Hewlett-Packard Strategy Strategy Paper Hewlett Packard, Inc. (NYSE: HWP) TABLE OF CONTENTS SECTION 1 2 BACKGROUND 2 SECTION 2 2 MISSION, GOALS, AND STRATEGIES 2 Company Mission 2 Company Goals 2 Company Strategies 2 Management By Wandering Around. 2 Management By Objective. 2 Open-Door-Policy 2 Open Communication 2 SECTION 3 2 STAKEHOLDERS 2 Stockholders: 2 Employees: 2 Competition: 2 Major suppliers: 2 SECTION 4 2 EXTERNAL ENVIRONMENT 2 Industry Environment 2 Differentiation versus Commodity 2 Capacity versus Demand 2 Entry and Exit Barriers 2 Economic Conditions and Forces 2 Importance of Product 2 Proprietary Knowledge 2 Government Forces 2 Social-Demographic Forces 2 Technology 2 SECTION 5 2 INTERNAL ENVIRONMENT 2 Competitive Analysis 2 Porters Five Forces Analysis: 2 SECTION 6 2 FINANCIAL CONSIDERATIONS 2 Sales/Sales Growth 2 Income/Income Growth 2 Net Profit Margin/ Debt-Equity Ratio 2 HPs Five Year Financial Trends 2 SECTION 7 2 INTERNAL ANALYSIS 2 Strengths 2 Diversification: 2 Brand awareness: 2 R & D: 2 Alliances: 2 Agilent Technologies: 2 International Sales: 2 Weaknesses 2 Diverging from original vision? 2 Too diversified? 2 Is HPs core competency changing? 2 Too many alliances? Will this create conflict of interest? 2 SECTION 8 2 Business Level Strategy 2 SECTION 9 2 Corporate Level Strategy 2 Printers: 2 Computer Products: 2 Personal Information Appliances 2 Notebook PCs 2 Home PCs 2 Commercial PCs 2 Technical Workstations 2 Networking Products 2 Enterprise Computing 2 Mission-critical Solutions (Systems, Services, Software) 2 Technologies available that will help HP make Enterprise Computing a continued success. 2 HP Labs 2 Information Technology Center 2 Microelectronics and Measurement Solutions Center 2 Agilent Technologies: 2 Test and Measurement 2 Chemical Analysis Group 2 Healthcare Solutions Group 2 Semiconductor Products Group (Components) 2 SECTION 10 2 SUMMARY OF ISSUES, STRATEGIC RECOMMENDATIONS AND IMPLEMENTATION 2 Summary of Issues 2 Strategic Recommendations 2 Customers needs: 2 Alliances: 2 Development of new products/services outside PCs: 2 Major areas that HP is and should continue to focus its E-services on: 2 International Sales: 2 Strategic Implementation 2 SECTION 11 2 Conclusion 2 Section 1 Background Hewlett Packard is second only to IBM and is one of the worlds top provider of computers, peripherals, and related services. Hewlett Packard also manufacturers testing and measurement equipment, and medical equipment in a recent creation company of Agilent Technologies to be implemented by mid-2000. Over 50% of Hewlett Packard’s sales are outside the United States, and are made up of nearly 85% computers and related products.

The vision, culture, and environment created by the co-founders are very much alive today, and continue to make Hewlett-Packard stand out from the crowd. Section 2 Mission, Goals, and Strategies Company Mission Hewlett Packard’s basic business purpose is to create information products that accelerate the advancement of knowledge and improve the effectiveness of people and organizations. These products and services are used in industry, business, engineering, science, medicine, and education in over 130 countries worldwide. Company Goals Hewlett Packard has well defined corporate goals that are a reflection of the overall mission. Service is most important to HP, whether the relationship is HP/consumer or HP/employee.

Profit is one of the components of HPs goals but only as a means to the greater ends. HPs primary goal is to give its customers the products and services they desire. Followed are HPs specific corporate goals: To achieve sufficient profit to finance our company growth and to provide the resources we need to achieve our other corporate objectives. To provide products and services of the highest quality and the greatest possible value to our customers, thereby gaining and holding their respect and loyalty. To participate in those fields of interest that build upon our technologies, competencies and customer interests, that offer opportunities for continuing growth, and that enable us to make a needed and profitable contribution. To let our growth be limited only by our profits and our ability to develop and produce innovative products that satisfy real customer needs.

