HP maps growth path

Hewlett-Packard hosted its annual securities analyst meeting in San Jose this week, and the company's top brass laid out its plan to grow revenues consistently at a rate in the high single digits (twice the rate of global GDP growth) and to grow profits by more than 20 per cent a year. This ambitious goal is similar to that of its main rival IBM, but HP thinks it has a unique way of reaching it...

Every company sees the future through its own eyes, in relation to its own products and capabilities, and a company as complex as HP will naturally see the world as a complex market with lots of places for it to play in. At some point, chairman and CEO Carly Fiorina will probably not have to justify the Compaq acquisition from nearly three years ago when she talks about HP, but that wasn't the case this week.

Rather than reiterate what she said, I ask you to imagine what HP's enterprise server, storage, and services businesses might look like if the company had not acquired Compaq. They would be a mess, and getting hammered by whoever did buy Compaq. Let's just say for once and for all that the Compaq acquisition was good for HP even if it has been tough on Compaq.

Now that the transition is mostly done, HP is throwing off more than $6bn in cash and has $15bn in the bank. IBM, which is roughly the same size, at around $80bn in sales a year, wishes it had $15 billion in the bank. (The tens of billions of dollars in share buybacks in the past decade have come at a cost.) The HP that Fiorina has built is HP, whether we like it or not. And, whether we like it or not, Fiorina did exactly what she said she would do. There were a few missteps, but that is to be expected given the largest merger in IT history, and HP has ended up a healthier competitor.

Digital, mobile and personal

That's not to say that HP doesn't have problems. It surely does, and that is why it has merged its server, storage, and services units to try to shift from selling products to solving IT problems. In her keynote address at the analyst conference, Ms Fiorina talked about how the 1980s were about having stable, reliable (and relatively simple) IT systems, and that the 1990s was the era of the hot box, when customers chased best-of-breed technology to build client/server and then Internet-style computing infrastructures. In the 2000s, everything is about going digital, mobile, and personal.

"This is a profound change in the industry," she explained. "The key technology imperatives are about simplicity, manageability, and adaptability. These trends are changing entire industries, and this is the world we built the entire company for." She said that HP would bring the same focus on execution to selling products and services in this new technology era, as it did with the HP-Compaq merger.

Selling experience

In fact, it was the merger insight HP gained through streamlining one of the most complex manufacturing, supply chain, and IT operations in the world that made it realize it had to change not only what it sells but how it sells. When customers buy into HP's Adaptive Enterprise approach to IT, what they are buying is a piece of that HP merger experience. (Peter Blackmore, who heads the new Customer Solutions group sales arm of HP, said that HP has booked $7.8bn in sales related to Adaptive Enterprise since introducing the concept.)

What HP wants to do now is wring profits out of its supply chain, just like every other manufacturer and distributor. Ms Fiorina said the company has a $50bn supply chain (compared with $25bn for Dell and $20bn for IBM), and that there is tremendous opportunity to cut costs and get more flexible by managing that supply chain better. HP has consolidated 26 supply chains down to five since the merger, and has reduced the time it takes to add a new partner into a chain from five weeks to less than two hours. As HP figures this out, it will sell the expertise to other companies.

Chasing market share

While this is interesting, what Ms Fiorina really wants HP to do is get a bigger piece of the markets that the company plays in (PCs, servers, storage, services, and to a small extent software) as well as targeting emerging and nebulous markets such as digital media. Getting more share from where it is already playing is an obvious tactic, and there is apparently a lot of room for growth here for HP.

According to HP's own estimates of the IT market, HP played in markets that comprised a total of $710bn in spending in 2003. The enterprise market, at $320bn, was about half of the total potential market for HP, but HP only had 8.4 per cent of that market. HP reckons it has the largest share of the $186bn market of small and midsized businesses, which is growing at 5.8 per cent compounded annually, but that share is still only 10.2 per cent. (The enterprise market is growing at about 5 per centannually, according to HP.) There seems to be less upside in the consumer market, which HP estimates was worth about $87bn in 2003, of which it had about an 18.6 per cemt share. The public sector business (healthcare, state, local, and federal governments) comprised about $118bn in opportunity, but HP only had a 7.6 per cent share. While getting market share from 10 per cent to 20 per cent is not as easy as getting from 5 per cent to 10 per cent in most markets, HP is one of the two largest IT suppliers in the world. If anyone has a shot, it is a company like HP. (Getting much beyond 25 per cent seems very unlikely in most markets.)

HP reckons it has about 23 per cent of the $98bn imaging and printing market, about 12.6 per cent of the $168bn PC business, about 16% of the $96bn enterprise systems business, and only 3.5 per cent of the $349bn IT services business. (Again, those categories are only for products and services HP offers, not for the entire IT sector.)

Finding new markets

HP is also adding new markets that it believes can push the company's total addressable market to $1 trillion, and by getting products in these new markets it can increase the IT spend in places where it already has customers. HP reckons that, in the 2003 market, security was worth $11bn, IT management software was worth $15bn, mobility products comprised $200bn in sales, and rich digital media comprised another $400bn.

HP's share in these markets is very small, and this is what Fiorina wants to change. She also said that even the largest HP customers typically spend only 10 per cent of their IT budget with HP. She wants that number to go up, too. It's all about cross-selling, upselling, and stressing the value of the full HP portfolio. This is easy to say but hard to do.

Protecting core businesses

The trick for HP will be to move into these new markets while gaining revenue and shipment share in core markets like servers. According to Ann Livermore, who heads HP's new Technology Solutions Group, the x86 market, where the company's ProLiant servers play, was a $19bn market in 2003, growing at 14 per cent annually.

HP reckons that the high-end server market, where its Unix and proprietary machines play, is a $22bn market, but it is declining at three per cent a year. Without Compaq, HP would be facing the same decline in the high-end server market without a strong x86 server market to offset it. The related network storage business is a $20 billion market, growing at only 3.5 per cent. Compaq contributed mightily to HP's storage business, and the company hopes that driving up attach rates of storage on servers will help it grow its market share.

Simply put, the server and storage businesses are what give HP the credibility to chase services business, particularly complex outsourcing, as it has with customers like Procter & Gamble. HP wants a profitable server business, but it wants a bigger server business a lot more. It will be interesting to see how the company balances these two desires and tunes its profits.

Source: ComputerWire/Datamonitor