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Even before her November announcement that she was running for the US Senate on a pro-business platform, I had begun to wonder whether I needed to reconsider my long-time antipathy to former HP (NYSE:HPQ) CEO Carly Fiorina.

I hadn’t thought about Fiorina in years until she announced her candidacy. I also ended up examining new information when I had my students review HP’s recent business during all three of my courses last fall.

In fact, in the face of new information, over the past few months I’ve had to admit that I was wrong (at least in part) about Fiorina’s strategy, even if I have no new information about her winning personality.

Destroying the HP Way
During her tenure at HP (July 1999-February 2005), I thought she was destroying the company. As an HP contractor — with my company at one point supplying most of the Mac software for HP’s inkjet printers — we worked closely with HP engineers and watched the company cut quality to save pennies. The engineers who wanted to make great technologies like those that had made the company famous were getting shoved aside by boot-licking MBA types that would do Fiorina’s bidding.

Carly’s top priority was obliterating the “HP Way” — to break the culture of Bill & Dave and remake it in her own image. A symbolic example was the mandate that every voicemail recording proclaim “The New HP” — to the point that if a worker didn’t change his/her voicemail, her manager would do so. At the time, this seemed like a massive ego-driven (successful) effort to get her face on the cover of Forbes, Fortune and Business Week.

Fiorina’s signature proposal — and the flashpoint for opposition to her — was the 2001 Compaq acquisition, then sold as a “merger.” I agreed with Walter Hewlett — and HP hagiographer Mike Malone — that the “merger” was a terrible idea. On March 19, 2002, a few months before taking a job here in Silicon Valley, I even flew up to the shareholders' meeting where employees and shareholders voiced their futile opposition to it.

The merger went through, I commiserated with my HP friends about how terrible the merger and culture change were, and shared in their schaudenfreude when the resulting acrimony cost Fiorina her job.

The initial results of the merger were inconclusive, and after railing against Carly in my undergraduate strategy class from 2002-2003, I lost interest and went back to studying open source and later mobile phones.

Carly, Mike and Mark
HP’s finances have turned around around under the operational focus of Mark Hurd, CEO since 2005. Current employees say that Hurd is really just executing on Fiorina’s strategy — he’s providing the execution skills that Fiorina lacked (but might have had available if she’d kept Michael Capellas around).

How has Hurd done it? Reporter Chris O’Brien decided to answer that question by reporting facts that have been sitting in plain sight. As he wrote in Sunday’s Merc:

When their companies stumble — as HP did in the 1990s — most CEOs generally use only two strategies to fix things: fire lots of people, or buy another company.

Beginning with the arrival of Carly Fiorina in 1999, and continuing under her successor, Mark Hurd, HP has undertaken a staggering transformation, as it pursued both strategies with a vengeance.

What O’Brien found interesting is that (according to SEC filings) HP has fired 75,505 employees over the past decade, a number expected to hit 84,000 by the end of this fiscal year. (HP had 88,000 employees in 2000).

O’Brien continued,

Why do I find HP's job cutting so extraordinary?

First, let's start with some context. To find job-cut numbers of this magnitude, you have to look to the automotive or airline industries. General Motors, for instance, has announced 195,000 jobs cut since 2001, according to outplacement firm Challenger Grey & Christmas, and Delta Air Lines announced cuts of 51,154.

But when we talk about those industries, we talk about failure. As they dance in and out of bankruptcy and receive government intervention to stay afloat, we wonder whether they will collapse completely.

By comparison, HP is a fairly healthy company.

O’Brien’s reporting is remarkable, because the overall magnitude of the job cuts has been ignored for a decade. It hasn’t gone unnoticed by current (and now-former) HP employees, who have been whispering about the massive layoffs and the end of the former culture for years — as well as the use of the current economic crisis to cut salaries permanently.

Commoditizing HP
In 2000-2002, I thought Fiorina was destroying HP’s traditional business model and turning it into a commodity, low-innovation company. As both an engineer and an academic researcher, I felt she was destroying the great engineer-driven culture of the founders and replacing it with a by-the-numbers, penny-pinching, bean-counting mentality.

It turned out that I was right, because that’s what Fiorina (and then Hurd) did: end what had made HP great.

The problem with my argument was that I assumed that HP had a choice. In retrospect, it didn’t: Fiorina saw this and I didn’t.

HP during its heyday created the HP 35, various minicomputers, workstations, calculators and other innovative products. (That’s not counting the test instruments that Fiorina’s predecessor dumped into Agilent in 1999). There were many opportunities for innovation, and HP exploited them.

