Hewlett Packard: Changing of the Guards

Prepared for Prof. Martin Schulz

COMM 329 – Organizational
Behaviour

The University of British

Columbia
November 25th, 2010

Prepared by Atlas Consultants:

Andrei Postrado 78092103

Farah Khurrum 60224094
Jeffery Lee 67728089
Lia Palumbo 66088063
Naoya Koizumi 49272081
 Hewlett Packard: Changing of the Guards i

EXECUTIVE SUMMARY

HP has proven to be a successful company but the recent recession, strong competitors, and

expectations of stakeholders for improvement has initiated some problems within the company.

This report examines some leadership issues at HP and proposes solutions for them.

An organization’s leadership plays an important role in defining the ethical values, innovation

standards and its culture.

An organization’s culture can become more of a liability when the shared values are not in

agreement with the leaders that will further the organization’s effectiveness, especially when

they are hired externally and not properly socialized into the organization’s core values. HP

experienced similar negative impact with the initiation of external hiring trend for CEOs in 1992.

We suggest the implementation of an “Executive Socialization Plan” to prepare new Chief

Executives for their roles as leaders at HP.

The high turnover rate of leadership at HP due in part to ethical issues was initiated by the 2006

spying scandal and has continued to date. To ease the negative impact of these issues and to

prevent them in future the leadership at HP should implement “Values based Decision making

model”.

Problems surrounding the HP’s creativity emerged with Fiorina’s centralization of the company.

The company has been making efforts to revert back to their creative roots with new products. In

order to sustain this momentum and help propel HP back to its success in creativity and

innovation we recommend that HP revert to its decentralized structure, making each product line

independent and autonomous. HP should also increase its R&D budget in order to keep up with

rapidly developing IT industry.

 Hewlett Packard: Changing of the Guards ii

Table of Contents

Executive Summary ....................................................................................................................... i

Introduction ....................................................................................................................................1

Past Problems .................................................................................................................................2

Current and Future Problems ......................................................................................................5

Recommendations ..........................................................................................................................7

Conclusion ................................................................................................................................... 12

Citations ....................................................................................................................................... 13

Appendices ................................................................................................................................... 16

Appendix A: Moral Leadership .............................................................................................. 16

Appendix B: Shandwick’s Study of CEO Socialization ......................................................... 18

Appendix C: HP’s R&D Budget ............................................................................................. 19

 Hewlett Packard: Changing of the Guards 1

INTRODUCTION

HP was founded in 1939 by classmates Bill Hewlett and Dave Packard. The company has come

a long way since its first product, an audio oscillator, which was built in a Palo Alto garage

(Hewlett-Packard, 2010). Since then, the company has created a staggering amount of new

products and services that has ultimately led to its expansion and success today. HP’s success is

largely due to the shared corporate values which were set by its founders. These values are based

on results driven through teamwork, meaningful innovation, uncompromising integrity, and a

passion for its customers, (Hewlett-Packard, 2010). It is these values that have enabled the

company to continue to not only thrive in an extremely competitive market, but to drive its brand

to one of the most recognizable household names in the world (Hewlett-Packard, 2010).

Unfortunately throughout the past decade, HP has not been able to adhere to its own company

standards. Since 1999, HP has seen three different people take the leadership position as the

company’s CEO. As a result, various problems have arisen that have not only affected the

company financially, but have also destroyed the reputation that the founders have strived so

hard to build.

This report analyzes the impact that HP leaders have had on the company. The first section of the

report discusses past cultural, ethical, and creative problems that occurred under the leadership of

Carly Fiorina and Mark Hurd. The second section discusses current problems that have occurred

under the current CEO Léo Apotheker. It also considers future problems that may arise if no

changes are made. The third section of the report discusses organizational behaviour related

solutions to HP’s cultural, ethical, and creative problems. Lastly, the report contains an

implementation plan that will facilitate the execution of our recommended solutions.
 Hewlett Packard: Changing of the Guards 2

PAST PROBLEMS

Culture

With the hiring of Carly Fiorina as HP’s new CEO in July 1999, the corporate culture and core

values of HP began a dramatic change. Fiorina, an executive with AT&T prior to joining HP in

1999, brought her expertise in marketing and public relations (Hewlett-Packard, 2005). She had

an impressive track-record of being a successful leader and manager beforehand. Unfortunately,

her marketing and PR specialties did not agree with the operations and the mindset that was

already endowed upon the technical, engineering based organization. One of Fiorina’s first major

projects as the new CEO was facilitating the acquisition of Compaq. She viewed the acquisition

of Compaq as a way to give HP the ability to rival IBM in size and revenue (Taylor, 2001).

