HP needs to rediscover innovation, and organic growth

"You've got to be kidding me" tennis legend John McEnroe used to yell it at officials when he thought they made a bad decision. There's no better line to yell at Leo Apotheker after last week's announcements that Hewlett Packard will shut down its tablet/WebOS business, spin-off (or sell) its PC business and buy Autonomy for $10.2B. Really. You've got to be kidding me.

Now that Steve Jobs has officially resigned as CEO of Apple, he will be standard of comparison for many years - like Lou Gerstner and Jack Welch have been. So let's start right now - with a description of what's wrong with the CEO(s) at HP, and why the latest won't create the value Steve Jobs did at Apple.

HP has suffered through a string of 3 really lousy CEOs. Apotheker is just the latest. All had comparable failings. They were wedded to their personal histories (what worked for them before) and old-fashioned, out-of-date business ideas. Where Steve Jobs grabbed Apple and set it on a course to deliver what people wanted in the future, Fiorina, Hurd and now Apotheker drove HP with their eyes firmly in the rear view mirror, ignoring major trends changing markets. Where Steve Jobs built a company capitalizing on market shifts that grew sales and value, their lust to buy old businesses and enter profit-sucking gladiator wars with me-too products killed value.

HP was once an excellent market sensing company that invested in R&D and new product development, creating highly profitable market leading products. HP created enormous shareholder value by making and selling equipment (oscilliscopes for example) for the exploding electronics/computer industry. It was a leader in patent applications, new product launches and being first with products that engineers needed, and wanted. As Jim Collins waxed eloquently in his first book, HP was "Built to Last."

Fast forward to 2001 when Carly Fiorina decided the smart move was for HP to spend $25B buying Compaq. Compaq was getting creamed by Dell, so Carly hoped to merge it with HP's retail PC business and let "scale" create profits. Old fashioned, industrial idea. Only, the PC business had long been a commodity industry with competition based on cost, and profits largely going to Intel and Microsoft! There was no "scale" advantage - especially as short product lifecycles allowed competitors to constantly reposition. The "synergistic" profits didn't happen, and Carly got fired.

But she paved the way for HPs downfall.

CEO Fiorina was the first to cut R&D and new product development in favor of seeking market share with largely undifferentiated products. Why file 3,500 patents a year - especially when you were largely becoming a piece-assembly company of other people's technology? To get the cash for acquisitions, supply chain investments and retail discounts Carly started a whole new tradition of doing less innovation, and spending a lot being a copy-cat. HP became HPQ - but the price paid was an internal shift away from investing in new markets and innovation, and heading straight toward commoditization and volume!

Compare that with Steve Jobs actions around the same time. He eschewed the PC war. He cut the traditional Mac product line, and repositioned Apple products toward internet use (the iMac) and mobility. He rapidly sought out new technologies, such as MP3, which could be used to fulfill the trend for ease of use and mobility, and launched organic products that were differentiated from competitors - such as Dell, HP and Sony.

CEO Fiorina used what might be the most valuable commercial liquid in all business - HP ink - to fund the acquisition, merger and PC war. But printers became the "golden goose," receiving a paltry amount of feed. And the printer business itself clearly had a limited future, because the trend was already established away from printed documents!

Mark Hurd replaced Carly, and he was willing to be the champion of cost cutting. If she was willing to reduce R&D and product development - well he was ready to outright slash it! And all the better, so he could buy other worn out companies with limited profits, declining share and management mis-aligned with market trends - like his 2008 $13.9B acquisition of EDS!

EDS was once a great services company, but offshore outsourcing and rabid price competition had driven EDS nearly to the point of bankruptcy. A new CEO had slashed costs, and EDS was a break-even company with almost no growth prospects when Hurd decided to buy it - leading many analysts to pan the acquisition idea. But Mr. Hurd believed in the old success formula of selling services (gee, it worked 15 years before for IBM, could it work again?) and volume. He simply believed that if he kept adding more stuff to what he was already selling businesses revenue would grow - and surely profits would improve. By assembling weak profit businesses into a new morass, and continuing cost cutting, surely somewhere in there he'd find a pony!

Under CEO Hurd innovation was well on its way to obliteration at HP, and patent applications just kept falling. By the end of his cost-cutting reign, the once great R&D department at HP was a ghost of its former self. From 9%+ of revenues on new products, expenditures were down to under 2%! And patent applications had fallen by 2/3rds

Chart Source: AllThingsD.com "Is Innovation Dead at HP?"

While Mr. Hurd was busy fighting the last war, piling up dead bodies, CEO Jobs was busy finding new growth markets, then innovating and launching differentiated products and services. While HP gave us one unmemorable laptop and printer after another through big-box retailers - and another boring services company barely profitable shifting work to India while competing with emerging tigers like Infosys - Apple was making a killing with iPods, ITunes - and the market shifting iPhone that takes users completely off their PC - augmented by the unique Apple retail store. Rather than focusing on monster acquisitions, Apple created and launched new solutions.

