9 billion to improve its capabilities in the IT services sector.
The truth is that computers have long been commoditized. HP's strengths in innovation are no longer relevant in the personal computer business. Moreover, the degree to which the PC business supports the other HP business lines is debatable. Competitor IBM got out of hardware years ago and the Compaq merger itself was driven by the recognition that this struggling business could only be salvaged through consolidation. Hewlett Packard has done all it can do in the computer hardware business. The hardware business is still growing -- a sign of the brand strength that HP and Compaq enjoy considerable equity. Growth last year was 16.2%. Margins, however, were slender. At just 5.6%, the operating margin for computer hardware was by far the weakest in the company. The best time to divest a business, though, is when it still has some value. The size of the business (nearly $43 billion in revenue) and its growth means that there is substantial value HP can extract. The company will then be able to better focus on its various enterprise services lines. The result of this move will be to focus HP on business where its innovation credentials mean something; on businesses that support one another; an increase in margins; and cash to pay down the debt acquired with the EDS purchase.
The net result of these tactics will be a Hewlett-Packard company that operates in a clearly-definable sphere with a distinct strategy, one of differentiation. Hewlett Packard will then be playing to its traditional strengths. It is difficult to understand managerial reticence to divesting the PC division, given that the company has been going in a different strategic direction since 2005 and the Hewlett family in the ownership group has wanted to move out of hardware for even longer. HP does not have sustainable competitive advantage in that industry and its core competencies are near-useless there. Moreover, it provides a distraction from the businesses that do generate strong profits. To fully adopt a differentiation strategy, HP must focus on the businesses that support that strategy.
Hewlett Packard has gradually shifted its business from its core computer hardware segment to an enterprise-wide IT services model, based on technological innovation. This approach has been somewhat successful, but the purchase of EDS and subsequent economic recession has posed many challenges to HP. The company's balance sheet is terrible, its margins stagnant and the need for cost reduction has become apparent in the face of declining revenues.
The best way for HP to approach this situation is to focus its energies on the businesses that benefit most from its core competencies in technological innovation. The PC hardware business may still be performing well but, as evidenced by its slender margins, is not a business where innovation is relevant. If HP were to divest this business, they could achieve a number of strategic ends simultaneously. They could improve their margin position. They would be able to focus on a differentiation strategy based on technological innovation. HP would be able to pay down some of the EDS legacy debt. Lastly, the company would be able to focus exclusively on the businesses that offer the most growth and profit potential, given the firm's competencies.
Financial information from MSN Moneycentral. Retrieved May 20, 2009 from http://moneycentral.msn.com/investor/invsub/results/hilite.asp?Symbol=HPQ
2008 Hewlett-Packard Annual Report. Retrieved May 20, 2009 from http://media.corporate-ir.net/media_files/irol/71/71087/HewlettPackard_2008_AR.pdf
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