HP Case Study †Strategy Essay

Hewlett-Packard’s personal computer (PC) division operates in a hyper-competitive, highly-commoditized industry subject to dynamic shifts. The PC industry is driven by technological advancements requiring continuing commitment to research and development to capture the ever-changing PC market. For most of the past five years, Hewlett-Packard led the PC industry in terms of market share. However, Hewlett-Packard’s market share is currently declining and recent industry reports indicate that a Chinese low cost PC manufacturer, Lenovo, is now the market share leader. Over four primary sections, we performed an analysis of Hewlett-Packard’s strategy in the PC industry. First, we performed an external industry examination to obtain information on the current conditions of the market, including industry trends, buyer and supplier marketplace power, and emerging market concerns, such as the threat of PC substitutes. Second, we conducted an internal analysis to determine Hewlett-Packard’s top resources, assets and liabilities, and potential capabilities from its value chain. Third, we documented Hewlett-Packard’s current strategic position within the PC industry. Fourth, we examined and scrutinize Hewlett-Packard’s current industry strategy of returning to its core competencies while consolidating aspects of its PC manufacturing and sales. From the information in these sections, we conclude that if Hewlett-Packard is to sustain (or regain) its place as the market leader in the PC industry, it must leverage its brand recognition, economies of scale advantages, and product integration features to capture market value while producing technologically competitive products. Introduction This analysis is focused on the personal computer (PC) segment of Hewlett-Packard (HP). For clarification, HP’s PCs segment includes desktop, laptop, and notebook / netbook computers. Hardware devices falling outside of the PC category are mobile personal computing devices, such as tablets and cellular phones. HP’s PC sales for fiscal year 2012 were $41. 5 billion, which represents 26. 5% of HP’s $120 billion total revenue from all products and services. HP’s PC sales captured a 16% share of the total PC market (Trefis, 2012). From an analytical standpoint, HP has made many significant moves over the past three to four years, including numerous changes in company leadership and distinct shifts in business strategy. As a result, the ultimate effectiveness and success of HP’s strategies discussed has yet to be seen. Therefore, some of the conclusions we draw regarding HP’s forward strategy will be measured by whether HP’s strategic decisions align with its competitive advantages and obligations to stakeholders. External Analysis The global PC industry is led by a small number of large scale manufacturers who are homogenizing products and looking to capitalize on low cost labor resources. Industry demand is driven by technological developments, disposable consumer spending, and corporate spending cycles (First Research, 2012). Although global demand for PCs has increased, profit margins are decreasing, creating an industry focused on price rivalry and little differentiation (MarketLine, 2012). In addition, PC substitutes are a major threat to the PC industry (Indigo, 2012). The traditional PC industry, with its focus on desktops and laptops, is in the mature or declining stage of its life cycle. Our external analysis examines the significant factors influencing the current PC environment, including potential market threats and opportunities during the next five years, and how HP is performing relative to its industry competitors. Exhibit One illustrates the forces currently affecting the PC industry. Threat of New Entrants Overall, the threat of new entrants is low because any new entrants face numerous competitive obstacles in order to obtain industry relevance. The PC industry has significant fixed entry costs and the challenges to compete with the economies of scale of major companies would be exceedingly difficult for potential entrants to overcome. Brand recognition creates another distinct entry barrier because PC consumers have high brand awareness (MarketLine, 2012). With that mentioned, Microsoft and Intel are powerful industry suppliers so the threat for forward integration is reasonable. In addition, the oversaturation of basic PC component suppliers in Southeast Asia poses an additional concern for potential entrants to the industry. New firms could originate in Southeast Asia by leveraging the low cost labor force and avoiding expensive supply chain expenditures. Buyer Power Differentiation: The industry trend is to move manufacturing abroad in order to capture low cost labor efficiencies. There also has been a trend to homogenize products across the industry (Krabeepetcharat, 2012). In order to drive manufacturing costs down, most basic components used in the PC industry are standardized and lack