Strategic Analysis (SWOT, Porter, PESTEL) on Hewlett Packard

| November 30, 2012

 

1. Introduction

Hewlett Packard (HP) is a multinational information technology corporation headquarterd in Palo Alto, California, USA. This report examines the external and internal factors that have influenced  HP defining their strategic and competitive position. Evaluation of the company’s strategic choices is presented. The models of Porter’s five forces, Ansoff Matrix, SWOT and PESTEL are used in the analysis.

 

1.1.(i)  PESTEL Analysis

Political:  The political analysis of HP pertaining to government controls and rules in the effort of HP to keep up with the Environmental and CSR (Corporate Social Responsibility) Codes and in terms of decency, quality and environmental concerns.

Economical:  HP mainly relies on revenue from its printing hardware, financial investments, investments in small and medium enterprises and internet solutions for its maintenance.

Social:  HP has the local US consumer base well captured but it seems that there is very little to be done here in terms of attracting the upcoming young generation of IT zealot and unless there is a stress upon updating the models of its hardware for printing and PC’s to catch up with the hype created by HP and Intel who unveil new models almost every other month.

Technological:  HP went “cyber” almost a decade ago, which is fairly recent in comparison to its 70 year long market presence (HP, 2009). In fact the turning point of HP’s luck came in 1998 when HP’s corporate software and support division and corporate systems division was amalgamated and Ann Livermore took over to run this new Enterprise Computing Solutions Organisation (ECSO), with an investment of $15 billion and an employee base of 44,000 employees (Moore and Snyder, 2000).

Environmental:  HP’s operations are subject to regulations under federal, state, local and foreign laws concerning the environment, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites.

Legal: Patent Reform Legislation – As one of the largest patent holders in U.S, HP is on average granted four patents every day. HP is a constant target of frivolous patent lawsuits. These lawsuits force HP to divert resources away from innovation and product development, leading to reduced economic benefits from invention (HP, 2009).

 

1.1 (ii)  Porter’s Five Forces Analysis

Threat of Entry:  Threats of entry in this case is moderate. There is low brand loyalty of existing firms. Consumers usually compare the prices with different brands when they decide to purchase PCs. They think that every PC has the same price and has the same function no matter what brand it is, which means low product differentiation. There is medium capital requirements, no government regulations and low economies of scale in manufacturing. There is low investment for independent stores. Decreasing profitability indicates that there is a threat of new entrants

Threat of Substitutes:  Threat of substitute products is low. HP believes in standards-based technology, which represents the opportunity to decide in the item of much preferance. HP tries to eliminate barriers by continuous updating processes and presenting new products to remain in the top of the industry.

The Power of Buyers: Bargaining power of buyers is high. Consumers are very price sensitive because they like to buy cheap and high quality products. If they see a hardware or software or PC with similar functions but different brands and price, they will tend to buy a cheaper one. The buyer power for HP can be low since product demand is high, this means that the company has power to control the amount of production and also its products price. On the other hand, customers have lots of substitutes. Moreover there is not a huge difference between products which are produced in the market.

The Power of Suppliers:  HP bargaining power of suppliers is high. There are large number of suppliers for every component parts of the PC, for example, one can make a PC by using component parts from different suppliers, including hard disk, DVD drive, monitor, etc. Microsoft and Intel have tremendous bargaining power against the PC manufacturers. There are high switching costs.

Competitive Rivalry:  Rivalry is high. For instance, price, when one company acts to protect its position by lowering the price of PCs, it will affect other companies. This means all other firms may want to lower their price in order to attract the customers. There is also decreasing profitability. Since the firms sell their PCs in a low price, they will make less profit.

 

1.2.  Opportunities And Threats

1.2. (i)  Opportunities

Expanding presence in cloud computing market – In July 2008, HP along with Intel Corporation and Yahoo, created a global multi-data centre,  open source test bed for cloud computing research and education. The goal of the project was to promote collaboration among industry, academy and governments by removing the financial and logistical barriers. In 2009, HP announced HP Cloud Assure, a new SaaS offering designed to assist businesses to safely and effectively adopt cloud-based services. The increasing demand for cloud computing is likely to create demand for HP’s solutions in coming years. The global spending on cloud computing is forecast to cross a value of over $40 billion by 2012.

Expanding portfolio of imaging and printing solutions – HP has made several strategic acquisitions and introduced new products in the imaging solutions segment in recent times. Its imaging solutions strategy entails the commercial markets, from print services solutions to new growth opportunities in commercial printing. HP has launched several retail photo printing solutions and services that provide consumers the tools to personalise their photos and publish customised creative output.

1.2. (ii)  Threats

Projected decreases in the IT markets – Forecasters predict a decrease in the worldwide demand for various IT products offered by HP. The economic slowdown has negatively affected many market segments, including information technology. HP has experienced this decline not only in the U.S. but also in its global markets.

