Stories of Change

A Hewlett-Packard Change Story: Managing a Merger

Around 7 a.m. on March 19, 2002, Hewlett-Packard’s CEO Carly Fiorina and CFO Bob

Wayman were on the phone to Deutsche Bank trying to make one last ditch effort to convince

them to vote yes. 1 The vote, scheduled for later that morning, was an important one.

It would determine the future of the proposed Hewlett-Packard (HP) and Compaq Computer

Corp. merger and the future of HP as a major player in the technology industry. 2 The

months preceding the vote had been tumultuous. After the announcement of the proposed

merger had taken place in September 2001, Walter Hewlett, the son of the co-founder of

HP, had publicly opposed the proposition, which required shareholder approval. 3 Fiorina

and her team faced serious and accumulating opposition to the merger, but there was also

growing concern for HP’s future if the deal was rejected. A Merrill Lynch portfolio manager

said at the time, “If the deal is voted down, I don’t know what I’m left with. I don’t

know if the board will stay, if management will walk out the door, or what the strategy will

be. Sometimes the devil you know is better than the devil you don’t.” 4

In the lead up to the vote, HP was confident that a yes vote by Deutsche Bank was a sure

thing. Representatives of Deutsche Bank such as George D. Elling had been public supporters

of the merger and had reportedly even given HP a $1 million contract to uncover

the voting plans of other institutions. 5 Word of a change in Deutsche Bank’s thinking

reached Wayman and, despite reassurances from his contacts that the merger would be

supported, talk strongly suggested that they had, in fact, reversed their decision. On the

morning of the vote, Fiorina and Wayman were given their first and only opportunity to

pitch the deal to the investment team at Deutsche Bank. Fiorina, using her innate ability

to impress, gave a compelling and persuasive argument questioning the company’s future

if the merger did not go ahead. The Deutsche Bank team decided that a failure to continue

with the merger would be more disastrous than the merger itself. 6 On March 19, 2002, the

merger was approved by a shareholder vote 7—a result that would have been more difficult

had Deutsche Bank not supported the merger. 8

Back in 1999 when Fiorina joined HP, the company was in serious need of guidance.

The personal computer division faced growing competition, the sales force needed better

coordination, and the company was losing market share to rivals such as Dell and Sun

Microsystems.9 Fiorina joined the organization with aspirations, and external pressures, to

change how it functioned. In her view, the culture of HP could be changed by “going back

to the roots of the place.” 10 One of the ways she set out to achieve this was by working

with a local ad agency and the head of Human Resources to create a set of “Rules from

the Garage” that outlined what she hoped the culture at HP would become. “The customer

defines a job well done” and “Invent different ways of working” became signifiers of the

company’s direction and aspirations. 11

She decided to restructure the company. Customers such as Ford and Boeing were

frustrated by the separate sales teams from HP that were constantly marketing individual

products to them. They wanted a complete package that addressed the needs they

had in their entirety. 12 In light of these uncommunicative operational units within HP,

Fiorina reorganized the company into “quadrants,” creating two “front-end” sections that

consisted of sales and marketing and two “back-end” functions where manufacturing

and research occurred. 13 There was considerable, but subtle, employee resistance to the

change. Fiorina’s vision of HP creating a new interface with customers may have been

sound, but, as a radical change, it was not widely welcomed by many who were part of

the HP “system.” 14

In the aftermath of the merger, and the ensuing lawsuit that opposed the merger and

attempted to dissolve it, 15 Fiorina had a huge task ahead of her. The integration of the two

corporate cultures was made more difficult by the strained relations Fiorina had with her

own staff, many expressing serious concerns regarding the merits of the merger. 16 The

transition was made slightly easier by the 65,000 new personnel who became a part of the

HP community after the merger. They were more at ease with creating an organization in

the way that Fiorina envisioned. According to Fiorina, the necessary cultural adjustment

was simplified by this injection of “new DNA.” 17

Following the merger, Fiorina embarked on a series of technological symposiums and

“coffee talks” with HP engineers. 18 Although the merger had already been undertaken by

HP and Compaq, there were still many employees who were not convinced of the validity

of HP’s riskiest move, some of whom faced being victims of the job cuts resulting

from the merger. 19 To win over the 147,000 employees worldwide, Fiorina used a range

of methods of communicating including the “management by walking around” style that

Packard and Hewlett had originally advocated within the organization. A company

employee commented on her style and interaction with all members of the company by

saying that her actions and down-to-earth nature “earned her a lot of points” with transferees

from Compaq. 20

The company faced challenges in the way of significant competition from both Dell in

the PC business and IBM as a service provider. 21 Communicating a vision for the future of

the company post-merger remained a key issue for Fiorina. 22

Three years later, in February 2005, Fiorina was ousted from HP and replaced by Mark