significant differentiation (MarketLine, 2012). The exception differentiators are memory size, processor speed, and product form features (Bradley, 2012). Overall the industry has moved toward commoditization, which strengthens buyer power. Network Effect / Brand Recognition: Regardless of particular PC brand, consumer brand awareness is high in this focal industry. Apple has carved out a unique and loyal customer following largely because its users have higher switching costs than other PC users due to Apple’s specific computer operating system. If Apple consumers were to change to a non-Apple computer, they would be required to learn a new operating system. Apart from Apple computers, the majority of the other PCs run on Microsoft Windows-based operating systems. Consumers of PCs operating on Windows have lower switching costs overall, allowing more independence in switching brands. Despite this, brand awareness is still high among consumers of Windows-based PCs, thus contributing to an overall moderate buyer power rating. Supplier Power Microsoft and Intel are two powerful suppliers to the PC industry. Intel is the leading manufacturer of the processors inside all PCs. Intel’s brand name carries significant brand recognition to end-level consumers providing Intel with a powerful industry position. Similarly, Microsoft’s widely-used Windows operating system provides Microsoft a powerful industry position as well. As mentioned earlier, the manufacture of most basic component PC parts is being outsourced to Southeast Asia to capitalize on low cost labor. Since Southeast Asia is replete with component suppliers competing with one another, major PC manufacturers face low switching costs when deciding on basic component suppliers. Therefore, supplier power in the PC industry is divided between powerful suppliers, such as Microsoft and Intel, and basic component suppliers with relatively little power. However, any examination of supplier power must acknowledge a growing socio-cultural concern regarding working conditions in low-cost labor regions that may factor into business decisions. Substitutes The PC industry has been significantly impacted by the threat of substitutes in recent years. Emerging mobile technologies, such as smart phones and tablets, now account for 61% of total PC market volume (MarketLine, 2012). While smart phones and tablets are strong substitutes for consumer PC purchasers, up to this point mobile devices have not had the same impact on business-end users, who generally chose the robust functionality of traditional PCs over less powerful smart phones and tablets. It is important for PC manufacturers to leverage these capabilities to diminish the functionality gap between PCs and PC substitutes. Degree of Rivalry Market Value Forecast: Future PC sales are projected to generate slimmer profit margins than the current 3. 8% industry average (Krabeepetcharat, 2012). As major manufacturers leverage manufacturing efficiencies abroad, product costs are lowering, creating a degree of rivalry and a focus on end-level costs. Manufacturers are essentially looking to cut costs and offer cheaper products to gain market share (First Research, 2012). Since products within the industry lack differentiation, price competition becomes the default battleground, resulting in ever-shrinking profit margins (Porter, 2007). This is very apparent in the PC industry market forecast (exhibit two), which projects a 10% decrease between 2011 and 2016 (MarketLine, 2012). Apple’s position in this analysis is noteworthy. Apple is the only pure hardware/software integrator, which has allowed Apple to create an incredibly strong position that is unique to the PC industry. Apple’s five-year rolling profit margin average is approximately 23%, significantly higher than the PC industry (exhibit two) at large (YCharts, 2012). Large Scale Manufacturers: Computer manufacturing is labor intensive. Major industry participants have moved manufacturing abroad to take advantage of low cost labor and geographic proximity to electronic component manufacturers (ECMs) in Southeast Asia. This close proximity to ECMs contributes to low switching costs for PC manufacturers (Krabeepetcharat, 2012). Shifting production of PC manufacturing to low cost labor regions and having access to numerous component suppliers creates economies of scale advantages for these large PC manufacturers. HP’s Performance Relative to PC Manufacturing Competitors Since 2007, Hewlett-Packard held the market share leader position (MarketLine, 2012). However, in the fourth quarter 2012, Lenovo, Chinese PC manufacturing firm (formerly IBM’s PC division), overtook the market share leader position (Gaudin, 2012). HP’s brand still carries superior brand integrity in the PC industry. The integration of multiple HP products, such as laptops seamlessly linking to HP printers, help differentiate an HP consumer’s experience. Additionally, HP’s ancillary products and services are still a strong differentiator (Bradley, 2012), and HP was able to capture a 5. 