HP CEO Leo Apotheker making the right strategic moves

Less than a year after Apotheker took the helm at one of the largest US tech companies, HP announces major strategic changes to its product lines – finally, some good moves out of HP.

It  seems HP has been mired with controversy over the last decade, and each CEO made their mark with their own mistakes. Carly Fiorina who was a media darling at the time, pushed HP deeper into the hardware business through the Compaq acquisition, a move she never quite recovered from. And Mark Hurd, who was brought in for his efficient management style, was let go abruptly in 2010. Enter Leo Apotheker, the CEO of SAP, a major player in the software industry.

Let’s back up a little. No matter what analysts would like you to believe, HP has been a hardware company at its roots, and typically, the hardware business shows high revenues and low margins, and products that quickly become commoditized. OK hardware companies usually sell software too, but there’s a huge difference between a software-only company like SAP, and a hardware company like Dell, so let’s not get too technical about that.

Both Fiorina and Hurd came from a hardware background. Even though Hurd oversaw the acquisition of EDS back in 2008, the company still ran as a hardware company. Apotheker, on the other hand, has lived and breathed software. He knows how to run a software business, and he gets the nuances of running a software and services business. This is a major advantage.

The disadvantage is that changing a company’s focus from hardware products to software and services is messy business. The revenues will take a hit, major chunks of business will have to be spun off, major chunks of business will have to be acquired or developed. And most importantly, organizations need to be rearranged. IBM did this in the 90s, with great results I might add (I think HP is following IBM’s footsteps in many regards).

In the sweeping changes for his strategic move to turn HP around, Apotheker has not held back. HP today announced multiple changes to several major product lines. Here’s the list:

Intention to sell off the PC business . This is huge. Remember, HP’s PC business is a combination of the original HP PC business plus the Compaq business acquired by Fiorina almost a decade ago. Spinning off the PC business makes perfect sense due to the mature nature of the business and lowered margins. IBM sold its PC business many years ago to the Chinese conglomerate Lenovo (ironically, around the time HP acquired Compaq). It’ll be interesting to see who will acquire this line of business, and for how much.

Acquisition of Autonomy. HP has bet 80% of its cash on this British software company – to the tune of $10.25B. Autonomy provides data search and analytics solutions for cloud computing, eCommerce, and other enterprise systems. With high margins and a repeatable revenue generation model, it becomes clear that HP is swapping its PC business for a more lucrative software business. Excellent move.

Discontinue TouchPad. Just weeks after launching TouchPad, a direct competitor to iPad, HP makes the gutsy move to discontinue it. The product has shown disappointing results, and HP decided to let Apple reign as the king of tablets.

Discontinue WebOS. WebOS was HP’s mobile platform acquired through the $1.2B acquisition of Palm (yes, HP at the time paid $1.2B cash for a company that was at the bottom of the market totem pole and on the verge of bankruptcy – why the shareholders at HP weren’t livid at the time, is beyond logic… but I digress…). Apparently HP realized they’re not making it in the mobile business, and decided to cut the business loose. It helps that Apotheker was not the one in charge of that acquisition.

For the first time in a long time, I think HP is making all the right strategic moves in repositioning itself as a software and services business. At this point, the trick becomes operational in terms of integration, organizational changes, and refocusing the business lines for better results. Of course, Wall Street, with its myopic “quarterly” views, has dinged the stock, as these moves probably won’t show solid bottom line results for another 6-8 quarters.

All the media discussions about HP are leaving out one major business line. What will HP do with its printer business? (I happen to know more about this business than I’d like to admit). The printer business has gone through a brutal commoditized stage over the last decade, and although the hardware sales are really there to generate toner and ink revenues (the razor/blade business model), at some point, the printer business won’t fit into the big picture at HP. But HP is probably done with major changes for a while. Time to roll up the sleeves and get to the operational work.

Everyone will be watching.