Who Says Elephants Can’t Dance?

The big news yesterday and today is that HP has decided to spin off its consumer PC business. HP is Microsoft’s biggest partner and one of the largest PC manufacturers in terms of volume. It’s like Ford deciding to quit the car business to focus on making 18-wheeler trucks.

But a move like this isn’t unprecedented in the tech industry, and merits a history lesson.

The tech industry is complex to say the least, maybe that’s why it’s so interesting. To be a winner in the industry you have to overcome twin challenges – fast change and complex system interactions. In a nutshell, you have to be able to adapt quickly while dealing with technology that is very difficult to change.

That’s where HP has found itself, and IBM found itself nearly 20 years ago.

At the time, there was a general consensus amongst analysts, industry leaders, and technologists that IBM was an also-ran in every major computer technology introduced since 1980. From 1990 to 1993, shareholders saw nearly $6 billion of value evaporate.

To solve this, IBM board member Jim Burke brings in a non-technologist change agent, Lou Gerstner, who becomes IBM’s most legendary CEO, to turn around the company.

Gerster relayed his management philosophy when he took over:

“If we make mistakes, let them be because we are too fast rather than too slow!”

In his first year, he shifted an organization that had a philosophy of “we know better” to a more collaborative and open environment, but the key was fostering a collective commitment amongst the entire elephant of a company. Each BU leader had focused on growing their own little fiefdom instead of a collective kingdom, and that was at the root of their strategic paralysis. By focusing on wholesome services & solutions rather than individual businesses, Gerstner was able to reinvent IBM’s value as an integrated company, enough rationale for keeping it all together.

Here’s the kicker: they decided that product lines that did not contribute to that logic, because they were commodity products (disk drives) or were increasingly serving individual consumer-like markets (PCs) would be divested when the opportunity arose.

Sound familiar?

HP is quite the elephant, with over 300,000 employees worldwide. They’ve moved into service businesses through acqusitions and are doing a bit of everything in consumer and enterprise. In 2009, the CEO at the time, Mark Hurd, brought a new way of evaluating HP’s businesses by benchmarking HP against the competition:

“The measure of great companies in this kind of environment is how you do, relatively speaking, within it. And how do you emerge stronger, relatively speaking, at the end of it?”

As the PC industry has matured, it’s moved from a “build it and they will come” mentality to “you have to take the complex technology and make it usable.” No one can deny that Apple has driven that mentality, but it’s a common shift in every industry. Apple has shown an uncanny ability to take complex technology systems and make them beautiful and simple to use, most often through their integrated approach.

HP and Leo Apotheker know that great design and building amazing yet profitable products isn’t in their DNA. That’s ok! It’s the sign of a mature and well executing company. They’re not going to continue to copy and follow Apple in the PC and Post-PC markets while making razor thin margins – because those margins will turn south soon enough.

Instead, HP has confronted reality and drawn a line in the sand. They’re going to focus on areas where they can be the best: scale, security, reliability, perfect for the enterprise market.

HP could have tried to inject design DNA into the company, but they’ve learned first hand about “Packard’s Law” (ironically from David Packard) in the late 90s when they hit a wall in 1998 after 5 years of unsustainably rapid growth. It states that:

“No company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth and still become a great company.”

To shift their consumer-facing organization to a more design and product-centric group in a long-term sustainable manner, it would have required either 1) a long time or 2) rapid growth that not even acquiring Palm could fix. They would end up failing in the long run, because Apple and others have too much of a head start.

Focusing on single core competencies and doing them damn well is the way that companies win, not by staying in markets that they can’t be the best and are just blindly following the winners.

I applaud HP & Leo Apotheker for having the audacity to make this bold move. Hopefully, HP’s history of excellence and execution will continue to help them succeed, because many people’s jobs depend on it.

August 19, 2011