6% profit margin in 2011 (Hughes, 2011), a margin higher than the industry average of 3. 8% (MarketLine, 2012). Exhibit two captures HP’s competitive advantage over top rivals in regards to profit margins. In the United States, HP remains the largest domestic PC manufacturer (MarketLine, 2012). With the high degree of rivalry in the industry, the maturing/declining PC industry is shifting manufacturing to low cost regions abroad. Since the United States is the second-largest PC consuming country in the world, HP must continue to delicately balance its outsourcing activities (Krabeepetcharat, 2012). Once considered a technological leader in the PC industry, HP now struggles with competition from PC substitutes such as tablets and phones. Looking forward, it is critical that HP retains market share and re-establishes profitable growth in the PC industry by being first-to-market with new technologies or higher performing capabilities (First Research, 2012). Internal Analysis As a whole, the PC industry is currently in the mature or declining stage of its life cycle. During the six-year period spanning 2005 to 2011, HP’s unfavorable strategic decisions caused a refocusing and restructuring of its PC division. Listed below are HP’s top resources from its VRIST and top capabilities from its value chain. Comparing these resources and capabilities against HP’s past and current weaknesses allows an analysis of whether HP is propitiously positioned to regain its former status as the world’s leading PC manufacturer. HP’s PC Resources and Capabilities R&D / Intellectual Property Trusted Brand / Profit Margin Interoperability Market Share HP’s PC Weaknesses Acquisitions Substitutions Market Share Trends PC Revenue Trend Value Chain In the Technology section of HP’s Value Chain, HP is returning to one of its long standing core competencies by increasing investments in its Research & Development department (R&D). According to exhibit three, prior to 2004, HP’s R&D budget was more than $3. 7 billion. But after Mark Hurd became CEO in 2005, the R&D budget was reduced to as little as $2. 8 billion in 2009 (Y-charts, 2012). As shown in the lag metrics for new products over the past two years, this significant decrease in R&D correlates directly to the middling success of HP’s recent product launches. HP’s initial launch into the smart phone and tablet market offers tangible evidence of mediocre product development as both the Palm webOS and touchpad were subsequently discontinued. In 2010, HP started to increase its R&D budget again and the reporting for calendar year 2012 shows the R&D budget is over $3. 4 billion through November. This increased financing and refocus into technology development is a promising indicator, but any resulting intellectual property will take time to build back up. VRIST Analysis HP continues to be a trusted PC brand name (FTSE, 2012). Next to its intellectual property, HP’s brand name is its most valuable extraordinary resource. HP manages to earn higher profit margins than the rest of the leading hardware PC manufacturers based in part on this brand awareness (MarketLine, 2012). HP’s trusted brand image is a competitive advantage that it must sustain. Through brand recognition and interoperability with other products across its platform, HP is able to charge consumers a slightly higher premium over other leading PC manufacturers. Interoperability HP expects the interoperability of its Ultrabooks, ElitePad, and smart phones with other HP products and solutions, such as ePrint Cloud Services, to be its distinguishing competitive advantage (video link). HP’s next generation Ultrabooks boast stylish form features, low power consumption, world-class security features, and preserve mainstream price points. HP and its partners anticipate that these features will differentiate its PCs from its competitors (Bradley, 2012) and could one day be an extraordinary resource much like it is for the Apple brand. Since the PC market is facing continued encroachment from tablets and other PC substitutes, HP is marketing its enterprise tablet (ElitePad 900) in early 2013. Additionally, HP’s managers feel its enterprise tablet has the opportunity to differentiate with other products HP offers by providing interplay between the physical and digital worlds (Bradley, 2012). Overall, the size, scale, and connection that HP products have will enable customers to create, store, consume, and share information safer than before (Bradley, 2012). Market Share Since 2007, HP was the leading global PC manufacturer (MarketLine, 2007). But in the fourth quarter of 2012, Lenovo, a Chinese PC manufacturing firm overtook HP and now leads all manufacturers in global PC sales (Gaudin, 2012). Furthermore, China is now the largest global PC consumer market (Dauod, 12). HP faces substantial difficulty regaining its prior spot as market leader because Lenovo’s