Assignment # 2 – Chapter 14 Case – “Hewitt-Packard Company”

1. Discuss the three most serious problems you have identified in the case. Defend why you think they are the most serious.

When Mark Hurd, the new CEO, took over, he found matrix structures ambiguous, confusing and inefficient. The main reason is that there is no clarity on the roles that each unit in the matrix is intended to play. Unit roles suppose, responsibilities and relationships in a way that is clear, but not excessively detailed and hierarchical. Although the matrix seems to be a logical organizational solution, Fiorina, has not found it an easy structure. She has struggled with ambiguous responsibilities and reporting relationships, been slowed down by the search for consensus decisions, and found it hard to get all the different units to work constructively together. In fact, CEO Carly Fiorina was so preoccupied with immediate issues that she lost sight of her ultimate objectives.
Fiorina and her staff consider that the HP Way is an anachronism of a different, slower time, and that for the company to survive and succeed in the future it must be driven purely by a rational business strategy. After all of the layoffs, organizational changes, assertion of executive hierarchies and the destruction of traditional company rules of behavior, the HP Way that the old-timers are fighting to save is probably already dead. Fiorina and her team appear not to believe in the Way, they are now reduced to appealing to it in order to get enough shareholders votes to win. What this means is that, contra-Carly, the HP Way really did exist, it remains as powerful and useful as ever, and that its last use will be to destroy itself forever.
So, What Is the Strategy? Fiorina did not believe in the HP Way, and she just followed its dictates. But the heart of the HP Way is the notion of trust, and the ultimate manifestation of that trust is in open communication from the top of the firm to the bottom. And this is where she has failed as CEO. The second mistake is the merger. Is the HP-Compaq merger a good deal? Certainly yes and the managements of the two companies taught so.
The information technology industry is undergoing a period not only of consolidation, but standardization, around specific architectures like Itanium, UNIX, Linux and NT. During such periods, competitive advantage goes to those firms that can bring to bear the maximum amount of R&D, sales, marketing and other economies of scale. With the merger, HP will have that scale, and that in turn will help it dominate such high-margin emerging markets as digital imaging and digital publishing. Then, what was wrong? Fiorina failed to trust the intelligence of her employees and shareholders.
The fact is that the first requirement of corporate leadership is to get the employees to follow. At that, she failed miserably. She took a company that was one of the most innovative of all time, one that empowers its employees, and turned it into a top-down company that was trying to profit off the PC market. Another fact is that the real reason Fiorina lost her job at HP was because, even as the rest of the tech industry was recovering from the dot-com bust, HP's stock remained flat until current CEO Mark Hurd came along to tear down Fiorina's infrastructure and restore company morale. In other words, Fiorina's leadership was also repudiated.