To help HP people share in the company’s success which they make possible; to provide them employment security based on performance; to create with them an injury-free, pleasant and inclusive work environment that values their diversity and recognizes individual contributions; and to help them gain a sense of satisfaction and accomplishment from their work. To foster initiative and creativity by allowing the individual great freedom of action in attaining well-defined objectives. To honor our obligations to society by being an economic, intellectual and social asset to each nation and each community in which we operate. Company Strategies In order for HP to attain the goals they have set forth, several corporate strategies and practices have been implemented. These create an atmosphere in HP of informality and a sense of working together for the common good of the company.

Followed are four examples of HP practices and there uses within the company. Management By Wandering Around. MBWA involves keeping up to date with individuals and activities through informal or structured communication. Examples of MBWA are: A manager having office hours available for employee discussions or departmental lunches and breakfast meetings Management By Objective. Individuals at any level contribute to HPs goals by forming goals or strategies, which are integrated with their manager’s and those of HP as a whole. Adaptability and innovation in recognizing alternative approaches to meeting goals provides an effective way of meeting customer needs. MBO examples are: Clearly defined written proposals, leading to and giving accountability within the organization or development of cross departmental or division teams to solve customer needs.

Open-Door-Policy The assurance that no adverse consequences should result from responsibly raising issues with management or personnel. Trust and integrity are important parts of the Open Door Policy. Open Door examples would include: Ability to voice frustrations in a constructive manner, willingness to consider or see alternatives in a new way or Openness to discussion of advancement, or transfer opportunities Open Communication At the core of HPs practice of open communication is the belief that when given the right tools, training and information to do a good job, people will contribute their best. HP hopes that open communication leads to strong teamwork between HP people, customers and others, and energized team achievement and contribution. Section 3 Stakeholders Who are Hewlett-Packard’s relevant stakeholders? Stockholders Employees Competition Major Suppliers Stockholders: HP currently has 1.019 million shares of common stock outstanding.

Current stock price as of October 12, 1999 was 87 3/8. Stockholders are directly affected by HPs operations by the money made or lost within the organization. If the stock price dramatically drops, or dividends decrease or cease, stockholders are likely to take their money and invest where returns are higher. Employees: HP has high regard and respect for its employees. One reflection of this high regard is a stock option plan was implemented in 1996 where HP along with employees contribute to the stock purchases.

This gives HP employees not only a stake as an employee, but also as an investor. HPs profitability/operations becomes increasingly important as the stakes get higher. Competition: Competition in the diversified computer industry is innovative and competitive. If HP were to have financial troubles, competitors such as IBM are posed and ready to snatch up lost market share. The same can be said about HP, its the nature of the game. One companys downfall becomes anothers windfall.

Major suppliers: Major suppliers include firms such as Intel, the number one supplier to all PC manufacturers for chips. HP is susceptible just like any of the other PC manufacturers to Intels prices and availability. This gives Intel the corner in the market, and strength when it comes to affecting HPs operations. If HP does not have the components needed to make its products, customers do not receive their products, resulting in unhappy customers. Section 4 External Environment Industry Environment The diversified computer industry (PCs, imaging products, servers, e-services, software, etc.) has become the worlds largest revenue generator and one of the most rapid growing industries during the past 10 years. Multiple new entrants and incumbents are fighting for market share and profits.

Company profitability does not always depend on its longevity due to short product life cycle. Differentiation versus Commodity The personal computer, imaging and network servers industry is becoming a commodity producer. Home and business desktop PCs, imaging products, and network servers are very common and are supplied by nearly every vendor in the industry. Components for PCs, imaging products, and network servers are attainable in large quantities from a variety of suppliers and at very affordable prices. There is a great amount of similarity in the products due to the fact that vendors are using the same suppliers for their components. Because of this, price becomes a more important factor when trying to sell PCs and imaging products.

E-services and software are product segments where differentiation does exist. E-services require the newest technology and IT professionals that can provide the best product and service. Newer technology is brought into the market place everyday and there is a lack of competent IT professionals that understand how and why this technology works. This gives those companies that have the resources to hire competent IT professionals with an understanding of the newer technology the ability to differentiate themselves from the rest of the marketplace. Software and technology changes go hand in hand.

