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HP battered by past decisions and the future of its industry


(MoneyWatch) HP (HPQ) CEO Meg Whitman, hired from her board position to turn around a troubled company, yesterday acknowledged that the problems are massive and will be around for years. The stock dropped 13 percent by the end of Wednesday as investors went screaming for the door.

The near future financial weather report -- at least until 2016, according to Whitman -- is revenue and profits both down sharply. According to sources quoted by the New York Times, Whitman wanted to get as much bad news out at a single time so she and the board could work on rebuilding. But the future is perhaps even grimmer than she lays out, and the question is whether people at the top of HP are capable of doing what is necessary to improve the company's lot.

HP's current situation is a mess, with all the business lines in trouble, as Rolfe Winkler at the Wall Street Journal puts it. One reason is changes in the industry.

The PC business is battered, largely because of shifts in the industry. Not only have tablets such as the iPad become popular, but competitors like Lenovo have come on strong. Dell has gained share in the critical server market.

Worst of all was the services business that HP started with fanfare and the $13.9 billion acquisition of EDS. Although it tried to follow the model that IBM had successfully implemented, emphasizing high-margin services and less reliance on traditional hardware sales, HP never achieved the integration with its other business units. The mistake led to an $8 billion goodwill write-off in August.

The other reason is the legacy of mistakes that have finally come home to roost at HP. Primarily under former CEO Mark Hurd, the company cut spending in R&D and saw a significant drop in patent activity, two indicators that it had sacrificed innovation and future development for short-term financial gains. The run of revolving door CEOs, including Hurd, predecessor Carly Fiorina, and, most recently, Leo Apotheker, left the organization demoralized and in disarray.

Apotheker's stay was particularly damaging because he set up a series of strategic shifts, including plans to spin off the company's PC unit, that the board, including Whitman, originally approved and then repudiated after firing him. HP's problem has been the need for a new strategic direction that could counter past mistakes and general industry and social changes.

However, HP has treated the problem as a turnaround, which means doing what you did in the past, only better. But the company needs something significantly different and it's unclear whether Meg Whitman, who made some major mistakes during her time at eBay, knows how to deliver what HP needs.