Hewlett Packard: How smart is it to give up the PC business?

Dear reader,

Dr. Peter Otto is a faculty member of the Lorange Institute, commenting on the recently announced exit strategy of Hewlett Packard.

Yours,
Peter Lorange

1. HP announced its exit strategy, giving up the PC business. How smart is it, to give up tablet computers and smart phones?

In Jerry Porras’ and Jim Collins’ book ‘Built to Last’, a philosophical blueprint of what makes great companies, they coined the term ‘preserving the core while stimulating progress’. HP started out as a focused company and over the years became a highly diversified enterprise doing many things at the same time. And now HP is going back to become a focused company, following in the footsteps of IBM and shifts its attentions on enterprise applications and value added services, which will enable the company to have a more differentiated market approach.

The PC market is highly saturated and only a few companies managed to differentiate their products to provide a value proposition for customers. I remember a discussion with Rod Canion, one of the co-founders of Compaq Computers in Houston, who, back in the early 90’ already realized that ‘a box is a box is a box’ and thus pushed to establish a strong brand image for Compaq. But over the years, all PC manufacturers invested in building their brands in what became a low margin market.

Giving up the tablet and PC business, enables HP to focus on value-added services, such as IT outsourcing and the enterprise software market, with the acquisition of the British enterprise software company Autonomy for $10.24 billion. The PC and tablet computer business is a high volume low margin commodity market, as opposed to the enterprise software and IT service market, where companies such as Oracle, SAP, or IBM realize healthy profit margins. HP is refocusing its business strategy to compete in this high margin market and as such it seems to be a smart move to give up the PC business. The new CEO of HP, Leo Apotheker, a former top executive of German business software giant SAP, understands the enterprise software market and can navigate HP into the right position to compete against the key-players in this field, e.g. Oracle or IBM.

2. HP made one third of its turnover in the PC business. How should HP presumably compensate this loss of substantial income?

The market for enterprise applications and IT services (e.g. cloud-based computing or software as a service) is growing steadily, as companies’ need, more than ever, applications to manage the glut of data to keep track on customers and markets. The acquisition of the software company Autonomy will enable HP to capitalize on the higher value business solutions that will help companies to manage the explosion of data they collect on a daily base.

 

3. If the PC market is in a downturn, who would buy HP’s PC business?

Given the fact that the PC market is a high volume and low margin business, it is foreseeable that a potential buyer for HP’s PC business will come from Far East. It could be one of the OEM manufacturers, for example ASUS, which is well positioned to absorb such a take-over. Alternatively, a smart phone manufacturer, like HTC, could buy HP’s PC business to extend its line of products.

4. HP’s is now focusing on software solutions and services. The right step to a bright future?

The market for cloud applications is going to increase from about $41 billion in 2011 to $241 billion in 2020, according to new estimates from the research firm Forrester. And by 2015, managed application services are predicted to grow at a CAGR of 26.2 per cent. HP will be well positioned in both of these markets, first with Autonomy, the British software company, which HP acquired and with an already strong presence of HP in the managed application and IT service sector. It was for IBM the right step to get out of the PC market so I predict HP will be equally successful in shifting the focus to software solutions and services.

Dr. Peter OTTO, M.B.A, Ph.D.
The former managing director of Ogilvy Healthcare Switzerland is now managing partner of the „Intelligence Performance Group Inc.“ Albany New York, a business strategy consulting firm with offices in Zurich, Switzerland. He earned a Ph.D. in information science and systems at the State University New York and is currently teaching at the Union Graduate College, School of Management and at the IESEG School of Management, Lille Catholic University, France.

Visiting Professor, Lorange Institute of Business Zurich

Associate Professor, School of Management, Union Graduate College, Schenectady, New York

Contact: ottop@uniongraduatecollege.edu

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4 thoughts on “Hewlett Packard: How smart is it to give up the PC business?

  1. Who could have foretold that Leo Apotheker would not see the first day of his innovative concept? But is Meg Whitman really the right CEO during this crisis? International commentaries doubt her qualities. Alas, we will see.

  2. John Thompson

    So how long will it take HP to generate $10.24B in net profits just to break even with buying Autonomy? What else could it have done with that $10B?

  3. Pingback: Why am I excited about the first quarter? | Lorange

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