2. Describe how the company should attempt to correct each of the three most serious problems.

Fiorina does seem to have a strategy, but you have to dig deeply into some of her industry speeches to find clues to it. She should know that a business review or preparation of a strategic vision is a virtual necessity. Even if it is not the key for success, without it a business is much more likely to fail. She should rely on the strategic plan which should:
Serve as a framework for decisions or for securing support/approval.
Provide a basis for more detailed planning.
Explain the business to others in order to inform, motivate & involve.
Assist benchmarking & performance monitoring.
Stimulate change and become building block for next plan.
Her strategic vision was confused with business and operational plans. It should be a short document which should provide the foundation and frame work for a business plan. A strategic plan is visionary, conceptual and directional. If her strategic vision was realistic and attainable, it would allow her and later the new CEO, to think strategically and act operationally. Fiorina failed to achieve these objectives, she failed to execute a planned strategy of slashing costs and boosting revenue as quickly as directors had hoped. According to CBS News.com Technology Analyst Larry Magid,” Fiorina made a lot of changes, including the merger with Compaq, layoffs, and reorganizations. A lot of employees resented her leadership.” These mistakes cost Carly Fiorina, who was CEO of HP in a period of major transformation, to resign because she had differences about how to execute HP’s strategy. According to the Board of Directors she stepped down because there was disagreement on how to best execute the company's strategy. Hurd led HP through the post-Carly crisis to become the world’s leading computer company, and boosted its sales in about four years from $80 b. to $115 b., an increase of 31 per cent, while raising profitability as well in an industry known for its falling margins. In 1995, Hewlett-Packard posted $38 billion in sales and earned $2.5 billon. In 2003, it posted $73 billion in sales and earned the same $2.5 billion. That’s not progress. That’s running harder to stay in the same place. Hewletts new focus on digital imaging is great. It would probably do the company a world of good for Fiorina to do the math on one of her flagship financial calculators and admit her mistake with Compaq. She should sell off or just write down the purchase, and return the company to its roots as a smaller, duller but more profitable and innovative designer of digital imaging solutions. Under her egotistical direction, a company that was once a paradigm of Silicon Valley entrepreneurship has simply failed to make any progress at enhancing shareholder value. It is now trading at the same value as it did in 1995. Almost 10 years of marking time.
"It was not a difference over strategy but over execution, the board feels execution is of primary importance going forward." The board constantly reviews performance and, after a series of meetings and deliberations with external advisers, it "felt change now was in the best interests of the company". HP blamed poor execution by the enterprise group for costing it $400m in revenue and $275m in operating profit in one quarter. Tough pricing was blamed as one reason for these losses, along with poor sales of storage systems. It soon emerged that a botched SAP installation by an in-house team had a catastrophic effect on enterprise hardware sales, leaving a lot of disgruntled customers in its wake.
The leader will be focused on accelerating their execution against their established strategy, he will be focused on driving improved performance and consistency of operations. A dedicated team will help him, focused on executing theirr strategy and meeting customer needs." Fiorina was a controversial figure at HP, partly because of the abrasive manner in which the takeover of Compaq was fought in 2001 and 2002. HP was regarded as a family firm, a bit slow and doddery but a caring and kind place to work. There was no universal welcome to the mega-merger with Compaq although the merger was not the disaster many predicted, HP has not reaped that much benefit. The company failed to persuade enterprise customers in any great numbers to love Itanium, its processor of choice to replace five server lines, many old (but still loved). Storage - a Compaq stronghold - is having more downs than ups. The HP-Compaq post-merger combo overtook Dell in PCs and servers, but soon enough again slipped behind its rival. Through Compaq, HP inherited a big, but low-rent, services division, but it is no closer than it was before the merger to becoming a major outsourcing / business processing play, competing toe-toe against IBM, Accenture and EDS. HP's printing division remains peerless, but this is a beast entirely of HP's creation. Fiorina's ousting will revive calls yet again for HP to spin off the printer division into a separate company.
" According to the London Observer, "Since the merger, HP has lost market share and failed to revive its profit margins. It lost the number one position in personal-computer market share last year to Dell. While the share price of Dell has soared over the past 18 months, HP's has floundered. Indeed, the merger was so disastrous that Fiorina fought off three attempts to spin off HP's highly profitable printer business and cut the PC business adrift. Merger failed to produce for Shareholders and to make HP more competitive. Fortune reported, "First, under the only lens that matters, did the famed merger that Fiorina engineered between HP and Compaq produce value for HP's shareholders? Second, with that merger nearly three years past, is HP in shape to thrive in its brutally competitive world? The answers are no and doubtful...This was a big bet that didn't pay off, that didn't even come close to attaining what Fiorina and HP's board said was in store." Even before Compaq merger, Fiorina's Tenure At HP A Series Of Disappointments. According to the Economist, "She has had to warn repeatedly of disappointing results. In the nine months to July, HP saw its net profit fall by 82%, to $506m. The company has slashed costs, announced 6,000 job cuts and asked staff to volunteer for a temporary 10% pay cut. Although there had been some speculation that Ms Fiorina would be replaced, the takeover of Compaq shows that she has - at least for the time being - still got the backing of her board." And what of the cost to the workers of all this post-merger upheaval? Thousands of job cuts in several tranches and aggressive targets have put a huge dampener on staff morale, and HP's reputation as a good company to work for has plummeted.

3. Recommend a leadership style or combination of initiating structure and consideration the CEO should adopt to address the problems of distrust and declining morale. Explain your answer.

The obvious answer to a lack of clarity in organization design seems to be to specify responsibilities in more detail. Make clear the respective responsibilities of practice areas and regions, lay out the processes by which client relationship partners, practice areas and regions should jointly agree on priorities, establish the roles of firm-wide and regional management, and so on. But although laying out responsibilities in more detail can be helpful, there is a limit to how much detail the organization designer can, or should, attempt to impose.
A second, and even stronger, reason for avoiding excessively detailed responsibility allocations is to allow flexibility for managers to decide how they will work together as circumstances change. An ability to adapt responsibilities and relationships to take account of new circumstances and of individual learning is much preferable to a rigid and cumbersome design in which senior management try to mandate every responsibility from the top down. Many organization experts now argue strongly that companies need to move away from excessive reliance on hierarchically imposed structures and systems and empower frontline managers to make their own decisions in accordance with a broader sense of corporate purpose.
The organization designer therefore confronts a perplexing dilemma. Clarity about the way the organization is intended to work is vital. But it is neither feasible nor desirable to design an organization in great detail from the top down. How can organization designers make clear their intentions without descending into excessive detail? How can they hardwire in enough design, but not too much?
From our research, we have concluded that the most important things for organization designers to make explicit are the basic purpose or role of each unit. For example, we noted that managers often felt clearer about their responsibilities and their relationships with other parts of the organization if they were told that their unit was a ‘business unit’ or a ‘shared service unit’. This was because these terms were recognized as having important implications for the unit’s:
• broad area of responsibility
• intended reporting relationship to upper levels of management
• intended horizontal relationships with other units in the company
• main accountabilities.
Although it may be necessary to spell out some of the key decision processes in more detail, specifying broad responsibilities, relationships and accountabilities provides a context within which unit managers can, in most situations, work out detailed decisions for themselves on a self-managed basis.

