HP and IBM Strategic Plans

Senior management at Hewlett-Packard Co. (HP) and IBM Corp. spoke with analysts and journalists about their companies' strategic plans for financial and market growth.

Focal Points:

• HP intends to increase its dividend to 12 cents per share in its next fiscal year, which amounts to $1 billion in cash. Moreover, HP intends to boost the dividend "in the double digits" in each successive year after that. According to HP, this growth will be driven by products for cloud computing and business analytics. CEO Leo Apotheker announced at the HP Summit that the company's goal is to be the partner of choice as companies make the transition from a traditional IT stack to one of cloud computing and connectivity linking them together. Apotheker added that HP plans to build with its partners a "cloud stack" that consists of connected devices, including PCs, smartphones, and tablets, which would hook into an HP public cloud, private cloud, or hybrid cloud. HP would offer both infrastructure and platform clouds; although Apotheker did not provide any details into how these offerings might affect server deals with Amazon.com, Inc. or appliance deals with Microsoft Corp. HP also announced that it would continue to grow its sales force for systems and services, and invest in security and data analytics for the cloud.
• At the annual IBM investor briefing, President, CEO, and Chairman Sam Palmisano and CFO Mark Loughridge introduced IBM's plan to nearly double earnings per share to $20 between now and 2015 through acquisitions, cost cutting, growth, and share repurchases. The executives added that IBM reported another record year with $99.9 billion in revenues, up four percent; $14.8 billion in net income, up 10 percent; and $11.52 in earnings per share, up 15 percent. Moreover, gross profits rose for the seventh straight year. According to IBM's executives, the company plans to create another $100 billion in cash flow in five years, nearly as much as it did in the prior decade. With this money, IBM intends to spend another $20 billion on acquisitions and $70 billion on share repurchases and dividends. IBM also plans to double profits in its Software Group and have growth markets, including Brazil, China, India, and Russia, contribute about 30 percent of its overall revenues. Those growth markets are expected to contribute about 50 percent of IBM's overall revenue growth between now and 2015, IBM added.
• Linda Sanford, the executive in charge of enterprise transformation at IBM, said that the company plans to reduce costs by $8 billion by doing end-to-end process transformation and integrating operations. Approximately $2.3 billion in savings will come from shared services, $2.6 billion from process transformation, and $3.1 billion from better integration of operations across divisions, Sanford added. According to IBM, its shared services model will enable it to grow its $30 billion in revenues from its four growth initiatives – business analytics, cloud computing, growth markets, and smarter planet – to $50 billion by 2015. IBM expects sales for business analytics to be around $16 billion by 2015, and would contribute about 20 percent of the company's growth. Cloud computing would bring in another $7 billion, while smarter planet is expected to hit around $10 billion by 2015. Finally, IBM expects growth markets to contribute close to $17 billion, which would outpace the developed markets by about eight points of growth.

Experton Group believes HP's strategy lacks imagination and does not address the gaps in its offerings that its primary competitors will attack. On the other hand, IBM's strategy defines its four targeted plays and is already pursuing them aggressively. The elephant in the room is Oracle Corp. Oracle intends to strengthen its application-to-chip stack and use it in its quest to rule the world. While IBM is charged and ready for the fight, it is not clear that HP is prepared for a battle where the rules may be shaped by Oracle. HP's CEO made clear that HP does not intend to become an application or major software player, which could be problematic. IBM will not make that mistake, although it will not get into the application business but instead rely on its partner relationships for that. All three players have strengths and weaknesses, so domination by any one will not be an easy undertaking. Michael Treacy theorized that a company can at best be competent in two of three value disciplines: operational excellence (a requirement for a vendor desirous of being a low-cost provider); product leadership (an innovator); and customer intimacy. IT executives should understand the value disciplines and strategies of their strategic partners and ensure their partner's mindsets are compatible with their own corporate disciplines and strategies.