is a Chinese company with greater access to the China’s PC market; the largest and quickest growing PC market in the world. HP currently manufactures 16% of all PCs shipped worldwide, however that market share has declined since 2010 (MarketLine, 2012). Once a technological leader, HP is now an industry laggard and must develop new marketable technology to maintain its market share position in this hyper-competitive market. Acquisitions HP recently made some costly acquisitions with the goal of reaching product segments with higher profit margins (Krabeepetcharat 2012). Autonomy, a British software firm which specializes in â€Å"unstructured data† or human information, was purchased for nearly $11 billion dollars. HP is now accusing Autonomy of overvaluing its financial records and has taken an $8. 8 billion write-off against its balance sheet for this acquisition (Rushe, 2012). HP also purchased Palm in 2010 for $1. 2 billion with the hope of capitalizing on the emerging tablet market. But consumer sales of HP’s new tablet, the TouchPad, failed to support the product line, and the TouchPad was discontinued less than a year after product launch (Panzarino, 2012). Beyond these noted questionable acquisitions, HP made numerous other eyebrow-raising acquisitions under past CEOs that were not in line with HP’s core competencies. Internal Analysis Conclusion In August 2011, HP’s last CEO announced that HP planned to divest of its PC division (Krabeepetcharat, 2012). However, HP’s current CEO, Meg Whitman, has stated a renewed commitment to the PC segment. Part of HP’s internal strategy is to rebuild the balance sheet through the newly formed Printer and Personal Services (PPS) division in order to accommodate acquisition-related charges (Thacker, 2012). This is part of the CEO’s five-year plan to rebuild HP (Whitman, 2012). While multi-billion dollar write-offs are staggering hurdles for any company to survive, if HP can return to its core competencies and re-brand itself as the company of innovation (as it was once known), then HP can remain a dominant participant in the PC industry. Current HP Strategic Position Our strategy diamond analysis, shown in Exhibit five, determines that HP plans on implementing the following five strategies in the PC industry: (1) Focus on R&D (vehicles) (2) Pursue emerging markets (staging) (3) Reduce SKU’s offered (arenas) (4) Integrated products & services (differentiators) (5) Economies of scale & Consolidation (Economic Logic) Vehicles HP’s primary strategy vehicle is a commitment to R&D in order to re-establish HP as a technologically focused hardware company (Times, 2012). Exhibit 2 illustrates HP’s changing strategy regarding R&D investment. Starting in 2005, HP’s investments in R&D steadily decreased. After reaching its lowest figure in 2010, the R&D budget was increased. In 2011, HP invested $3. 25 billion on R&D, a significant improvement from 2009, when HP invested just $2. 77 billion in R&D (Yarrow, 2012). Interestingly, the bottom chart on Exhibit 2 shows that Apple spent less on R&D than HP but delivered technologically superior products. This exemplifies how R&D spending does not always equate cleanly with results. R&D is critical to generating a pipeline of intellectual property. Intellectual property is critical to HP’s growth because it is one of HP’s extraordinary resources. Strong R&D investments are often a good leading indicator of well-received future products. On the other hand, the lag metrics arising from HP’s previous R&D slashing indicate numerous problems. Of most concern is the failed WebOS that affected both HP’s initial smart phone and tablet touch pad releases (Davis, 2011). After the poor reception of HP’s WebOS, it became open-source software available to the general public to freely use and modify. HP is currently working on developing its own WebOS but is opening the system to the free market to encourage outside development of mobile applications. Staging Pursuing emerging markets such as China will enable HP to produce and distribute PCs more cost effectively. In fact, China is the future hub of both HP’s manufacturing and distribution plan (Bradley, China, 2012). HP’s executive team is aware of China’s increasingly vital role in consumer PC sales. China currently accounts for 20% of the market and is expected to double the United States’ PC consumption by 2016 (Bradley, Shanghi summit, 2012). HP is acting early by building PC manufacturing facilities in China, both to act as a distribution hub for other Asian suppliers and to distribute PCs directly to the Chinese market. Since HP began this strategy two years ago, HP seems to have been correctly following leading indicators and should see a beneficial pay-off over the coming years as China’s market surpasses the United States’ PC market. Arenas HP intends to reduce the number of its PC and printer stock-keeping units (SKUs) by 25% and 30% respectively by 2015 (Bradley, Newsroom, 2012). The