Facing its  greatest business challenge in its nearly 80-year history, Hewlett-Packard Co. is facing pressure in its core businesses from hardware commoditization, cloud, infrastructure virtualization, and open source. While all the major traditional vendors are being disrupted by these and forces, HP’s financial misadventures and lack of consistent leadership in the decade before Meg Whitman arrived as CEO has caused it to lose precious time and to play catchup. The company is facing shrinking revenues but has significant cash reserves that could give it some time to reconfigure its business operations as it splits into two companies.

Watch live coverage of HP Discover 2014 from Barcelona on theCUBE Tuesday, Wednesday and Thursday mornings to gauge where HP is going and what Whitman’s strategy is to stabilize the company and return it to growth.

How did HP get to this point? In addition to pressure on its core PC business from mobile devices, several things contributed to HP’s challenges, but primarily it has suffered from inconsistent leadership, a changing vision and execution issues. HP once claimed to be one of the few companies to provide an end-to-end set of solutions (from devices, to PCs and printers to high end servers, software and services). Now the company has decided to pull the trigger on the inevitable – splitting its consumer business (i.e. printers and PCs) from enterprise hardware, software and services.

In the enterprise, its core hardware markets are facing three mega forces. First, server virtualization and converged infrastructure has swept through data centers. The big attraction is new performance and consumption expectations as seen by spectacular increases in server utilization and software innovations.

Cloud

Second, HP customers now are moving increasing amounts of compute loads to cloud platforms, which puts pressure on HP’s hardware business. In the cloud market, HP is only one of many players.

The 1990’s and 2000’s were all about the rise of the CIO and the IT organization.  Today, it’s not about the CIO and IT groups, but mobile, consumer, data, and business driven outcomes such as winning new customers and keeping existing customers. With the powerful infrastructure now in place in most organizations to support low cost utility computing available from Amazon Web Services (AWS), businesses are able to quickly stand up fast and agile new and mission critical applications.

HP announced its own cloud platform, Helion, at HP Discover U.S. in June. Its message was that Helion is the pure, open source choice. HP also talked of bringing in its resellers and other partners to build a network of clouds. As indicated by HP’s most recent earnings report, few areas of its business are growing and those that are can’t offset declines in older businesses – an indication that its newer cloud products have yet to make up revenue losses.

One major thing HP is focused on in its cloud strategy is the developer emphasis specifically the enterprise as businesses move quickly to strong Software-as-a-Service (SaaS) solutions.  Can HP build a viable platform for SaaS? This is one of the fruits of its double-down on hardware in the 1990s and early 2000s. While IBM and Microsoft started with strong software portfolios that they have turned into SaaS offerings, HP is redefining its offerings in software for cloud leveraging their expertise in big data.

Hyperscale

As a server manufacturer, HP would like to be selling to AWS, Microsoft Azure and other cloud competitors. But those services run in hyperscale data centers that use their own virtualized, commodity-priced white box servers. To crack that market, HP has announced its Moonshot platform and has sought partnerships with ODMs/contract manufacturers.  This will give HP differentiation from the commoditization of stand alone servers.  These advanced capabilities software and hardware will allow HP to get the most out of its servers to offer alternative to the commodity servers.

Value of higher end server bring performance at large scale for commodity prices. IBM’s sale of its entire x86 server and network switch hardware line to Lenovo means that commodity pricing will soon be coming to corporate data centers. Lenovo has already had a huge impact in the PC market, mainly at the expense of HP and Dell Inc. Many are betting that something similar will take place in the server market. Meanwhile Cisco Systems has entered the market with converged x86 servers and is taking share from established players.

To continue to thrive as a server vendor, HP must at least match Lenovo and take the initiative from Cisco in high-end servers, where the margins will be better at least for the next few years. Most of all it has to crack the born-in-the-cloud hyperscale market where margins are thin but volumes are high.  As SiliconANGLE founder John Furrier says “bring large scale performance with software innovations to drive value for enterprises”.

Strategic purchases

Big vendors often buy their way into new, fast-developing markets. IBM, for instance, has been steadily buying startups to fill out its 21^st Century portfolio, the most notable being Softlayer. So far, however, HP has not been able to do that because of the high debt load Whitman inherited from the misadventures of the several previous HP CEOs, going back to Carly Fiorina. But HP has re-structured its balance sheet and according to Whitman is in a better position to do “tuck in” acquisitions, such as its recent purchase of Eucalyptus.

Without the cash to buy what it needed to acquire companies to fill in product gaps, HP had to rely on its internal innovation through research and development (R&D), which was constricted under Mark Hurd. However Whitman has increased R&D spending at HP. The big question is can HP get back to its roots – “Invent?” At one time HP was known as an innovation leader.  Can HP pull out a “Waston out of their hat” to drive value across their portfolio of products?

Overall the big challenge for HP is the time this turnaround is taking the management team.  As HP goes into its annual European Discover Conference this week, Meg Whitman must present a fully fleshed-out strategy for HP’s future that will motivate their team and customers base. If HP is going to remain a hardware vendor first – and unless Whitman has found a new source of money to fuel a startup buying spree – then she must show how HP can recapture the high-end server market, where the big margins are, and break into the cloud hyperscale marketplace. She must provide real differentiation for Helion, around solutions and customers wins not just current “we are 100 percent Open Source” message.

Another area to watch is Big Data generally and Vertica specifically. The company’s Vertica business grew in the high double digits last quarter and is a real bright spot for HP. Vertica and Autonomy are two keys to HP’s software strategy along with its security portfolio. But more work needs to be done to shift the company’s revenue mix to higher margin products like software.

On balance, HP is doing what Meg Whitman said it would do… take five years to turn the company around. Cash is king and HP is throwing off lots of it, which right now is the company’s ace in the hole. The question is, how will HP play its hand and what cards is the competition holding?

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Written by Bert Latamore and Dave Vellante

Meg Whitman photo courtesy Hewlett Packard Corp.

photo credits: rich35211 and Bryn Jones2008 via photopin cc