This Business Model Just Won't Work

In 2011, Hewlett-Packard (NYSE: HPQ  ) was very clearly lost -- an industry giant in search of direction. New CEO Meg Whitman came aboard to stop the ship from running aground. With six months of HP experience under her belt, Whitman has finally laid out a plan to get it done.

I appreciate HP making some goals to shoot for. The question is: Will it work? I have a CAPScall riding on the answer.

Where, exactly, are the goalposts?
Whitman is not short on confidence. The main mantra she chanted throughout Wednesday's earnings call outlined a three-pronged attack. HP wants to "make sure that we own" cloud computing, security, and information management. Not just for a while, but for decades to come.

Sock! Bam! Bingo!

Cloud computing, information security, and handling of the enormous datasets that drive modern businesses are perhaps the hottest concepts in IT today. Whitman intends HP to dominate all three.

That's a colossal bag of tasks, ma'am, and I'm afraid that HP will die trying. Even with this company's huge resources and long backstory, it'll be hard enough to capture just one of these three targets. Going for all of them will spread the company thin for years to come.

What not to do
In fact, Cisco Systems (Nasdaq: CSCO  ) has already tried a version of this tactic. Not satisfied with utterly crushing the market for networking equipment, CEO John Chambers set out on a quest to capture some consumer sales while also invading new parts of the data center. That didn't work out too well.

Now Cisco has all but abandoned the consumer play and lost crucial ground to smaller networking rivals. Only the effort to launch additional enterprise hardware seems to be working as planned, and even that took years to gain traction. Longtime investors can't be too pleased, although Cisco looks like a decent investment at today's depressed valuation.

HP will probably go through the same trial by fire. In the end, Ms. Whitman needs to prioritize her three target markets, largely sacrificing any others. Otherwise, by then the effort will have damaged sales, profits, and share prices almost beyond recognition.

Wear rose-tinted lenses much?
Meg says all the right things, aside from that dedication to three insanely difficult goals. I applaud her focus on long-term objectives over managing to short-term objectives. She understands that there's a difficult task on her plate which will take a combination of tight execution, disciplined asset allocation, and a touch of cost cutting to achieve.

And the plate in front of her holds an unappetizing mess. That's not her fault, any more than you could blame Obama for an economic crisis that started rumbling long before he took office. Whitman has been dealt a tough hand and needs to make the best of it.

As CEO, she needs to keep a stiff upper lip. I get that. But sometimes her optimism goes beyond the pale:

  • "We've embarked on rebuilding HP in a thoughtful way that is true to the spirit of innovation, financial discipline and financial success that has defined this company. I have no doubt that we'll turn HP around."
  • "We see a once-in-a-generation chance to define the future of technology and position HP as a leader for decades to come."
  • "We are taking advantage of this opportunity to position HP for success."

I'm sorry, but this doesn't really sound like a turnaround plan. It sounds more like denial.

More models of futility
Compare and contrast Whitman's rosy-cheeked outlook to that of Sears (Nasdaq: SHLD  ) chairman Eddie Lampert, who laments "poor financial results in 2011" but hopes to make Sears' Craftsman and Kenmore brands as cool as Apple (Nasdaq: AAPL  ) . This moonshot comes from a celebrated investing genius who has failed to turn Sears' oodles of assets into investor returns after eight years of trying. If he hasn't made iPhone-class lust objects out of Kenmore refrigerators yet, I don't think it will happen.

If Sears isn't scary enough to illustrate my point, take a look at Eastman Kodak (OTC: EKDKQ.PK) instead. Right up to the iconic photography expert's Chapter 11 bankruptcy filing, CEO Antonio Perez kept insisting that everything was fine, or at least fixable. A hasty reorg just days before the filing was like polishing the silverware on the Andrea Doria.

The language in Whitman's bold goals reminds me of these proven failures. It's a deal-breaker in my book, because business leaders need to stay in touch with reality.

If a hundred-year brand like Kodak can collapse, then so can HP. History counts for nothing when the reckoning comes. I hope Meg Whitman doesn't drag her company to this horrific end, but she's on her way. Scale down the trifecta of overambitious goals to just one, and HP will be fine.

Find out who rules the roost in cloud computing and Big Data today. Here's a hint: No single company spans these markets with authority yet. I think you'll agree that Meg has picked some tough nuts to crack. My bearish CAPScall on HP will stand until she changes her mind about this crazy strategy.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+.

The Motley Fool owns shares of Apple and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. We have a disclosure policy.


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  • Report this Comment On February 26, 2012, at 1:58 AM, capitan60 wrote:

    The article's main point is obviously right on.

    If Ms Whitman is to have a shot at achieving ONE goal for HPQ it MUST be believable to workers, suppliers, customers, and market / shareholders.

    All 3 goals she stated are simply not believable.

    Idealistic goals of Dominance (Own) of a new market are rarely stated by dominant companies!

    Dominant companies focus on Understanding and Delighting Customers and when they do so well find themselves "owning" the lion's share of that market. I find even then they remain humble and do not speak of "owning" the market, simply of "Customer Satisfaction" "enabling them to do well"

    so, Ms Whitman might rethink her approach to it.

    Article is right on about need for Focus on ONE clear, actionable, achievable Goal with measurable performance parameters. Market share, Billings, etc. THAT might get them "turned around"...

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