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If Today Ends in a Y, HP Must Have Flip-Flopped on PCs Again

The noble Duke of York, he had 10,000 men. He marched them up to the top of the hill and marched them down again.
Watching HP (HPQ) is like following a furious game of ping-pong in which every volley immediately ends before it begins as the receiving player wildly swings and misses and the ball sails off the table's edge. That's why there's no surprise in hearing that HP has decided to keep its PC division within the company after all, rather than spinning it off or selling it.

HP has rationalized the decision, with a quote attributed to CEO Meg Whitman (and likely written by the PR department) saying that "keeping PSG within HP is right for customers and partners, right for shareholders, and right for employees." The company says that keeping the PC group would save one-time expenses of $1.5 billion and retain joint marketing and sales opportunities whose loss would have cost another billion a year ongoing. But the real message is that HP continues to act years too late and doesn't know what it wants while upper management and the board don't have the courage of their convictions. That is to say, HP is in a far worse state than the financials could possibly show.

Should it stay or should it go?
Not that any of this is surprising. When announcing Whitman's appointment as CEO, chairman Ray Lane essentially telegraphed that the company would do an about face on the PC decision, even though the entire board, including Whitman and Lane, had signed off on the strategy.

How is it that HP could suddenly recognize that selling or spinning off the PC group was a bad idea when it seemed so good just a few months ago? Was it new data that no one in management had access to before? A sudden realization, perhaps, that sales teams used PC margins as bargaining chips to get enterprise customers to buy servers, infrastructure gear, and consulting services? Of course not.

Nobody likes us, everybody hates us, think we'll go eat worms
If any of the implications were a surprise, then everyone connected with the decision, including Whitman and Lane, should have been fired for utter incompetence. No, they're all using the financial arguments as an excuse to back off a strategy that proved unpopular with investors, channel business partners who resold HP products, and customers. The investors didn't want to see 31 percent of revenue walk out the door. Neither channel partners nor customers wanted to feel left in the lurch.

But HP and former CEO Leo Apotheker were right in the first place to decide to rid themselves of the PC business. Yes, the boxes are nice bones to throw to corporate buyers, but the result was very low margin business which nevertheless required massive amounts of capital to purchase components and pay the gazillions of people involved. HP's big mistake was to not have anticipated the problem years ago, as IBM did, and develop a strategy that would work going forward.

Things will only get worse. The margins have only started to sink in the PC business, because hardware continues to drive downward in price and devices like tablets -- you know, that market that HP jumped into and then out of again -- make PCs unnecessary for many things consumers and businesses need to do. All HP's frightened management has done is placate angry people who scared them. But what the heck, given recent history, there will probably be a new CEO in the next year or two who can deal with the problem then.


Image: morgueFile user paulcopeland.
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