Under Fiorina, Tech Innovation And Growth Weren't HP's Strong Suits

Some analysts blame the cost-cutting, which prompted too many veteran HP employees to take their skills to other companies, notably Intel and IBM.
SAN JOSE, Calif. -- When Carly Fiorina took charge of Hewlett-Packard in 1999, the slumping Silicon Valley pioneer was on the verge of missing the Internet boom.

Her mission was to cut the bureaucracy and jump-start innovation. Within months, HP added the word "invent" to its corporate logo.

But with Fiorina's dismissal on Wednesday, HP's technology record is mixed. Her tenure may be better remembered for a different sort of engineering -- managing the contentious Compaq Computer Corp. merger, inventing new branding campaigns and cutting costs.

HP researchers consistently unveil advances in everything from molecular computing to data center architecture to printing technology. As of last year, HP was No. 4 in patents received, with 1,775, according to the U.S. Patent Office.

But it trails archrival IBM's 3,248 patents. And all of HP's research hasn't translated into significant and consistent growth across all its businesses, which range from PCs, ink, printers and cameras to high-end servers, consulting and other enterprise services.

Despite HP's efforts to tout its innovation, the biggest news out of the 2004 Consumer Electronics Show was that HP would sell its own branded version of Apple's iPod. This year, it announced new Media Center PCs based on Microsoft Corp. software and media hubs.

"HP's innovation record ... has dropped precipitously with the tenure of Carly and with the ironic elevation of the 'invent' logo as the company's slogan," said Richard Doherty, research director of the Envisioneering Group, a market research firm.

Some analysts blame the cost-cutting, which prompted too many veteran HP employees to take their skills to other companies.

In fiscal 2004, HP spent $3.5 billion on research and development -- down from $3.7 billion a year earlier and nearly $4 billion in 2002, though still higher than before the Compaq merger.

"The HP labs were devastated at a time when companies like Intel and IBM were scurrying for new talent," Doherty said. "In fact, a lot of the HP people went to Intel and to IBM. They benefited from the HP belt-tightening."

Fiorina also made a habit of suggesting the gangbuster-growth days of the technology industry were gone -- not a message that inspired innovation, said Mark Stahlman, a Caris & Co. analyst.

``Carly was the only senior executive in the computer business who consistently appeared in public and said it's no longer a growth industry," he said. "No senior executives at IBM, Intel, Microsoft or Sun believed that."

HP also invested heavily in a decade-long joint venture with Intel Corp. to develop a next-generation microprocessor for high-end servers. But since the Itanium chip was unveiled in 2001, it has failed to capture significant market share. That's OK for Intel, which still sells not only Itaniums but also the chips that it was supposed to replace.

It was a different story for HP.

"They committed enormous resources to a losing platform," Stahlman said.

HP's efforts to dethrone IBM in the world of business services and getting various technologies to work together also have come up short.

One problem, analysts say, was that HP's marketing campaigns confused real innovation with public relations. Another is that even Fiorina had difficulty concisely describing HP's business strategy, called the "Adaptive Enterprise."

The company also faced the embarrassment, in August 2004, of missing its earnings targets because of glitches with a new internal order processing system, a fiasco that prompted the ouster of three HP executives and raised doubts about HP's effort to promote its internal technology environment as an example of what's possible for its customers.

Most of all, HP failed to capture new markets like it had in the past. Under Fiorina's tenure, there was no revolutionary new technology like its calculators of the 1970s and its printers of the 1980s.

The company, founded in a garage in 1938 by two engineers that grew to $79.9 billion in annual revenues and 150,000 employees in fiscal 2004, has seemed to be unable to find its way.

With Fiorina's ouster, HP's board appears to be desiring a return to greater growth -- a move it signaled last week by appointing Thomas Perkins, founder of the venture capital powerhouse Kleiner Perkins Caufield & Byers, to its ranks.

"He's one of Silicon Valley's top growth strategists," Stahlman said. "Perkins is in the growth business -- he has overseen every important growth development that has happened in the Silicon Valley in the past 25 years."

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