HP places a big bet on its future competitiveness

HP recently hired former SAP CEO Leo Apotheker as their new CEO. Some people are calling it a foolish move. I think it’s smart. I think HP is making a big bet on a strategic move that could transform the company.

THE BACKGROUND
First, a little background, just to review some of the recent events at Hewlett-Packard:

  1. CEO Mark Hurd, who made HP into a lean, financially successful organization (with significant marketshare in hardware) in the past five years, was faced with a sexual harassment accusation.
  2. An investigation determined that the company’s sexual harassment policies were not violated but the company’s business and conduct policies were violated, due to some inappropriate payments from HP to an HP consultant with whom Hurd had a personal relationship.
  3. Hurd resigns.
  4. Hurd is hired by software giant Oracle.
  5. HP threatens that it will sue Hurd for a non-compete clause in his contract.
  6. HP backs off of their lawsuit.
  7. HP hires former SAP CEO Leo Apotheker as CEO.

That’s the backstory. Now let’s dig a little deeper:

STUPID AND SMART
Admittedly, Hurd did something stupid and his resignation is not a surprise. Oracle made a good move in hiring him because Hurd’s background as an efficient, cost-cutting machine will help turn Oracle (which tends to be somewhat inefficient because of its acquisition-heavy growth-plan) into a more profitable enterprise. [Note: It’s already doing well… but Hurd will make it better].

HP was wise to back off of its threat to sue Hurd. That would only attract bad press and make HP seem to be a poor loser.

But what about its move to hire Apotheker? That has been met with some mixed opinions. (If you haven’t yet, check out this BusinessWeek article which points out that SAP suffered under the 2-year-long leadership of Apotheker).

In spite of some of Apotheker’s baggage, I think HP is making an aggressive — and fairly smart — move. Here’s why:

COMPETITIVE STRATEGY: SOFTWARE
Hewlett-Packard has long competed in the computer hardware space, easily straddling both retail and business sectors and enjoying a fairly significant marketshare (thanks to Hurd). Consumers probably think of HP as “the printer people”; medium and large businesses may have desktops supplied by HP.

The problem is, hardware is a commodity business and very price sensitive. Prices are aggressively decreased as low-cost competitors vie for limited dollars. Equipment is easily outsourced, driving costs and prices down. At the same time, businesses with pinched budgets look to extend a previous computer hardware investment by delaying equipment upgrades.

For companies with good marketshare, there is some benefit to being in this space (as HP has shown), but expenses are high and there is a lot of downward pressure on price, so profits are always a struggle.

The real money is in software. Software – especially enterprise software – can be expensive to development but, once built, it is very cheap to sell and install. (Similar to pharmaceuticals, where the first pill sold cost millions to develop but subsequent pills cost a mere fraction of a cent).

Not surprisingly, HP is looking to compete in the enterprise software space. HP offers some enterprise software solutions but their offerings pale in comparison to the offerings at Oracle and SAP.

SAP is the only company that offers any competition to Oracle. (Well, maybe IBM is up there, but I don’t think it’s as significant of a player). HP tends to be down one tier, competing with other smaller players for the scraps left over from Oracle and SAP.

Apotheker knows software, and as a former SAPer, he knows his main competitor Oracle. In fact, he likely knows more about Oracle than Hurd knows, he definitely knows more about SAP than Hurd knows, (thus he brings a superior competitive advantage) he likely knows more about enterprise software than Hurd knows, and he has experience in the enterprise software space – the very space that HP covets.

I believe Apotheker’s biggest challenge will be turning a hardware company into a software company. Apotheker’s primary experience in leadership has been in growing a software company. He’s been with SAP since the late 1980’s and although his work as a CEO wasn’t met with enthusiasm, he did have some success in the previous years where he founded country-specific versions of SAP and was president of regional teams.

WHAT APOTHEKER SHOULD DO

  • HP has an interesting advantage over Oracle (and SAP). They have hardware in a lot of companies. I believe they could easily achieve a foothold in the same way that Microsoft does – by adding basic HP software on their equipment, then creating enterprise solution add-ons that customers can purchase which run seamlessly with the pre-existing HP software.
  • Find a space where Oracle and SAP are lacking and innovate there. (SAP has been slow to move into cloud-based computing and social media adoption. I think Oracle is a little better but maybe HP has an opportunity here).
  • HP should also start playing catch-up, Oracle-style: by acquiring or developing significant joint partnerships with smaller innovative software players looking for funding and growth.

Disclosure: I have written content for SAP (while it was run by Leo Apotheker) through a SAP content partner, and I am currently in a consulting contract with HP as a technical writer. These are my opinions only! I have tried to remain as neutral as possible and have not received compensation for this blog post, nor have I been asked or authorized to write it.

Aaron Hoos

Aaron Hoos is a writer, strategist, and investor who builds and optimizes profitable sales funnels. He is the author of The Sales Funnel Bible and he's a real estate investor and a copywriter for real estate investors.

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