It is interesting to look at the IT market today because we see vastly different financial performance across the industry. Pure-play companies—those focused on either the consumer market or the enterprise market—such as EMC, IBM, Apple and Lenovo are doing well. With Apple, that is an understatement, as it is currently operating as the most highly valued company in the world.
This means the tech sector, overall, is strong. When you look at blended companies such as Microsoft, Dell and particularly Hewlett-Packard, though, you see weaknesses.
When you see strength in companies that are focused and weakness in firms that are trying to bridge markets, the natural conclusion is that the problem with the underperforming companies is one of focus. Let's look at Dell and HP and try to find a solution for both firms.
Dell Struggling With PCs, Tablets
For starters, both HP and Dell are struggling to sell PCs, especially when compared to Lenovo, which reported quarter-over-quarter growth of 35 percent, and IBM, which saw growth of 6 percent despite taking a hit in sales in Africa and the Middle East. This last quarter marked 11 consecutive quarters of growth for Lenovo and 38 straight for Big Blue.
Dell, meanwhile, declined in the PC space, with consumer revenue dropping 22 percent. Take away the PC business, though, and the company actually showed strong growth in virtually every other area, with enterprise solutions revenue growing 6 percent(in line with IBM's overall number) and server and networking revenue rising 14 percent.
These figures showcase where Dell's focus is—and the impact of where it is not. In hindsight, given the growth of Lenovo and IBM, you could conclude that the PC market was the stronger market—which offsets conventional wisdom substantially.
Furthermore, business customers aren't rushing to adopt Windows 8, so that segment isn't holding off for the new OS. However, there is some truth to the fact that BYOD is driving customers to consumer products. The hot portions of that market are tablets (mostly iPads, though Windows RT may change that) and smartphones (mostly Android phones). Dell, to date, has been unsuccessful with both platforms, having gone so far as to vow that there will be no Dell smartphones. Lenovo faces the same Windows 8 issues as Dell, but Lenovo's international strength differs from Dell's and may account for some of the difference in the numbers.
This suggests that Dell has two clear choices—return a heavy amount of focus to the PC space or follow IBM's example and break the company up. The status quo doesn't appear to be working.
There is hope. Within Dell, there may be an answer to keeping the firm together. Dell's acquisition strategy has succeeded by preserving the acquired companies as largely self-contained. If Dell could model the PC division like the young, successful Dell, make it more independent and resource it adequately, it would end up with something far closer to a wholly owned subsidiary. In doing so, Dell would strengthen the PC business enough that it could be spun out on its own, but it would also strengthen the entire company enough that this wouldn't have to happen.
HP Turning Around, But Will Whitman Have Enough Time?
The issues at HP, on the other hand, are far more complex. Networking and software are the only divisions doing well, with the latter growing at an impressive 18 percent, though this trails the Microsoft profit margin of 23 percent.
The printer division, meanwhile, sits in a market that is contracting significantly at the moment. Lexmark's 12 percent drop in revenue can be explained by market conditions and makes HP's overall 3 percent decline look far better. At the same time, HP clearly anticipated electronic printing and developed an eBook prototype long before the Amazon Kindle existed, but the printer division fought the change and now struggles with the market's evaporation.
To be fair, HP is still in the first year of a multi-year turnaround under CEO Meg Whitman. Based on the examples of Louis Gerstner at IBM and Steve Jobs at Apple, these endeavors typically take five years. In the last decade, though, we haven't seen a CEO get more than two years, which is problematic for anyone attempting something of this scale now.
Analysis: HP Plots Its Recovery
Compare HP to Cisco, Microsoft, IBM, Dell or Lenovo and you sense that, instead of synergy among divisions, there's a corporate drag that's hitting hard services, enterprise hardware and PCs. If you look at the catastrophic results of the last several HP acquisitions, namely EDS and Palm, you could conclude that HP has an excess bureaucracy problem similar to what pulled IBM down in the 1980s and early 1990s.
HP's divisions need either greater independence or clearer common goals, since the company as currently constructed doesn't seem to be optimized to either extreme. Dell's model of integration mergers may work here, but the problem is far more complex than that and may require HP to become far smaller before it can again grow to expectations.
My sense is that HP really needs to channel the late Jerry York, the chief financial officer who helped IBM and Chrysler get back on track with his tight focus on performance basics.
Dell, HP Head for Bumpy Roads
Both Dell and HP generate cash and are far from going under, but they're off the mark when compared to focused industry pure players. Dell's issues are simpler to address, and the company's history of integrating acquired firms provides a working model that, if correctly applied, could return it to stronger PC performance. But Dell has to decide if it wants to take that risk or do what IBM did and become a very different company. When it comes to personal technology, at least, Dell's path doesn't appear to be working.
HP, meanwhile, can't fix printers unless it moves that division out of a failing market into a growing one. The other divisions, though performing well, appear to be experiencing some kind of shared drag. In my view the firm should take a hard look at Jerry York's turnaround method for IBM. The rapid destruction of HP's latest acquisitions, particularly Palm, showcase an excess of bureaucracy. That may take someone with an axe to correct—and that person hasn't yet emerged at HP.
Whitman and Michael Dell both need to make critical decisions. What is interesting is that, while Dell's choices are easier, he will be granted more time to make them than Whitman, who has the far more difficult job. In the end, both CEOs' legacies will be tied to the results of their efforts—and it's fair to say both know it.
Rob Enderle is president and principal analyst of the Enderle Group. Previously, he was the Senior Research Fellow for Forrester Research and the Giga Information Group. Prior to that he worked for IBM and held positions in Internal Audit, Competitive Analysis, Marketing, Finance and Security. Currently, Rob writes on emerging technology, security and Linux for a variety of publications and appears on national news TV shows that include CNBC, FOX, Bloomberg and NPR.