HP vs. Everybody

Be inconspicuous. If there’s one tenet of the legendary corporate culture known as the HP Way that CEO Mark Hurd has mastered, that’s it. Known as a numbers guy who shirks the limelight, Hurd has practically channeled founding fathers Dave Packard and Bill Hewlett in his focus on how best to arm his 300,000-plus employees — and then get out of their way.

No wonder, then, that HP’s recent strategy to take on all comers has put some of its biggest rivals on the defensive. Just ask Dell, which HP leapfrogged to become the world’s largest PC maker. Or IBM and Cisco, whose respective IT consulting and networking supremacies Hurd has in his sights. Even Apple isn’t immune; HP’s forthcoming Slate tablet has been hailed as the best potential iPad killer out there.

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HP, of course, is no underdog. The Silicon Valley institution’s newfound swagger is backed by results: it has been the biggest player in the $1.7 trillion technology market for nearly five years. Earnings have grown, on average, 55% annually since 2005; last year the firm’s net earnings were $7.7 billion on revenue of $115 billion.

Indeed, under Hurd’s watch, HP has worked to transform itself from an underperforming printer manufacturer into a profitable IT-services supermarket. What’s more, the company has proved it is ready to trim where needed, dive quickly into promising new arenas and, when necessary, acquire the means to go head to head with formidable foes. “In a short time, Mark has identified opportunities worth trillions of dollars, convinced his people to go after them and led the pursuit with vigor and financial acumen,” says Robert Burgelman, a Stanford University professor who has studied HP closely for the past 11 years. “He has an incredible ability to see value where others don’t.”

Data is what everyone in the geek world that HP inhabits is eyeing at the moment. Or more precisely, how users — whether they’re Fortune 500 companies, garage bands or housewives — access, store and consume millions of megabytes of electronic information each day. Thanks to innovations such as smart phones and cloud computing, getting customers the data they need quickly and efficiently has become an increasingly complex and valuable proposition for HP and its competitors. Consider, for instance, that consumers are expected to buy 30% more netbooks and slate PCs in 2010, boosting the total to more than 40 million sold. “Every single firm is going after that next billion users,” Needham & Co. analyst Richard Kugele says. “They have the potential to generate a surge in storage and infrastructure unlike the world has ever seen.”

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That HP could be a contender to lead this charge would have been unthinkable five years ago. Sure, the HP legend is still the alpha start-up story: in 1939, Hewlett and Packard, two Stanford-trained engineers, launched the business from a rented Palo Alto, Calif., garage. And despite a beginning in automatic urinal flushers and harmonica tuners, the pair went on to develop a business in test instruments like oscilloscopes. They also invented the pocket calculator, the ink-jet printer and the basic user’s manual for the Silicon Valley companies that followed.

Yet as HP got bigger, it began to lose its innovative edge. So in 1999 the HP board hired firebrand CEO Carly Fiorina from Lucent Technologies (she’s now a GOP candidate for the U.S. Senate in California) to stage a comeback. Fiorina’s vision made her a darling of HP directors, investors and media. She even spun off Dave and Bill’s test-instrument division.

Execution was not, however, a strong suit. Her strengths and weaknesses were on display in the tumultuous 2002 acquisition of PC manufacturer Compaq. Although making the deal may have been strategically shrewd, Fiorina couldn’t deliver its promise of bringing HP more market share at lower cost. She was forced out in early 2005, concluding one of the most dramatic corporate soap operas ever witnessed.

Hurd took over Fiorina’s game plan. He was, to many, the anti-Carly — a finance hawk who’d perfected his operational prowess and Midwestern sensibility as CEO of Ohio-based ATM manufacturer NCR, once known as National Cash Register, another tech company with a long pedigree. “Whereas Carly tended to do brilliant Hail Marys that didn’t quite connect, Mark was an execution master,” says Rob Enderle, a tech analyst in San Jose, Calif. “He basically took Carly’s strategy and finally got it done.”

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Hurd quickly stopped work on product lines like televisions where HP wasn’t already either No. 1 or No. 2. Next he consolidated the data centers from which HP conducted its operations, going from 85 to six. Once the financial crisis hit, Hurd slashed salaries across the board, including his own by 20%. “In an environment like this, there’s no margin for error and no tolerance for inaction,” Hurd wrote in a staff memo last year.

Meanwhile, Hurd has turned strategist. His goal? To integrate HP’s operations so fully that its customers could fulfill all their printing, computing, connectivity and tech-service needs in one stop. HP has beefed up its 20,000-strong sales force and targeted its attention on the top 2,000 firms worldwide. The company has just launched a $40 million rebranding campaign, complete with a new tagline: “Let’s Do Amazing.” “We’re entering an era where the primary thing is going to be services,” says HP strategy chief Shane Robison. “And we want to be there to provide the necessary infrastructure.”

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So as other companies were scaling back in the past two years, HP was on the hunt for bargains. Hurd found his first in August 2008, when HP spent $13.9 billion to buy the languishing infotech-consulting giant Electronic Data Systems (EDS), a direct play against high-end-services leader IBM. Then last November, HP announced it would pay $2.7 billion for networking concern 3Com, a means to rile Cisco as well as expand HP’s footprint in the rapidly growing China market, where 3Com is strong. About 70% of HP’s business is overseas.

Unseating Dell is one thing; usurping IBM or Cisco remains a longer shot. But HP clearly has their attention. After nearly a year of very public infighting, Cisco finally booted HP from its privileged-partner circle in February, cutting off all proprietary information. Speaking on a corporate blog, Cisco exec Keith Goodwin minced few words: “We are taking this action to be transparent to both partners and customers — we will compete with HP for future business.”

At home, Hurd has had to reconcile his drive for efficiency with HP’s legacy of letting the geeks in R&D roam freely. Innovation, after all, is what tech companies do. And critics note that HP’s $17 billion in overall R&D investment since 2004 has dwindled as a percentage of its growing sales.

To take on this balancing act, Hurd hired research director and former academic Prith Banerjee in 2007. Banerjee undertook a full-scale overhaul of HP Labs, a longtime oasis for HP tinkerers and their outlandish ideas. To his astonishment, Banerjee found his new researchers sprawled across as many as 150 ongoing projects.

“The key change we made was to take our brilliant scientists and sharpen their focus around a much smaller pool of big bets,” Banerjee says. Of these 21 projects, he adds, “we set a high bar that every single one must have the potential to [generate] $1 billion — plus in revenue for HP.”

But are these research priorities the right ones? The much hyped Slate, for example, still has no rollout date. Plus, despite its thirst for expansion, HP has a ways to go in key niches such as smart phones, software and storage. “HP will tell you that it doesn’t want to compete with its partners — Microsoft, Oracle, SAP,” says Forrester Research analyst Frank Gillett. “But software has pretty high margins to simply be left on the table.”

Still, HP hasn’t shied away from using scale to its advantage, something the company has relied on its partners to achieve. Indeed, HP and Microsoft in January announced a new $250 million pact to sell their hardware, software and services bundled. While the deal itself was not groundbreaking, the notion that Microsoft and HP salespeople will now push one another’s products almost exclusively is sure to aggravate the likes of Dell, Cisco and IBM. And maybe that’s the new HP way.

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