The Challenges of Organizational Change; the case of HP

Introduction

"Someday, there will be books written about what we're doing,” Carly Fiorina declared in 1999. She had
just joined Hewlett-Packard as its new chief executive, the first outsider ever chosen to run the high-tech
giant, the highest-profile female CEO in the United States. Her strategic and operational mandate: to
breathe new life into a proud but aging company and to successfully execute one of the most audacious
business transformations of all time. Over the past few years, Fiorina's tenure at HP has become a case
study in more ways than she ever expected. Early on, the new boss seemed to be conducting a master class
in leadership, winning allies and taking steps that made HP nimbler, leaner, and more exciting. Then the
economy turned south, and some of her boldest bets misfired. She was held up as a paragon again, this time
of hubris and insensitivity to the company's deep-seated culture. Then she masterminded HP's $20 billion
acquisition of arch rival Compaq Computer Corp. in the face of fierce resistance, a strategic move that was
packed with lessons about crisis management and the changing future of the high-tech sector. All along the
way, Fiorina has sat in the celebrity-CEO chair, competing in a high-stakes industry, leading a time-
honored company, working in the intense environment of Silicon Valley --and doing it all with the added
scrutiny that comes with being a woman at the top.

Carleton S. (Carly) Fiorina

Carly Fiorinagraduated from Stanford University with a bachelor’s degree in medieval history and
philosophy. She went on to earn a master’s degree in business administration from the University of
Maryland at College Park, as well as a Master of Science degree from the Massachusetts Institute of
Technology. Before joining HP, Fiorina spent a combined total of almost 20 years at AT&T and Lucent
Technologies. At Lucent, she was instrumental in expanding the company’s international business as well
as in planning both its initial public offering and its later break-off from AT&T.At both companies, Fiorina
held a number of senior leadership positions. When she became chairman and CEO of HP in 1999, Carly
Fiorina became the first woman to lead so large a company, and consequently, one of the nation’s most
prominent female executives. Perhaps more important to HP’s future, however, Fiorina became the first
outsider to take charge of the 62-year-old company.

Hewlett-Packard: The Company

In 1938, two Stanford graduates in electrical engineering, William Hewlett and David Packard, started their
own business in a garage behind Packard’s Palo Alto home. One year later, Hewlett and Packard formalized
their business into a partnership called Hewlett-Packard. HP was incorporated in 1947 and began offering
stock for public trading 10 years later. Annual net revenue for the company grew from $5.5 million in 1951
to $3 billion in 1980. By 1997, annual net revenue exceeded $42 billion and HP had become the world’s
second largest computer supplier. The company, which originally produced audio oscillators, introduced its
first computer in 1966. In 1972, the company pioneered the era of personal computing by introducing the
first scientific, hand-held calculator. Hewlett-Packard introduced its first personal computer in 1980. Five
years later, HP introduced the LaserJet printer, which would become the company’s most successful
product ever.

The HP Way

In 1956, Bill Hewlett, Dave Packard, and a handful of other HP executives gathered at the Mission Inn in
Sonoma, California, to create a set of values and principles to guide their company. The six objectives that
this small group subsequently created not only helped shape “a new kind of company,”but ultimately
became the foundation for what came to be known as “the HP way.”
These six objectives, which later became seven, are:

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 1. Recognize that profit is the best measure of a company’s contribution to society and the ultimate
source of corporate strength;
2. Continually improve the value of the products and services offered to customers;
3. Seek new opportunities for growth but focus efforts on fields in which the company can make a
contribution;
4. Provide employment opportunities that include the chance to share in the company’s success;
5. Maintain an organizational environment that fosters individual motivation, initiative and creativity;
6. Demonstrate good citizenship by making contributions to the community;
7. Emphasize growth as a requirement for survival.

HP was one of the first to offer benefits as profit sharing, flex time, catastrophic insurance, and tuition
assistance to employees. Founders Bill and Dave believed that the company made money because they were
good to their people. The "HP Way" included treating everyone with respect, sound finances, trust in
employees, technical excellence, teamwork, thrift, humility, and hard work. Following these principles paid
off handsomely. According to journalist Peter Burrows (2003):

HP had been wildly successful. It had never suffered so much as one annual loss in 63 years. But what made
HP a management icon was how it achieved those results. For decades, the company had balanced stellar
financial performance with unquestioned integrity, from how it kept the books to how it treated its
employees and customers. It had plowed millions into the communities in which it did business, not only out
of charity but out of a progressive self-interest in keeping them strong. Put simply, it seemed HP had
figured out the magic formula for how to run a company. Everyone won--investors, customers, managers,
and employees.