Although financial advantages may be the initial attraction of an acquisition, whether the

acquisition actually works seems to have more to do with how well the organizations’ cultures

match up (Langton, Robbins, & Judge, 2010). Compaq had previously experienced a bad merger

with Digital Equipment Corp and the two companies were never able to successfully merge their

individual work cultures (Taylor, 2001). Consequently, when HP acquired Compaq, the

organization had to manage the merger of three separate work cultures. Mergers and acquisitions

can blur the lines of authority and make it unclear as to where employees fit in (Langton,

Robbins, & Judge, 2010). This ambiguity can make it difficult for employees to form a unified

culture and the company can suffer as a result. Financially, HP’s acquisition of Compaq was

unsuccessful and caused HP’s share price to drop drastically (OS News, 2005). This could have

been partially due to HP’s inability to successfully integrate its culture with Compaq’s.
 Hewlett Packard: Changing of the Guards 3

The corporate culture continued to change when Mark Hurd replaced Carly Fiorina as HP’s CEO

in March 2005. Prior to his position in HP, Hurd was the CEO of NCR Corp. (Hewlett-Packard,

2010). Hurd’s management style was that of aggressive cost-cutting, exemplified by the 15,000

layoffs made shortly after becoming CEO (Gustin, 2010). Hurd was successful in raising profits

and steering HP in a more economically beneficial direction. Under his leadership, HP reported a

25% jump in profit (Gustin, 2010). However, these financial benefits proved to be short-term

because Hurd’s strategy of improving HP’s financial position largely came from cost cutting and

financial discipline (Madden, 2010). The large cost cuts and employee lay-offs were

unfavourable with many of the company’s personnel and consequently led to a sense of unease

and distrust among employees (Thibodeau, 2010). Hurd’s management of HP allowed the

company to survive and grow during the recent recession (Thibodeau, 2010); however, it seems

that Hurd did not account for its effects on HP’s core values. He redirected the company’s

objective from innovation, as set out by its founders, to one that focused on cost-cutting

(Thibodeau, 2010).

Ethics

Leadership can be considered one of the most important aspects in of any company.

Organizational success often starts at the top; therefore it is vital to understand that a good ethical

culture does as well. Ethical and moral leadership facilitate the creation of a healthy and

successful organizational culture (Costa, 1998).

Under Hewlett and Packard’s leadership, HP was considered to be a center of excellence for its

ethical culture. In 1976, David Packard claimed that any employee would be fired if they were

discovered to be violating HP’s ethical standard for any short term divisional profits (James

Collins, 1994). However for the past five years, HP has been having ongoing ethical related
 Hewlett Packard: Changing of the Guards 4

problems. Specifically, HP’s previous CEO Mark Hurd and members of the Board of Directors

have been accused of various issues (Stewart, 2010). In 2006, HP’s Board of Directors was

caught up in a scandal involving leaks and spying on reporters. As a result, HP faced the

California Criminal Court and later Federal criminal charges were brought up due to these spying

scandals. Ultimately, the chairperson and several board members resigned due to these issues

(Open, 2010).

In early August 2010, Hurd was forced to resign as he was facing various accusations. These

included filing false expense reports (Stewart, 2010) and lying to the Board of Directors (Menn,

2010). Additionally, Hurd was involved in a sexual harassment scandal with Jodie Fisher, a

former HP contract employee (Schumpeter, 2010). Hurd’s recent resignation has brought up

many ethical considerations for the company. His alleged sexual harassment case along with his

lack of moral leadership has created many ethical problems, which ultimately affected his

credibility. Although Hurd positively affected the company in terms of operational growth and

efficiency, his unethical behaviour outshone any benefits he brought to HP.

Creativity

Many problems emerged when Carly Fiorina became HP’s CEO in 1999. She reorganized HP’s

organizational structure from 83 product divisions to six centralized divisions. Before her arrival,

each product division was largely independent, and responsible for its own research and

development (“R&D”), production, and sales. After the reorganization, product development was

reduced to three divisions – printers, computers and tech support, while the other three divisions

focused on marketing and sales (Eduljee, 2007). The restructuring separated the product

development and manufacturing divisions from the customers, as the marketing and sales

divisions were now in charge of selling the products. Therefore, the product divisions got most
 Hewlett Packard: Changing of the Guards 5

of its feedback from the sales division, to make their products more “sell-able” rather than meet

customer’s requirements, and HP focused more on marketing and selling products rather than

developing them. Analysts have stated that HP products became more “ordinary” and

emphasized more “style rather than substance” (ICMR Case Studies, 2001). Centralization also

concentrated HP’s decision making among the top management which reduced the autonomy of

each product division. This further reduced the company’s ability to produce innovative

products, as HP’s top management was focused more on the financial aspect of the company,

rather than its technical foundations (ICMR Case Studies, 2001).