Hyper-competitive Environment – Although HP recently overtook Dell in sales, the latter remains a formidable competitor, as are other companies such as Toshiba, Lenova Group and Aver. It competes in terms of price, quality, brand, technology, reputation, distribution and range of products, among other factors. In some regions, the company faces competition from local companies and from generally-branded or white box manufacturers.

 

2.1. Internal Analysis

Comparative Analysis – The three dominant producers (competitors) in the PC industry are HP, Dell and IBM. HP has always been a leader in this industry and in all aspects of technology. Through its merger with Compaq, HP has created an even bigger market share to compete with Dell’s PC division. As far as research and development, HP is always at the head of the game. HP has created and patented some of the leading products in technology development, such as touch screen monitors. HP still receives royalties today, from that invention.

All three companies agree that employee learning is a very important aspect of their organisations. Each of the companies spends a substantial amount of money on educating and rewarding employees. HP and IBM have similar strategies for learning. When it comes to sales, Dell is at the top of the market. With regards to IT services, IBM is a far more profitable company than either HP or Dell.

Organisations willing to spend money on research and development, like HP and IBM, will likely be here in years to come because they are not just relying on PCs to make a profit. Dell will likely have to get involved in producing other products in order to stay on top of the market.

Resources: HP has 324,600 employees worldwide while servicing more than one billion customers in 170 countries on six continents (HP annual report, 2010). It has three main business divisions namely:

HP Enterprise Business – is the largest business segment of HP accounting for 36% of HP’s 2007 revenue, providing servers, storage, software and information technology services that enable enterprise and midmarket business customers to manage their current IT environments and transform them into a business enabler. HP Enterprise Business has three sub-divisions namely HP Personal Systems Group, HP Imaging and Printing Group and HP Financial Services.

HP Labs – is the exploratory and advanced research group for HP with some 600 researchers in seven locations throughout the world

HP Software Division – is the Enterprise software division of information technology company. From September 2005 through 2010, HP purchased a total of 15 software companies as part of a publicized, deliberate strategy to augment its software offerings for large business customers (HP, 2010).

HP also has subsidiaries namely, 3Com, 3PAR, Compaq, Palm, Inc, ProCurve, Snapfish and VoodooPC.

Finance: HP’s posted net revenue in 2010 was $126.3 billion, in 2009, net revenue was $115 billion, with approximately $40 billion coming from services. In 2006, the intense competition between HP and IBM tipped in HP’s favour, with HP posting revenue of $91.7 billion, compared to $91.4 billion for IBM, the gap between the companies widened to $21 billion in 2009. In 2007, HP’s revenue was $104 billion, making HP the first IT company in history to report revenues exceeding $100 billion. In 2008, HP retained its global leadership position in inkjet, laser, large format and multi-function printers market and its leadership position in the hardware industry. The financial position of HP as of October 2010 is as follows: (HP,2010)

US$ billion
Operating Income   11.479
Net Income     8.761
Total Assets 124.503
Total Equity   40.781

 

Value Chain Analysis:

Inbound Logistics

  • Building products to order, maximise manufacturing effeciencies by producing high volume of basic product configurations
  • Configuring products to order – for customer customization
  • JIT to minimise inventory
  • Purchase supplies from multiple vendors

Operations

  • Utilizes its own manufacturing capacity as well as origional design manufacturers and contract manufacturers for cost efficiencies
  • HP is the largest customer for most of their suppliers – best terms and prices

Outbound Logistics

  • HP uses external partners for its outbound logistical needs

Marketing and Sales

  • HP has a number various types of partners including retailers, VARs, distribution partners, OEMs, system intergrators and independent software vendors

Services

HP Services competes in IT support services, consulting, intergration and outsourcing services.

Products : HP has successful lines of printers, scanners, digital cameras, calculators, PDAs, servers, workstation computers and computers for home and small business use. HP not only supplies hardware and software but also a full range of services to design, implement and support IT infrastructure (HP, 2010).

Culture: HP founders, Bill Hewlett and Dave Packard developed a unique management style that came to be known as “The HP Way”. The HP Way focuses on employee satisfaction as the source of company success. Some of the by-products of the HP Way include flex time and open communication between managers and employees.

 

2.1 (i) Strengths

Prominent Brand Name Recognition: HP has launched a branding initiative called, “One Voice,” in order to better intergrate its line of consumer electronics and computer hardware products. The project resulted in hundreds of thousands of dollars in cost savings by automating package design creation. In 2009 the company moved up from the 12th to the 11th most recognisable brand (Interbrand.com).

Successful Strategic Acquisitions: HP’s major mergers and acquisitions in recent past include Compaq Computer Corporation in 2002, Mercury Interactive in 2006 and Electronic Data Systems Corporation (EDS) in 2008. In Nov 2009, HP announced that it had reached an agreement to acquire 3Com, a provider of computer network equipment for $2.7 billion.

Strong Market Position: HP can boast of a 30% global server market. Its domination of the global printer market is evidenced by its 40% market share. In 2008 HP took a major step in strengthening its position in the IT services market by acquiring EDS.

