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IBS Case Studies

IBS Hyderabad
Date: 23/06/2012
LDEN/026

Time: 17:29:27

IBS Center for Management Research

LicensetouseIBSHyderabadforSemI,classof2014

Carly Fiorina: The Change Leader

ThiscasewaswrittenbyVivekGupta,IBSCenterforManagementResearch.Itwascompiledfrompublishedsources,andisintendedtobeused asabasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofamanagementsituation.

2004, IBS Center for Management Research. All rights reserved. Toordercopies,call+918417236667/68orwritetoIBSCenterforManagementResearch(ICMR),IFHECampus,Donthanapally,SankarapallyRoad,Hyderabad 501504,AndhraPradesh,Indiaoremail:info@icmrindia.org

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CarlyFiorina:TheChangeLeader
BusinessWeek,February29,2001.

ShesplayingCEO,visionary,andCOO,andthatstoohardtodo.

INTRODUCTION
In2002,CarletonS.Fiorina(Fiorina),theChairmanandChiefExecutiveOfficer(CEO)ofHPwastheonly woman CEO to head a Fortune 50 company. Fortune magazine also ranked her as the most powerful woman in business for the sixth consecutive year. There were several other prominent women CEOs in the US including Anne Mulcahy of Xerox, Patricia Russo of Lucent, and Meg Whitman of eBay, but it was Fiorina who earned the coveted rank. Commenting on Fiorinas leadership,JohnChambers,CEOofCiscoSystems,said,ShespotentiallyoneofthetopCEOsofallAmerica.[1] FiorinareinventedHPandmadeitmorecustomerfocused.HPswebsitesaid,Underherleadership,HPhasreturnedtoits rootsofinnovationandinventivenessandisfocusedondeliveringbesttotalcustomerexperience.[2] However,manyofFiorinasinitiativesatHPhadbeencontroversial.WhenshealteredHPslongcherishedcultureTheHP Wayofmanagementproposedbythecompanysfounders,shecameinforstrongcriticismfromthecompanysemployees andthemedia.WhenFiorinaundertookatotalreorganizationofHPsstructure,thecostsranoutofcontrol,whichledtoutter confusion in the company. Another controversial move was to acquire HPs competitor Compaq Computer Corporation (Compaq)atacostof$19billion,whichresultedinoneofthebiggestproxyfightsincorporatehistory.Thesemovesleda fewanalyststodoubtFiorinasmanagerialcapabilitiesandtowonderaloudifshehadtherightvisionforHP. When it was put up for approval in March 2002, Fiorina managed to get the merger approved by winning the support of institutionalshareholders.ThebiggerchallengeforFiorinahoweverwastomakethemergerwork.HPhadperformeddismally infiscal2002(ReferExhibitI)andwasjustshowingsignsofrevivalin2003.ItremainedtobeseenhowshewouldleadHP backtoitsgloriouserawhenitreporteddoubledigitrevenueandearningsgrowthyearafteryear.

BACKGROUNDNOTE
Bornin1954,FiorinawasbroughtupinAustin,Texas(USA).HerfatherwasalawyerwhoalsotaughtlawatStanfordand other universities while her mother was a painter. Fiorina attended school in different parts of the world including Ghana, England, North Carolina and California. She graduated in arts (BA in medieval history and philosophy) from Stanford University in 1976. Fiorina displayed her analytical capabilities at Stanford, where she was able to summarize hundreds of pagesofreligiouswritingsintocrisp,twopageabstractsinquicktime. Aftergraduation,sheattendedthelawschoolatUCLA(UniversityofCaliforniaatLosAngeles).However,sheoptedoutof the course after completing one semester. In an interview to Investors Business Daily, she said that lack of interest had promptedhertodropoutsincelawwasallaboutdiscoveringprecedentsomeoneelsehasset.Shethencompletedamasters degreeinscience(MS)fromMITsSloanSchool. In the early days of her career, Fiorina taught English in Bologna, Italy, and also worked as a receptionist in a commercial brokerage firm in New York. It was in this firm, when writing deals for brokers that she became attracted towards business management.Whilecontinuingtowork,FiorinadidacourseinmarketingmanagementfromtheRobertH.Smith School of Business, University of Maryland. After she acquired her MBA degree, she joined the sales department of AT&T Long Lines[3]asanaccountexecutive,in1980. ExcellentsellingskillsenabledFiorinatomoveupthecorporateladderfast.By1989,shewashandlingtheNorthAmerican operations of AT&Ts equipment business. In 1992, Fiorina became the first female officer to head the network systems business of AT&T. According to analysts, Fiorinas success at AT&T revealed her determined, goaloriented and ruthless whennecessarypersonality. In 1995, Fiorina started working for Lucent Technologies (Lucent), an equipment subsidiary of AT&T. Within an year, she became the first woman executive vicepresident of corporate operations at Lucent. Fiorina successfully spearheaded the planning and execution of the companys initial public offering (IPO) in late 1996. Investors were highly impressed by her marketingsavvy,whichmadeLucentthemostsuccessfulIPOoftheyear.ShealsoplayedamajorroleinLucentsspinoff fromAT&T. In 1997, Fiorina became the president of Lucents Global Services Provider Business, a division that generated revenues of about $20 billion annually. Under her leadership for the next couple of years, the division grew rapidly global revenues increasedsignificantly,anditgainedmarketshareineveryregion,acrosseveryproductline. InJuly1999,FiorinabecamethePresidentandtheChiefExecutiveOfficerofHP,succeedingLewisE.Platt(Platt).Shehad thedistinctionofbeingthefirstwoman,thefirstnonengineer,andthefirstoutsidertobehiredasCEOatHP.Priortojoining HP, Fiorina had spent nearly two decades at AT&T and Lucent. HPs board hired Fiorina in a desperate bid to pull out the companyfromapoorstateofaffairs.

