Case Study

A NEW STRATEGIC DIRECTION FOR HEWLETT-PACKARD

On March 14, 2011, HP issued a press release to outline the company's new vision and strategy presented by its CEO and President, Lo Apotheker (HP 2011a).1 HP recognized the steady information technology migration from onsite proprietary computer networks to extensive and flexible cloud computing resources. HP wanted to maintain its market leadership in the continually evolving information technology (IT) landscape and Lo Apotheker presented the following four-pronged strategy to continue HP's leadership in the IT marketplace:2

• extending its leadership in managing and optimizing today's traditional environments;
• leveraging HP's core strength in cloud [technology] to build and manage next-generation cloud-based architectures;
• being the trusted partner to customers by enabling the seamless transition to hybrid computing models [i.e.: "In HP's view, a hybrid environment that combines the best of traditional environments with private and public clouds will be the prevailing model for many large enterprises for a long time."];
• defining and delivering the connected world from the consumer to the enterprise (HP 2011a).

The press release stated that HP's new strategy lays a foundation for the company to move from delivering world-class information technology, to world class information experiences." It presented the new strategic priorities of HP in three areas: cloud, connectivity, and software. First, HP planned to create a "full cloud stack" (i.e., "a portfolio of cloud services from infrastructure to platform services") and to assist its customers migrate to "hybrid cloud environments" that combine traditional onsite computing with cloud computing resources. HP also planned to expand "its higher-value services that offer greater strategic value," which indicates HP's premium pricing strategy. Second, HP stated its intention to be a connectivity leader leveraging its extensive global reach. Third, using "a build, buy and partner approach, HP intends to continue to enhance its leading management and software portfolio" (HP 2011a), which indicates three ways to achieve its strategic objectives: build its own systems, buy innovative companies (e.g., its anticipated purchase of Vertica Systems mentioned in the press release), and partner with other innovative companies. The press release also reported HP's strategy to "build webOS into a leading connectivity platform," and to take advantage of its scale as the world's leading PC and printer manufacturer "to deliver 100 million webOS-enabled devices a year into the marketplace" (HP 2011a). One of these webOS enabled-devices was the ill-fated TouchPad Tablet that will be discussed next.

TOUCH-PAD TABLET

On July 1, 2011, HP launched the TouchPad tablet in the U.S. (HP 2011b). The 16GB TouchPad was priced at $499.99 and the 32GB option was priced at $599.99. The press release reported the statement by Jon Rubenstein, senior vice president and general manager of Palm Global Business Unit, that TouchPad should be highly competitive because of the unparalleled features and flexibility of its webOS operating system.

Despite the optimism expressed in the press release, only 48 days later (on August 18, 2011) HP announced that it was stopping production of TouchPad tablets and also webOS phones because these products had failed to achieve "internal milestones and financial targets" (HP 2011c). The HP press release also stated that "strategic alternatives" were being explored for webOS software.

Two days later (on August 20), HP reduced the price of unsold 16GB TouchPad tablets to $99 from $399 (having earlier reduced the retail price from $499.99 to $399) that resulted in much online buzz and a huge demand for the tablet with long lines at retail outlets (Sherr 2011). Eleven days after announcing cessation of tablet production HP announced, in response to this surging demand, that it was restarting manufacturing the 16GB TouchPad for a temporary period (Sherr 2011). Some analysts wondered why HP temporarily reversed its decision as each tablet would be sold at a $207 loss just based on the direct materials cost of $306 estimated by the research organization IHS iSuppli and assuming continuation of the $99 selling price (Sherr 2011). In a video recording Sherr and Fried (2011) with others discussed the temporary resurrection of 16GB TouchPad and other related matters. Table 1 (Appendix) presents a breakdown of the direct materials costs of the 16GB TouchPad and 32GB TouchPad reported by Hesseldahl (2011a), as estimated by IHS iSuppli (based on its teardown of the TouchPad).3

On October 31, 2011, it was reported in another video recording that BestBuy was bundling the 32GB HP TouchPad for $149 with the purchase of any HP or Compaq PC (Hesseldahl 2011b). The TouchPad could also be purchased separately for $599. Selling the 32GB TouchPad when bundled with a HP or Compaq PC at $149 is $179.65 less than the estimated direct materials cost of $328.65 presented in Table 1 (Appendix).

Later it was reported that HP would continue to enhance webOS, retaining the 600 employees who work on it, and that it would provide the software free to anyone wishing to use it (HP 2011h; Worthen 2011c). The webOS operating system was acquired by HP in conjunction with its purchase of Palm Inc. for $1.2 billion in 2010 (HP 2010a).

