Lew Platt's Fix-IT Plan For Hewlett-Packard

For years, CEO Lewis E Platt has used his

annual management-review meeting to warn Hewlett-Packard Company's executives not to get

sloppy. After all, the company was growing at more than 20% a year, making it the

fastest-growing $30 billion company in the US. It would be easy for giddy executives to

become less watchful. Sure enough, by last January's meeting, the company had missed Wall

Street's expectations for five straight quarters. So to kick off the weekend meeting at a

Monterey (California) hotel, Platt tried a different tactic. The normally amiable CEO

blasted his top 200-plus managers for shoddy execution, lax cost controls, and

overreliance on slow-growth markets.

Then, a steely Platt told them to write

down "two things you'll do differently on Monday morning." Since all the

managers had laptops, Platt got their plans immediately. And he didn't like what he saw.

Disappointed, he laid into them the next day. "You guys just don't get it, do

you?" Platt scolded. "I expect more coherent plans from you moving

forward," recalls an attendee.

Falling Short



Now, Platt is facing similar

expectations from investors. Since mid-1996, after years of blowing away the most bullish

estimates, HP's sales have settled below the 20% growth clip analysts had come to expect.

For the 1997 fiscal year, the company recorded a 12% revenue growth rate, down from 22%

the year before. Worse, earnings have zigzagged wildly as the company has struggled with

factors ranging from the Asian flu to erratic execution to falling prices for personal

computers and printers.

The latest example: Although sales growth

is back up-rising 16%, to $12 billion-HP shocked analysts with an 18% jump in operating

expenses and a 12% dip in earnings in the quarter ended on April 30. That, sent the stock

spiraling downward 26%, where it is stuck at around 60. Concedes Platt: "The

competition has closed the gap. Our execution just isn't what it used to be."

To be sure, HP remains a powerhouse by

almost any measure. Despite falling short of Wall Street's expectations, the most recent

quarterly sales growth topped the rate of IBM, Sun Microsystems, and Compaq Computer. As

for earnings, which totaled $685 million in the quarter, HP has an insurance policy that

rivals envy: a $4 billion annual annuity in lucrative paper, ink, and toner cartridge

sales from its printer business, where it enjoys 50%-plus US. marketshare. And HP remains

a top player in most of its markets, including PCS, where it has vaulted from the 27th

place in 1992 to # 4 today.

Still, the company hasn't come up with any

blockbuster innovations of late, long an HP hallmark. Without breakthrough products-which

typically command premium prices because competition is limited-the company is forced to

compete largely on price. "I look at HP as being in maintenance mode," says

former # 2 Richard E Belluzzo, who left in January to run Silicon Graphics Inc. "HP

has got tremendous potential, people, technology, and a great brand, but there's something

missing (that would) move the company to the next level."

Indeed, Belluzzo had been pressing hard for

drastic change during his final months at HP. Former and current managers say this put him

at loggerheads with Platt, who wanted to move more slowly. Belluzzo, for example, pushed

to slash pricey overseas sales offices and divert investment from slower growth, old-line

HP businesses to invest in high-growth areas such as PCs, say current and former

executives. Platt complained to board members late last fall that Belluzzo's

superaggressive efforts had become overly disruptive, they say. Platt won't discuss

Belluzzo. "I'm not going down that rathole. It has nothing to do with the issues we

face as a company."

Today, Platt is clearly focused on HP's

future with a two-part fix-it plan firmly in motion. First, he needs to get HP's house in

order by cutting costs and sharpening execution. Longer term, though, the 57-year-old CEO

wants to ensure growth by extending current businesses and creating brand new ones. To do

this, he is building on the belief of founders Bill Hewlett and David Packard that smart

people will do great things if given the independence and authority to make their own

decisions-fast. So Platt is easing back on corporate control of HP's business units. He is

giving managers more freedom to define their own goals and policies.

Costly Discounts



But with freedom comes

accountability. Through new pay policies, Platt hopes to tie managers' salary to the

performance of their units. Platt was a guinea pig for this last year, when the board

linked some 40% of his compensation to HP's performance. Now, Platt has asked the board to

do the same for HP's top 40 executives.

The company's PC chief, Duane E Zitzner, is

adopting the same philosophy. Starting this quarter, Zitzner will award stock options to

managers based on revenue growth, as well as shareholder value. That way, employees will

not be tempted to offer unreasonable price breaks to make quota-a mistake that cost HP

dearly last quarter, when it offered discounts of up to 50% to keep business from rivals

such as Compaq. "We chased some deals that we shouldn't have chased," says

Zitzner. "You get so into the battle that you can lose perspective."

Platt also is hacking away at the company's

spiraling costs. He put out a call for a 5% cut in operating expenses-a pledge he made at

a May analysts' meeting where he proclaimed: "I'm mad as hell, and I'm not going to

take it anymore." Now, the newly-empowered division heads are responding quickly. The

personal computer division, which shocked people by losing an estimated $50 million on a

70% increase in unit sales, is out banging on suppliers for price breaks. "We saw

much more of a tough-guy attitude from HP within a week of the earnings

announcement," says a top US supplier of HP's PC unit. "They were saying: `It's

a new era, and you better cut your prices or we'll go somewhere else.'"

