Pneumonia cp

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May'03

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Case in focus

Reorganizing Hp

The case discusses the problems faced by HP during the mid-1990s because of its

highly decentralized organizational structure. The case is designed to facilitate a

critical analysis of the changes that occurred in the organizational structure over

the years, as the company increased its size of operations, product portfolio and

geographical reach. The case also analyzes the aggressive management

reorganization plan implemented by CEO Carly Fiorina and its effect on the

company.

The Problems

In the mid-1990s, global computer major HP

was facing major challenges in an

increasingly competitive market. In 1998, while HP's revenues grew by just 3%,

competitor Dell's rose by 38%. HP's share price had remained more or less

stagnant, while competitor IBM's share price had increased by 65% during 1998.

Analysts said HP's culture, which emphasized teamwork and respect for co-

workers, had over the years translated into a consensus-style culture that was

proving to be a sharp disadvantage in the fast growing Internet business era.

Analysts felt that instead of Lewis Platt, HP needed a new leader to cope with the

rapidly changing industry trends.

Responding to these concerns, the HP board appointed Carleton S Fiorina

in July

1999 as the CEO of the company. Revenues grew by 15% for the financial year

ended October 2000 (Refer Exhibit I), prompting industry watchers to say that

Fiorina seemed all set to put HP's troubles behind for good. However, for the

quarter ended January 31, 2001, net profits were well below the stock market

expectations. There was more bad news from the company. In late January 2001,

after forcing a five-day vacation on the employees and putting off wage hikes for

three months in December 2000, HP laid off 1,700 marketing employees. By early

February 2001, HP's share price fell 18.9% from $45 in July 1999 to $36.

In April 2001, citing a slowdown in consumer spending, Fiorina announced that

HP's revenues would decrease by 2% to 4% for the quarter ending April 30, 2001.

She also said that HP would in all likelihood show no growth for the next two

quarters. Many analysts and competitors were surprised at this announcement.

According to some analysts, the major reason for the shortfall in revenue was

Fiorina's aggressive management reorganization. They said that with global

slowdown in the technology sector, it was the wrong time to reorganize.

Things worsened when HP laid off 6,000 more workers in July 2001. The layoffs

came less than a month after 80,000 employees had willingly taken paycuts. The

management also sent memos saying that layoffs would continue and just

volunteering for paycuts would not guarantee continued employment. According to

company insiders, though these changes were necessary, they had affected

employee morale. Many employees had lost faith in Fiorina's ability to execute her

reorganization plans.

Background Note

Stanford engineers Bill Hewlett and David Packard founded HP in California in 1938

as an electronic instruments company. Its first product was a resistance capacity

audio oscillator, an electronic instrument used to test sound equipment. During the

1940s, HP's products rapidly gained acceptance among engineers and scientists.

HP's growth was aided by heavy purchases made by the US Government during

the Second World War.

Exhibit I: HP’s Consolidated Condensed Statements of Operations

(in $ mn, except per share data)

Year ended October 31,

2001

2000

1999

1998

Net Revenue

45,226

48,870

42,370

39,419

Costs and expenses:

Costs of products

sold and services

33,474

35,046

34,135

27,790

Research and

development

2,670

2,634

2,440

2,380

Selling, general

and

administrative

7,259

7,063

6,522

5,850

Restructuring

charges

384

102

—

Total costs and

expenses

43,787

44,845

38,682

36,020

Earnings from

operations

1,439

4,025

3,688

3,399

Interest income

and other, net

171

356

708

530

Litigation

Settlement

400

—

Losses (gains)

on divestitures

244

Interest expense

—

202

235

Earning from continuing operations

before taxes

702

4,625

4,194

3,694

Provision for

taxes

1,064

1,090

1,016

Net earnings

from continuing

operations

621

3,561

3,104

2,678

Net earnings

from

discontinued

operations

—

136

387

267

Net earnings

624

3,697

3,491

2,945

Net earnings per share:

Basic

0.32

1.87

1.73

1.42

Diluted

0.21

1.8

1.67

1.39

Source: HP Annual Report 2000

Till the 1950s, HP had a well-defined line of related products, designed and

manufactured at one location and sold through an established network of sales

representative firms. The company had a highly centralized organizational

structure with vice-presidents for marketing, manufacturing, R&D, and finance. HP

had 90 engineers in product development. To have a clear demarcation of goals

and responsibilities, and to promote individual responsibility and achievement, HP

began to organize these engineers into smaller, more efficient groups by forming

four product development groups. Each group concentrated on a family of related

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May'03 View Demo Regular Features Editorial To Our Readers Data Bank Book Summary Articles Case in focus Reorganizing Hp The case discusses the problems faced by HP during the mid-1990s because of its highly decentralized organizational structure. The case is designed to facilitate a critical analysis of the changes that occurred in the organizational structure over the years, as the company increased its size of operations, product portfolio and geographical reach. The case also analyzes the aggressive management reorganization plan implemented by CEO Carly Fiorina and its effect on the company. The Problems In the mid-1990s, global computer major HP1 was facing major challenges in an increasingly competitive market. In 1998, while HP's revenues grew by just 3%, competitor Dell's rose by 38%. HP's share price had remained more or less stagnant, while competitor IBM's share price had increased by 65% during 1998. Analysts said HP's culture, which emphasized teamwork and respect for co-workers, had over the years translated into a consensus-style culture that was proving to be a sharp disadvantage in the fast growing Internet business era. Analysts felt that instead of Lewis Platt, HP needed a new leader to cope with the rapidly changing industry trends. Responding to these concerns, the HP board appointed Carleton S Fiorina2 in July 1999 as the CEO of the company. Revenues grew by 15% for the financial year ended October 2000 (Refer Exhibit I), prompting indus ...
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