THESTINTATHP
Duringthelate1990s,HPfacedmajorchallengesinanincreasinglycompetitivemarket.Infiscal1998,whileHPsrevenues grewbyjust3%,competitorDellsroseby38%.ThecompanyfailedtocapitalizeonthePCandInternetboomandmissedits targetearningsforecastsineightcontinuousquarters. HPs culture, which emphasized teamwork and respect for coworkers, had over the years transformed into a culture of consensus. This was proving to be a major disadvantage in an era of fastgrowing business. The company had 83 different productdivisionsandabloatedbureaucracytomatch.JeffreyL.Cooke,VicePresident,PackardBellNECInc.,andaformer

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productdivisionsandabloatedbureaucracytomatch.JeffreyL.Cooke,VicePresident,PackardBellNECInc.,andaformer executiveatHP,said,IleftHPbecauseIdidnotwanttospend80%ofmytimemanaginginternalbureaucracyanymore.[4] Herevealedthatheoncehadtogetanoperationalchangeclearedby37differentinternalcommittees. ThebureaucracyatHPhadbegunaffectingitsinnovationtoo.[5]Managerswereoftenreluctanttoinvestinnewideasforfear ofmissingtheirquarterlygoalsHPhadnothadamegabreakthroughproductsincetheinkjetprinterin1984.Despite the absence of new products, Fiorinas predecessor at HP did nothing to motivate the product development teams. Instead, he focusedonpromotingdiversityintheworkplaceandonensuring a more humane balance of work and personal life for HP employees.Whiletheseeffortswerepraiseworthyontheirown,theydidlittletohelpHPfacethetoughbusinessenvironment inwhichitwasoperating.HPbadlyneededacompletechangeandanewleadertocopewiththerapidlychangingtrendsin theindustry. In her attempts to revive HP, Fiorina devised a threepronged strategy. The key components of this strategy included revampingtheorganizationalculture,changingtheorganizationalstructureandacquiringalargePCmanufacturer.

REVAMPINGTHECULTURE
Soon after taking the charge at HP, Fiorina decided to change HPs consensusdriven culture to a performanceoriented culture.Thechallengeforherwastoretainthecompetitiveedgeinengineeringandinnovationwhilemakingtheemployees moreadaptableandresponsive.FiorinaimmediatelyintroducedseveralchangesatHP.Shedemandedregularupdatesonkey units.ShealsoinjectedthemuchneededdisciplineintoHPscomputersalesforce,whichhadreportedlydevelopedahabitof lowering sales targets at the end of each quarter. Sales compensation was tied to performance and the bonus period was changedfromonceayeartoeverysixmonths. Fiorina linked compensation to the improvements in customerapproval ratings. She instituted the concept of 360degree feedbackatHPwhichmeantthatthepayofmanagerswouldbebasedontheresultsofemployeesurveys. HPLabs,thecompanysR&Dcenter,hadforlongbeenmakingonlyimprovementstotheexistingproducts.Theengineers bonuses were linked to the number, rather than the impact, of their inventions. To encourage innovation and product development, Fiorina increased the focus on breakthrough projects. She started an incentive program that paid researchers for each patent filing. The measures resulted in doubling the patent filings from HP to 3,000 in 2001, placing the company amongthetopthreepatentfilersintheworld. Fiorina also changed the HP Way of management that promised lifelong employment, employee satisfaction and worklife balance (Refer Exhibit II). She said: The HP Way had come to mean a set of bad habits for example, being slow. In the 1990s,itcametomean,Wecantdoanythingunlessweallagree.[6]InDecember1999,FiorinareplacedtheHPWayby theRulesoftheGarage(ReferExhibitIII) In2000,Fiorinachangedthecompensationstructure.Previously,apercentageofthecompanysprofitwasdividedamongthe employeesbasedontheirsalary.Bonuswaspaidwhenthecompanybeatitsownnumbersforrevenue,profitandreturnon assets.Fiorinacameupwithanewsystem,wherethebonuswasbasedonHPsperformancevisvisitscompetitors.Thus,in spiteofHPreportingaprofitinthefirsthalfofthefinancialyear2001(November2000toApril2001),employeesdidnotget theirbonusforthefirsttimein39years. Fiorinaimplementedseveralcostcuttingmeasurestostreamlinethecompanysoperations.Someofthemeasuresincludeda forcedfivedayvacationfortheworkerseveryyearandthepostponementofwagehikesforthreemonths,inDecember2000. InJanuaryandApril2001,HPlaidoff1,700marketingemployeesand3,000managementemployees.Fiorina said that this wastomakeHPsratioofmanagerstoemployeeslesstopheavyandmoreinlinewiththeindustrystandards. InJune2001,HPaskeditsemployeeseithertotakepaycutsortouseaccumulatedvacationdaysasacostsavingmeasure. Theemployeesweregiventheoptionoftakinga10percentpaycutforthenextfourmonthsortakinga5percentcutplus fouradditionalpaid vacation days in the same period. A third option was to take eight additional paid vacation days. More than80,000employeeswereforcedtochooseanyofthesethreeoptions,savingthecompany$130million.InJuly2001,HP laidoffanother6,000employeesthebiggesteverlayoffinthecompanyshistory.Fiorinaalsosentoutmemos,sayingthat layoffswouldcontinueandthatvolunteeringforpaycutswouldnotguaranteecontinuedemployment.BytheendofOctober 2002,morethan17,900employeeshadlosttheirjobsatHP. CHANGINGTHEORGANIZATIONALSTRUCTURE BeforeFiorinacamein,HPwasaflat,decentralizedorganizationwheretheindividualdepartmentsweregivenagreatdealof autonomy. Decisions were made either by consensus or never made. When Fiorina took charge, she developed a plan to transformHPfromastrictlyhardwarecompanytoaWebservicespowerhouse.Asapartofthestrategy,Fiorinadismantled thedecentralizedorganizationstructure.Inearly2000,HPhad83independentproductdivisions,eachfocusedonaproduct such as scanners or security software. The company had 83 product chiefs having their own R&D budgets, sales staff, and profitandlossresponsibility.TomakeHPaneffectivesellingorganization,Fiorinareorganizedtheseunitsintosixcentralized divisions.Threeofthesewereproductdevelopmentgroupsprinters,computers,andtechservices&consulting,(theback endunits)andtheotherthreeweresalesandmarketinggroupsforconsumers,corporatemarketsandconsultingservices (thefrontendunits). Thebackendunitsdevelopedandbuiltcomputers,andhandedovertheproductstothefrontendgroupsthatmarketedthese productstoindividualconsumersandcorporations.Fiorinaexpectedthenewstructuretostrengthencollaboration,betweenthe sales and marketing executives and the product development engineers, thus enabling faster solution to customers. Industry expertssaidthatthiswasthefirsttimeacompanywiththousandsofproductlinesandscoresofbusinessunitshadattempteda frontbackapproach,astrategythatrequiredsharpfocusandpropercoordination. Inthe earlier setup, most of the strategic decisions were left to the heads of product divisions. To ensure that most of the important decisions came from the top, Fiorina created an executive council comprising of eight senior vice presidents (includingtheheadsofsixfrontendandbackendgroups),whoreporteddirectlytoher.Aninememberstrategycouncilwas formed to advise the executive council on the investment of resources in the best available opportunities. These measures transformedHPintoatightlycoordinatedcorporatemachinewheredecisionsweremadequicklyandmoreconfidently.