maintenance cost of servicing over 2,100 types of laser printers is neither sustainable nor conducive to continued growth and profitability. Instead of divesting the PC division, as considered in 2011, HP now intends to re-invent its existing product line by focusing on quality innovation over quantity of product offerings. Geographically, HP will also be building a Chinese-based manufacturing facility which will help them operate more cost effectively in that emerging market. Differentiators HP expects to differentiate itself from other PC manufacturers by integrating products with services solutions, a process HP has already begun. In March 2012, HP combined its Personal Systems Group (PSG) with its Imaging and Printing Group (IPG) to form a new segment named Printing & Personal Systems (PPS) (Bradley, 2012). According to a HP director, merging the two groups into PPS â€Å"was a key strategy to provide consumers and business customers with better products and solutions that are seamlessly integrated with each other. † For example, upon purchasing a HP laptop, a consumer can expect his or her new laptop to wirelessly find and automatically connect with any of the consumer’s HP printers or other products. In addition, by integrating internal supply chain processes between the old PSG and IPG, and having a single HP sales person selling both PCs and printers, HP can keep the prices of its products and services competitive. It is business strategies such as these that show HP is still forward-thinking and seeking innovative or cost effective technologies. Refer to Exhibit 3 to view one of HP’s marketing videos (HP marketing, 2012). Another example of how the newly-formed PPS group integrates products can be seen in their â€Å"Exstream† product, which has been put to use by Humana and saved millions Humana millions by integrating static and dynamic content for easier communication with clients (HP marketing, Humana, 2012). Economic Logic Economies of Scale: As HP seeks to differentiate its PPS group to drive product innovation, there will be significant cost-saving effects due to increased economies of scale. Essentially, HP will save money by manufacturing more products directly in emerging markets like China. With China’s consumer PC market expected to double that of the United States, HP is ideally situated to take advantageous benefit of China’s emerging market through manufacturing plants and distribution channels located within China. Consolidation: By consolidating its PC and Printing groups, HP strengthened its position in many ways, including lowering costs in the supply chain. In addition to consolidating its supply chain functions, HP is also streamlining its sales teams and reducing its functional support organizations (Bradley, 2012). HP’s current PC strategy of consolidation is a direct byproduct of both a planned decrease in SKUs and the PC manufacturing and consumer sales reaching the ending stage of their lifecycles. If HP can successfully set new standards for PC and printing synergies through consolidation, then HP can create a viable path to maintaining its history of premium pricing via product features. HP Strategic Implementation Based on our analysis, the facets of HP’s strategy diamond are internally consistent. HP’s analyzed strategies are both interconnected and overlapping. For example, being focused on China provides HP with a strong arena given China’s anticipated growth in the consumer PC market. But a presence in China also validates HP’s economic logic by producing lowered costs. Overall, HP’s PC strategy is sound because HP is returning to its core competencies, such as hardware innovation. On a larger scale, HP’s renewed focus on R&D coupled with the creation of the PSG division supports HP’s current desire to grow organically rather than through mergers and acquisitions. One weakness that continues to hamper HP is operating with over $20 billion in debt derived almost entirely from acquisition costs related to fruitless assets. Looking back, HP could have benefited from smarter business plans, including a balanced scorecard, prior to some of these acquisitions. With such information, HP would have had a more realistic chance to make each acquisition profitable, or perhaps it would have had enough qualitative metrics to realize that the acquisition may not integrate with its core processes. Since change in the PC industry is highly iterative, HP must continually adjust the implementation of its forward strategy. Fortunately, HP appears to be taking the necessary steps to address its past failures and to capitalize on future opportunities. Since HP still has industry-wide brand name recognition, its return to market dominance is entirely feasible. But as technology progresses and markets shift, HP’s ability to maintain sustainable growth will depend largely on whether HP’s new PC business strategy can capture value while simultaneously producing competitive, cutting edge products.