As new technology is developed, system software has to be developed to enable the technology. The new technology is also providing the capacity for new application software and tools that are being developed to perform business functions and data management. Capacity versus Demand The personal computer and imaging industry have been in an over-capacity situation for most of its existence. There are many vendors competing for the same buyers and vendors need to convince buyers that their product has an advantage over the competition. The e-services, software, and network servers product segments have experienced greater demand and are not at the point of excess capacity. Entry and Exit Barriers Entry barriers into the diversified computer industry are surmountable.

Components for PCs and imaging products are easily attainable through many suppliers. Suppliers generally give volume discounts and the small newcomer must compete with larger established vendors who benefit from economies of scale. The ability to provide quality service and support to the customer is another barrier. Buyers are becoming accustomed to having support from the vendor, at any time of the day, after the sale. This requires having knowledgeable staff available to handle customer calls. Newcomers also have to overcome brand recognition and the reputation of established vendors.

Exit barriers vary depending on the company. Companies that emphasize one product will cease to exist if they are unable to be competitive with other producers of that product. Diversified companies would have an easier time leaving a specific industry product because they have other product lines in which they do business. Economic Conditions and Forces The diversified computer industry has been subject to seasonal, quarterly, and annual fluctuations. These fluctuations can be caused by product developments, pricing, reviews and component availability.

The diversified computer industry is subject to economic forces that could influence current and future profitability. The spending patterns of consumers are subject to prevailing economic conditions. The prevailing domestic and international economic conditions affect foreign currency prices and the amount that consumers are willing to spend. The industry is also subject to the liability of foreign taxes and foreign product sales. 1 Importance of Product Products used in the personal computer industry are very important.

The concern for Y2K reflects the importance of the computer industry. The government, businesses, and individuals are concerned with what will happen to technology when the calendar turns to the year 2000. It is anticipated that there will be power disruptions, some water systems will not provide water, medical equipment will malfunction, etc. All the systems that are used to run the machinery and equipment used for the various processes contain technology produced by the computer industry. Therefore, the computer industry is very important because of the processes it helps to monitor and run. Proprietary Knowledge The safeguarding of proprietary knowledge is important in the diversified computer industry.

Computer manufacturers rely on suppliers and other technology developers to stay abreast of the latest developments in PC technology. If computer manufacturers or their suppliers were unable to obtain licenses necessary to use protected technology in their products on commercially reasonable terms, these manufacturers may be forced to market products without desirable technological features. This could require a company to incur substantial costs to redesign their products around other parties protected technology or to defend patent or copyright infringement actions against their own company.1 Government Forces The computer electronic industry must meet standards established by the Federal Communications Commission, and similar agencies in other countries. An example of a standard would be the regulation on the maximum amount of radiation emitted by monitors. Companies in the computer industry must receive the appropriate certification before shipping computers. Therefore, if companies encounter problems obtaining certification, they risk delays in introducing new products.

In addition, advertising, shipping and other operations are subject to state regulations, regulations of the Federal Trade Commission and the U.S. Department of Commerce in the United States, and similar agencies in foreign countries. Any failure to comply with such regulations can result in significant fines, penalties, forced rebates, and shipping restrictions levied against the violating companies. Companies are also subject to federal and state sales and income tax regulations. State regulations vary by state.1 Social-Demographic Forces A relevant social force is the excitement over the Internet and e-mail.

Individuals and corporations are finding computer technology very valuable in their everyday lives and operations. Individuals have quick and easy access to virtual communities and consumer information. Corporations have a vital link of communication and a strategic tool for operations and managerial decision making. For whatever reason, this trend has caused the industry to grow at a very significant pace over recent years. Without major changes in other industry forces, this demand is foreseeable into the future. Consumers have also changed and have become knowledgeable about components and how the components are used within the computer and other technological products.

This knowledge is used to make selective purchases and forces the computer industry to offer the products that consumers want. Therefore, it is important that the computer industry establish the ability to produce products based on each consumers needs. Technology The computer industry is a technology industry and is therefore greatly affected by the technological changes that take place in the world. Technological advances occur very quickly; therefore, companies must stay abreast of these changes and incorporate them into their products in order to remain competitive in the industry. Manufacturers must decide which new technologies will be the most cost-effective to incorporate. Section 5 Internal Environment Competitive Analysis Competition in the diversified personal computer industry is aggressive and numerous. Hewlett-Packard competes with some of the worlds largest companies and smaller highly specialized firms. Hewlett-Packard’s competition can be separated into the following areas: personal computer, software, and computer services industry. The personal computer is the largest section of the computer hardware industry.

