Essay: Hewlett-Packard – Reorganising to Implement a New Strategy

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Organising and Planning for Effective implementation

Throughout most of the 1990s, Hewlett-Packard was one of the most successful and admired firm’s in the global computer industry. The firm’s booming success in PCs and printers drove sales from $13 billion in 1990 to nearly $40 billion by 1996, with profits more than keeping pace.

A primary reason for HP’s success during that period was its organisation structure. The firm was managed like a conglomerate of small ventures, each responsible for its own success. More than 130 business units were focused on specific product lines such as UNIX computers or inkjet printers, each employing fewer than 1500 people. And each SBU was granted substantial autonomy to pursue its own product and market development activities and to reinvest the capital generated by the unit.

Within HP’s business units there was a heavy reliance on cross-functional teams. The PC unit, for example, was organised into small teams focused on different customer segments. The salesforce, too, was organised into teams focused on major accounts or application segments. HP’s decentralised, team-based structure helped the firm stay in touch with changing customer needs and technical developments in each product category. And the SBUs were flexible enough to respond to those changes quickly. The result was a constant stream of product improvements and line extensions. More than half of the company’s sales in 1995, for example, came from products that were not in existence two years earlier.

The Internet Changed the Firm’s Market Environment

Paradoxically, the decentralised and flexible structure that enabled HP to be so successful at developing new generations of PCs and printers made it difficult for the firm to respond quickly to changes in the market environment brought about by the growing popularity of the Internet. For instance, as firms embraced the World Wide Web, system integration became critical. A company’s computers, servers, routers, and software all had to be designed – often with the help of experienced consultants – to work together seamlessly, both internally and with the Internet itself. Unfortunately, while the narrow product focus and high level of autonomy of HP’s business units had enabled them to move quickly and creatively when bringing out the next generation of offerings within their own product domains, it hindered their ability to coordinate efforts across product categories. Consequently, while old competitors such as IBM and new ones such as Sun Microsystems were designing and selling integrated e-business systems, HP lacked the internal coordination mechanisms necessary to do so.

The autonomy and financial independence of HP’s many business units also caused difficulty in developing innovative new technologies not directly related to an existing product category. A decision to devote substantial resources to a technology that fell outside the domain of existing SBUs required the consensus of the various unit managers; and gaining that consensus could take months or years, thereby giving competitors a head start. Worse, some promising new Internet technologies were never developed because the necessary consensus was never achieved.

As a result of the firm’s lack of coordination and strategic focus, HP missed much of the early growth in Internet hardware, software, and e-services markets that occurred in the late 1990s. Sales and profits began to stagnate, the firm’s share price dropped dramatically, and management got the message.

Reorganising to Implement a New Strategy

One of the first steps toward correcting the problem taken by HP’s board of directors was to bring in a new CEO from outside the company. Carly Fiorina was hired away from Lucent Technologies, where she had gained substantial experience developing and marketing gear for the new economy. Fiorina and other top managers quickly took several actions aimed at improving the coordination and sharpening the stra¬tegic focus of the company. They created four divisions – each headed by a divisional manager with CEO-like powers – to provide closer coordination and oversight for businesses making complementary goods and services without constraining their entrepreneurial spirit. For example, the UNIX computer and software and support units are now components of an Enterprise Computing Solutions Division, which is charged with combining computers and software into simple problem-solving pack¬ages for buyers, such as technology for helping small businesses set up shop on the Web.

Other steps aimed at improving the coordination of HP’s Internet-related goods and services include increasing emphasis on e-commerce consulting services aimed at designing customised solutions for customers that utilise a wide range of HP hard¬ware and software, changes in the compensation and reward system that increase the proportion of managers’ pay tied to company sales and profit performance via bonuses and stock options, and a $100 million advertising campaign aimed at increasing customer awareness of the full range of Internet goods and services HP offers and improving the company’s image as an e-commerce provider.

Finally, Fiorina created a new organisational entity, the E-Services Solutions Group, whose domain cuts across all of the other business units and divisions in the company. Its charge is to get the various business units to work in innovative ways with each other – and with outside partners – to develop new Web-based goods, services, and ways of doing business. The manager of the new group given a lot of authority to create, invest in, or acquire interesting Internet start-ups. And a large chunk of HP’s $4 billion R&D budget was directed toward the development of new e- commerce systems and services. For example, the firm’s research lab at Bristol, UK – its main research site in Europe – was directed to focus its efforts on e-services and e-publishing.

It’s too soon to know whether Carly Fiorina’s attempts to reorganise and reorient Hewlett-Packard and turn it into a major e-services provider will be entirely success¬ful. Matters have been complicated by a merger with Compaq which was finally approved in 2002, and which nearly doubled the company’s revenues to about $80 billion. Before the merger was finalised, HP’s sales and earnings were battered during 2001 due to slackening demand in many computer equipment markets and Dell Computer’s attempt to capture market share through very aggressive pricing tactics. Nevertheless, the company did experience six per cent growth in revenues from e-services in 2001, and more than 20 per cent sales growth overall in the fourth quarter of 2002 compared to the year before. But whether the firm’s new direction is successful or not, the ongoing changes in HP’s market, competitive, and internal environments will likely demand future adjustments in the firm’s marketing strat¬egies – and in the organisational structures needed to implement those strategies effectively.