Hurd’s cost cutting strategies reduced HP’s R&D from 4.5% of its revenue in 2005 to only 2.2%

as of 2010. HP also terminated development projects on improving many of its products (Krazit,

2005). As a result, HP lost its ability to produce innovative products, which it was previously

known for. HP had become a “generic company” instead of a trend-setter (Ante, 2010). In

addition, HP’s latest costly acquisition of data-storage provider 3PAR was attributed to the

termination of its own data-storage development project (Yarow and Angelova, 2010). Analysts

argue that HP’s cutting costs on its R&D would actually cost them more in the long run

(Sherman, 2010).

CURRENT AND FUTURE PROBLEMS

Culture

HP’s current CEO, Léo Apotheker joined HP on November 1st, 2010. Earlier, he was CEO of

SAP and was also hired externally. Apotheker may not be the best fit for HP’s leadership

position due to the cultural and strategic differences between SAP and HP (Valentino-DeVries,

2010). SAP has a very rigid culture and centralized business structure with only one product line
 Hewlett Packard: Changing of the Guards 6

to look after. On the other hand, HP is a more decentralized company that focuses on a number

of different product lines (Valentino-DeVries, 2010). This does not help the difficult cultural

transition that HP must make once again with a new leader. In the highly competitive IT

industry, HP is still continuing to purchase companies and consequently purchase new cultures

as well. With the additions of many new cultures, both large and small, HP may continue to have

issues with keeping its culture alive while trying to preserve the positive aspects of other

companies that they acquire.

Ethics

Important ethical issues have arisen under HP’s current CEO Léo Apotheker. Apotheker has

recently been accused of being involved in the theft of Oracle’s software while he was CEO at

SAP. SAP has been accused of illegally downloading mass amounts of software and using it as

their own products (Finkle, J., 2010). As the new CEO, Apotheker’s objective is to bring back

stability and credibility to HP; however Apotheker is already facing ethical challenges regarding

his own credibility due to the accusations surrounding Oracle software. Currently HP is facing a

lot of trust and loyalty issues relating to Shareholders. If they do not improve their ethical culture

they may not be able to gain the lost trust again.

Creativity

The same creative problems continue under Apotheker’s new leadership. HP’s centralized

structure has created a gap between customers and product developers. The product divisions in

charge of manufacturing and developing HP’s product lines are separate from the marketing and

sales division involved in selling them. This negatively affects their ability to innovate their

products, as it takes a longer time for the developers to get customer feedback. Moreover, the

developers have to meet the sales division’s requirements, which are more focused on saleability
 Hewlett Packard: Changing of the Guards 7

rather than innovation (Eduljee, 2007). What HP needs is more innovation and there are doubts

on whether Apotheker will be able to provide it. Critics believe that Apotheker’s enterprise-

oriented perspective will not help HP in its shift in business applications. The IT industry is

continuously and rapidly evolving, and HP should continue to develop and improve its products

to keep up with its competitors.

RECOMMENDATION

HP has been facing many leadership related issues and has consequently lost credibility. They

are facing challenges maintaining their corporate culture and creativity in innovation. HP needs

an environment where they can promote their open culture and the creativity that they had years

ago while possessing an ethical and moral face of leadership that will be helpful in improving

their credibility and building trust amongst their investors and clients. HP needs Moral

Leadership (Costa, 1998 – See Appendix A).

Although Léo Apotheker has been hired as HP’s new CEO, his hiring has been recent enough

that his ability to harm the organization’s culture, ethics, and creativity has not been devastating.

Decisions can still be made that will have positive effects. Our analysis of HP reveals that large

problems in culture, ethics, and creativity stem from the organization’s leader, its CEO. For this

reason, we believe in adopting change in a “top-down” approach beginning with HP’s upper

management (its Chief Executive and its Board of Directors).