Hurd.23 In one of his first acts as the new CEO, Hurd undid some of the radical changes

from his predecessor’s reign. 24 He cut jobs and engaged in a restructure, breaking down

the four quadrants into product divisions because they were too “matrix” in design. 25 Some

commentators, in referring to “the debacle of the Carly Fiorina years,” argue that many

of the changes Hurd has made are “designed to unscramble the forced attempt at synergy

attempted by his predecessor, instead handing back clearer responsibility to divisional

managers for their own operations.” 26 Greater attention to becoming more efficient and getting

better at execution appears to be producing results: in August 2007, Hurd announced

HP’s best sales growth for seven years. 27

An IBM Change Story: Transformational

Change from Below and Above

Change from Below 28

Before using the Internet became as commonplace as watching television, David Grossman

and John Patrick took on the mammoth task of convincing their superiors and co-workers

at IBM that the Internet was even worth looking at. Their subsequent actions helped to

revolutionize Big Blue and drastically change its path into the future. 29

When David Grossman, a computer programmer, stumbled across a rogue Internet site

for the 1994 Winter Olympics in Lillehammer, Norway, he was troubled. IBM had the

official broadcast rights to the Games, but Sun Microsystems was taking the raw footage

and making it available on the Internet under their logo. Although his position as a

programmer did not require him to act on his findings, Grossman was deeply concerned

about the implications of the branding of the Internet broadcast and the potential effects

on IBM. He pursued the issue by contacting the IBM marketing team for the Olympics.

The rogue site was eventually shut down, but the lesson had not been learned. IBM had not

even begun to comprehend how the Internet could become an integral part of their business

dealings. 30

Grossman’s persistence landed him a meeting with the head of marketing, Abby

Kohnstamm, and some of her colleagues. It was here that Grossman was able to give a

detailed explanation of the benefits of the Internet. He captivated one member of his audience

wholeheartedly. John Patrick, a member of the strategy task force, attended the presentation

that day and he immediately became Grossman’s ally in the Internet Revolution

and an important link to the world of senior management. 31

As a team, Grossman and Patrick complemented each other. Grossman had the more

developed technical know-how. 32 Patrick knew how to make the “boundaryless” culture at

IBM work to his advantage. 33 Together they created an underground community of Web

fans who shared technical information that ultimately helped IBM into the Internet era,

albeit working, for the most part, unofficially. 34 The grassroots Web community infiltrated

all corners of the company in a way that would have been difficult for an officially sanctioned,

top-down group. It was through the advocacy of the lower-level personnel that the

Internet message was spread through IBM’s culture. 35

Of course, the downside of being an unofficial part of an organization is the potential

lack of financial backing for a group’s projects. However, when it came to finding money

for IBM’s first-ever display at an Internet World trade convention in 1995, Patrick was

not fazed. By coordinating the funds and the Web technology from various business units

and becoming a “relentless campaigner” for the project, he gained support and expertise

from multiple parts of the organization. 36 By sharing experienced personnel and resources

from many departments, Patrick and Grossman were able to provide departments with

more expertise and highly trained personnel when they were “returned” to the area from

which they came. This strategy reinforced internal support for the change. 37 Over the

years, Patrick and Grossman succeeded in creating a system that revolutionized the way in

which IBM does business. Coupled with the leadership of Lou Gerstner, the period from

1993 to 2002 was one of reinvention and change. 38 IBM transformed from a computer

manufacturer to a global service provider, focusing on e-business and the Internet. By

the late 1990s, IBM’s trading in the e-business sector began to reflect in the bottom line,

accounting for almost a quarter of its revenue. 39

Change from Above

In 2002, Samuel Palmisano, a lifetime IBMer, took over leadership of the company from

Gerstner. Palmisano’s focus changed to emphasize teamwork and collaboration. One of his

first steps in demonstrating his new management style, to investors and employees alike,

was a readjustment in executive compensation. 40 This involved a cut in the controversial

CEO bonus that was redistributed within the top management team. Palmisano claimed that

in order to function as a team, the gap between the CEO and his team must be reduced. 41

Insiders said that the amount pooled was $3 to $5 million, approximately half Palmisano’s

personal bonus. 42 This was an effective way of communicating to the entire organization

his intentions and commitment to his vision.

In a BusinessWeek e-mail interview, Palmisano wrote that in planning for change, “I

kept thinking about an approach that would energize all the good of the past and throw

out all the bad: hierarchy and bureaucracy.” 43 To this end, he disbanded the executive

management committee and created three teams with which he would work directly.