3 Hesseldahl (2011a) also reported that other costs associated with the tablets were impossible to estimate.

PERSONAL SYSTEMS GROUP

On August 18, 2011, HP also announced that its Board of Directors had approved exploration of strategic alternatives for its personal computer division, Personal Systems Group (PSG), which included spinning-off PSG into a separate company (HP 2011d). Krazit (2011) speculated that this announcement was similar to "putting a for-sale sign on the division." This announcement surprised the stock market as HP was at the time the world-wide market leader in PC sales. This major announcement, along with the two other strategic announcements on the same day that confirmed HP's discussions with Autonomy Corporation PLC to acquire the British company (HP 2011e) and its decision to cease operations of webOS devices,

contributed to HP's 20 percent stock price decline (Worthen 2011a). In fact, HP's stock price was reported to be 36 percent less in late October 2011 than at the start of the year (Worthen 2011b). Some investors and customers expressed their disappointment with the announced decision to explore spinning-off the PC division as well as other recent strategic decisions and some customers stated that they were reconsidering planned purchases of HP products (Worthen 2011a).

On October 27, 2011, 70 days after the possible spinoff of PSG was publicly announced, HP announced its decision to retain the PC division following extensive strategic, financial, and operational analyses of the impact of separating PSG to establish it as a separate company (HP 2011g). The press release announcing this decision reported that the benefits of separation and creation of a standalone company were less than the costs that included recreating the division's significant contribution to "HP's solutions portfolio and overall brand value" in a standalone company (HP 2011g). It was reported that Meg Whitman, HP's recently appointed President and CEO (HP 2011f), had earlier stated her support for the investigation into a possible spinoff of PSG and other recently announced decisions that had not been well received by some of its corporate customers and the market in general (Worthen 2011b).

CASE ANALYSIS QUESTIONS

To further aid addressing the case analysis questions, Exhibit 1 (Appendix) outlines the timeline of some of the significant HP announcements and appointments referenced above, while Table 2 (Appendix) shows HP's adjusted close stock price the day before, day of, and day after these announcements and events. In addressing the case questions 1-3, give examples of any of the four factors that are relevant to the decision and also specifically identify any of the four factors that you believe are not affected by the decision. Relevant concepts for the case questions that typically are discussed in management/cost accounting textbooks include the benefits of centralization versus decentralization, relevant costs and revenues, and long-run versus short-run pricing.

Fully reference any articles or other sources of information that you use to address each of the following questions.

1. Discuss possible financial and other reasons for HP seriously considering spinning-off its PC division (PSG) into a separate company when it was the world's largest PC manufacturing company in terms of sales.
2. Discuss likely financial and other reasons for HP later deciding to retain PSG within the company.

3- Evaluate the strategic decisions made by HP during this time (2011 - 2014). Do you think they acted appropriately?

4- Think about how HP is performing as a company now, do you think these decisions impacted their current standing?

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Direct Materials 16GB 32GB LG Electronics 9.7 inch display $69.00 $69.00 6 Cypress Semiconductor Chips to control the touchscreen 11.75 11.75 Materials used to build the capacitive glass assembly that overlays the LCD display ($63.50) plus other display components 144.25 144.25 Samsung 8GB system memory (DRAM) 26.00 26.00 Qualcomm main application processor chip 20.00 20.00 Qualcomm (Atheros subsidiary) Wi-Fi Chips 2.60 2.60 Qualcomm (Atheros subsidiary) two power management chips 5.00 5.00 Texas Instruments three power management chips and one display interface chip 4,50 4.50 SanDisk iNAND chips for storing data 23.00 45.00 Other (possibly rounding differences) 0.55 0.55 Total estimated direct materials costs $306.65 $328.6548 days later on August 18, 2011 140 Apotheker announces HP is to acquire Autonomy, get rid of webos hardware 5.5 months business 35 days later on (TouchPad later on March 14, and webos October 27, April 28, 2010 2011, phones). and 2011, Meg Announcement Leo possible PC Whitman of definitive Apotheker Division announces agreement for announces (PSG) spin- HP will HP to purchase HP's new off CHP keep PC Palm CHP strategy 201 1d; HP division 2010a) (HP 201 1a) 201 1e) (HP 201 1g) 5 months 109 days 35 days later on later on September July 1, CA later on September 30, 2010, 2011, HP 22, 2011, Leo launches Leo Apotheker TouchPad Apotheker is appointed (HP 201 1b) steps down new President President and CEO of and CEO HP effective and Mes November Whitman is 1. 2010 (HP appointed 2010c) new President and CEO