Employees are required to be socialized by the organization in order to help them adapt to

company values and ensure their fit (Langton, Robbins, & Judge, 2010). Socialization on the

executive level is equally, if not more, necessary and must be handled differently as the

organization has a tendency to follow the direction of its leader. For this reason we propose an
 Hewlett Packard: Changing of the Guards 8

“Executive Socialization Plan”. To be implemented by the board of directors, the Executive

Socialization Plan requires board members to be proactive in educating new Chief executives or

leaders as they enter HP. They must be careful not to force or impose rules on new Chief

Executives as this may strip away ideas and innovation that the person already has, but rather

educate in a non-invasive way (Fondas & Wiersema, 1997). After a candidate has been hired,

certain expectations of the new Chief Executive by the organization should also be clearly set

(role requirements) such as performance expectation and managerial discretion. These

requirements are meant to provide a base for the individual to set their own goals and should not

be imposed so strongly as to prevent the CEO from exploring creative opportunities and changes

in company operations to suit their vision for HP.

As technology has evolved, the way Chief Executives decide to operate and present their

organizations, and themselves, evolve as well. In today’s modern era of social networking and

instant information via the internet, executives have the opportunity to reach and address all their

stakeholders (employees and shareholders alike) at the touch of a button. From a public relations

point of view, there is no better spokesperson for an organization than its CEO (Liu, 2010).

Surprisingly, over 64% of CEOs have no online engagement with external stakeholders

(Shandwick, 2010 –see Appendix B). HP has the opportunity to once again set the standard, not

only with its products, but with its operations. We suggest that HP take advantage of this statistic

and use social media as a proven method to reach its stakeholders. The most effective medium is

video, and can be easily incorporated as a blog on the company website or YouTube channel

(Liu, 2010). Even blog posts as rare as annually have shown to increase interest and trust among

a company’s stakeholders (Shandwick, 2010). By using these mediums to update and interact

with stakeholders on a regular basis, CEOs will be able to form a more personal connection not
 Hewlett Packard: Changing of the Guards 9

only with shareholders and the public, but also its thousands of employees thus garnering trust

and effectively showing an effort by HP to surge ahead of its competition yet again.

Should HP decide to hire a new Chief Executive, we recommend reviewing the screening

process prior to deciding on a candidate. Board members and HP’s Human Resource department

must proactively work together in setting strict criteria and expectations for the ideal candidate.

Having set criteria that is agreed upon for hiring individuals is necessary in ensuring that

qualified professionals are recruited and that the rest of the organization, including shareholders,

can trust that their employees are an adequate fit in the company. Hiring an individual to lead a

multi-national corporation with thousands of employees and shareholders is an important process

with lasting implications and should be handled as such. Criteria should be based on factors

including (but not limited to):

 Amount and type of previous experience

 Similar prior positions
 Ethical history in past jobs
 Culture/management style in past leadership roles
 Career Path
 Level and type of education
 Personal characteristics including locus of control and self-efficacy

(Fondas & Wiersema, 1997).

Aristotle suggested in Nichomachean Ethics that morality cannot be learned by simply reading it.

It can only be learned by witnessing the moral conduct of other people. This is called

“patterning” or “mentoring” (Gini, 1997). Tom Peters and Bob Waterman stated: “The real role

of leadership is to manage the values of an organization” (Tom Peters, 1982). The mentoring
 Hewlett Packard: Changing of the Guards 10

described by Gini can be extrapolated to provide a “Values based Decision making model”: This

is an ongoing and interactive training provided to all employees of an organization to get a sound

understanding of the ethical codes of conduct of the organization and should help them how they

decisions can comply to those codes (L.Craft, 2010). The employees should be trained how to

make business decisions according to the ethical code of conduct of the organization (L.Craft,

2010). A sample could be:

1. Does this decision have strategic clarity? i.e. does it promote innovation in the
organization, does it promote respect for all relationships involved.
2. Does this decision promote respect and dignity? i.e. does it promote job safety and
dignity for all the related employees?
3. Does this decision promote fairness? i.e. does it promote fairness of wages and
intellectual rights of all the parties involved?
4. Does it promote honesty? i.e. does it promote transparency and integrity within the
organization?
5. Does it promote Justice? i.e. does it provide equitable opportunities and rewards for all?

