Yahoo vs. HP: Turn Around Efforts by the Numbers

Thursday Feb 9th 2012 by Rob Enderle
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Both companies face big challenges. Which one is better equipped to improve its position?

Over the next few months we’ll get a chance to compare how two new CEOs are doing in their respective companies. Neither Meg Whitman at HP nor Scott Thompson at Yahoo were experienced in the kind of companies they took over.

Whitman got the more complex company but also got a team of seasoned executives already running the divisions, Thompson got a simpler firm but one also in far more difficulty. Both new CEOs had board changes surrounding their appointments, Whitman’s before and Thompson’s after.

Whitman is also clearly subordinate to Ray Lane, credited with turning around Oracle, a vastly different kind of company that has recently drifted into HP’s space. This creates an interesting dynamic as both CEOs are likely to take their respective charges on paths inconsistent with these companies’ current strengths.

With Yahoo’s board changes this week let’s take an updated look at Yahoo and HP.

HP: Drifting to Software

Given the competitive pressure by Oracle, IBM’s own shift to software, and Ray Lane’s background, seeing HP drift again towards a software model shouldn’t be surprising.

Recent developments suggest a major, though dangerous, change there. Specifically, the departures of Shane Robison, an Apple-trained hardware-focused CTO, and Jon Rubenstein (father of the iPod). the only person deeply trained to be a Steve Jobs. These departures were coupled with moves to license WebOS (creating a potential additional conflict with Microsoft) and the appointment of ex Microsoft VP Bill Vehgte to chief Strategy Officer.

Certainly this is financially a more compelling move than Oracle’s move in the opposite direction. Software is traditionally higher margin than hardware and, unlike Oracle, success is likely to increase, not collapse, margins.

Now typically a best practice is to reorganize a company around the skill sets of its CEO but this rule breaks down a bit when talking about an umbrella company like HP where the division heads hold the key skills.

And while IBM is clearly on this same path, IBM up until the early 90s had the largest software company in the world and they have had better than 50 years in software to prepare for this move. HP, under Carly Fiorina, was building a software unit but Mark Hurd effectively killed the effort; he saw the head of that unit, a Fiorina favorite, as a threat and forcing her out.

Leo Apotheker, Whitman’s predecessor, started rebuilding with Microsoft veteran Bill Vehgte at the head of the unit but it was still in early phases when Whitman took over. HP will still need to make major acquisitions to close the software gap with both HP and Oracle. Software acquisitions are particularly treacherous because it is very hard to effectively lock in the talent – and the talent is the product.

Finally, retaining hardware executives who likely will see their opportunities to become HP CEO evaporate now becomes more difficult. And HP leads in several hardware markets, making top players like David Donatelli, the well regarded VP hired from EMC, potentially vulnerable over time.

HP is currently fighting on a number of fronts against global companies, including their traditional competitors IBM, Dell, Asus, Apple, Acer, Sony, Toshiba, and Lenovo; ex-partners Oracle and Cisco; and the company is increasingly drifting into Microsoft’s turf.

HP: Designed for Conflicts -- But There’s a Limit

The umbrella model does allow for multiple fronts but HP’s number exceeds even IBM’s. And HP may have more ongoing battles than any other vendor currently in segment.

Eventually they are likely going to have to make some hard choices and exit one or more of them. Oracle’s own moves have lessened their leverage, the loss of Steve Jobs has weakened Apple, and the other consumer vendors aggregated don’t represent that much of a threat.

This is with the exception of Lenovo, which is currently growing rapidly and has a strategic position in China – the world’s fastest growing technology market. Dell is strengthening in the mid-market but that hasn’t historically been an HP strength. The battle with Oracle has largely benefited IBM, which enters this decade at the top of their game. Finally Microsoft, which historically seems to have a binary way of considering companies friend of foe, could be problematic. And WebOS might put HP at odds with Google as well.

HP is holding but will likely need to begin making peace with some of these competitors in order to husband its resources effectively. If not, it will need to become far more agile than it is to move on the threats these firms represent in aggregate. Yet assuming Whitman still has political aspirations, large layoffs could be as problematic for those aspirations as they were for Fiorina, who largely lost her bid for the US Senate due to her HP staffing policies.

In short, hemmed in and with massive complex competitive pressures and potential increasing executive retention challenges, HP faces an unprecedented level of stress. Making sure this doesn’t exceed HP’s tolerance for stress will be a prime element of Whitman’s success or failure.

Yahoo Drifting

Yahoo was clearly drifting under Carol Bartz, whose skills as a packaged software CEO ironically would have likely been more valued at HP than at Yahoo. Yahoo wasn’t an umbrella company like HP and that means that the CEO needed to have the company reflect her skill set. And it clearly didn’t, suggesting the mistake wasn’t Bartz but with the board that selected her. That said, Thomson takes over a demoralized firm that is struggling to articulate a present, let alone craft a plan for the future.

While HP faces the complexities of multiple markets and a change in focus, Yahoo doesn’t even start with a focus and lacks the executive backstop that HP enjoys. This puts far more pressure on their new CEO, who while closer in skill to Yahoo’s core properties, is still a better match to a financial services firm than a digital publishing company.

Currently Thompson is building his board, something that Whitman was the result of at HP, so he can even begin to make a change in direction. And he also lacks the clear choices that Whitman enjoyed.

HP and Yahoo Contrasts

This sharply contrasts the problems of the two CEO’s. Whitman needs to watch her conflicts but her direction has been preselected by Ray Lane. Thompson faces far less competitive pressure (he doesn’t have a Larry Ellison trying to put him out of business for instance) but he hasn’t yet determined, and needs to, the direction to take the company.

He still needs to determine whether to package the company for sale or turn it around. A turn around can take 5 to 10 years as Steve Job’s successful effort at Apple proved, and Thompson will be lucky to get 24 months. A sale, given Yahoo burned Microsoft (the last highest bidder), is problematic as well because it seems that no one wants to buy the entire company anymore.

In short, at HP the pressure is massive but shared, at Yahoo it may be less but with the CEO-directed board changes the Thompson owns it potentially making it higher on him than on Whitman. And excessive pressure can quite literally break a CEO.

Wrapping Up: The Keys to Success

The keys to both efforts are similar and are grounded in past successful practices. Both CEOs need to ensure they balance resources with efforts, cutting those they can’t afford to do well to fund those that are more strategic.

But, in both cases, the first big step will be to assure the company is on a course that it physically can complete. This is because if ether firm is taken in a direction outside of the company’s scope, it will fail regardless of execution. So the priority is to find a course the company can complete and then assure that course is resourced to assure it arrives at the predetermined destination.

Carly Fiorina was strong on destination but sucked on execution. Mark Hurd didn’t care about the destination, he seemed to focus on optimizing his compensation (which is a board level problem) and had far too much free time to get into trouble. Carol Bartz was mismatched to her company. And Leo Apotheker, like Whitman, had help with the destination but couldn’t execute.

Whether it is captaining a chip or a company, you need the right skills, a destination that can be reached, and proper resource management so the goal/port is reached.

Both Yahoo and HP are at the start of their journey. HP has a course; Yahoo is struggling with picking one. HP is struggling with resource management due to complexity, and Yahoo may not yet have the skills it needs to reach or pick a viable destination. We’ll be watching both companies for a while.

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