Hewlett-Packard Co. Chief Executive Carleton Fiorina was on the job just three months when rival Scott McNealy at Sun Microsystems Inc. started taking potshots at her company's new Internet strategy.
Discussing Sun's blowout earnings for the fiscal first quarter, McNealy said his results ``e-speak for themselves,'' lampooning the name of the HP software that's designed to let people book restaurant reservations via the Web or get instant language translations using devices as simple as a cell phone.
Promoting e-speak is just one step Fiorina is taking to energize the 61-year-old Palo Alto, California, company and reposition it as a leader in the Internet age.
``We've developed some bad habits,'' says Fiorina. The 45- year-old executive made history in July when she left her position managing $20 billion in telecommunications-equipment sales at Lucent Technologies Inc. to become the first woman to head a Dow 30 company and the first outsider to run HP.
Fiorina's challenge is to break those bad habits and rekindle the inventiveness that has helped make the company the world's second-largest producer of computers, after International Business Machines Corp.
Catching up to Sun is her most pressing job. Sun, which is also based in Palo Alto, is whipping its crosstown rival in one of HP's most important markets -- powerful servers that run networks of other computers, phone systems, online shopping sites, Internet search services and corporate databases.
Companies from retailer Wal-Mart Stores Inc. to online auctioneer eBay Inc. are buying servers by the truckload. Market researcher Dataquest expects server sales in the U.S., which totaled $16.2 billion in 1998, to reach $18.9 billion in 2002.
HP, which led Sun in U.S. server sales from 1996 through 1998, now lags. Sun pulled in $1.78 billion from server sales in the first half of 1999, surpassing HP's $1.6 billion, according to International Data Corp.
HP, founded by Bill Hewlett and David Packard as a maker of testing and measuring devices in a Palo Alto garage, now gets half its $42 billion in annual revenue from computers and services. The machines include everything from $500 PCs to million-dollar servers. The other half comes mostly from printers, ink, scanners and digital cameras.
To cash in on the server boom, Fiorina must reinvigorate her sales force and coax more improvements out of Hewlett-Packard's computer laboratories, which plan to spend $179 million in the fiscal year that began Nov. 1, second only to IBM's labs.
Most important, she needs to persuade fast-growing Internet companies that HP can help them sell their products and services on line, so they'll look past Sun's hot computers and CEO McNealy's bravado and buy from her.
Investors have reason to be restless. HP shares rose to a record 118 7/16 on July 19, the day the company announced that Fiorina was the new CEO. They've since fallen 8.2 percent. All told, the shares have gained 72 percent since Dec. 22, 1997. IBM shares have more than doubled in the same period, and Sun's have surged more than sevenfold.
In the four quarters that ended in July, HP's revenue rose 8.9 percent to $48.8 billion. Net income rose 13 percent to $3.4 billion. Sun has done much better. Its revenue in the four quarters through June rose 20 percent to $11.7 billion, and net income climbed 35 percent to $1.03 billion. Sun's market value of $117 billion is $6 billion more than HP's.
Bill Milton, an analyst at Brown Brothers Harriman & Co., says HP's performance reflects an unmotivated sales force that has been allowed to miss quotas without consequences, business units that haven't worked together on strategy, and a failure to use the Internet to buy supplies or sell HP products.
``There are a lot of problems here,'' says Milton, who's been following Hewlett-Packard for 18 years and rates the stock a ``neutral.''
Fiorina delivered some bad news Oct. 1, when she said fourth- quarter sales would rise about 10 percent because an earthquake in Taiwan had cut the supply of semiconductors for HP computers. Some analysts had expected an increase of 13 percent.
The stock fell 13 percent Oct. 27, when Hewlett-Packard said it agreed with some analysts who had lowered their profit forecasts to 73 cents a share, just a penny more than the company earned in the year-earlier period. Sales of printers and PCs weren't making up for the server slump, HP said.