2.1 (ii) Weaknesses

Weak Market Segment Intergration: HP’s portfolio of offerings lack significant software product or manage consulting services when compared to major competitors, for instance, IBM and Accenture are establishing management consulting divisions so as to provide more comprehensive and intergrated range of services.

 

3. Key Strategic Issues

3. (i)  2002 deal to acquire Compaq

While the merger went smoothly, it didn’t solve too many of HP’s strategic challenges. The Compaq merger helped HP vault to no. 1 in storage and no. 2 in servers while becoming stronger in technology services. In the fourth quarter, the corporate unit’s sales rose a surprising 10%. Still HP was struggling with profitability at the same time IBM and other competitors were reaping strong profits. Even with HP’s top line gains, the margins and profits declined.

Also, combining the market shares of HP and Compaq was designed to create a market leader that could slow Dell’s advance, but Dell had blown past HP in market share and had widened its lead to 18.3% of the market, versus HP’s 15.7%. HP had also fallen short of its 3% operating margin goal, reporting margins of less than 1% for 2004. This merger meant a lot of people lost their jobs.

3. (ii) No Defined Smartphone Strategy

While the HP company directors had confirmed their interest in smartphones, nothing had been communicated about its strategy, even, if previously, projects existed which were looking to combine hardware and mobile services in a harmonious fashion.

Always enterprise oriented, HP completely missed the uptake of smartphones by general public, allowing market leadership to be taken by a smaller player. In the first quarter of 2010, latest financial results indicated that this business unit was losing money at a fast rate, generating only $25million compared to $57million, the same period in 2009 (NYT, Feb 2010). There was a dilemma whether to continue with the smartphone market.

4. Relevant Frameworks

4. (i) With reference to Ansoff’s growth strategies, HP used “product development” strategy in acquiring Palm.

Suitability: HP had already acquired the iPaq line of smartphones in 2001 when it bought Compaq Computer although there had been a decline in profits. Before the acquisition, HP had no legitimate play in the vital smartphone space, so this strategy is suitable. The deal would give HP access to Palm’s homegrown software that could run phones, as well as other types of devices like computer-tablets. It was an opportunity not to be missed.

Feasibility: HP has all it takes in terms of finance, technology and skills, to make the acquisition profitable. This came at the right time as both companies were struggling and therefore needed a big fix. Palm’s innovative operating system provides an ideal platform to expand HP’s mobility strategy and create a unique HP experience spanning multiple mobile connected devices. Product development is therefore a feasible strategy.

Acceptability: The strategy is acceptable but with some risks of “new strategic capabilities” and “project management risk”. Both companies were failing in the smartphone industry therefore there was no guarantee that when the two companies come together, there will be any improvement, especially since Palm chief executive was to stay on. Product development also involves heavy investments which could be a risk in case the project fails.

4. (ii) Alternative Option

In order to deal with its key strategic issues HP could possibly have adopted “market penetration” strategy.

Suitability: This was going to be a suitable strategy, as in the case of compaq, market penetration would have meant hq would gain compaq’s customers. It would have worked well also for the smartphone industry. All that HP was going to do is attracting non-users of HP products and convincing current clients to use more of their products through promotions and advertising.

Feasibility: Market penetration is the least risky way for any company to grow, also, penetration pricing involves the setting of lower rather than higher prices in order to achieve a large, if not dominant market share so this makes it a feasible strategy.

Acceptability: It is however not such an acceptable option as there might be a likelihood of competing suppliers following suit by reducing their prices also, thus nullifying any advantage of reduced prices. The other potential disadvantage is the impact of reduced price on the image of offering, particularly where buyers associate price with quality.

 

5. (a) Key HP stakeholders

Stakeholders have different interests in supporting or opposing a particular strategy (Johnson et al., 2008) and this is best illustrated below:

                                                      Stakeholder power vs level of interest

                                                               (Adopted from Johnson et al., 2008)

Key players are those where their reaction towards the organisation’s projects and initiatives must be given primary consideration.

Shareholders exercise their ultimate control over HP and how it is managed, for example, having a say on how the management is paid. Recently, (March, 2011), investors expressed how unhappy they were on pay packages for top managers , saying they are paid a lot of money and claiming it’s a waste. By voting against these pay packages, the board approved the change (Inquirer, March 2011).

Managers are key players in the sense that for any company to succeed, it needs management that is driven and ambitious. In 2007, HP produced a report called “The Seven Habits of Ambitious Companies”, briefly laying down that its managers have big ideas, stay focused, build momentum, put people first, encourage communication, manage innovation and listen to their conscience (HP, 2007). With all these habits, the company is bound to thrive for the best and stay at the top.

Employees are equally important as they are integral to the success of the business. The talent, expertise and skills of employees drives everything from how HP innovates its products and manage its supply chain to how they connect with customers and collaborate with partners (HP, 2010).

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