Leadership at HP

Upon HP’s incorporation in 1947, David Packard was named president, with William Hewlett as vice
president. In 1964, Dave Packard was elected CEO and chairman of the board, while Bill Hewlett assumed
the position of president. When Packard was appointed U.S. Deputy Secretary of Defense in 1971, he left
HP and Hewlett became CEO. Packard resigned from his government position after just one year, however,
and returned to HP to serve as chairman of the board. Hewlett retained his positions of president and CEO.
In 1977, John Young, an engineer at HP, replaced Hewlett as president of the company. When Hewlett
finally retired the following year, Young also assumed the role of CEO. Upon Young’s retirement in 1992,
Lewis E. Platt, an HP employee since 1966 and head of the company’s computer systems organization,
succeeded Young in both positions. Carleton S. Fiorina replaced Platt as president and CEO in of HP in
1999.
The Need for Change

By the late 1990s, critics both inside and outside the company believed that HP had lost the magic formula
described by Burrows. Employees expected regular bonuses whatever their level of effort. HP was no
longer a technical leader but had evolved into a huge bureaucracy resistant to change (Anders, 2003). It
periodically missed earnings projections and its stock price lagged behind high-tech rivals like Dell and Sun
Microsystems. Concerned that the company was becoming unwieldy, board members spun off the test and
measurement businesses into a new firm called Agilent Technologies. CEO Lew Platt agreed to step aside.

There was no clear internal successor to Platt, so the board hired an executive search firm to locate an
outsider to lead the company (Anders, 2003). Soon, Carly Fiorina emerged as the leading candidate. Unlike
Lew Platt, a quiet individual who largely shunned attention, Fiorina was media savvy. She epitomized the
"celebrity CEO." Celebrity CEOS are bigger-than-life figures often called upon to rescue organizations.
They enjoy the limelight, acting more like rock stars than traditional business executives (Khurana, 2002;
Sloan, 2001; Varchaver, 2004). Fiorina had never run a corporation and came out of a different industry.
Her expertise was in sales and marketing, not in operations.To lure Carly to HP the board offered a
compensation package that included $65 million in stock options and restricted stock, a $3 million signing
bonus, and a $1 million annual salary with a $1.25 million to $3.75 million annual bonus. She also received
more than $36,000 for mortgage assistance, a relocation allowance, and a contract that not only allowed her

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to use company planes for personal use but encouraged her to do so (Burrows, 2003). This package dwarfed
anything offered to her predecessors. Lew Platt stayed on as an advisor to ease the transition and Richard
Hagborn, founder of HP's printer business, agreed to act as board chair. Hagborn's strengths--his knowledge
of HP and operational skills--were to help compensate for Fiorina's weaknesses.

The new CEO's arrival generated a great deal of excitement in the media and among employees at HE After
her hiring was announced at a major press conference, Carly conducted a whirlwind tour of HP facilities to
introduce herself. Business writers wrote of the new energy she brought to the moribund company and how
she was going to take the firm in a badly needed new direction (Burrows &Elstrom, 1999; Hardy, 1999). To
many employees, Carly signalled a welcome change, and a number of women looked to her as a role model.

The Changes and the Challenges

Fiorina believed that the HP Way was a major cause of the company's mediocre performance. She treated
workers who clung to the HP Way as the opposition. Their devotion to the past put the firm at risk. For the
company to move forward, those who resisted change would have to be removed. "If one-quarter of the
people in HP don't want to make the journey or can't take the pace," she told a reporter, "that's the way it
has to be".Fiorina instituted three changes, in particular, that had a major effect on HP's culture. First, she
shifted priority from nurturing employees to financial performance. Financial results (sales and revenue
growth, stock price) became the primary value under her leadership. In one of her first meetings with her
top managers, Fiorina interrupted a presentation to say, "Let me make something very clear. You will make
your numbers. There will be no excuses. And if you can't make your numbers, I will find someone who
can" (Burrows, 2003, p. 141). She was more concerned with revenue growth and earnings than were her
predecessors. Under previous leaders, reporting quarterly earnings was routine. Not so under Carly. She and
a team of advisors pored over the numbers, trying to put them in the best light. Whereas the company's
founders were conservative, believing it better to underpromise and overdeliver, Fiorina continued to
promise double-digit sales and revenue increases even in the face of the economic downturn of 2000-
2001.Carly's second major change initiative altered HP's reward metrics. The CEO replaced HP's profit-
sharing plan with an incentive program that would provide a bonus to all employees if the company hit its
financial targets. Salespeople, who had been salaried, now earned commissions based on individual sales.

Fiorina's third cultural change focused on structure. In the past, divisions at HP operated largely as
independent businesses focusing on the development and sale of particular products. This structure kept
operating units smaller to maintain the firm's person-centered culture (Malone, 2007). Carly reduced 83
units to 4. Two "back end" units manufactured computers, printers, and imaging equipment. These units
then turned the products over to two "front end" units that targeted either consumers or corporations
(Burrows, 2001).Within a year, Lew Platt left HP complaining that the new CEO wasn't listening to his
advice. Board chair Dick Hagborn stepped down and Fiorina assumed the roles of both CEO and board
chair. Her biggest supporter at first, Hagborngrew increasingly concerned about Carly's shortcomings and
later worked to remove her.

