Hewlett-Packard Business Model, Strategy & Competitive Forces

Business Model Overview

Hewlett-Packard is considered by many to be the largest IT company in the world. Its impressive revenues surpassed the $100 billion mark in 2007, when the company reported revenues of $104.3 billion — a 14% increase compared to the previous year.

Founded as an electrical company in the late 1930s, Hewlett-Packard evolved into one of the leading computer and IT companies in the world. Its vast product portfolio ranges from computers, laptops, and notebooks to printers, peripheral instruments, and accessories.

All of these products are backed by an extensive services framework under the HP umbrella, referred to as HP Enterprise Business, which includes "Technical Services, Enterprise Services (formerly known as EDS), HP Software & Solutions, and Enterprise Storage and Networking Group (ESN)." Growth was fueled both by internal research and development and by an extensive acquisition campaign, while portfolio diversification became a key instrument in ensuring that the company retained its leadership position on the market. Through the acquisition of several software developers, Hewlett-Packard ensured that its business encompassed as much of the software market as possible, while simultaneously continuing its leadership in hardware and related markets.

Industry Relationships and Competition

Hewlett-Packard has helped shape the evolution of IT and continues to partner with many important governmental and private entities. It is also an innovative company that continually reinvents its business model and adapts it to the current economic and societal environment in order to remain competitive in the medium and long term.

Hewlett-Packard operates in the computer industry and in a series of connected and complementary industries, such as the printer and printer cartridge industry. In fact, a significant portion of HP's profits — as much as 15% — comes not from its main area of activity (selling fully assembled computers), but rather from such additional tools added to its portfolio.

This is, however, also where much of its competition originates. The computer, laptop, and notebook segments of the IT business are reasonably stable, with high barriers to entry for new competitors. On the other hand, connected and auxiliary segments are often challenged either by small players attempting to replicate HP's innovations or by individuals who replicate manufacturing processes in their own workshops. A straightforward example is the individual user who refills printer cartridges rather than replacing them.

This does not mean that competition in the computer and laptop segments is any less intense. The most important competitive advantage in today's computer business environment appears to be cost. Computers offer broadly similar characteristics, so real differentiation means offering comparable quality at a lower price than the competition. Prices are therefore continually pushed downward, making business more challenging for all players.

Competitive Forces and Challenges

Beyond intra-industry partnerships, perhaps the most important relationships Hewlett-Packard can cultivate are those with national governments. Government contracts tend to be very large in scope and volume, which allows the company to deliver substantial quantities of its production and obtain near-immediate revenues for the corresponding services.

Among Porter's Five Forces, the bargaining power of suppliers presents one of the most significant challenges. Hewlett-Packard increasingly relies on suppliers from Asia, including countries such as Taiwan, Malaysia, and China. During the early phases of this outsourcing process, supplier power was relatively limited and HP was able to negotiate aggressively on price and delivery terms. However, as the years passed, the company became progressively more dependent on these external suppliers. The bargaining power of suppliers remains high and is expected to continue increasing.

The bargaining power of customers has also increased. When Hewlett-Packard launched its computer business in the 1960s and 1970s, the pool of potential consumers was largely limited to large corporations and government organizations that could afford such technology. Today, the personal computer in its various forms is part of everyday life for most individuals. With this mass adoption, however, came greater customer bargaining power: clients can choose among numerous competing offers and frequently influence how products are developed to meet their desired specifications.

On the other hand, the threat of new entrants and the threat of substitute products remains comparatively low. The IT and computer industry is an extremely demanding one, and despite some new entrants from Asian markets, these markets remain more significant as suppliers than as full providers of IT hardware and IT solutions. Substitute products, meanwhile, are very rare in this industry.

The intensity of competitive rivalry is arguably the Porter force that most significantly affects HP's business model. Competition is extremely intense: despite an exponential increase in the number of consumers, the large number of producers and the relatively limited differentiation between products elevates competitiveness considerably. Beyond the recognized industry names, a growing number of small companies offer custom assembly services, allowing clients to select their own configurations at a lower cost than purchasing a pre-built machine from an established brand.