Fiorina, fit from early morning workouts on a treadmill and almost always dressed in a stylish Armani suit, is working hard to make those warnings her last. That means changing a corporate culture that, in some ways, has grown as bland as the seemingly endless rows of cubicles where HP employees work -- or the unadorned Ford Tauruses,awarded to managers and top salespeople, that line the parking lots outside HP buildings.
Lew Platt, Fiorina's predecessor, drove one. Fiorina, though, prefers her silver Audi A8. ``We're going to be much more aggressive,'' she says. Like Platt, Fiorina sits not in a cubicle but in an office that doesn't have a door.
Fiorina endorsed the company's fledgling ``e-services'' strategy her first day on the job. One part of that strategy is a risky plan to boost revenue by giving HP computers and software to start-up Internet companies in exchange for a portion of their sales. Another piece hinges on creating new services with the e- speak software.
Fiorina is betting that she can get customers to think of HP when they think of the Internet. In November she unveiled a $200 million advertising campaign designed to show HP hadn't lost the spirit that brought the world the first handheld scientific calculator and the inkjet printer. The company unveiled a new logo that features the word ``invent.''
To spur performance, Fiorina, who gets $1 million a year in salary and has restricted stock and options that could be worth more than $90 million in four years, has tied the pay of her top 100 executives to how Hewlett-Packard fares relative to its strongest rivals, including Sun. Other managers will go on the plan starting in 2000. Those who don't make the higher targets won't get bonuses.
At her first meeting with financial analysts, Nov. 30, Fiorina had some good news: Amazon.com Inc., the biggest retailer on the Internet, had agreed to buy 20 Hewlett-Packard V-Class servers, which sell for about $1 million each. Amazon.com chose HP's deal over a competing bid from Sun. Fiorina had flown to Seattle herself to court the company shortly after becoming CEO.
Oracle Corp. Chief Executive Larry Ellison, who -- like Sun's McNealy -- isn't shy about knocking rivals, praises Fiorina for aggressively wooing customers: ``She's a remarkably accomplished salesperson, and that's probably just what HP needs.''
The challenge for Fiorina is to shake up Hewlett-Packard without breaking the parts -- such as the printer business --that are working well. The printer operation is one area where HP is already riding the Internet wave, as it benefits from an expanding universe of Web surfers downloading and printing photos and documents.
HP, the world's biggest maker of printers, got as much as 45 percent of fiscal 1999 revenue from inkjets, laserjets, and ink cartridges and other supplies, analysts estimate. Unit sales of inkjets rose 37 percent in the fiscal fourth quarter from a year earlier, pushing the total number sold since the product's debut in 1984 to 100 million. Some ink cartridges and supplies carry a profit margin of more than 50 percent, analysts say, making them among HP's most profitable products.
``Printers and supplies are going bananas,'' says Tom Rath, a fund manager at Safeco Asset Management Co. in Seattle, which owns 1.3 million Hewlett-Packard shares.
Along with nurturing businesses that are doing well, Fiorina wants to preserve the parts of HP's fabled culture that foster employee loyalty and longevity. The average worker stays seven years -- unusual in an industry bedeviled by high turnover. That gives HP an edge over some rivals as it battles to keep key workers from defecting to Internet start-ups that promise lavish stock-option plans.
The straight-talking Fiorina has made it clear that she doesn't want everyone to stay. She raised eyebrows in October when she berated her sales force on a conference call with financial analysts. She said that poor performers in the server business had been relieved of their duties.
Fiorina says workers often hide behind the HP Way to avoid tough decisions. ``The phrase 'the HP Way' became a way of resisting change and resisting radical ideas,'' Fiorina says. ``One of the things I've been able to do as an outsider is challenge it.''
She's trying to recapture opportunities overlooked by Platt, 58, who was CEO for seven years and worked at HP for a total of 33 years. Some executives say Platt didn't move fast enough on new ideas in the mid-90s, causing HP to miss the Internet boom that created companies like Yahoo! Inc. and Ask Jeeves Inc. in its backyard.
