Why Meg Whitman's Plan To Rescue HP Won't Work

Hewlett-Packard has proven yet again that just when you think it has hit absolute rock bottom, HP will prove you too optimistic. On Wednesday, HP stock sank to its lowest price in 10 years after telling investors that profits for the next fiscal year would limp in far below Wall Street expectations. CEO Meg Whitman is counting on innovation to rescue her giant company, but what the heck does that mean?

For more on HP's troubles, see ReadWriteWeb DeathWatch: Hewlett Packard.

A year at the helm apparently hasn't been long enough for Whitman to turnaround a giant company battered by years of floundering at the top - not to mention troubles with all of its core businesses. To make HP sound again, Whitman told investors she would focus on innovation, but exactly what she plans to deliver remains anyone's guess.

R&D Is The Lifeblood Of Tech

Research and development is the lifeblood of any ambitious tech company. Cut R&D spending and products will quickly become imitations of competitors' homeruns. HP's handling of R&D pre-Whitman is reflected in Tom Brakke's Research Puzzler blog. Brakke's chart details how HP's spending on R&D fell for years while operating margins climbed, a clear indication that HP was more interested in short-term profit margins to impress Wall Street than innovation for the long term. (Operating margin provides financial analysts with an idea of what a company makes on each dollar of sales before interest and taxes.)

According to Whitman, HP has never stopped innovating; it just forgot how to bring its inventions to market. "Innovation is actually alive and well at HP," she told the meeting with investors. "We need to work a lot harder to get those ideas productized and commercialized and into the market much faster."

HP's Widespread Troubles

Maybe so, but events over the last few years seem to show HP was more interested in buying new products than in creating its own. In 2010, the company bought Palm and its promising webOS software. HP pledged to make webOS the cornerstone of its mobile strategy designed tablet to take on Apple's iPhone and iPad. Despite generally good reviews for the much-delayed Pre smartphone and TouchPad tablet, HP shut down the whole operation when sales failed to instantly materialize.

There was also the $10.6 billion - in cash - HP paid for now-struggling British software maker Autonomy and the $13.9 billion purchase of Electronic Data Systems. The latter ended up being an $8 billion accounting charge that contributed to a huge loss in HP's fiscal third quarter ended July 31.

Innovation Hurdles Everywhere

The repeated missteps of HP's CEO parade have become legendary. And undoing their mistakes through unspecified innovation is going to require some pretty amazing products.

First off, the PC market, which sustains HP's more profitable businesses, is in the tank. IDC expects less than 1% growth this year, and HP is expected to cede its title as the world's largest PC maker to Lenovo sometime soon. Tablets and smartphones are eating away at PC sales - for HP and the industry as a whole - and the company has nothing to stop the erosion. HP no longer makes smartphones and is still working on business and consumer tablets running Windows 8 expected in January.

Hardware and software for companies is where HP is likely to demonstrate whether it has any innovation left. Whitman has been spending R&D money on building products to help businesses manage the huge amounts of data generated each year and to transition their data centers to cloud computing, according to Bloomberg.

Whitman's strategy would be much easier to pull off if HP was working in a vacuum. Instead, the company's comeback depends on beating Oracle, IBM, Microsoft, EMC and VMware, none of which have followed a path that a former HP director called "corporate suicide."

Wall Street Shows No Mercy

And while HP tries to buy time to get its house in order, Wall Street has already run out of patience. Peter Misek, managing director of investment bank Jefferies & Co., said on CNBC that it is time to sell or short HP stock. Misek saw nothing in the horizon that would bolster the company's turnaround efforts. His prescient advice came six days before Whitman's latest announcement sent shares tumbling 13% to less than $15.

Whitman's focus on the high-margin business market to save HP is her best option. But at this point, even her best option looks like a Hail Mary pass.

Meg Whitman image courtesy of drserg / Shutterstock.com.