Reference no: EM132087136

Case study application :

INSTITUTIONALIZING STRUCTURAL CHANGE AT HEWLETT-PACKARD

In May 2002, the hotly contested acquisition of Compaq by Hewlett-Packard (www.hp.com) was finalized. Unlike the major organization changes before it, the acquisition challenged the abilities of this perennial “most admired com- pany” to execute a complex structural change. The success of the integration process described in Application 8.4 is partly due to a store of institu- tionalized knowledge and capability within the HP organization. This application describes a number of large-scale structural changes at HP. The com- pany’s repeated ability to carry out such change speaks to its institutionalized capability to manage change.

Since its founding in 1939, HP has implemen- ted successfully no fewer than a dozen major orga- nizational changes, including the transition from a high-tech entrepreneurial start-up to a profes- sionally managed company; from a small instru- ments business to a leading computer company; from a company oriented around complex- instruction-set computing technology to reduced- instruction-set computing technology; from a technology/engineering-based company to a market/brand-driven company; and, from a “pure products” company to a services company.

HP’s electronics and computer business was characterized by highly volatile technological and market change. It had to quickly adopt, inno- vate, and implement a variety of technological and organizational changes just to survive. HP’s traditional and current strategies were built on innovation, differentiation, and high quality. Another important feature of HP, and one of its more enduring characteristics, is the “HP Way”—a cultural artifact that supports a partici- pative management style and emphasizes com- monness of purpose and teamwork on one hand and individual freedom and initiative on the other. Over time, however, the HP Way has been both a constraint to and a facilitator of change.

For example, the HP Way has been at the root of the company’s difficulties in institutional- izing structural and behavioral changes to bring about more cooperation among the computer divisions. The initial structural change occurred in 1982 when HP transformed itself from a pro- ducer of high-quality electronic measuring instruments into a computer company. At the time, computers and computer-related equip- ment accounted for only about one-third of rev- enues and HP was structured into more than 50 highly autonomous and decentralized product divisions focused on specialized niche markets. Individual engineers came up with innovative ideas and “bootstrapped” new products any way they could. Organization members were encouraged to work with other engineers in other departments within the same division, but there was little incentive to coordinate the development of technologies across divisions. This focus on the individual was supported by a performance management system that mea- sured and rewarded “sustained contributions;” the key to success for an individual was work- ing with many people in the division. HP pros- pered by maximizing each of its parts.

Former CEO John Young’s decision to focus on computers fundamentally shifted the keys to success. Computer production required a coordinated effort among the different compo- nent divisions and market shares large enough to encourage software vendors to write pro- grams for their machines. In a culture that sup- ported individual contributions over divisional cooperation, Young placed all the instruments divisions into one group and all the computer divisions into another group, a basic design that persisted until the spin-off of the Agilent instru- ments business in 1999. In addition, he central- ized research, marketing, and manufacturing, which had previously been assigned to the divi- sions. Problems quickly arose. In one case, the company’s new and highly touted graphics printer would not work with its HP3000 mini- computer. The operating software, made by a third HP division, would not allow the two pieces of hardware to interface.

In response, the computer group formed committees to figure out what new technolo- gies to pursue, which to ignore, which of HP’s products should be saved, and which would be shelved. As the committees came up with recom- mendations, the committees themselves kept mul- tiplying. The company’s entrenched culture, built around the HP Way’s philosophy of egalitarianism and mutual respect, promoted consensus: Every- one had to have a hand in making a decision.

By 1988, the organization chart still showed a predominantly decentralized divisional structure. What it didn’t show was the overwhelming number of committees that slowed decision making and product development. In one case, it took seven months and nearly a hundred people on nine commit- tees to name the company’s new software product. This web of committees, originally designed to foster communication among HP’s operating divisions, had pushed up costs and slowed development. In the rapidly changing world of software, personal compu- ters, minicomputers, and printers, the HP Way was hamstringing the organization’s success. The ethic of individual freedom balanced by teamwork had pro- duced an unwieldy bureaucracy.

After a series of delays of important new pro- ducts, John Young reorganized the computer group. In late 1990, he eliminated most of the com- mittees and removed layers of management by dividing the computer business into two groups: one to handle personal computers and peripherals sold through dealers, and the other to handle sales of workstations and minicomputers to big custo- mers. To match the organization structure, the pre- viously centralized corporate sales force was split and assigned to particular divisions. This change focused HP’s computer systems on the market and restored much of the autonomy to the divi- sions. The balance between individuality and com- mon purpose that characterized the original HP Way was unleashed, leading to several years of strong revenue and profit growth.

In 1993, and before he was officially installed as the new CEO, Lewis Platt announced that HP would pursue the convergence of several base technolo- gies, such as wireless communication, printing, and measurement, to create whole new products for the converging computer, communication, and consumer electronics markets. Implementing such a strategy again depended on strong coordination among HP’s product divisions. To ensure that the gains in cooperation were not lost as HP embarked on its new strategy, CEO Platt tied division managers’ incentive compensation to working cooperatively with other divisions to create new pro- ducts that used multiple-division technologies.

The new structure was a big success. Growth in the printer and PC markets drove revenues from $13.2 billion in 1990 to $38.4 billion in 1996, with profits growing in the same proportions. In 1996, they were the fifth-most-admired company in the United States. In the Internet world, however, their success was short-lived, and critics argued that Platt’s subsequent attention to “soft” issues such as work/life balance and promoting diversity, rather than launching an Internet strategy, resulted in stalled growth. For 1997 and 1998, and aided by the Asian financial crisis, growth rates slipped to single digits. In the summer of 1998, Platt believed that HP had simply become too big and complex. In March 1999, he announced and implemented the spin-off of HP’s $7.6 billion instruments division, the business on which the company had been founded.

Shortly after being named HP’s fourth CEO in 1999, and the first to come from outside the com- pany, Carly Fiorina laid out her agenda: create a com- pelling vision for HP, implement a structure to support the vision, and launch a marketing campaign to build the HP brand. The vision called for a shift from a stand-alone products company to a services company. The structural change involved merging the four major product divisions into a group focused on computing and a group focused on printing. This structure for the first time united HP’s laser and ink- jet printing divisions and furthered the opportunities for computer products to coordinate their activities. Fiorina also announced a major marketing campaign focused on the HP Way’s value of innovation. Then, in the fall of 2001, Fiorina announced the intended acquisition of Compaq computers.

The lessons of history had not been lost on the CEO. The acquisition process pulled knowledge from the experiences of other mergers and other changes within HP; it acknowledged the strengths and weaknesses of the HP Way; and structural changes were backed up with changes in the com- pensation system. Few organizations implemented as many major changes and still maintained both strong financial performance and corporate reputa- tion during this decisive period in the computer industry. HP’s history of seeing the need for, imple- menting, and reaping the benefits of structural change was a testament to its ability to institutional- ize change, as these examples demonstrate there is normative agreement about the changes reflecting a particular set of values, over time there should be some consensus on those values among organization members.

Given this developmental view of institutionalization, it is implicit that whenever one of the last indicators is present, all the previous ones are automatically included as well. For example, if employees normatively agree with the behaviors associated with job enrichment, then they also have knowledge about the behaviors, can perform them effec- tively, and prefer them. An OD intervention is fully institutionalized only when all five factors are present.

this application describes Hewlett-Packard’s successful history of institutionalizing a new set of behaviors through structural change. It describes how culture and reward systems can play a strong role in both supporting and constraining change.

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