Learning Objectives

Hewlett-Packard’s fall from grace in the face of the dramatic Internet-driven shifts in its market environment and its subsequent attempts to remake itself into a major provider of e-commerce hardware and services illustrate that a busi¬ness’s success is determined by two aspects of strategic fit. First, its competitive and marketing strategies must fit the needs and desires of its target customers and the competitive realities of the marketplace. The emergence of the Internet increased companies’ needs for closely integrated computer, network hardware, and software systems. Hewlett-Packard’s balkanised approach of selling stand¬alone products produced by many semiautonomous and entrepreneurial busi¬ness units had once been extremely successful, but it was incapable of providing the integration customers were looking for in the Internet age. Consequently, the firm is scrambling to adjust its competitive strategy and product offerings to better fit the new realities of the marketplace.

But even if a firm’s competitive strategy is appropriate for the circumstances it faces, it must be capable of implementing that strategy effectively This is where the second aspect of strategic fit enters the picture. A business’s organisational structure, internal policies, procedures, and resources must fit its chosen strategy or else implementation will fall short. Hewlett-Packard’s highly decentralised structure and its policies of granting substantial control over financial resources to individual business units, for example, made it nearly impossible for the firm to implement a strategy of differentiating itself by providing tightly integrated and customised packages of Internet products and services to its customers. The company had to make major organisational changes to implement its new strategic direction. And it may have to make further changes to stimulate innovation or reduce costs in order to fend off Dell’s aggressive compaign to capture market share.

Therefore, in the next section we examine several questions related to the issue of organisational fit – the fit between a business’s competitive and mar¬keting strategies and the organisational structures, policies, processes, and plans necessary to effectively implement those strategies.

For companies with multiple business units or product lines, what is the appropriate administrative relationship between corporate headquarters and the individual SBUs? How much autonomy should business unit managers be given to make their own strategic decisions, how much control should they have over the SBU’s resources and programmes, and how should they he evaluated and rewarded?

Within a given business unit, whether it’s part of a larger corporation or a one-product entrepreneurial start-up, what organisational structures and coordination mechanisms are most appropriate for implementing different competitive strategies? Answering this question involves decisions about variables such as the desired level of technical competence of the various functional departments within the business, the manner in which resources are allocated across those functions, and the mechanisms used to coordinate and resolve conflicts among the departments.

How should organisational structures and policies be adjusted, if at all, as an organisation moves into international markets?

However, even if a business has crafted brilliant competitive and marketing strategies, and it has the necessary organisational arrangements and wherewithal to implement them, implementation is unlikely to be very effective unless all of the business’s people are following the same plan. This fact underlines the importance of developing formal, written marketing plans to document all the decisions made in formulating the intended strategy for a given good or service so it can be clearly communicated to everyone responsible for its implementation and to firmly establish who is responsible for doing what and when. Formal plans also establish the timetables and objectives that are the benchmarks for management’s evaluation and control of the firm’s marketing strategies. Thus, good planning is important.

Given the importance of formal plans as tools to aid implementation and control, we will examine the content of effective marketing plans in more detail and review the many strategic decisions involved in formulating that content. The purpose of these planning decisions is to lay a well-conceived foundation that permits effective implementation of the marketing strategy. While good planning is important, effective implementation is crucial.

18.1 Designing Appropriate Administrative Relationships for the Implementation of Different Competitive Strategies

Prior we pointed out that businesses, whether small independent firms or units within a larger corporation, compete in different ways depending on their intended rate of new product-market development (i.e., prospectors versus analysers versus defenders) and whether they seek an advantage by differentiating themselves via superior product or service quality or by being the low-cost producer. For example, during the mid-1990s many of Hewlett- Packard’s business units could be characterised as differentiated analysers. They were defending well-established share positions within their product domains by offering quality products while simultaneously investing in the development of more technically advanced product improvements and line extensions.

The chosen competitive strategy tends to influence the marketing strategies pursued by individual product offerings within the business unit, at least in the short term. The differentiated analyser strategies of Hewlett-Packard’s busi¬nesses, for instance, demanded a willingness to cannibalise existing products in order to ensure the future. Consequently, the advertising and promotion bud¬gets for many older products were slashed as more technically advanced models were introduced.

Because different competitive strategies seek to satisfy customers and gain a sustainable advantage in varying ways, different organisational structures, poli¬cies, and resources are necessary to effectively implement them. For one thing, the administrative relationships between the unit and corporate headquarters influence the ability of SBU managers, including its marketing personnel, to

implement specific competitive and marketing strategies successfully. This sec¬tion examines three aspects of the corporate business unit relationship that can affect the SBU’s success in implementing a particular competitive strategy:

1 The degree of autonomy provided each business unit manager.

2 The degree to which the business unit shares functional programmes and facilities with other units.

3 The manner in which the corporation evaluates and rewards the perform¬ance of its SBU managers.

Following itemises the appropriate marketing policies and strategies for each of the four business strategies – prospector, analyser, differentiated defender and low-cost defender.

The fit between business strategies and marketing programmes Business strategies

Appropriate Prospector Analyser Differentiated Low-cost defender

marketing policies defender

and strategies

Product and service Broad, technically Moderately broad Relatively narrow Narrow, less

policies sophisticated and technically but high-quality technically

product lines; sophisticated and technically sophisticated

moderate to high product lines; service sophisticated product lines;

quality and levels of levels and quality product lines; high relatively low levels

service; especially indeterminate, quality and levels of of quality and

sales engineering service, service. services.

Price policy Relatively high Relatively high Relatively high Relatively low to

prices. prices. prices, competitive prices.

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