HOW HP IS RETOOLING THE MONEY MACHINE

[Anonymous]

Why HP Is Pruning the Printers

Growth is slowing, margins are falling, and competition is intensifying. Here’s the inside story on how it’ll retool the money machine

During the recent Sturm und Drang at
Hewlett-Packard , there has been little soul-searching in the tech giant’s
gold-mine printer business. For almost two decades, this $24 billion-a-year
division has sailed along on a river of ink-cartridge profits, dominating rivals
with a market share of more than 50% — and remaining blissfully detached from
the problems at HP’s computer units.

But with overall growth in printer
demand slowing and margins tightening in the face of an assault from Dell  and
others, HP has decided there’s no room for complacency. BusinessWeek has
learned that printer chief Vyomesh Joshi is knee-deep in a “transformation” to
ensure HP’s dominance in printing and imaging.

“GETTING WHACKED.”  Originally started at the urging of
ousted CEO Carly Fiorina but supported by new boss Mark Hurd, the effort,
“Operation Lead Dog,” involves cutting the division’s head count by 10% or more,
while pruning HP’s cluttered portfolio of businesses, say four HP managers and
an outside consultant. While Joshi hasn’t determined the exact savings goals,
his aim is to refocus on the biggest opportunities while lowering costs to
maintain profit margins amid falling printer prices. HP declined to comment on
the restructuring, but one printer division manager, speaking on condition of
anonymity, described it as a “Jack Welch kind of thing. If you can’t be No. 1 or
2, why do it?”

Let’s be clear: HP’s printer division is still a
heavyweight. It accounted for 73% of HP’s $4.2 billion in earnings for fiscal
2004, despite delivering less than a third of its $80 billion in sales. But
tough times loom. Revenue growth is expected to slow to 5.7% for the fiscal year
ending in October, down from 7.2% in fiscal ’04, says Goldman, Sachs , which also predicts that
operating margins will slip to 15% this year, down from 15.9%.

A
cross-current of pressures is to blame. Now that most PC owners have printers,
demand is expected to be nearly flat in coming years. Yet Dell and others are
competing harder for HP’s customers. HP’s share of the U.S. printer market,
measured in unit sales, fell six points in 2004, to 47%, according to IDC. HP is
expected to grab some of that back this year by cutting prices, but that could
hurt profits.

Meanwhile, a host of cartridge refillers wants to horn in
on HP’s lucrative sales of ink. “They’re getting whacked from all sides,” says
Marco Boer, a consulting partner at IT Strategies consultancy.


SEVERANCE FRENZY.  All that explains the urgency to get the
printer division firing on all cylinders. The cost-cutting phase of the
restructuring is well under way. Many staffers have taken a voluntary severance
program that ended on Apr. 22, according to several managers in the printing
unit. Once the total is tallied, these people say, management will turn to
mandatory layoffs that could run higher than 25% for some units.

Much of
the focus is on slashing bureaucracy and revamping basics such as processing
orders, developing products, and the like. Says one staffer: “I’ve never seen
the frenzy that’s going on right now, with people not knowing if they have a job
or not.”

Next up, Joshi is expected to start moving out of
underperforming niches. The company isn’t providing details, but current and
former printing managers say HP will go no further with its 18-month-old foray
into corporate copiers. That would be quite a climbdown. In November, 2003,
Joshi predicted HP would take 10% of the copier market from the likes of Xerox , Canon , and Ricoh by reselling a
product built around technology from Konica Minolta.


PROFITS IN NOZZLES?  But, says IDC, HP had just 0.1% of the
copier market in 2004. Its gear lacked cutting-edge features, says a manager and
his HP business partner, and HP failed to invest in the marketing, sales, and
support that corporate customers require.

“They felt their brand would
carry them,” says the partner. “It makes all the sense in the world for them to
refocus where they’re strong, rather than chase rainbows.” Other candidates for
the ax, say two high-ranking staffers, include a document-management software
business and a pen that lets users digitally record their scribbles.

So
where will HP place its big printing bets? For starters, it will ramp up its
fight for the office. Besides hawking now-affordable color laser printers, say
two high-ranking HP managers, the company hopes to roll out a radical new inkjet
technology called “page wide arrays.” Rather than a single cartridge that moves
across the page, the printer would have thousands of nozzles that print the
entire page at once.


WEB PRESENCE.  Big
technical challenges remain, but the devices could be cheaper to build than
laser printers. Better still, HP would keep all the profits, rather than sharing
them with the likes of Canon, which supplies the complex laser engines at the
heart of HP’s current LaserJet line.

A push into fast-growing consumer
segments is also likely, mainly on digital entertainment and photography. While
HP is an also-ran in digital cameras — it has a meager 5% share — IT
Strategies’ Boer expects the company to design products for professional
shutterbugs willing to pay top dollar.

Change is afoot in HP’s strategy
for printing photos, too. Until now, it has focused on selling photo printers,
since 76% of digital pics are printed at home. But IDC expects that number to
fall to 45% by 2008, as more consumers go to retail kiosks or order prints
online. To respond, HP in March bought Snapfish, a Web site that stores and
prints photos. IDC analyst Christopher Chute expects HP to adapt its high-speed
Indigo printer — both for Snapfish and to sell as retail minilabs. “They’re
finally taking a step forward outside the home,” says Chute.

“A LOT OF SNIPPING.”  HP also hopes to use those Indigo
printers to crack the huge commercial printing market, say three HP managers.
The aim is to persuade the industry to replace older printing presses with
faster digital devices that can be easily programmed to do massive runs or crank
out on-demand documents.

HP has had high hopes since buying Israel-based
Indigo in 2001, but the effort has gotten off to a slow start. For one thing, HP
has yet to fulfill plans to create cheaper, more reliable versions of these
$350,000 “digital presses,” making it tough to entice the mom-and-pop printers
who dominate the industry. With the $400 billion industry ripe for a
technological upgrade, Boer says HP should “push the hell” out of Indigo.

It’s far from crisis time for HP’s printer business. Yet it’s also clear
the division no longer has a license to print profits. As a result, Joshi has
plenty of support inside the company to take drastic — even painful —
measures.

“Everyone realizes that someone with a pair of scissors could
do a lot of snipping around here,” says one staffer at HP’s operation in
Corvallis, Ore. “This transformation is necessary.” And, if executed well,
probably not too late.

[Author]

May 3, 2005 at 9:39 AM