The personal computer industry has recognized an average annual growth of 20% in PC shipments between 1991 and 1998. It is anticipated that the growth will be between 15-20% over the next several years. Lower prices, improved performance, and demand driven by the Internet will provide this growth.(3) The PC segment is the most competitive segment of the computer hardware market. Consolidations and shakeouts of the second and third tier PC vendors have left approximately 65% of the market share with the top 10 vendors. The major competitors in the personal computer industry include Compaq/Digital, Packard Bell-NEC, IBM, Dell and Hewlett-Packard. The chart below shows world wide unit shipments for 1998.

As the chart shows, Compaq sold more units than Dell, IBM, Packard Bell-NEC, and Hewlett-Packard. Figure 1. World Wide PC Vendor Market Share for 1998 It is forecasted that additional consolidation & shakeouts will leave 70% of the market share with the top five vendors by the early 2000s.(3) The PC industry’s growth has been boosted by the sub-$1000 PC. It is anticipated that the average desktop prices will drop below $1400 by the year 2000. The means used to sell PCs also can have a positive/negative affect on PC pricing.

Direct sellers traditionally have been able to underprice indirect sellers.(3) The reduction in prices is mostly due to the drop in major component parts of PCs. All of the competitors listed above offer standard PCs that contain mostly the same components. Therefore, there is little differentiation between the various competitors PCs.(3) The reliance on the component suppliers does present risk for the PC industry. Most computer components are standardized and the industry relies on one or two suppliers for two critical components: the CPU and motherboard. Approximately 85% of the worlds CPUs include an Intel Processor and Intel has been able to significantly increase its share of the motherboard market.

This gives Intel a significant control on which and at what cost a PC vendor can provide a computer with its CPU and motherboard.(3) The packaged software market has always been the fastest growing segments of the computer industry. The packaged software industry consists of three general market segments: application solutions, application tools, and systems software. Applications software performs specific industry or business functions and currently this market provides over $56 billion in sales and is expected to grow to a $98 billion dollars by 2001. Application tools provide data management, manipulation, access, and retrieval. It currently provides over $31 billion dollars in sales and is expected to grow over $50 billion dollars by 2002. System software is comprised of operating systems, and data center management.

It currently provides over $35 billion dollars in sales and is expected to grow over $53 billion dollars in sales by 2001. The major competitors in the software market are listed below.(4) Worlds Top Software Suppliers(4)6 REV. (MIL$)997 1996 1997 1. IBM 13,052 12,844 2. Microsoft 9,247 12,836 3.

Computer Associates 3,945 4,457 4. Oracle Corp 3,615 4,447 5. Hitachi Ltd 3,960169 4,023 6. SAP AG 1,692 2,290 7. Fujitsu Ltd 2,000 2,000 8. Compaq/Digital 1,224.9 1,174.2 9.

Sun Microsystems 1,000 1,117.7 10. Siemens Nixdorf 1,020 1,071 11. Parametric Technology 596.3 1,013.8 12. Intel Corp NA 1,002.8 13. Novell Inc. 1,208 930 14.

Adobe Systems 786.6 911.9 15. Sybase Inc 1,011.5 903.9 16. Hewlett-Packard 798.5 886.1 17. CadenceDesignSystems 587 755 18. SAS Institute 620.4 727 19.

PeopleSoft Inc 389.4 706.4 20. BMC Software 530.9 677.7 The software industry is fragmented and one established vendor (Microsoft) dominates the mature software markets such as operating systems. It is nearly impossible to start up software companies to take market share from well-established vendors. Potential users might perceive new products as being better but are concerned with upgrades and the ability of the company to enhance its product over the long run. Newer software markets are very appealing to software vendors. Software vendors can be the first to enter the new market and can establish themselves at the same speed as other software developers/vendors.

Growth in the computer services industry has grown steadily from 1997 to 1998 and the trend is expected to continue. This segment of the computer industry consists of professional and processing services. The computer services industry is fragmented and consists of businesses ranging from one employee to thousands. Companies can focus on a niche market and or can provide services for several different markets. This market has excess demand, therefore new firms are always entering the market, and existing firms are increasing their market share.(5) Consumers of the services provided in the computer services industry have a large selection of competent firms to choose from. Consumers can pick a firm that provides only computer services or a company that provides both computer services and products. The table below lists the top five independent computer services firms.(5) TOP INDEPENDENT SERVICE FIRMS(5) Revenues Company (in billions $) 1.

