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Case Study: Hewlett-Packard

1.

Problem Definition

1) Primary Business Technology Firm.

Imaging and Printing Group (IPG)

1) Products: Printers and inks

2)Revenue: 30% of total

2) Personal Systems Group (PSG)2.1)Products: Desktop PCs, notebooks, servers, flat-scree2.2) Revenue: 29% of total

3) Technology Solutions Group (TSG)

3.1)Technology and IT services for B2B segment

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3.2)Revenue: 37.5% of total

Main Issue HP is struggling to decide whether to continue selling PCs, a large revenue generator

with consistently small and diminishing margins. Along with this decision, the firm is also wrestling with

how to price the PCs in the market amidst strong competition from Dell and IBM.

.

1) PCs are central to HPs strategy to maintain their position as a complete technologyprovider to both the B2B and B2C segments.

2) Through testing the market, HP has found that the demand for PCs are elastic to price.Increased prices resulted in loss of revenue but increase in margins. Whereas a decrease

in prices improved market share, but saw margin erosion.

Objectives

1) Decide whether to keep PCs are part of product portfolio.2) Decide how to price PCs if decided to keep as part of portfolio.

4.) Situation Analysis

4.1. The Market

Size: In 2003, the global PC market was estimated at USD 170 billion.

Estimated to grow at 11.4%, the forecast for 2004 was USD 182 billion.

4.2. Segments

1. Product: Desktop PCs and portable computers.

2. Customers: Enterprises, small businesses, and consumers.

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4.3. HPs Position:

1. Product: HP sold its own-branded computers and also HP Compaq products to customers.

2. Distribution: HP products were sold to business customers through their direct sales force

and commercial retailers. They sold to consumer through retail stores.

3. Price: HP is priced approximately 15% higher than Dell PCs due to their brand equity.

4. Image: HP has tried very hard to redefine the brand for their customers. The overall

theme is to become more customer-oriented, and less driven by internal innovation. The key aspects of

HPs campaign were adaptable, straightforward, trustworthy, and human. The company

implemented the Total Customer Experience TCE program in 2000 to enhance the customer focus of

HPs employees. By 2004 HP was ranked first in customer satisfaction with Dell and IBM both trailing

behind.

5. Competition

5.1 Dell was very well positioned in the consumer market as the low cost, high service-level,

and very human product. Their online retail channel was a big success in the late 90s and early

00s. The ability to customize and receive prompt service was very attractive to all customers, perhapsespecially for the 18-30 year-old crowd who were becoming quickly accustomed to shopping

online. Dell was also priced slightly below HP PCs.

5.2. IBM

. IBM had a larger share of B2B PC market through their business relationships with enterprises in

providing information technology and consulting services. Through these relationships IBM was able to

sell PCs in large quantities instead of through online or retail channels. This perhaps allowed more price

tolerance as PCs became part of the total package.

6. Nature of Market

6.1 Growth The market will likely continue to grow at the rate of approximately 10% each

year. Growth rate may even increase in the consumer market as households are now owning morethan one PC.

6.2. Moores Law Moores Law states that the number of on a microprocessor will double

every two years. This puts continuous pressure on the PCs manufacturers to keep up with technology

advancements and cost pressures from the market. Margins may become harder and harder to

improve.

6. 3. The InternetAs Dells online sales strategy is demystified, other PC manufacturers may

follow suit. Lower-cost competitors may enter the market using third-part online

retail outlets to sell their PCs in low-cost model they do not have to pay retailers for space in their

stores.

7 Business Assumptions. Assumptions

7 .1. There will not be further consolidation in the industry whether it is between the top two

competitors, Dell and IBM, or between the top two competitors and smaller players in the industry.

7 .2. Purchasing another firm is not feasible for HP.

7.3. PC market continues to grow.

7. 4. A new market-leader will not emerge in the next 5 years.

7.5. PC sales account for 4050% for HPs total revenue.

7. 6. There will not be an introduction of a new technology innovation that will replace PCs.

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8 Alternative Evaluation

8. 1. Partner with Dell. Shed the PC manufacturing business and commission Dell to produce PCs in

the HP and Compaq brands.

Benefits

Risks

* Take advantage of Dells low cost model and established distribution channels.

* Focus on B2B and Imaging segment.

* Lose control of quality of product and consequently lose the pricing advantage.

* Lose image of a total technology firm.

8.2. Partner with IBM. Convince IBM to cede their PC product, and use HP to provide all PCs

Benefits

Risks

* Additional secure revenue stream (IBM B2B segment).

* Remove IBM as player in the market.

* IBM customer may view HP as inferior product and refuse to adopt.

* IBM may be using PCs as lost leader and thus margins are still not acceptable.

8.3. Become a premium PC manufacturer like Sony VAIO.

Benefits

Risks

* Capture market less elastic to price, and more attracted to performance.

* Increase margins

* Lose market share.

* Compete with Sony and Apple.8.4. Cease production of PCs.

Benefits

Risks

* Focus on imaging and B2B segment.

* Improve overall firm margins.

* Lose brand image of a total technology supplier.

* Lose revenue and market share.

9) Recommended Course of Action

9.1. Consumer Market

9.1. Launch Online Sales Channel In order to compete with Dell, launch online sales channel

where products can be customized from HP.

9.2. Three Pricing Positions Keep Compaq brand and market as budget PCs. Market HP PCs

as medium grade. Launch separate brand as high-performance PCs to compete with Sony and Apple.

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9.3. Enterprise Market

1. Vendors are Customers Too HP has a good deal of vendors. They use consulting,

accounting, and legal firms. They purchase parts and materials. They ship their products and raw

materials all over the world via ocean, air, rail, and

road. They ship parcels, too. Most of HPs vendors are firms of the same size as they are or even

bigger. Require vendors to contract with HP to provide PCs to their businesses. This will not only

improve the relationship with the vendor by helping them understand that cost savings to HP will be

passed on to them, it will also demonstrate to the market the reliability of the HP product.

10.. Expected Result

10.1. Improved Market Share In order to be truly dominate in the industry, HP now has a

product for each segment depending on customer price sensitivity. This should improve HPs overall

market share in the PC market. The Internet sales channel should also improve market share in the

consumer market. Partnering with vendors will hopefully improve market share in the enterprise

market.

10. 2. Improved Margin With targeted three market segments based on price price

discrimination, HP will theoretically maximize revenue. If costs are properly controlled based on these

pricing segments, profit will consequently be improved.

11 Risks By offering a low-cost product HPs overall quality perception in the market may be

compromised. Vendors may be turned off by the partnering offer with HP.

12 . Critical Success Factors

1. Market Share Improvement Measure market share after one year

2. Revenue Increase Measure revenue against last year. At 35% of total sales must be through

online channel within first two years.

3. Margin Increase Measure margin against last year.