Company cutbacks in 2001 marked a significant downturn in the relationship between Fiorina and her
workforce. First, she asked employees to take a voluntary pay cut or time off worth up to 10% of their
salary (Carly also passed up a $625,000 bonus). Eighty-six percent of the workforce complied, although
they were told that the voluntary reductions did not guarantee that there would be no further layoffs. Still,
when HP then instituted the biggest layoff in its history shortly thereafter, many workers felt betrayed (HP
manager, personal communication, July 15, 2007). How the layoffs were handled also undermined Fiorina's
credibility. Previously, frontline managers decided which employees to cut. This set of reductions came
from the top of the organization instead and seemed to have no relationship with performance. Cuts were
across the board and involved both high and low producers. Managers got scripts to read to those who were
affected. Laid-off employees only had a short time to clear out and say their goodbyes. This may have been
common practice at other companies, but not at HP.

A survey of 8,000 employees revealed widespread unhappiness about poor communication and poorly
implemented decisions. This was a complete reversal of earlier surveys, which found that HP had some of

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the highest employee satisfaction scores in corporate America (Burrows, 2003; Malone, 2007). Some
workers booed the CEO at company meetings. The company electronic bulletin board was shut down after
employees used this forum to attack Fiorina.

Employee dissatisfaction took the form of active resistance in 2002. Carly launched merger talks with
Compaq, a move that would add 65,000 employees and increase the company's presence in the computer
market. Current and past employee stockholders largely opposed the merger. They doubted that HP's
culture could survive the influx of so many new workers. Their champion was board member Walter
Hewlett, Bill Hewlett's eldest son. The board pushed for the Compaq deal over Hewlett's objections. An
ugly, highly publicized proxy broke out. Fiorina dismissed Hewlett as "an academician and musician" in a
letter to stockholders. Information about board deliberations was leaked to the press, which later prompted
Fiorina to launch an investigation to identify the source(s). At a crucial junction in the proxy battle, she
talked to investment managers at Germany's Deutsch Bank (who would earn $2 million in fees if the merger
went through) to win their support. Bank officials are not supposed to consider existing financial
relationships when voting company shares, and Deutsch Bank later paid a $750,000 fine to the Securities
and Exchange Commission (SEC), which regulates U.S. financial markets. The merger passed, but only by
a slight majority. Hewlett then unsuccessfully challenged the results in court.

2004 marked the last full year of Carly's tenure. By this point, HP stock had lost half of its value. Dell
began to eat away at HP's highly profitable printer business (Elgin, 2005). The business press, which had
once lauded Fiorina, began to complain about her lack of operational skills and failure to chart a coherent
direction for the company. Employee morale continued to drop. The CEO and her board sparred over
appointments to head divisions of the company, plans for further reorganization, and suggestions that she
hire a chief operating officer. Issues came to a head in the third quarter when the company badly undershot
earnings projections and it looked like Fiorina was sacrificing others to cover for her mistakes. (She fired
three executives in a 5 a.m. phone call for failing to meet the numbers.) The board removed Carly in
February 2005, providing her with nearly $28 million in severance pay (Loomis & Ryan, 2005). Employees
celebrated her departure. At HP's Boise facility, employees distributed Hostess Ding Dongs to announce,
"The witch is dead" (Malone, 2007, p. 386). Four pension funds holding HP stock filed a lawsuit claiming
that the board had violated company policy by authorizing excessive severance benefits without shareholder
approval (Marquez, 2006).

Fiorina's dismissal puzzles her still

Two major figures in HP woes plotted her ouster, she says

October 10, 2006|Associated Press. http://articles.boston.com/2006-10-10/business/29249050_1_ceo-

carly-fiorina-hewlett-packard-patricia-dunn Former Hewlett-Packard CEO Carly Fiorina says she remains
puzzled why she was fired last year and contends two board members who were prominent in the
company's recent spying scandal likely engineered her ouster.In her new memoir, ``Tough Choices," Fiorina
says HP's directors never made clear why they wanted her to go, and ``didn't have the courage to face me"
to break the news.``The decision to fire me -- frankly I know more about what it wasn't than what it was,"
she said yesterday in an interview. ``It wasn't about performance."

HP's stock lost more than half its value in her 5 1/2-year tenure. But she believes the board agreed that the
Internet bust and early 2000s recession were major factors, and finds it odd that just before firing her, the
board had approved her plans for 2005.She suspects, however, that her end at HP was sought by Thomas
Perkins and George Keyworth, whom she saw as counterproductive meddlers. Before her firing she had
rejected acquisitions and organizational changes they had suggested.

Perkins and Keyworth turned out to be linked powerfully again after Fiorina's ouster, when her successor
as chairwoman, Patricia Dunn, ordered the now-infamous investigation into boardroom leaks to the

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media.Perkins quit in protest and Keyworth resigned after admitting he had talked to reporters without
approval from the other directors.