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ThenewarrangementsolvedanumberoflongstandingproblemsofHP,makingiteasierforsuppliers/clientstodobusiness withit.Insteadofhavingtodealwithanarrayofsalespeoplefromdifferentproductdivisions,customersnowdealtwithonly onesalesperson.ThenewarrangementalsohelpedHPsproductdesignersfocusonthedesignaspect.Itgavethefrontend marketerstheauthoritytofinalizedealswhichweremostprofitableforthecompany.Forinstance,nowtheycouldsellaserver atalowermargintothosecustomers,whooptedforlongtermconsultingservices.

THEHPCOMPAQMERGER
OneofFiorinasmostsignificantmoveswasthedecisiontobuyoutoneofHPsmajorcompetitorsCompaq,inSeptember 2001. The deal involved HP buying Compaq for $25 billion in stock (the final cost for HP was $19 billion). This was the biggest ever buyout in the history of the computer industry. The merged entity was to have operations in more than 160 countrieswithover145,000employees,offeringtheindustrysmostcomprehensivesetofproductsandservices. ThenewcompanywastoretaintheHPnameanditscombinedrevenuesamountedto$87.4billionalmostequaltothatof theindustryleaderIBM($88.396billionin2000).Underthetermsofthedeal(ReferExhibitIV),Fiorinawastocontinueas theChairmanandCEOofthenewcompany. Fiorina claimed that the new HP would become the global leader in terms of revenues for servers, access devices (PCs and handheld devices), and imaging and printing. It would also have a leading revenue position globally, for information technologyservices,storageandmanagementsoftware(ReferExhibitV).Themergerwasprojectedtoyieldsavingsreaching $2.5billionannuallyby2004.Thesesavingswereexpectedtocomefrom Productrationalization Efficienciesinadministration,procurement,manufacturingandmarketingand ImproveddirectdistributionofPCsandservers. FiorinajustifiedthemergersayingthatthesizeofnewHPwouldenableittotakeadvantageofvolumesales.Sherevealedthat thetwocompaniesbought$65billionworthofmaterialsayear,whichwhencombined,couldresultinacostsavingsof3%or 4%.Compaqwasaleadingplayerinareaslikedatastorageanddirectselling,whereHPwasnot.Sheaddedthatpostmerger HPwouldbecomemoreefficientbydoingawaywiththemiddlemen.Moreover,Compaqwasknownforitsspeed,agilityand customer focus, which HP clearly lacked. Former Compaq Chairman, Ben Rosen, said, The deal will jumpstart both companiesintheirraceforefficiency.[7] Oncethemergerwasimplemented,Fiorinaplannedtolayoffanother15,000employeesasapartofamajorcostsavingdrive. Analystsinfactfeltthatthemergerwouldyieldhugecostsavingsmainlybecauseofthelayoffs.