These management teams—in the areas of strategy, technology, and operations—were

composed of people from all over the company, not exclusively top management. 44 His

aim in restructuring was to make IBM a flatter, more creative organization striving to

meet consumer needs. 45

In addition to the restructure, Palmisano saw a lack of skills in IBM around the delivery

of global services. In 2002, IBM acquired PwC Consulting as a way of bringing to it

highly specific consulting skills and expertise to assist IBM in providing a full range of

services to its clients, “from high-end technology consulting to low-end support.” 46 IBM

also put in place other techniques to make sure that it listens closely to its people. For

example, it introduced the concept of “jams,” which are online brainstorming sessions

where any employee can share his or her ideas about management issues or new product

development. Palmisano subsequently expanded the use of jams to include clients, consultants,

and employees’ family members in order to share ideas and help the company

innovate.47 It is as a result of such changes from the top that IBM hopes to meet the challenges

of the future.

A Kodak Change Story: Provoking Reactions

Could this be the beginning of one of the biggest turnarounds in American corporate history

or one of the most public and embarrassing busts? After more than a century of producing

traditional film cameras, Kodak announced in September 2003 that it would cut this line

of production. In Western countries, this involves a complete move away from traditional

products within the film industry and a full-scale launch into digital technology. 48 The

move is slated “to generate . . . $20 billion by 2010.” 49 At an investor conference, CEO

David A. Carp said: We are at the dawning of a new, more competitive Kodak, one that is growing, profitably,

that has a more balanced earnings stream, and that will have a dramatically lower cost

structure . . . To compete in digital markets, we must have a business model that lets us move

even faster to take full advantage of the profitable growth that digital promises. 50

Implementing this change required Kodak to cut their dividend and raise capital for new

technology purchases. 51 Further elaboration of this strategy occurred in January 2004

when it was announced that to reach the proposed savings of between $800 million and

$1 billion by 2007, Kodak needed to make two physical changes to the organization. 52

First, there would be a reduction in the square footage of Kodak facilities worldwide by

consolidating current operations and divesting unnecessary assets. Second, Kodak intended

to reduce employment worldwide with up to 15,000 jobs to be cut by 2007. 53

Investor Reactions

The announcement in September 2003 took many external experts by surprise. 54 At a series

of post-announcement meetings with investor groups, their reactions were not overly supportive,

55 particularly to the news that their dividends would be severely cut. 56 They were

conscious of promises to increase the company’s revenue that were not realized. 57 It was

feared that this would become another “half-hearted transition” 58—as with the $1 billion

launch into APS cameras in 1996 that ended in failure. 59 They also pointed to the risk in

moving in this direction given the competitive market with rivals such as Hewlett-Packard,

Canon Inc., and Seiko Epson Corp., which were already ahead in digital technology

research and product development. 60 Carp’s response was to stand firmly by his decision

to pursue digitalization of Kodak. 61

Staff Reactions

For many of Kodak’s employees, the future looked bleak regardless of the success of the

company in moving into digital technology. Employees were rightly concerned about losing

their jobs in light of the proposed 20 percent worldwide cutback in employment. 62

Downsizing is not new at Kodak. From 1997 to 2003, the company reduced its workforce

by 30,000. 63 As argued in The Wall Street Journal, this type of change “moves parallel

[to] those at many companies whose comfortable business models have been threatened

by rapid changes in information technology.” 64 As one union representative explained,

the stress on workers in one Kodak production plant has been made worse than necessary

because “management has not sought to reassure [Kodak employees] that they have got

any long term future. When people have families to raise, financial commitments, that’s a

very difficult environment to work in.” 65 Hence, along with having to convince investors

that the path of change is the right one for Kodak, Carp also had to manage the adverse

effects of an ongoing program of downsizing and restructuring.

The Next Phase

In June 2005, Antonio Perez replaced Carp as CEO. 66 He continued on the path of downsizing

and eliminating plants. From 2004 to 2007, Kodak reduced its head count from

63,900 to 30,600 and offloaded a factory that it owned in Xiamen, China. 67 Perez is also

engaging in a process of acquisitions in order to grow new businesses—with some concern

from the financial community about the amount of debt that the company is accumulating.

68 As Guerrera argues, “For now, Kodak’s position illustrates the problems that many

companies face mid-turnaround, when the tough choices have been made but the results

are still unclear. Management, under intense pressure from investors and buy-out groups,

faces a critical test of nerve.” 69

A McDonald’s Change Story: Responding to Pressure

Imagine eating nothing but McDonald’s for a month. Morgan Spurlock, independent filmmaker,

did just that, restricting his diet with the following limitations:

• No food or drink other than McDonald’s menu items.

• Meals supersized when given the option.