EDS 15.2 2. Anderson Consulting 6.6 3. Computer Sciences 6.3 4. GE Capital ITS 6.0 5. Science Applications 4.0 As technology changes and the Internet becomes more inherent in the business world the need for professional services will also increase.

The professional services provide outsourcing, systems integration, information technology consulting, and intranet/internet services.(5) The professional services segment of the computer services industry has generated over $100 billion in revenues in 1997 and 1998. It is anticipated that the industry will grow between 11% to 15% by 2001.(5) Processing services provide businesses with services such as payroll processing, employment regulatory compliance, tax information processing, and the dissemination of financial information. It is estimated that processing services provided $62.2 billion in revenues in 1997 and 1998. It is anticipated that the industry will grow significantly within the next five years.(5) Porters Five Forces Analysis: This analysis is in relation to the new focus of HP in not only the PC market, but the Server/Workstation market and E-services market. The PC market has evolved dramatically over the past 10 years, where there were only a few top providers in the PC market, there are now hundreds of various computer companies. Entry is easy, components are readily available, and buyers are very knowledgeable and aware of their needs.

Due to the change, the margins are shrinking and PC companies are exploring other markets. HP is one of these companies that are shifting into other markets. The first market HP is moving into is the server/workstation market. This market currently has medium internal rivalry, but as other companies enter, the rivalry will increase. Not all PC companies have the facilities or suppliers to produce servers so substitution is somewhat available, but not to the same extent as PCs. Supplier power, given the current providers, is limited, but no one company holds such a monopoly as say Intel in the PC market.

Buyers also have limited power because the option of whom to purchase from is not fully developed. Second market HP is heading into is E-services. This, like the server market has relatively medium internal rivalry and substitution due to the number of companies in the market. As more companies move to this market, again the substitutes and rivalry will increase. Entry into the market is high, based on the future and importance of the Internet.

Buyers of E-services have specific needs of products and services that will need to customization to fit each customer. Supplier power is limited because products are based on existing technologies. HP will need to monitor and analyze these markets, along with any new emerging markets very closely to maintain a competitive advantage. Remaining diversified and flexible to be able to react quickly to the future markets will be essential to HPs profitability. HP can not just equal its competitor’s prices or products, but must continue to give value-added in order to differentiation products and services. Basically, HP needs to be one step ahead off its competition. HPs goals, vision, and organizational structure lend itself well to this, especially how HP focuses on customer interaction and providing products/services to meet customer needs.

Followed is a diagram illustrating Porters Five Forces with relation to the PC, Server/Workstation, and E-services market. Section 6 Financial Considerations Sales/Sales Growth HP sells considerably more than the industry standard, showing the level of market penetration HP has developed over the span of existence. While HPs sales are well above industry, its overall sales growth in 1998 has dropped 11%. This would be a reflection of the slowing and reduced profit margins in the PC market. Income/Income Growth Again, HPs 1998 income is above industry standards, showing HP still has profits in the dwindling PC market.

However, HPs income growth dropped in 1998 and is below industry, leading HP to evaluate its financial condition. In evaluating financial considerations, other emerging markets have been entered. Net Profit Margin/ Debt-Equity Ratio HPs net profit margin has consistently been in the 7.3% – 7.7% range in the past 5 years. In 1998, the NPM was 7.3%, lowest of the past 5 years. To increase this margin, HP should review costs, and identify costs that can be reduced. Increasing prices is another option to increase profit margins, but given the PC market, is not an option for HP.

Entrance into new markets like the server and E-services should help the profit margin since the profits are currently higher in these markets compared to PCs. HPs debt-equity ratio is well below average; this is a positive trend, and show that HP has not borrowed heavily long-term against its equity. HPs Five Year Financial Trends HPs revenue and earnings has consistently increased over the past 5 years, of course due to the surge in PC purchases and related products. In 1998, the net earnings did fall below its 1997 earnings while revenue continued to increase (costs increased at a higher rate than revenue). This can be seen in the increase in 1998 costs associated with products sold and services.

These costs increased 2.1% to 68.1% of net revenues, up from 66% in 1997. A.G. Edwards just released a report forecasting that HPs EPS should increase 18% in the year 2000, and stock target price should be in the range of $130/share. HP has not ignored its setback in 1998 financials, and has taken a proactive approach. Examples of this proactive approach are the new corporate focus on providing E-services, and server/workstation sales, and the corporate realignment. These steps to counteract the recent set …