than IBM's.

You came to HP about four years ago. Where are you in refashioning the corporate culture and the HP Way? When people look back 10 or 15 years from now, what legacy do you think you will have left?
If you look at our statement of corporate values today and you looked at them (when David Packard and William Hewlett were in charge), you would find that they are exactly the same--but with the addition of speed and agility. If you look at the corporate objectives, they are precisely the same.

There's been a lot of misunderstanding what the HP Way was. Let me give you a simple example. When I came to HP, there was a performance management system in place. This system had been in place for 15 years and hadn't been used. Therefore, everybody was clustered in the middle...less than 1 percent was rated as "needs improvement."

I have two board members who knew and worked closely with Bill and Dave and told me that they were focused on excellence. What I said was, "We have this performance management system in place. Let's use it." There's been a lot of discussion that the HP Way meant nobody ever got fired. That's not true. Dave Packard did fire and his nickname was The Mean One. HP is a company where balance counts. But when the company becomes slow and inward focused and self-satisfied--this is not the HP Way.

Do you have any plans about what you might do next?
I never think about the next job. Never did. Never will.