September 7, 2005 2:19 PM PDT

Hurd offers just a glimpse of HP strategy

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Hewlett-Packard's chief executive, Mark Hurd, offered a broad-brush take on his strategy for the computing giant Wednesday during a rare presentation before HP investors at the New York Stock Exchange.

In a sign that he is perhaps becoming more comfortable in his role as CEO, Hurd discussed the company's product portfolio, recent restructuring, where HP sits in relation to IBM and Dell, and surprises he encountered when he arrived at the technology pioneer less than six months ago.

In offering his very general description of the company's new direction, the former NCR chief noted that investors will have to wait until the company's annual analyst day, Dec. 13, to get deep details.

Industry observers and investors have been wondering what strategic path Hurd will take, especially because the company initiated a major restructuring less than two months ago.

HP's overarching game plan, Hurd said, is to be an infrastructure technology company, using its vast research and development resources to collectively serve as a foil against competitor Dell. HP would leave IBM, meanwhile, to focus on business processing, he said.

"These are very different companies. A lot of IBM's work is in business processing, whereas HP is about technology and R&D...We spend a lot more on R&D than Dell," Hurd said, in response to investors' questions about whether HP felt sandwiched between the other two industry titans. As Hurd spoke, however, it was hard to ignore the fact that HP cut four research projects and laid off one its R&D luminaries as part of its restructuring.

In assessing which businesses to keep, which ones to divest and which ones to reallocate resources to, Hurd said, the plan is to avoid making the more successful business units carry the weight for those that are less successful.

"With a blended company, a strange dynamic occurs," Hurd said. "If it looks like you're going to be short one quarter (in hitting financial targets), you call up that business that's doing well and you ask them to do better...and the businesses that aren't performing aren't asked to do better. You need to restructure where it's needed. You shouldn't hurt the businesses that have the best opportunity for the long run."

High-end printing and imaging for large and midsize companies also offer strong growth potential, Hurd noted, even though HP historically has been identified with the consumer printer market. For HP, printing and imaging have been cash cows, providing 58 percent of its profits from operations in the fiscal third quarter.

On spinoffs and acquisitions
And while HP's services business has generated revenue growth, the company needs to improve its operations in order to reap the benefits, or profits, from that work, Hurd said.

Investors have frequently voiced their desire to see HP spin off its profitable printing and imaging operations, or its lackluster PC business. But Hurd is taking a more measured approach.

"People say the PC business is a disaster, but when you look at the numbers, it's not like that," he said. He added the company needs to expand the profit margins of its PC business, rather than focus on creating a larger business.

One way he hopes to increase the profitability of the PC business is through HP's relationship with its channel partners. Hurd said he plans to take a harder view with channel partners that snag a customer by selling HP systems that contain 30 percent to 40 percent non-HP components.

HP also plans to take an inquisitive, opportunistic approach to potential acquisitions, Hurd said, pointing to the company's recent announcement of its planned acquisition of Scitex Vision's assets. Scitex, which helps companies print billboards and banners, will be used to bolster HP's printing and imaging efforts.

"We're opportunistic," Hurd said. "We look for something to append to our core (business), and something that is manageable and digestible."

Reflecting on his first days at the company, Hurd said he expected to find employees there dispirited but instead found that their morale was surprisingly good.

"When I got there, I found a lot more fight in these people than I expected, and a desire to do more," Hurd said.

But he also found a culture where accountability was difficult to pinpoint. Several people, for example, may hold responsibility for a task or project, he noted. However, if it were bungled, it was difficult to determine who should be fired, Hurd said.

Over time, as employees are fired or promoted based on the merits of their work, Hurd envisions the HP culture will gradually change to one that is based on accountability and performance.

"People tell you they love to be accountable," Hurd said. "Now we'll see who steps up."

Even though Hurd's presentation lacked details on his strategy for HP, analyst Richard Chu of S.G. Cowen said he appreciated Hurd's candor.

Had Hurd declared he had a "magical potion to fix HP, it would be distressing. It would be premature," Chu said. "What he's saying is he knows more about the company than he did on day one, but that he doesn't have a strategic game plan he wants to discuss until December ...It's probably not satisfying for investors to hear, but it's more realistic."

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Firing people for making mistakes
Hurd's comments that he wants HP employees to be accountable so when a mistake is made he will know who to fire is not the best way to motivate people to take risk. I once worked for a company that rewarded people for taking risks although it wasn't a license to "kill, steal, or act foolish" but unfortunately that company changed to a fire mentality and all of the good people left and now that company is in trouble.
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