Like most other computer companies, HP also funneled a big chunk of development dollars into Microsoft Corp.'s Windows NT operating system, thinking NT would rapidly replace the older, more expensive Unix systems that run powerful computers. That turned out to be a bad move, as the Unix system championed by McNealy's Sun proved more reliable for Internet businesses, which need to be up and running all the time.
Now, many employees say they're relieved to have a CEO who doesn't leave important moves to consensus. When Fiorina told workers at an inkjet-printer development site in Vancouver, Washington, that change was coming, the audience applauded. She told them to remember the ovation if the changes affect their jobs.
``There are times when you have to be autocratic,'' says Nigel Ball, who heads HP's push to line up more software partners on the Internet. ``That's what Carly is bringing.''
During Platt's first few years as CEO, profit and sales boomed. Net income doubled in fiscal 1993, his first year, and rose 36 percent in his second. But by his last full year, which ended in October 1998, profit had fallen 5.6 percent.
When Platt announced his retirement on March 2, he said he would consider candidates from inside and outside HP to replace him. At the top of Platt's list was Fiorina, who beat out Ann Livermore, head of the business computer unit, and other insiders. That same day, Platt said he would spin off HP's medical-equipment and measurement-device businesses -- later named Agilent Technologies Inc. -- in a plan that would be completed by mid-2000.
Shedding the diverse units that make everything from ultrasound imaging supplies to semiconductor testers would rid HP of what many analysts and investors view as a distraction. Fiorina, free of Agilent, will be able to focus on fixing problems in the computer business, by setting performance goals and spurring workers to exceed them.
``She is very demanding,'' says Webb McKinney, a 30-year veteran who runs HP's PC unit. ``We're all running faster.''
McKinney says Fiorina's arrival is the most important event for HP since 1972, when Packard himself returned as chairman after three years in Washington, where he'd been deputy secretary of defense. He had left HP in the hands of Hewlett, who was more technologist than manager.
Packard found inventories bloated and bills uncollected. The company was on the verge of borrowing money for the first time ever. Packard traveled the country for weeks, visiting plants and offices, exhorting employees to fix the problems. He became so enraged during a meeting at the computer division, which was losing money, that he kicked a garbage can across the room. Operations improved. Packard scrapped the borrowing.
Fiorina made her own tour starting in September, visiting more than 20 HP sites in 10 countries in a new, leased Gulfstream jet. One of her themes is looking for gems hidden within HP: patents that may be promising, technologies that are unused. To decorate her office, she even chose artwork retrieved from the company's storage. She also replaced Platt's big couch with a table and chairs.
Charm and poise are among the attributes that people note first about Fiorina. She likes gardening, especially perennials, though she's had to give it up for the moment because she's moved into a rented property until the remodeling is completed on her new Silicon Valley home. She loves dogs and has three Yorkshire terriers.
Fiorina has lots of experience adapting quickly to new situations. She attended five high schools as her father, a law professor, moved the family around the world. After getting a degree in philosophy and medieval history from Stanford University, she went to law school, where she made the first of several detours from the career track, dropping out because she disliked the subject.
After teaching English in Italy, she got an MBA from the University of Maryland and joined AT&T Corp. when she was 25. Soon, she was selling phone services to big federal agencies.
Then she made another unconventional move, switching to AT&T's humdrum equipment unit at the invitation of Bill Marx, then president of AT&T Network Systems. Her career caught fire. She became the unit's first female officer at 35. By 40, she was running its North American operation.
Fiorina managed the $3 billion initial public offering that turned AT&T's equipment unit into Lucent in 1996. By the end of her stay at Lucent, her division accounted for 60 percent of sales at the world's largest telecommunications equipment maker. Lucent's stock has rocketed 11-fold since the IPO.