THECRITICISM
Fiorinas measures to revive HP led to a lot of criticism from HP employees as well as independent analysts. A majority of employeesfeltthatthoughchangewasnecessary,theirmoralesufferedbadly.Accordingtoasenioremployee,Moraleisas lowasithasbeeninalongtime.ThePresident/CEOtriedtochangetoomuchtoofast.Insuchacase,theorganizationdoesnt knowwhattodoandflounders.[8] Some analysts felt that the steps Fiorina took were destroying much of HPs cherished culture. The employees were not preparedfor the change. Fiorinas marketsavvy and her customeroriented focus were in complete contrast to HPs relaxed engineeringculture.GeoffreyMoore,ahightechmanagementexpert,remarked,HPwasbuiltasacollaborativeculturenot a star system. She drives a competence culture, which puts performance ahead of teams, values and intuition. Thats a wrenchingproblem.[9]AccordingtoGrinstein,formerCEOofBurlingtonNorthernandWesternAirlines,Carlyisarticulate, withawonderfulstyleandflair.Butinbreakingfromculture,youcannotelevateyourselftoohighaboveit.[10] Fiorinas largescale layoff plans were also met with stiff resistance from HPs employees. By late 2002, more than 16,000 employees had lost their jobs, a majority of them after the merger with Compaq. Employees felt that Fiorina should have lookedforbettermeasuresotherthanlayoffs,toreviveHP.LarryMitchell[11]complained,Layoffshadalwaysbeenkindof nontraditionalforHP.HPscultureisdefinitelychangedthesedays.Withthepriorcultureweprobablywouldhavefigured out something other than laying off 6,000 people. There are other ways to get rid of performance problems other than just layoffs.[12] Moreover, the layoffs increased the workload of the existing employees. A manager of one of HPs product groups, who routinelyputina60hourworkweeksaid,Theideaofwork/lifebalanceisajoke.[13]Anotheremployeewhohadbeenwith HPfor20yearssaid,Employeesarenowviewedasassetsortools,nodifferentthanmachinesorbuildings.[14] FiorinasmovetochangetheorganizationalstructureatHPalsoranintotrouble.WithHPs88,000employeesadjustingtothe biggest reorganization in the companys history, expenses rose beyond the limits. Free from the decadesold lines of command, employees began spending heavily, with dinner and postage expenses running higher than ever. Such lavish spendingwasrareundertheoldstructure,whereproductchiefskeptatightcontrolonexpenditure. Earlier, HPs product chiefs ran their own operations from designing the product to providing customer support. In the new setup,theyhadaverylimitedrole.Thoughtheywerestillresponsibleforachievingcostgoalsandgettingproductstomarket on time, they had to pass on those products to the frontend units responsible for marketing and selling them. With no authority to set sales forecasts, backend managers were unable to allocate the R&D funds accordingly. At the same time, frontend sales representatives had trouble meeting their forecasts if their backend colleagues came up with the wrong products. Analystsalsoclaimedthatinthenewstructure,thebackendproductdesignerswouldnotbecloseenoughtothecustomersto designproductsaspertheirrequirements.Neitherwouldtheexecutives responsiblefor sellingthousandsofHP products be abletogivesufficientattentiontoeachcustomer/product.Moreover,whileproductivitylinkedcommissionstothesalesforce wereintendedtoboostrevenuesandprofitability,theyonlyhelpedinincreasedsalesoflowmarginproductsthatdidlittlefor