This training should be interactive like any other technological or cultural training of the

organization. It should involve real life decision making cases and help the trainees identify the

decisions appropriate to the ethical code of conduct. Caffarella and Barnett (1994) supports

interactive learning model for adult learners. The adults need acknowledgments, use of prior

knowledge and active involvement in learning. As all employees are adults they will benefit

more if the ethics training is done in an interactive manner (L.Craft, 2010). In correcting its

cultural and ethical characteristics, HP will be able to re-establish the trust it has lost from their

lack of ethical standards in their past Chief Executives (Kinick and Kreitner, 2008).
 Hewlett Packard: Changing of the Guards 11

As a company in the extremely competitive IT industry, creativity and innovation are necessary

qualities that HP must gather in order to succeed. We believe that a reversion to a more

decentralized organizational structure, as it was before, would be beneficial. Decentralized

structures are characterized by the degree to which control and decision making is distributed to

lower-level employees. Product divisions should be integrated with sales and marketing, and

each product line should be responsible for the development, manufacturing, marketing and sales

of its products thus allowing more independence and autonomy within the divisions. This would

lead to better customer feedback specific to each division and will enable them to develop

products that are more suited to customer requirements instead of meeting the specifications set

by the marketing and sales departments.

A decentralized structure would also give the divisions more freedom in decision making. It is

important for the product divisions to have their own discretion in decision making rather than

having upper management decide for them since they are more knowledgeable about their

products. This may increase job satisfaction among employees as it will result in a horizontal

hierarchy, where the lower-ranking employees are more empowered and involved in decision-

making. (Langton, Robbins and Judge, 2009).

HP should also increase its R&D budget to increase its ability to invent and innovate. HP’s

current R&D budget of 2.2% of its revenue, or $2.96 billion, puts it behind its competitors

(IBM’s R&D budget is $6 billion or 6% of its revenue) (Nagarajan, 2010). R&D is critical for

companies dependent on technology, such as HP, since their products quickly become obsolete

and must be continuously improved.

 Hewlett Packard: Changing of the Guards 12

CONCLUSION

From its humble beginnings in a Palo Alto garage, HP has made significant leaps in making

itself a leader and a successful brand in the IT industry. By developing a culture based on

creativity, innovation, and customer satisfaction, HP experienced massive gains in profit and

market share, and was considered to be a leading example of corporate success. However, due to

recent problems in leadership, the company has experienced substantial financial losses, decline

in customer satisfaction and an increasingly negative public image.

Cultural, ethical, and creative problems have arisen under both Carly Fiorina and Mark Hurd.

Unfortunately, these problems continue under Leo Apotheker, the current CEO of HP. As a

result, HP suffers from cultural ambiguity and a negative ethical image. HP’s R&D also suffers

due to the lack of attention to innovation. In order to fix these problems, HP should focus on

developing moral leadership. Moral leadership can be implemented by following a specific

timeline using the top-down approach. HP needs a CEO who is ethical and moral because an

organization’s leader influences the actions of its employees and also represents the company to

the outside world. Additionally, HP needs a CEO who understands the importance of a unified

corporate culture and the importance of development and innovation. Once moral leadership is

achieved, HP will be able to drive and maintain success in all aspects as the company will be

respected both internally and externally.

 Hewlett Packard: Changing of the Guards 13

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 Hewlett Packard: Changing of the Guards 16

Appendix A: Moral Leadership (Costa, 1998)

1. Strategic clarity. HP is currently facing issues related to creativity and innovation of new

products (Ante, 2010). The leadership at HP should try to shift their focus more on

product development and research rather than marketing and selling them.

2. Respect dignity. With massive layoffs and pay cuts, employees lose trust and confidence

in the company. Harsh actions without warning and assistance from the company may

result in employees feeling a lack of respect from upper management.

3. Fairness. The leadership at HP was already faced with the challenges of dealing with the

inequitable pay amongst different levels of employees (Sherman, E., 2010). This is

aggravated by the appointment of the current CEO Leo Apotheker who is accused of

being involved with the recent illegal downloading of mass amounts of software and

using it as SAP’s own products (Finkle, J., 2010).

4. Honesty. The HP leadership should focus on the decentralization of their structure; this in

turn will improve the transparency and access amongst different levels of the hierarchy. If

this transparency was imposed before, former CEO Mark Hurd would not have been able

to pull off with his filing false expense reports (Stewart, 2010) and lying to the Board of

Directors (Menn, 2010).

5. Justice. The leadership at HP should focus more on the justice and equity amongst their

employees. The former CEO Mark Hurd was involved in inequitable methods of cost

cutting which was discriminative between him and other employees (Sherman, E., 2010).
 Hewlett Packard: Changing of the Guards 17

The current CEO Leo Apotheker should display more moral standards and make his pay

more equitable.
 Hewlett Packard: Changing of the Guards 18

Appendix B: Shandwick’s Study of CEO Socialization (Shandwick, 2010)

 Hewlett Packard: Changing of the Guards 19

Appendix C: HP’s R&D Budget (Nagarajan, 2010)