Broad Responsibilities

Unit responsibilities need to be specified in a way that makes the broad remit clear, but leaves most of the details to be determined by the unit. A product group, for example, needs to know what sort of products and markets are, and are not, within its responsibility. An Automotive Components Group, for example, should know that it will be off-limits if it proposes getting into breakdown services, but has discretion about whether to compete in shock absorbers as well as brake pads, and can make its own decisions about what specific shock absorber product range to offer. Similarly, a European Manufacturing unit is clearly charged with running the manufacturing facilities in Europe, but can have a high level of discretion about what processes and equipment to adopt, and even about the overall European plant configuration. In addition, the unit needs to know what resources it will have in carrying out its responsibilities.
Reporting Relationships
By laying out what the unit is supposed to be doing (broad responsibilities), how it is supposed to work with other units (reporting and lateral relationships), and how its performance will be assessed (main accountabilities), the organization designer provides sufficient specification to help the unit management to make sensible self-managed decisions that are compatible with the organization designer’s intentions. While most organization designs do cover the broad responsibilities of each unit, they are typically much weaker on reporting relationships, lateral relationships and accountabilities. These are very often the areas that cause problems, especially in matrix structures. Clarity about broad responsibilities, relationships and accountabilities does not prevent all organizational conflict and confusion. Difficult people, who disagree with the organization design or are dissatisfied with their personal positions within it, may try to flaunt the intentions behind the design. Difficult decisions, where managers can legitimately disagree about the extent of their units’ responsibilities, their relative power and influence, and how they should therefore work together, may still arise. But, provided managers are willing to accept the designer’s intentions, clarity about these key issues does resolve most disputes and is essential for avoiding the sort of confusion that so often bedevils matrix structures.
The language, therefore, not only provides a simple but powerful means of clarifying organizational roles, but also forces out into the open areas of ambiguity and potential confusion. It can also be a prompt for considering different possible design options. Senior managers who use the roles taxonomy to describe proposed new structures are much less likely to fall into the trap of lack of clarity.

4. After having examined all of the issues facing HP, recommend whether the CEO should focus on the approach to the current strategy or on implementation and execution. Defend your decision.

Under Hurd leadership, HP became the world’s leading computer company, and boosted its sales in about four years from $80 b. to $115 b., an increase of 31 per cent, while raising profitability as well in an industry known for its falling margins. His predecessor, Carly Fiorina, had a powerful vision for HP, reinventing the company founded by legendary entrepreneurs David Packard and William Hewlitt (the “H” and the “P”). She led the acquisition of Compaq, which now turns out to have been a good deal, against fierce internal opposition. Hurd was a penny-pinching efficiency expert who slashed costs to the bone, boosted HP margins – and destroyed HP’s future by slashing R&D investment from 9 per cent of revenues down to only 2. HP, for instance, has no answer to Apple’s iPad, nor will it. Hurd engaged in a classic and not untypical strategy of boosting short-run profits, he destroyed long-run competitiveness.
The irony is this: Fiorina’s vision was outstanding, but she was incapable of leading the operational excellence needed to apply it. Hurd brought that operational excellence, but neglected and discarded the vision. For a company like HP to become great and remain great, you need both. Hewlitt and Packard together had both – long-run vision and short-run operational excellence. Somehow their successors have not. As Nocera summarizes: “One thing I found surprising was learning that to many H.P. observers Ms. Fiorina no longer seemed quite so bad. It was actually her strategic vision that Mr. Hurd had executed, I heard again and again. Her problem was that while she talked a good game, she lacked the skill to get that big, hulking, aircraft carrier of a company moving in the direction she pointed. Mr. Hurd was a brilliant operational executive, but had the strategic sense of a gnat, and knew only how to cut costs.”
Without vision and operational excellence, business literally falls apart. You need both, for businesses. HP, under Carly, had vision (strategy). HP, under Hurd, had operations (tactics). Each is a necessary condition for long-term sustained success, and together, they are sufficient. Firms, like HP, need good strategy and good tactics. But if you lack one or the other, you are out.
Under Hurd leadership, the company has been the first in the sale of desktop computers since 2007, and laptop computers since 2006. In 2008, it also increased its market share in inkjet and laser printers to 46% and 50.5%, respectively. Hurd said that he gets up every day at 4:45 a.m. in California without an alarm clock because competitors on the east coast are already awake. He had a reputation for aggressive cost-cutting. He laid off 15,200 workers — 10% of the workforce — shortly after becoming CEO. Other cost-cutting includes reducing the IT department from 19,000 to 8,000, reducing the number of software applications that HP uses from 6,000 to 1,500, and consolidating the HP's 85 data centers to 6. In the recent recession, Hurd imposed a 5% pay cut on all employees and removed many benefits. Hurd himself took a pay cut of 20% in his base salary, although the compensation committee increased his bonus by the same amount. Following the acquisition of EDS, Hurd instructed that all EDS employees should have their salaries adjusted to match the salaries of their HP counterparts, with pay cuts of as much as 20%. Hurd forecast that in 2009, HP's sales could drop as much as 5% in the midst of the recession, but its profit would increase by nearly 6%. In 2009, he was considered one of the "TopGun CEOs" by Brendan Wood International, an advisory agency.

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