Fiorina had a policy of not talking to headhunters, so she ignored several calls from Christian & Timbers, HP's search firm. Working late one night, she picked up the phone and learned just how big a job they were offering. Her husband Frank had retired from AT&T and her two stepdaughters were grown, making it easier for her to consider a move to California from New Jersey.
As HP executives interviewed Fiorina, she quizzed them -- especially Richard Hackborn, the retired HP executive and board member whom she would later persuade to return as chairman to replace Platt on Jan. 1. That's how she learned enough about e- services to know on her first day that it would be her Internet strategy.
In August, a month after she had taken the job, Fiorina gathered her top executives at Seascape, a vacation resort near Santa Cruz, California, that overlooks the Pacific Ocean. She asked the top four to think about what they could do at HP beyond their current jobs. As it turned out, she already knew what she wanted them to do.
She parceled out their new assignments two months later. She gave Livermore, 41, her ex-rival for the CEO post, responsibility for HP's 100 most important accounts. Livermore now handles all her clients' purchases, including printers.
Fiorina gave Duane Zitzner, 52, who'd been head of the PC business, the additional task of managing servers. She was impressed that Zitzner had been able to make HP the No. 4 PC maker in the world and still earn money in one of the industry's most cutthroat markets.
The new CEO put management of laserjets and inkjets, previously run as separate businesses, under the leadership of Carolyn Ticknor, 52, who'd turned laserjets into one of HP's most lucrative businesses during her five years as boss of the Boise, Idaho, division.
Fiorina made Antonio Perez, 54, responsible for marketing all HP products sold to consumers. She told him to quickly come up with a new branding campaign to unify HP's muddled marketing message. Created by Goodby, Silverstein & Partners of ``Got Milk?'' fame, the new ads feature images of the HP garage, now a California landmark.
Fiorina narrates one TV spot and appears in tight close-up. HP is fundingthe campaign by cutting its promotion of more than a hundred smaller brands that dilute the company's image. HP has brand names for everything from Kayak workstations and Brio PCs to Chai and JetSend software. Some brands will be dropped.
In October, Fiorina and Livermore promoted Nick Earle to chief strategist for the Internet, a new position. Under Livermore's guidance, Earle, a witty Briton who grew up poor in Liverpool, had been digging into the Internet before Fiorina arrived.
He'd enlisted Allison Johnson, the marketing maven who helped cook up IBM's ``e-business'' strategy. Livermore, Earle and Johnson figured that the Internet would become more sophisticated and aimed to make HP a pioneer in what they called ``chapter two'' of the online revolution -- a time when the Internet would be used for much more than searching and shopping. They had to do something because HP had missed chapter one, ceding it to Sun and IBM.
A group led by Johnson conceived of new things that could be done on line to try to capture customers' imaginations. They included e-speak, software that HP had been developing for the past five years, in their thinking.
E-speak is designed to let people seek out services on the Internet the way the HTML language searches for Web pages today. Since early this month, HP has made the software available free on the Internet with the goal that developers would create new uses.
Say a businesswoman in Beijing needs a document translated immediately. E-speak will let her search for translation services using any device from cell phone to handheld computer that has a chip in it, HP says. The program will sort by price or other criteria to find the cheapest deal or the fastest service.
``Frankly, I didn't believe them,'' Fiorina says of the first time Hewlett-Packard scientists told her about e-speak.
Fiorina gave Earle carte blanche to pursue a plan of swapping HP equipment for revenue-sharing agreements with Internet companies. Earle is forming a unit within HP to do those deals and, in some cases, take stakes in young companies. The group will have $150 million to invest.
``This is going to be the hottest start-up in the Valley,'' says Earle, 42, who's been at HP for 17 years. ``It's not cubicles. It's not Tauruses. It's not boring.''
Fiorina is aiming to find the next Amazon.com before Sun does, then sell it lots of computers and software.
A handful of dot-com companies already are on board, including USA.Net, a Colorado Springs, Colorado, firm that provides electronic mail services to 13.5 million people. ``This is what I thought all my equipment vendors should be doing,'' says USA.Net CEO John Street.