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wereintendedtoboostrevenuesandprofitability,theyonlyhelpedinincreasedsalesoflowmarginproductsthatdidlittlefor corporateprofits. Thenewstructuredidnotassignclearcutresponsibilityforprofitsandlosses.Withresponsibilityforgrowthandprofitsbeing sharedbetweenthefrontendandthebackendmanagers,therewaslittlefinancialcontrol.Withemployeesspreadacross120 countries,redrawingthelinesofcommunicationandgettingpersonnelfromdifferentdivisionstoworktogether,wasproving tobeverycumbersomeandtroublesome. HPs customers were not happy either.The frontbackreorganization had created confusion internally, and many customers saidthattheyhadnoticedlittleimprovement.AccordingtoonecomputerresellerwhohadstruggledfortwomonthstogetHP toworkoutacustomizedconfigurationforoneofitsnewservers,Itsbeyondmyabilitytocommunicateourfrustration.Its painfultowatchthemmessupmilliondollardeals.[15] Doubts were also raised about Fiorinas ability to execute the HPCompaq merger successfully. In November 2001, the proposedmergerfacedamajorhurdleintheformofWalterB.Hewlett(Walter),theeldestsonofHPscofounderWilliamR. Hewlett. He decided to use his 5.2% stake to oppose the merger. Soon, another relative of HPs founders, David Woodley Packard(David)ofTheDavidandLucilePackardFoundation,HPslargestshareholder,witha10.4%stake,alsodecidedto opposethemerger.ThepossibilityofmassivelayoffsafterthemergerledDavidtoofferstiffresistance.Hewasagainst the merger because of the change it would bring in HPs egalitarian culture. Opposing the merger, David said, I am perfectly aware that HP has never guaranteed absolute tenure status to its employees. But I also know that Bill and Dave never developedapremeditatedbusinessstrategythattreatedHPemployeesasexpendable.[16] CriticsridiculedFiorinabysayingthatonebadPCbusinessmergedwithanotherbadPCbusinessdoesnotmakeagoodPC company.Moreover,HPscompetitorsfeltthattheproposedmergerwouldnotworkforthecompanyandthecombinedentity wouldlosemarketshare.DellComputersCEOMichaelDelladdedthatthemergerwouldonlyconfusecustomersandbenefit HPscompetitors.However,inspiteofthestiffopposition,Fiorinamanagedtogetthedealapprovedbygainingthesupportof institutionalinvestors. AnalystsfeltthatFiorinahadextendedherreachtoofarinattemptingsuchamassiverestructuringofacompanyofHPssize andcomplexity.ShewasaccusedofbeingoverambitiousintryingtotackleallHPsproblemstogether.Theysaidthatputting inplacesuchsweepingchangeswastoughanywheremoresointhecaseoftraditionboundHP,whichwasalreadysuffering fromtheslowdownintheITindustry. To add to these criticisms, HPs business performance did not improve substantially during Fiorinas tenure as CEO. The market share gains made in Fiorinas first year as CEO began to recede in late 2000. While HP continued to dominate the inkjet and laser printer business with a 41% market share, its PC share fell from 7.8% to 6.9% for the 12 months ending January 31, 2001. For the fiscal year ending October 2002, HP posted net losses of $903 million, the companys worst performance under Fiorina. HPs shares came down from $70 in mid2000 to as low as $10 in mid2003. HP stock significantlyunderperformedtheDowJonesindustrialaverageduringthisperiod(ReferExhibitVI). FIORINASLEADERSHIPSTYLE Fiorinawasastraightforward, articulate and marketfocused manager. She was appreciated for her willingness and ability to takeonchallenges.ShewasquitesuccessfulinspinningoffLucentTechnologies.Hercapacityforhardwork,gutinstinctand herabilitytobuildandmotivateateamwerehermajorassetsasacorporateleader. However,themediawasnotunanimousinitspraiseofFiorinasleadershiptraits.Whilesomeanalystssawherasbeingsmart, brilliantandavisionary,othersdescribedherasarrogant,complexandselfserving.OfherstintatHP,someanalystssaidthat Fiorinahadsucceededininstillingaspiritofhardwork,customerfocusandgoodperformanceintoHPemployees. Fiorinaroutinelyputin16hoursofworkaday,andexpectedthesamefromheremployees.Recalling her experiences with Fiorina,ShaneRobison,executivevicepresidentandchiefstrategyandtechnologyofficerofHP,saidShesnotinouroffices everydaybeatingonus,butsheexpectsustobeontopofwhatweredoing.Shebelievesourculture should be based on performance,selfmotivationandhighachievement.[17] Fiorina always believed in providing the best customer experience. Reflecting her own demanding management style, she alwaysaskedHPscustomerstodemandmorefromthecompany.ShepromisedthatHPwouldputintheextraeffortstomeet alltheir demands. Earlier, the research teams at HP focused on developing innovative products. Under Fiorinas leadership, researchteamswereaskedtodevelopproductsthatfocusedoncustomerneeds.ChandrakantPatel,aprincipalscientistatHP, said,Carlyisallaboutthecustomer,thecustomer,thecustomer.Intodaysmarketwecannolongerdopureresearch.We havetogetoutandlearnwhatthecustomerneedssoweknowwhattomakenext.17 Fiorinaintroducedapolicyoflayingoffthebottomfivepercentofunderperformers,inordertopushperformancestandards upatHP.ThispolicywasinsharpcontrasttotheearlierHPculture,wherepoorperformersweregivenachancetoimprove over a oneyear period. The new approach was so similar to the ABC system (categorizes high performing and underperformingemployees)followedbyGEthatcriticssaidFiorinalookedlikeshewouldbethenextJackWelch. Fiorinaencouragedemployeestotakemorerisksforfasterdecisionmaking.Sharingherexperience,ReneeSt.Denis,general manager of product recycling solutions at HP, said, Before, people were reluctant to make decisions until they had all the facts.Carlyhaschangedthat.Shesmadeitokayforpeopletotakerisksandgowithjust80percentofthedata.Forexample, Iworkinproductrecycling,andourworkisleadingedge.Insteadofmakinguschurnoutabusinesscaseforeverythingwe do,Carlysaysjustgoaheadbecauserecyclinginherentlymakessense.17 Some of Fiorinas leadership characteristics, however, met with a less positive response from the employees. Layoffs, they said, had become so frequent and widespread in HP that a culture of fear prevailed among HP employees. Employees no longer felt secure in their jobs. Barton Coddington, a former employee of HP, found Fiorinas attitude arrogant and self serving.Hesaid,PreviousCEOstalkedaboutthecompanyaswe.CarlymayhaveusedthewordItoomuch.Amanagerat FortCollins,Coloradoplant,confirmedthis,saying,Intheolddays,whenHPexecswouldvisit,theywouldrentacarfrom Hertz.ButCarlytraveledinastretchlimoshewantedtobetreatedlikeamoviestar.18 Some academics like Nancy Rothbard, a professor of management at the University of Pennsylvanias Wharton School appreciatedherstyle.Shesaid,Fiorinademonstratesthattherearealotofstylesoutthere.Thatsgreatforwomen.Itmakesa

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appreciatedherstyle.Shesaid,Fiorinademonstratesthattherearealotofstylesoutthere.Thatsgreatforwomen.Itmakesa nicecontrasttosomeofourstereotypicalnotionsofwomeninleadershiproles.[19]

THECHALLENGESAHEAD
After a lackluster performance in 2002, the first quarter of the fiscal 2003 brought good news for Fiorina and HP (Refer ExhibitVII).InspiteofthecontinuedslowdownintheITindustry,Fiorinamanaged to keep four out of HPs five business segmentsprofitable (Refer Exhibit VIII). Moreover, in the second quarter ending April 2003, HP exceeded the revenue and profitabilityestimates.InApril2003,FiorinaannouncedthatHPhadsigneditslargestservicescontractworth$3billiondeal with Procter & Gamble. Commentators said that the seeds Fiorina had sown earlier were now beginning to bear fruit. Expenditureinthemergedcompanycamedownbyasmuchas$3.5billionannually.Itwasearlierestimatedthatcostsavings of$2.5billionwouldbepossible. The real challenge for Fiorina still lay ahead. HP needed to increase its revenues that had been stagnant for several years. ThoughFiorinahadsucceededinbringingHPsPCbusinessbackintoprofit,thecompanysserverbusinesswasstillmaking heavylosses.ThetrendofHPsprintingandimagingdivisionaccountingformostofthecompanysprofitswascontinuing. Astheindustryrecovered,HPwouldfacecutthroatcompetitionfromDellComputersandIBM.LenRosenthal,aprofessorof finance at US based Bentley College said,Dell in particular has its sights set on HPs crown jewel: printers. Fiorina has to keepacompetitiveleadontheprinterbusiness.Otherwise,shesintrouble.[20] HP had a dismal financial performance in the third quarter ending July 2003, reporting lowerthanexpected earnings. Soon afterthis,Fiorinaannouncedthelayoffofanother1,300employees.