However, the reality is that overall IT industry growth ended with the NASDAQ peak of March 2000, and since then the industry’s revenues have been about replacing existing products rather than growing its overall share of the economy.

These issues were highly salient in the arguments for and against the Compaq merger. Re-examining the claimed costs and benefits of the merger:

  • Opponents’ Claim: The merger would increase HP’s exposure to the commodity PC industry. Reality: True.
  • Supporters’ Claim: The merger would give HP’s commodity business cost advantages through superior scale. Reality: True. Under Hurd, HP is a better commodity PC maker than even Dell (NASDAQ:DELL).
  • Supporters’ Claim: The merger would help HP increase service revenues. Reality: False. What was left of DEC wasn’t worth much, and so in 2008 HP spent $14 billion to buy EDS.
  • Opponents’ Claim: Adding Compaq would dilute HP’s printer cash cow. Reality: True, but it didn’t matter.

It was this last point that I should have seen coming as someone who spent almost 15 years working full-time writing printer software. I had a front-row seat watching the commoditization of HP’s printer business as it was dragged into price wars with Epson. Its HP DeskJet 900 of 1999 ($400) — strong enough for our toddler to sit on — was supplanted a couple of years later by the disposable HP DeskJet 3300 ($100).

In retrospect, the period from about 1984-1999 was a period of rapid innovation for inkjet and laser printers. HP was able to gain competitive advantage by being only a few years ahead of its rivals at a time when a few years mattered. In 15 years, HP went from a 96dpi monochrome printer (the 1984 ThinkJet) to a 300 dpi monochrome printer (the 1988 DeskJet), and then a decade later to 600 dpi color with the 1999 DeskJet 900. While dozens of new models have been created since then, chances to offer users dramatically better print quality have not.

In other words, there was 15 years of innovation-based differentiation, but when opportunities for meaningful differentiation disappeared, the emphasis of necessity shifted from innovation to cost cutting. With or without Carly Fiorina, around 2000 it was clear that HP’s printing margins were eventually going away, and new sources of revenue were needed to replace them.

Conclusion: Carly Was Right
Fiorina and Hurd have destroyed the old innovative, employee-friendly HP. The HP that once had a no-layoff policy has fired a quarter of its workers. The company that once had great labs and R&D is now a commodity, penny-pinching company that’s trying to (and succeeding at) out-Delling Dell.

Alas, commoditization is the future of the ICT industry: it’s happened to HP, Dell, Sony (NYSE:SNE), Toshiba (OTCPK:TOSBF), Acer, Lenovo (OTCPK:LNVGY) making PCs, and HP, IBM and Sun making larger computers.

Even with its quasi-monopolies, Microsoft (NASDAQ:MSFT) is having to worry about open source, SaaS and other price pressures as it’s unable to add new features that buyers will pay for. IBM, SAP, Oracle (NYSE:ORCL) , and other firms are facing the maturation of the industry and limited growth.

Meanwhile, the one type of computing devices that has recently witnessed dramatic innovation and growth — smartphones — is at the brink of commoditization if (as predicted) Android doubles its market share in 2010.

There’s only one differentiated systems company left — and that only as long as Steve Jobs is healthy. For most of the remaining IT industry, such differentiation is but a pipe dream: it’s either make commodity products cheaply or lose money.

[Bill & Dave]Under Bill & Dave, HP was an engineer’s paradise that was a role model for what a Silicon Valley company should be, at one time emulated by Apple (NASDAQ:AAPL) and the other startups of the 1970s and 1980s. Under Mark Hurd, HP no longer makes the lists (like Fortune’s) of the best companies to work for — while higher margin companies like Intel (NASDAQ:INTC), Microsoft, Intuit (NASDAQ:INTU) and Qualcomm (NASDAQ:QCOM) do. (Interestingly, neither Apple nor IBM makes the lists anymore, even though their respective financial positions over the past decade have been much more secure than HP’s.)

So while I accurately diagnosed Fiorina’s impact on HP employees and their morale, I completely missed that the environment was changing under HP’s feet and it had to change with it. As an engineer, entrepreneur, researcher and teacher whose career spanned the glory years of the PC and the Internet, it took me several years to recognize (or admit) that the world had changed forever.

The IT industry has become a slow/no-growth mature industry where commoditization is the unescapable reality. Economies of scale and scope are the only hope for even successful differentiated companies like Google (NASDAQ:GOOG) to maintain their lead.

Now I admit it: Commodities are HP’s future, and recently it’s been working well. Today, the only alternative seems like more of the same — good for shareholders, but bad for employees.

Disclosure: Author has holdings in INTC.

Source: Reconsidering 'The New HP's' Carly: She Was Right, I Was Wrong