Ball And Chain



And then there's Research and

Development (R&D), where the company spent $3 billion last year. In the past, each HP

unit kicked in a portion of sales to fund the company's vaunted HP Labs. That's fine for

high-margin businesses that need top-notch technology, but it's a financial ball and chain

for the PC business, which must compete with the likes of Dell Computer Corp. The new lab

tab? HP businesses now pay the labs 8% of their R&D budget, a figure tailored to the

development needs of each division. "This is an example of Lew letting us run our own

businesses," says Webb McKinney, who heads the consumer PC unit.

In the long run, though, Platt's # 1 worry

is growth. In late 1997, Chief Financial Officer Robert P Wayman did a study of companies

generating $40 billion-plus in annual sales and found that they grow, on average, less

than a piddling 5%-not nearly enough to support HP's shrinking margins. That lit a fire

under Platt, who is now trying to spark new innovation. One approach has been to create a

special unit to incubate promising new technology ideas. The first project is a new

computer display technology that Platt says could generate "billions" in sales.

HP has plenty of good ideas, but little to show for them. Consider networked printers. Few

analysts argue with HP's claim that networked printers will one day replace pricey

copiers. The theory: Why should companies incur the high cost of copying and distributing

documents that may not even be read when they could be stored on high-speed printers and

printed out as needed? Boeing Co., for example, is moving to store its huge service

manuals online so that technicians can print just the parts they need.

Yet HP has made little headway pushing its

"distribute-and-print" vision, say analysts. Meanwhile, HP still hasn't made

much of a dent on the Internet, a mark of shame for Silicon Valley's granddaddy. Having

purchased VeriFone Inc., the leading manufacturer of credit-card readers and authorization

software, HP hopes to become a top ecommerce player by outfitting PCs with VeriFone's

credit-card readers. This would allow cybershoppers a secure way to buy products or

download E-cash from home. So far, there's a small pilot program with Citicorp in

Manhattan, but little other progress.

Photo Op



There has also been little

movement in Internet imaging. Analysts drool over the potential sales of printers, inks,

and computers if HP could accelerate development of technologies to let consumers and

corporations print documents such as coupons, articles, and annual reports right off the

Web. Many technical hurdles exist, but "you look to HP, as the overwhelming market

leader, to solve them," says Deutsche Bank Securities analyst Michael K Kwatinetz.

The big digital photography initiation is

off to a slow start, too. While HP's $400 PhotoSmart printer was the first machine capable

of matching a snapshot in image quality, HP has failed to follow up with an all-out

marketing blitz that could persuade consumers to give up their trusty old cameras. The

result: HP has sold fewer than 25000 PhotoSmart units since it hit the shelves a year ago,

says analyst Marco Boer with market researcher IT Strategies. Later this year, however,

the company is expected to roll out new products that let shutterbugs wirelessly zap their

digital shots from HP cameras to special HP printers-a departure from most other schemes,

which require a PC to do this.

Platt says give it time. He insists that HP

launched its digital photography business knowing camera makers had yet to come up with

digital gear offering the required image quality at a price most consumers could afford.

"We could be accused of developing some of these markets too early," he says.

That's about to change. In March, Platt

Okayed a plan to hatch a series of internal "software startups" to attack

promising cyberniches. Rather than get lost in HP's sprawling software organization, these

units are off on their own. Staffers are compensated for attaining the same milestones

that venture capitalists demand of typical startups, such as delivering code on time or

attaining a key customer. On June 29, HP unveiled the first of these: HP OpenPix Image

Igniter, which makes software to let cybershoppers easily view and manipulate

high-resolution images. Says Platt: "If we see good ideas, we'll fund them."

Spotty Record



Platt must prove he will move

to turn these nascent efforts into big businesses capable of sustaining HP's growth goals.

There are plenty of skeptics. "Under Lew's leadership, there's been an aversion to

risk," says a former HP executive. "I can't point to one big new business that

has been created since he's been in place." Argues Platt: "For those who say

we're not attacking new kingdoms, look at PCS."

color="#000000">HP's Squeeze On Margins

There are signs that HP may not have the

stomach for the new fast-growth, low-margin businesses that dominate high-tech these days.

Since its latest quarterly disappointment, the company has backed away from a 1997 pledge

to become the PC marketshare leader by 2001. "We're not going to chase marketshare at

all costs," says PC Chief Zitzner.

Instead, some board members are quietly

wondering if PC sales are worth fighting for at all, admits Wayman. "This certainly

raises questions about how good (the PC) business is," he says. Platt disagrees. The

scrappy PC market is just the training ground HP needs to prove that big companies run as

fast as little ones. "We envision a model where most of the computer business looks

like the PC business," Platt says. "You can't duck that. It's the future."

Platt has to move boldly to make that future as bright as HP's past.

face="Arial" color="#000000" size="1">PETER BURROWS,



in California.


Copyrighted BusinessWeek


July 20, 1998.