QUESTIONSFORDISCUSSION:
1.AnalystsbelieveFiorinacouldbethenextJackWelch.CriticallycommentonthevariousaspectsofFiorinasleadership andmanagementstyle. 2.FiorinasstintwithHPhasbeenfullofcontroversies.CommentonFiorinasapproachtoalteringtheHPculture.Inyour opinion,whatisthebestapproachFiorinacantakeinviewofHPslongstandingculture,inordertoimprovethecompanys performanceaswellasregainemployeeconfidence? 3. Though Fiorina had implemented several measures to revive HP, her efforts did little to improve HPs financial performance.WhatmeasuresshouldFiorinatakeinthenearfuturetoimproveHPsrevenuesandprofitabilitysignificantly?

ExhibitI

HPsConsolidatedStatementsofOperations(19982002)
(in$million) YearendedOctober31, NetRevenue Costsandexpenses: Costsofproductssoldandservices ResearchandDevelopment Selling,generalandadministrative RestructuringCharges FinancingInterest Inprocessresearch&development charges Acquisitionrelatedcharges Amortizationofpurchasedintangible assets&goodwill TotalCosts&Expenses (Loss)/Earningsfromoperations Interestincomeandother,net LitigationSettlement Losses(gains)ondivestitures Netinvestment(losses)gains Interestexpense Earningfromcontinuingoperations beforetaxes (Benefitfrom)/Provisionfortaxes 2002 56,588 41,390 3,312 9,033 1,780 189 793 701 402 2001 45,226 33,474 2,670 7,259 384 2000 48,870 35,046 2,634 7,063 102 1999 42,370 34,135 2,440 6,522 1998 39,419 27,790 2,380 5,850

57,600 (1,012) 52 14 (106) (1,052) (129)

43,787 1,439 171 (400) (53) (455) 702 78

44,845 4,025 356 244 4,625 1,064

38,682 3,688 708 202 4,194 1,090

36,020 3,399 530 235 3,694 1,016

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(Benefitfrom)/Provisionfortaxes Netearningsfromcontinuing operations Netearningsfromdiscontinued operations Extraordinaryitemgainonearly extinguishmentofdebt,netoftaxes Cumulativeeffectofchangein accountingprinciple,netoftaxes Net(loss)earnings

(129) (923) 20 (903)

78 624 56 (272) 408

1,064 3,561 136 3,697

1,090 3,104 387 3,491

1,016 2,678 267 2,945

Source:HPAnnualReport19982002.
ExhibitII

TheHPWayHPsOrganizationalValues
HPs organizational values shaped its strategies and practices, including Management by WanderingAround(MBWA),ManagementbyObjectives(MBO),theOpenDoorPolicyand OpenCommunication.TheHPWaybecamethecenterofHPsmanagementstyle. HPsmissionstatementlistedthefollowingvalues: Tohavetrustandrespectforindividuals. Tofocusonahighlevelofachievementandcontribution. Toconductbusinesswithuncompromisingintegrity. Toachievecommonobjectivesthroughteamwork. Toencourageflexibilityandinnovation. HPusedsomeuniquemanagementtechniquestofollowtheHPWay. MANAGEMENTBYOBJECTIVES(MBO) Individuals at each level contributed to company goals by developing objectives, which were integrated with those of their superiors, as well as other departments. Flexibility and innovationinrecognizingalternativeapproachestomeetingobjectivesprovidedaneffective means of meeting customer needs. Written plans ensured that accountability existed throughouttheorganization. OPENDOORPOLICY This policy gave employees the freedom to express their dissent with the management without having to worry about adverse consequences. The policy was based on trust and integrity.Itencouragedtheemployeestospeakoutopenlyonissuesrelatingnotonlytothe businessorthejobbutalsotheprogressoftheirowncareer. OPENCOMMUNICATION HP believed that people performed well, given the right tools, training and information. Open Communication aimed at promoting teamwork among employees, customers and otherstakeholders. MANAGEMENTBYWANDERINGAROUND(MBWA) Thisinformalcommunicationpracticehelpedmanagerstogetupdatedon activities in their departments. A manager always reserved some time to walk through the department or be availableforimpromptudiscussions.

Adaptedfromwww.hp.com.
ExhibitIII

RulesoftheGarage(TheRevisedHPWay)
TheRulesoftheGarageare: Believeyoucanchangetheworld. Workquickly,keepthetoolsunlocked,workwhenever. Knowwhentoworkaloneandwhentoworktogether. Sharetools,ideas.Trustyourcolleagues. Nopolitics.Nobureaucracy.(Theseareridiculousinagarage.) Thecustomerdefinesajobwelldone.

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Radicalideasarenotbadideas. Inventdifferentwaysofworking. Makeacontributioneveryday.Ifitdoesntcontribute,itdoesntleavethegarage. Believethattogetherwecandoanything. Invent. I believe that if you carry these rules with you on your journey, if you create an environment where peoples hearts and minds are fully engaged, where strategy is ennobling, where great aspirations are powered by the desires of people to do something worthwhile, then you will have touched others you encounter on your journey. Carly Fiorina,PresidentandCEOofHP,2000

AdaptedfromTheSiliconValleyManagementStyle:Lessonstolearn,www.siliconvalley.com,December2001.
ExhibitIV

HPCompaqMergerTransactionSummary
PRIVATEStructure ExchangeRatio CurrentValue Ownership Accounting ExpectedClosing PRIVATEKey Figures (previous 4quartersin$billion) TotalRevenues Assets OperatingEarnings Numberofemployees Market Capitalization 31/08/01) (as on Stockforstockmerger 0.6325ofanHPshareperCompaqshare Approximately$25billion HPshareholders64%Compaqshareholders36% Purchase Firsthalfof2002 HP 47.0 32.4 2.1 88,500 45,109 Compaq 40.4 23.9 1.9 70,100 20,995 Combined 87.4 56.4 4.0 158,600 66,104

Source:HPPressRelease,September5,2001.