Innovation de-investment and patent application declines continued under CEO Apotheker. He is the latest CEO intent on continuing to act like the market has not changed as he tries implementing an outdated, industrial success formula. HP is blaming its tablet and PC failures on the impossibility of making profits in anything "consumer" oriented (MediaPost.com "Low Margin Consumers Do It Again, This Time to HP") The new answer is for HP to shift its business entirely into B-2-B.

Wow, that worked so well for Sun Microsystems. And DEC - oh yeah, the failing company Compaq bought - before HP bought Compaq.

Somebody forgot to tell Apple, Amazon and Netflix that consumer products lacked profitability.

There's no doubt Palm was a dumb acquisition by Mr. Hurd (pay attention Google as you think about Motorola.) Palm was a leader in PDAs (personal digital assistants,) at one time having over 80% market share! Palm was once as prevalent as RIM Blackberries (ahem.) But Palm did not invest sufficiently in the market shift to smartphones, and even though it had technology and patents the market shifted away from its "core," leaving Palm with outdated technology, products and limited market growth. Palm tried too long to rely on its "installed user base" and missed the market shift - far from leading it.

By the time HP bought Palm its user base was only in the rear view mirror, its techology lead had disappeared and it had no marketplace relevancy. Mr. Hurd's idea that somehow the technology had value without market relevance was another example of out-of-date industrial thinking.

For HP to completely exit the smartphone and tablet marketplace is, at a minimum, short-sighted. We all know that cloud architectures and thin apps are the wave of the future - and will include all kinds of new solutions. Taking an ill-conceived, proprietary tablet to Best Buy, with almost no apps or developer base, was pretty dumb given where the market is heading. But deciding to exit the business entirely is throwing the baby out with the bathwater!

Getting out of PCs isn't escaping the "consumer" business, as claimed. Consumers are shifting to smartphones and tablets - not PCs. The only hope for PCs is that businesses - the new "target market" for Mr. Apotheker - will keep buying. The problem is that PC sales are a gladiator war where all competitors live a day-to-day bloodbath, that is worsening as growth slows! Who would want it?

Can HP find a buyer for its PC business? Or an investment banker that can dupe the public into financing it? What investor would want a huge business that has marginal profits, declining sales, an extraordinarily dim future, expensive and lethargic suppliers and robust competitors rapidly obsoleting the entire technology? Lenovo and Dell would benefit most from an HP PC failure, so why not let this ill-timed announcement simply lead to the rapid decline and failure - thus shrinking supply as demand falters?

Now CEO Apotheker's plan for HP's growth is selling ERP software from a third-tier competitor. ERP (enterprise resource planning) applications like SAP and Oracle are viewed today as the remarkably expensive, hard to install, hard to maintain, hard to modify, monolithic, bureaucracy creating, innovation killing systems they were designed to be. ERP applications were created to force companies, functions and employees to replicate previous decisions, in the hopes of increasing control (especially financial control) and cutting operating cost. Not to learn, or do anything new. They were designed to create rigidity, and are completely unable to enhance flexibility, market responsiveness and growth. ERP was the emerging high-tech "solution" in 1992!

It is clear Mr. Apotheker is returning to his previous personal success, as CEO of SAP. He isn't looking to the future and how he can meet new, unmet needs. He's investing in what he knows, from his past. His focus on "business solutions" is his way of pushing HP to be more like SAP - only 2 decades too late, against enormously well funded competitors, in a low-growth marketplace looking for new solutions. Too bad for HPs investors, employees and suppliers.

While the latest HP CEO keeps doing acquisitions, and making reshuffling the assets seeking a "transformation" (third time's the charm, right?) Steve Jobs kept the Apple team focused on meeting emerging market needs. Distribution, including Apple stores, keeps growing. New products keep emerging, like the iPad. The thin app base keeps growing - some 350,000 now. And Apple keeps moving forward with new solutions like iCloud that make the user experience easier, and better. And now businesses are being attracted to these solutions, simply because they are better.

HP desperately needs is to connect to the evolving marketplace. There are a raft of emerging, unmet needs but for a decade HP has ignored them. Its CEOs have spent their time trying to figure out how to compete in old markets, with old solutions and cutting costs. These CEOs have spent over $50B creating large, but marginally profitable businesses that are now uninteresting (at best) and largely at the precipice of failure. HP's CEOs have ignored market shifts in favor of doing more of the same, and the value of HP has been destroyed - down 50% this year.

HP's leaders need to move in the direction Steve Jobs took Apple. To increase HP's value the CEO must understand important market trends, fulfill unmet needs and migrate customers to new solutions. HP needs to rediscover innovation, and organic growth.