• Every item on the menu had to be eaten at least once. 70

Spurlock spent one long month traveling across the United States interviewing various

community groups about the implications of eating fast food and using himself as a guinea

pig.71 Before embarking on this journey, Spurlock underwent a full medical examination

and was deemed to be a physically healthy man. One month later, the diagnosis had

changed.72 After three square McDonald’s meals a day for 30 days, Spurlock had gained

25 pounds, his cholesterol level had jumped from 168 to 230, 73 and his liver was in a state

that an alcoholic would have envied. 74

The result of this personal experience was a documentary called Super Size Me, an

entrant in the 2004 Sundance Film Festival. The aim? Spurlock claims his objective was

to uncover the link between foods like McDonald’s and obesity, 75 a correlation that the

company had long denied. 76 Nevertheless, the film’s release coincided with the launch

of McDonald’s new Happy Meal for adults, comprised of a salad, a bottle of water, and

a “stepometer.” Despite valiant attempts by McDonald’s to counteract the claims of the

film, Super Size Me became one of the five biggest-grossing documentaries in American

history.77

Highlighting health issues related to fast food has only added to other worldwide pressures

on McDonald’s operations. Externally these include an epidemic of mad cow disease,

foot-and-mouth disease, the SARS epidemic in the Asia-Pacific region, a fall in economies

leading to weaker foreign currencies, and high commodity costs. 78 Internally these problems

were compounded by McDonald’s aggressive international expansion strategy that

made future growth more difficult. 79 As the then-CEO, James Cantalupo, admitted, “we

took our eyes off our fries and paid a price.” 80

The problems that the company faced went beyond superficial fluctuations in sales and

revenue. The year 1996 was a turning point, with McDonald’s experiencing four consecutive

quarters of declining sales and beginning to lose market share to competitors such as

Wendy’s and Burger King. 81 Jack Greenberg, the former CEO, implemented the highly

unsuccessful “Made for You” kitchens with disastrous results. 82 The result was slower

service in contrast to its aim of flexibility with new menu items. 83

Franchisees became frustrated. Take Paul Saber. For 17 years, he was a McDonald’s

franchisee, but in 2000 he recognized the lack of fit between the product offerings at

McDonald’s and consumer tastes. “The McDonald’s-type fast food isn’t relevant to today’s

consumer,”84 he commented as he sold his 14 stores back to the company. Others stuck

it out with McDonald’s. Richard Steinig remembers getting a 15 percent profit from the

$80,000 sales at his two stores in the 1970s. 85 This was quite a comfortable income given

that the minimum wage was less than $2 an hour. By 2003 he was struggling to make ends

meet. Even the $1 menus advertised worldwide resulted in a loss for Steinig: as he said at

the time, “we have become our own worse enemy.” 86

Getting Back to Basics

In 2003 Cantalupo was brought in to rectify the declining state of the organization. 87 He

previously held the position of vice chairman and headed McDonald’s international expansion.

His vision for the organization’s future was in a “back to basics” 88 approach with

organizational changes to refocus the organization on core values of quality and service.

However, Cantalupo died in 2004 of a heart attack and his successor, Charlie Bell, left

soon after (and subsequently died from cancer). In 2004 Jim Skinner took over as CEO. 89

As part of the new strategy called “Plan to Win,” new store openings were cut back. 90

The aim was to increase sales from existing sites instead of growth through a rapid implementation

of new stores. 91 For example, in 2004, 300 new stores were proposed, in comparison

to 1995, when 1,100 new restaurants were opened. 92 There was also a complete

overhaul of the advertising campaign. By introducing the “I’m lovin’ it” slogan and commercials

featuring pop singer Justin Timberlake, 93 the hope was to reinvent the company’s

image and connect it with the younger generation. 94

Another part of the revitalization of the McDonald’s business was the introduction of

the new salads menu. 95 McDonald’s, in the past, had expressed little concern at the claims

that its products are directly linked to obesity, but some critics saw the launch into the

“fresh salads” menus as a sign that the unhealthy reputation of fast foods may have been

identified internally as a threat to the organization. 96 This new menu has helped to draw

in female customers who had previously been reluctant to dine at their restaurants 97 and

increase the number of customers during the evening. 98 In the past, McDonald’s had tried

creating low-fat menu options for their patrons with the McShaker salads and McLean

Deluxe burger, but with limited success. 99 Now, responding to external pressures, customers

are given healthier and tastier menu options. 100 One of McDonald’s newer goals

is “loved by kids, approved by moms,” focusing their nutritional efforts on these two key

customer groups. 101 Franchisees in Colorado, for example, have joined forces to introduce

“Smart Meals”—actively promoting meal combinations that meet specific nutritional

standards and include two Happy Meal options for children. 102 Other franchisees have

revamped their PlayPlace, the traditional children’s play area, by introducing the R Gym,

encouraging physical coordination and aerobic activity. 103

McDonald’s also implemented an online training program for all U.S.-based employees

to address customer service issues. 104 The aim was to bring the company back on the road

to providing the basic, speedy service and quality products that it became famous for so

many years ago. Together, these changes reflect the company’s most recent “better, not

just bigger” mantra to bring the company back in touch with its customers. 105 By 2007 this

seemed to be working, with the company declaring some of “its strongest business results

in 30 years.” 106