ExhibitV HowtheHPCompaqMeasuredUpAgainsttheirRivalsinDifferentProductSegments,attheTimeoftheMerger
Products PCs Analysis With 19% market share, the combo was the world's largest PC maker. ButwithPCsalesandmarginsatrecordlows,thecompanieshadlosta totalofnearly$500millionin2001,whileDellwasgaining. HP'sdominant50%marketsharewaslikelytogrow,asweresalesofits hugelyprofitableprinterink.Thenegativeaspects were weak margins and sales, and mounting pricing pressure from Lexmark, Canon and otherrivals. Compaq dominated, and the combined companies had a huge 37% market share in Windowsbased machines. But cutthroat competition fromDellandIBMwaslikelytoeatawayatsales. In this key highmargin market, HP and Compaq were laggards. Compaq would be phasing out its Alpha servers, while HP's highend UNIXmachineswerestagnatingagainstSunandIBM. HP and Compaq coveted IBM's services business. But 62% of their 65,000 service specialists were doing basic computer repair, not the lucrativehighendconsultingBigBluespecializedin. Compaq's $5.2 billion storage business would most likely get a big
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PRINTERS

LOWEND SERVERS HIGHEND SERVERS SERVICES

STORAGE
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STORAGE

Compaq's $5.2 billion storage business would most likely get a big boost as HP sold Compaq gear to its customers. Still the merger wouldn'thelpHPtakecustomersfromstoragegiantEMCandothers. Providing complete solutions for big corporations requires specialized software called middleware. But HP badly lagged rivals, and Compaq wasanoshow.

SOFTWARE

Source:BusinessWeekAnalysis,September17,2001.
ExhibitVI

HPsStockPriceChart(19992003)

Source:www.bigcharts.com.
ExhibitVII

HPsConsolidatedStatementsofOperations(2003)
(in$million) NetRevenue Costs&expenses: Costofsales Research&Development Selling,general&administrative Restructuringcharges Amortizationofgoodwill& purchasedintangibleassets Acquisitionrelatedcharges Inprocessresearch&development Totalcosts&expenses Earningsfromoperations Interestandother,net Netinvestment(losses)gainsand other,net Earningsbeforetaxes
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July31,2003 17,348 12,809 896 2,785 376 141 40 17,047 301 10 (24) 287

April30,2003 17,983 13,103 941 2,795 234 141 126 17,340 643 (20) (12) 611

January31,2003 17,877 13,141 908 2,725 138 86 16,998 879 51 (5) 925
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Earningsbeforetaxes (Benefitfrom)provisionfortaxes Netearnings

287 (10) 297

611 (48) 659

925 204 721

Source:www.hp.com,QuarterlyReports2003.
Note: (a)Certainreclassificationshavebeenmadetoprioryearamountsinordertoconformtothecurrentyear presentation. (b)TheresultsforthethreemonthsendedJanuary31,2003includetheresultsofCompaqfortheentireperiod. ExhibitVIII

HPsSegmentInformation(November2002July2003)
(in$million) NetRevenue: Imaging&PrintingGroup PersonalSystemsGroup EnterpriseSystemsGroup HPServices Financing CorporateInvestments Totalsegments Elimination of intersegment net revenues & other TotalHPConsolidated Earnings(loss)fromoperations: Imaging&PrintingGroup PersonalSystemsGroup EnterpriseSystemsGroup HPServices Financing CorporateInvestments Totalsegments July31,2003 5,240 4,965 3,708 3,083 442 88 17,526 (178) 17,348 739 (56) (70) 337 18 (37) 931 April30, 2003 5,526 5,124 3,862 3,031 501 84 18,128 (145) 17,983 918 21 (7) 301 21 (44) 1,210 January31, 2003 5,610 5,143 3,736 2,960 517 77 18,043 (166) 17,877 907 33 (83) 341 14 (47) 1,165

Source:www.hp.com,QuarterlyReports,2003.

AdditionalReadings&References:
1.Burrows,Peter,HPsCarlyFiorina:TheBoss,BusinessWeek,August2,1999. 2.Fulmer,RobertGibbs,Philip,andGoldsmith,Marshall,HowdoGeneralElectric,HewlettPackardandJohnson&

Johnsonkeepasteadystreamofleadersmovingup?Byfocusingonthefiveessentialsofleadershipdevelopment,Sloan ManagementReview,2000.
3.Steen,Margaret,HPWayhashadalastingimpactonmanagementstyle,www.siliconvalley.com,January21,2001. 4.Burrows,Peter,HPsWoesAreDeeperthantheDownturn,BusinessWeek,May7,2001.

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5.Larson,Mark,HPsEmployeeFriendlyCultureinaFlux,www.sacramento.bizjournals.com,August6,2001. 6.Seipel,Tracy,PackardSayshesDispleasedwiththeDirectionofHP,www.siliconvalley.com,November6,2001.

7.Swartz,John,ManyHPEmployeesOpposeDealwithCompaq,USAToday, December4,2001. 8.Burrows,Peter,CarlysLastStand?BusinessWeek,December24,2001. 9.Burrows,Peter,andRoman,Monica,CatchingtheBigMo,BusinessWeek,February18,2002.