Earle is an enthusiastic apostle. He took Internet executives helicopter fishing in British Columbia in October, letting them angle for salmon all day, then whisking them back to the lodge for meals cooked by a chef from London's Savoy Hotel.
One guest was Dan Fraisl, CEO at Network24 Communications, a company that broadcasts video over the Internet. After the trip, Fraisl agreed to sell 7 percent of his venture for $1 million of HP equipment.
While Earle's courting start-ups, Fiorina's wooing big accounts. She and Livermore are talking to Meg Whitman, chief executive of eBay, about buying HP machines. EBay's Web site runs on Sun servers and crashed several times this year, causing outages that cost the company money and hammered its shares.
Customers are bending to Fiorina's persuasion. Ball, the HP software manager, was out for dinner with Fiorina and an Internet company executive whose sour mood made the first 10 minutes unbearable. The HP CEO started talking, and the client softened. Two hours later the pair had extracted a handshake agreement to buy Hewlett-Packard equipment. ``She had them eating out of her hand,'' says Ball.
McNealy is taking notice. He flew to Seattle himself to try to persuade Amazon.com to stick with Sun before the retailer signed its final agreement with HP for 20 servers, Fiorina says.
Sun charges that HP gave away its servers to woo a customer. ``The systems were essentially free from HP,'' says spokesman Doug van Aman. ``That's not a sustainable business model.'' Fiorina disagrees. ``These are not acts of desperation,'' she says.
McNealy struck back this month, when he announced that Fiorina's old employer, Lucent, had agreed to buy as much as $500 million of his servers during the next seven years.
The Sun CEO says HP's revenue-sharing plan is misguided, because it could make the company a competitor to all customers in the same business. For instance, if HP teams up with eBay, that will make it a rival to Amazon.com, which also offers auctions on line. ``We're not going to compete with our customers that way,'' says McNealy.
Some analysts, too, are skeptical because HP's ``e- strategy'' sounds like so many others, especially IBM's.
``Everybody in the business is looking for a magical sound bite that either starts with an e or ends with a dot-com,'' says Marty Gruhn, an analyst at Summit Strategies in Boston. ``The `e' may mean that the emperor has no clothes.''
Fiorina is undeterred. She's pushing HP's labs to cough up more products like e-speak. She's looking into digital photography, hoping HP can dominate the fledgling industry the way it does computer printing. Printing digital photographs requires ink, among HP's most profitable products.
She meets at least once a month with Dick Lampman, the head of research. She blessed his plan to make research developments more public and talked up the lab at her analyst meeting. ``Being quiet is not a virtue,'' Lampman says.
Here again, Sun is the company to catch. Sun became a power in Internet computing in part because of Java, a language that software engineers use to write programs to run on any computer operating system. That's crucial on the Internet, where many different computers share information.
Perhaps just as valuable is the cult Sun has created around its chief scientist, Bill Joy, the force behind Sun's Unix operating system called Solaris, much of its UltraSparc chip technology, and a new Java-like language called Jini. Joy makes headlines when he leaves his laboratory in Aspen, Colorado, to speak on technology and the future. That marketing effort helps sell Sun computers and software.
Even though beating Sun is job one, Fiorina admits that she likes McNealy and many of his executives, having gotten to know them during her days at Lucent. Sun President Ed Zander, who was approached for the HP job, took Fiorina out to lunch when she got it.
Still, Fiorina's workers look forward to her meeting McNealy's arrows with her own. Bill Russell, a 20-year employee who manages HP's business software products, says upgrades have made HP machines ready for a match with Sun's. Fiorina agrees.
``We're going to go get some of their customers,'' she says. ``Some of their marquee customers. Stay tuned.''
That's not quite McNealy-style bravado, but it's another sign that a different kind of executive is now running HP. Investors will be watching to see if Carly Fiorina can deliver results as well as she delivers pronouncements.
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