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Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Merging HP and Compaq
Merging HP and Compaq
S&L Contributing Editor Alistair Davidson is a strategic consultant, and the lead author of Riding the Tiger, a book about strategies and practices in information management. His white paper on usage-based and business-case-justified sales strategies for selling advanced technologies in the current difficult sales environment is available at www.eclictick.com.
The acquisition of Compaq by Hewlett-Packard in 2002 was the big merger story of the year. HP is perhaps the quintessential Silicon Valley company - both technologically innovative and also on the leading edge of management of innovation. HP's management practices are summarized in a 1995 book that is widely quoted by technophiles, The HP Way by co-founder, David Packard, and Karen Lewis. Many wonder how the merger will play out in a variety of marketplaces and whether CEO Carly Fiorina's big bet on seeking economies of scale will ultimately strengthen the company. Just as interesting to other observers is how the integration of the two companies is being handled.
At a recent meeting of the Northern California Chapter of Association for Strategic Planning (ASP), Jackie Kane, HP Vice President, Executive Leadership and Corporate Functions HR, described the strategic management processes used to align around the strategy and realize the full potential of the combined portfolios.
HP's acquisition of Compaq now complete
When HP acquired Compaq, the deal created a $70 billion global technology giant. Kane characterizes the resulting company as having "the industry's most complete portfolio of IT products and services for both businesses and consumers".
The new HP has operations in 160 countries and approximately 142,000 employees. Recent market share figures quoted by Kane rank HP as number one in imaging and printing, personal computers, UNIX servers, Windows servers, LINUX servers, enterprise storage and number three in IT services.
Less well known is the merger's contribution to the company's strength in support of the financial services industry. HP technology powers 100 stock and commodity exchanges including the NYSE. HP supports 95 percent of the world's securities transactions, processes two out of three of every credit card transactions, 75 percent of electronic funds transfers, 80 percent of mobile billing and customer care traffic in Asia, and 65 percent of the world's energy infrastructure.
In the strategic management process, culture was key
Kane laid out the post-merger management process in five steps:
a cultural diagnostic phase, designed to identify the values of the two companies;
a structuring phase where the various business entities within the two companies were combined;
a "push down" phase where the new structure and values were communicated to all employees;
a resource allocation and implementation phase; and
making certain that the organization had the right leadership capabilities to make all of this transition pay off.
As a way of communicating the culture, values and objectives of the company, Kane recounted that Carly Fiorina begins and ends every meeting with the same slide outlining the HP leadership framework. And following the practice of her boss, Kane showed ASP the slide at the start and conclusion of her ASP presentation (see Exhibit 1).
Exhibit 1 HP Leadership framework
Commenting on the slide, Kane noted that HP's objectives are not necessarily unique. They include customer loyalty, profit, market leadership, growth, commitment to employees, leadership capability, and global citizenship.
HP's strategy is to provide the best return on information technology to business and public sector clients; to provide simple and rewarding experiences to consumers; to have a world class cost structure; and to invest in focused innovation where HP can make a value contribution.
HP's overall philosophy for its value proposition is to "deliver more" by providing high technology at low cost and the best total customer experience (TCE), Kane notes that this three-way combination is one that other firms often can not match.
The new company's operating model has four strategic business units: Imaging and Printing Group; Personal Systems Group; Enterprise Systems Group; and HP Services. All four are serviced by 11 horizontal processes that include IT, HR, finance, operations, supply chain, marketing, HP labs and strategic planning.
Like many firms, HP uses the balanced scorecard approach for evaluating its organization. In HP-speak, the four parts of the scorecard are: financial; operational excellence; customers; and employees.
Cultural due diligence
For Kane, who worked closely with CEO Fiorina on the merger, "culture was the biggest challenge of all". Prior to the deal closing, they did extensive research or "cultural due diligence", as she put it, to make certain the merger would succeed. She believes that "both organizations would have benefited from the work, even if the merger had not been approved".
The cultural due diligence process included third party interviews with 300 leaders in both organizations, surveying of several thousand employees and focus groups. Research into archival material was also undertaken to document practices. Kane said that one of the purposes of the research was to identify the informal decision making structure as much as the well documented formal organizational structure.
One of the key elements in the transition, "Fast Start", which brought every team together to communicate and discuss HP strategy, the structure, the values and how every employee on these teams fit into the new organization and contribute to executing the strategy.
The new HP values
Kane presented a list of the new HP values:
we are passionate about customers;
we have trust and respect for individuals;
we perform at high levels of achievement and contribution;
we act with speed and agility;
we deliver meaningful innovation;
we achieve our results through teamwork; and
we conduct our business with uncompromising integrity.
Of these values, only one was added in the merger process: "speed and agility".
Perhaps one of the most interesting deviations from standard strategic management practice was HP's decision to identify the top 300 leaders in the organization and do an offsite retreat with the CEO to discuss and align around the strategy, structure, metrics and values. In addition, the company identified 37 of its highest potential, highest performing leaders to create a leadership development roadmap aimed at fully leveraging HP's broad portfolio (see Exhibit 2).
Exhibit 2 Strategic thinking leadership famework
Execution and seeking value from the merger
HP's expectations of the merger were increased product range, increased scale economies and cost savings. A key framework the company used for ensuring gains involved classifying investment decisions in the combined business. There were two key decision approaches:
Adopt and Go - in essence, the decision rule for evaluating overlap in the two companies was "pick the better of the two processes or systems, then no more discussion".
The second approach was to engage in a dialogue around where dollars and people resources are invested relative to the number of initiatives and how the resolution accelerated the execution of the strategy. In some cases the following approach helped clarify the decisions.
Rather than pursuing all available initiatives, projects would be classified into three categories (see Exhibit 3). For projects in the upper right hand section, leading edge innovation capabilities were key to succeeding in the business. For projects in the middle of the grid, being a fast follower was an acceptable strategy. And for projects in the lower left hand portion, outsourcing or delivery in cooperation with other firms was a likely strategy.
Exhibit 3 Project classification
This type of framework and dialogue was key to realizing the cost saving opportunities for HP. But as Kane pointed out, making these trade-offs is difficult. Nobody wants his or her project killed. And HP had a long tradition of independent innovation.
Take-aways from the presentation
The merged company is a diverse and complex business.
The strategic management process used for integrating the two companies was guided by structure following strategy and values.
Overlaps in the two portfolios of businesses, processes and people required that emotionally difficult decisions be made.
Clarity in resource allocation and restructuring was key to making the merger work. However, without the use of teams from both firms, isolated from the legal complications of the merger (designated the "clean room"), the planning necessary for identifying product portfolio strategies would not have been possible.
Kane let it be known that in the new HP each of its four lines of business is independently profitable. Some have speculated that this was not true in the old HP.
The final chapter of the HP/Compaq merger has yet to be written. The new HP finds itself today competing with a wide variety of aggressive competitors in many different markets.
One outcome for the merger may be that the divisionalization of HP leads to a more aggressive and financial driven firm with a different pattern of innovation. An alternative potential outcome is that HP will seek fewer "first of breed" innovations and will rather try to innovate in ways that exploit its product line breadth.
More generally, industry observers predict that IT services and consumer sales are likely to be areas of particular emphasis for the new HP.