10.Burrows,Peter,andPrasso,Sheridan,Suddenly,FiorinasOddsLookBetter,BusinessWeek,February25,2002. 11.BurrowsPeter,andPark,Andrew,CompaqandHP:WhatsanInvestortodo?BusinessWeek,March18,2002. 12.Tsao,Amy,FiorinasStereotypeSmashingPerformance,BusinessWeekOnline,April3,2002. 13.Burrows,Peter,WalterHewlettsLastStand?BusinessWeekOnline,April29,2002. 14.Gutner,Toddi,TheRoseColoredGlassCeiling,BusinessWeek,September2,2002. 15.Edwards,Cliff,andRoman,Monica,CarlysCaveat,BusinessWeek,September9,2002. 16.Burrows,Peter,TwoCloseUpsofHPsCarlyFiorina,BusinessWeek,February17,2003. 17.Showdown,BusinessWeek,February17,2003. 18.AGoodDealafterAll?Economist,April19,2003. 19.Black,Jane,TheWomenofTech,BusinessWeek,May29,2003. 20.Tsao,Amy,andBlack,Jane,WhereWillCarlyFiorinaTakeHP?BusinessWeek,May29,2003. 21.Caudron,Shari,DontMessWithCarly,www.workforce.com,July2003. 22.Lashinsky,AdamCherry,Brenda,andTran,Muoi,CarlyFiorina,Fortune,August11,2003. 23.Tsao,Amy,andBlack,Jane,CarlyFiorinasNextBigChallenge,BusinessWeek,

August22,2003.
24.ChallengesofLeadership,www.pbs.org. 25.SmithSchoolAlumnaCarlyFiorinaNamedMostPowerfulWomaninBusiness,www.rhsmith.umd.edu. 26.CaraCarletonCarlyFiorina,www.infoplease.com. 27.CarletonS.Fiorina(Carly),www.web.mit.edu. 28.www.hp.com. 29.www.bigcharts.com 30.HPsAnnualReports19982002.

RelatedCaseStudies:
1.LeadershipTheBillGatesWay,ReferenceNo.8030431. 2.SteveJobsTheSiliconValleyPioneer,ReferenceNo.8030201. 3.LarryEllisonTheSourceofOraclesWisdom,ReferenceNo.8030171. 4.MichaelDellTheManBehindDell,ReferenceNo.4020151. 5.SteveCaseTheStoryofAOLsArchitect,ReferenceNo.8030341 6.LouisGerstnerJr.TheManWhoTurnedIBMAround,ReferenceNo.8030181. 7.JohnChambers:CiscosDrivingForce,ReferenceNo.8030311. 8.SamWaltonEntrepreneurofthe20thCentury,ReferenceNo.8030471.

[1] As quoted in the article titled Carly Fiorina, by Adam Lashinsky, Brenda Cherry, and Muoi Tran, Fortune, August 11, 2003. [2] As quoted in the article titled Smith School Alumna Carly Fiorina Named Most Powerful Woman in Business, posted on www.rhsmith.umd.edu, 2002. [3] AT&T Long Lines, later known as AT&T Communications, was the group of the Bell System that took telephone and data communications from one Bell operating company site to another. [4]AsquotedinthearticletitledHPsCarlyFiorina:TheBoss,byPeterBurrows,BusinessWeek, August2,1999. [5]In1993,aresearchershowedPlattaprototypeWebbrowsertwoyearsbeforeNetscapeCommunicationsbecamethefirstInternetCompany toreleaseitsNavigatorbrowser.Plattreportedlytoldtheresearchertoshowittothecompanyscomputerdivision.Eventually,itwasnot accepted. [6] As quoted in the article titled HP Way Has Had a Lasting Impact on Management Style, by Margaret Steen, posted on www.siliconvalley.com,January21,2001. [7]AsquotedinthearticleCarlysLastStand?byPeterBurrows,BusinessWeek,December24,2001. [8]AsquotedinthearticletitledHPsEmployeeFriendlyCultureinaFlux,byMarkLarson,postedonwww.sacramento.bizjournals.com, August6,2001.

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[9]AsquotedinthearticletitledManyHPEmployeesOpposeDealwithCompaq,byJohnSwartz,USAToday,December4,2001. [10]AsquotedinthearticletitledManyHPEmployeesOpposeDealwithCompaq,byJohnSwartz,USAToday,December4,2001. [11]Hespent29yearsatHPandwassitemanageratRosevilleofficewhenheretiredin1997. [12]AsquotedinthearticletitledHPsEmployeeFriendlyCultureinaFlux,byMarkLarson,postedonwww.sacramento.bizjournals.com, August6,2001. [13]AsquotedinthearticletitledDontMesswithCarly,byShariCaudron,postedonwww.workforce.com,July2003. [14]AsquotedinthearticletitledDontMesswithCarly,byShariCaudron,postedonwww.workforce.com,July2003. [15]Asquotedinthearticle,HPsWoesAreDeeperThantheDownturn,byPeterBurrows,BusinessWeek,May7,2001. [16]AsquotedinthearticletitledPackardSaysHesDispleasedwiththeDirectionofHP,byTracySeipel,postedonwww.siliconvalley.com, November6,2001. [17]AsquotedinthearticletitledDontMesswithCarly,byShariCaudron,postedonwww.workforce.com,July2003. [18]AsquotedinthearticletitledDontMesswithCarly,byShariCaudron,postedonwww.workforce.com,July2003. [19]AsquotedinthearticletitledFiorinasStereotypeSmashingPerformance,byAmyTsao,BusinessWeekOnline,April3,2002. [20]AsquotedinthearticletitledWhereWillCarlyFiorinaTakeHP?byAmyTsaoandJaneBlack,BusinessWeek,May29,2003.

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