HP minus Fiorina equals questions about the future

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Carleton S. Fiorina put in place a bold strategy when she championed Hewlett-Packard Co.'s merger with Compaq Computer Corp. in 2002. But her abrupt departure last week at the request of HP's board of directors shows that her strategy may have been less bold and more foolhardy-especially since it required HP, a strong brand in its own right, to take on two of the world's most dominant brands: Dell and IBM.

For now, however, the board seems committed to leaving intact the strategy of making HP a broad provider of computer hardware and services to both consumers and businesses.

"She had a strategic vision and put in place a plan that has given HP the capabilities to compete and win," Patricia Dunn, a board member since 1998, who took over the role of HP's non-executive chairman, said in a statement released last Wednesday, the day after the board asked Fiorina to leave. "We thank Carly for her significant leadership over the past six years as we look forward to accelerating the execution of the company's strategy."

HP said Fiorina's departure had nothing to do with fourth quarter 2004, saying its results, which will be reported on Wednesday, are in line with expectations. While HP's board searches for a new CEO, Robert Wayman will act as interim CEO. He will retain his CFO responsibilities. Most analysts believe HP will search for a CEO who will cede more power to the business unit heads.

"The [Compaq] merger undoubtedly laid the foundation for Carly's eventual departure," said Rob Enderle, principal analyst at Enderle Group.

In taking on Dell and IBM simultaneously, it's hard to imagine a more daunting marketing and branding challenge. Its difficulty contributed to Fiorina's downfall, which will be cushioned by the more than $20 million she receives in severance. "The issue with their mission statement is that it's under pressure from Dell on the consumer side and under pressure from IBM on the enterprise side," said Vernon Turner, general manger-enterprise computing for International Data Corp.

"I would say it's about much more than just marketing," said Ted Schadler, a Forrester Research analyst. "It's really about strategy. How do you compete against a low-cost provider like Dell and a high-end provider like IBM under a single product line and single brand? I would say it's very difficult."

merger diluted brands

Even though most analysts acknowledged that the integration of Compaq after the merger was well executed, building a single brand out of company that sells laser printers, digital cameras, servers, PCs and enterprise technology consulting proved a tall order.

"HP was an engineering-centered company," said Jim Gregory, CEO of branding consultancy CoreBrand. "Now it's vague. They took a company that clearly was a leading company and made its purpose less clear. They dulled the weapon."

Acknowledging the difficulty of the task, most observers applauded HP's branding and marketing communications under Fiorina, whose experience at AT&T Corp. and Lucent Technologies was on the sales and marketing side. "The marketing they've been running was vastly improved, but was it good enough to solve the problem?" Enderle asked.

BtoB, among many, lauded HP's marketing efforts, many of which were created by the company's agency of record, Goodby, Silverstein & Partners. For her role in the "Change + HP" enterprise campaign, Allison Johnson, HP's senior VP-corporate marketing, was named BtoB's marketer of the year for 2004.

What impact Fiorina's departure and the arrival of a new CEO will have on HP's relationship with Goodby, Silverstein is uncertain. "It depends on to what degree she had her hands in the relationship," said David Beals, president-CEO of agency search consultancy Jones Lundin Beals, Chicago. "It may have zero impact, or it may have a lot of impact."

While most analysts see the Compaq acquisition as the defining moment of Fiorina's HP tenure, another deal that didn't happen was almost as important. That was HP's failed attempt to acquire PricewaterhouseCoopers in 2000, which would have created a larger army of consultants with which to challenge IBM Global Services. The deal fell apart, and IBM acquired PWC two years later.

"In the end that took them out of the capability to challenge IBM Global Services," said Enderle, who described HP as a "distant second" to IBM.

As for Dell, the Compaq merger had the effect, at least in the laser printer arena, of turning Dell into an even fiercer competitor. When HP acquired Compaq it competed more directly with Dell, which then felt no compunction about terminating its role as a reseller of HP's printers.

Beyond the difficulty of marketing the company she created, some observers say Fiorina also had trouble marketing herself-especially to the business media. Enderle said he traces the animosity to Fiorina's refusal, when she joined HP, to cooperate with journalists who wanted to write stories about the rise of female CEOs. "The financial press never came back to her," he said.

The financial press' coup de grace was Carol Loomis' Feb. 7 Fortune cover story with the headline, "Hewlett Packard: Why Carly's big bet is failing." The story detailed, among other failings, how HP's PC unit was returning 1% margins when Fiorina promised 3% at the time of the merger. It also pointed out how more than 75% of HP's profits came from its cash cow imaging and printer unit.

That issue of Fortune began reaching subscribers on Jan. 25, about two weeks before HP's board asked for Fiorina's resignation. Dunn denied that the story had anything to do with the board's decision and called the timing a "coincidence."

What action the board will take next is now a matter of rampant speculation. Many analysts say the likelihood of HP breaking up or spinning off a unit-the printer business perhaps-has increased with Fiorina's departure.

Ironically, a leading candidate to replace Fiorina, according to a research report by Merrill Lynch, is Michael Capellas, who is now the CEO of MCI. Of course, he is also the man who sold Compaq to Fiorina.

Senior Reporter Kate Maddox contributed to this report.

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