HP Strategic Analysis
HP Strategic Analysis
HP (Hewlett Packard) is a market leading brand of personal computers and laptops. It came into being in 1939 through a partnership between William R Hewlett and David Packard. The brand was incorporated in 1947. Apart from computing and other access devices, the brand also sells imaging and printing products as well as other related technologies, solutions and services. In 2015, the company got divided into two companies - HP and HPE (Hewlett Packard Enterprise). HP currently holds the largest market in the entire industry followed by Lenovo, Dell, Apple and Acer. In 2017, it held a market share of 21% followed by Lenovo at 20.8%. The level of competition in the pc industry has grown very high and that has resulted in brands including HP spending a lot over research and development as well as marketing. HP has a large and diverse product portfolio. The brand has continued to grow its product range and apart from the lower end market, it also caters to the upper end market through premium laptops and other products. Its strategic focus has remained on research and innovation for faster market growth. In 2017, except a slight fall in gross margin, the brand saw a major rise in net revenue of close to 7.9% compared to that in 2016.
External Analysis of the PC and Laptop Industry
The laptop industry has been through a situation of decline during the past five or six years. The number of shipments and sales of laptops and desktops have kept declining. In 2016, the signs of growth in the industry were visible for the first time. However, since then the rate of growth has remained relatively flat in the industry. The most important reason that has affected the growth of the laptop industry is the rise of mobile computing. In 2016, HP returned to the first position in the laptop market with the highest number of shipments followed by Lenovo, Dell, Apple and Acer. After 2016, market again saw a decline in 2017 when the number of total shipments according to research by Gartner was around 262.5 million units. This was around 2.8% less than the previous year. HP and Lenovo were at the top with 55.2 and 54.7 thousand shipments.
The rise of the smartphone and tablet industry has led to reducing demand for desktops and laptops. Worldwide the demand for smartphones and tablets has grown as people are trying to remain active on the go. Demand for higher mobility led to people using large screen smartphones and tablets. The Personal Computing industry is expected to shrink further with the rise of mobile computing. However, there is still a large market for PCs since they cannot be substituted in every sphere of life and most importantly professional. The demand will still remain high from corporations and professionals. In case of individual use, people will continue to depend on smartphones and tablets for day to day use.
HP SWOT Analysis
Strong Brand Image: -
HP has maintained a strong brand image. Its focus on quality and innovation have helped it create a reliable brand image and a high level of trust among its customers. The brand brings a large range of products. From the lower end to the higher end its products in various price categories cater to the needs of a diverse customer segment. A strong brand image in the technology industry leads to higher sales and revenue as well as customer loyalty.
Large Product Portfolio: -
HP has a large product portfolio and apart from a large range of desktops, laptops and tablets, the brand also provides printing and imaging solutions and related technologies. The large product portfolio of the brand is targeted at a large and diverse customer segment. This also helps with beating the effects of economic turmoil. Apart from that a large product portfolio can help build a large customer base which is an important strength for any brand.
Large Market Share: -
HP is currently ruling the personal computer industry with highest sales and shipments. In 2017, its market share was 21% according to research by IDC. The brand is ruling the PC industry with highest market share followed by Lenovo and Dell. Apple’s market share is also much lower than HP’s. However, Lenovo is a very close competitor with a small difference in the market share of the two. The large market share of the brand means a larger customer base than the other brands is also a reflection of high level popularity, trust and customer loyalty.
Focus on Innovation: -
HP has focused on innovation for the growth of its brand and market share. Its focus on innovation also shows in its R&D spending. the brand has kept investing in research and design to bring new and more efficient as well as attractive models that are more popular. This is important in a highly competitive market since you want to keep your customers engaged if you want your brand to grow at a fast rate.
Strong Financial Condition: -
HP’s condition is financially strong which gives it extra leverage in terms of research and innovation as well as marketing expenditure. Moreover, Human Resource Management is also a costly affair and in the technology industry you need to hire the best to remain competitive and ahead of the others. Apart from paying competitive salaries, brands also need to provide appropriate motivators in the form of financial and non financial benefits to attract the best talent.
Global Presence: -
HP is a global brand that sells in all corners of the world. It is a globally popular brand. However, United States is the largest and most remarkable market for the brand. It accounted for around 35% of the brand’s revenue. Global presence of the brand is a major strength and accounts for the higher revenue of the brand.
Declining Gross Margin:
HP’s Gross margins have continued to decline over the past few years. From 19.3% in 2015, it fell to 18.7% in 2016 and then 18.4% in 2017. Higher commodity costs as well as unfavourable foreign currency impacts have continued to affect this decline. Another important factor that has affected the gross margins of HP is the brand’s dependence on PC business.
Higher dependence on US markets:
US markets are accountable for the largest part of HP’s revenue. Around 35% of HP’s revenue came from US in 2017. This also leaves the brand open to several kinds of risks associated with the US market. Economic fluctuations in the US market can reduce demand and lead to lower sales there which will in turn affect the brand’s revenue. US being the most advanced economy of the world is the largest market for several of the world’s technology brands. However, if demand is distributed more evenly globally, then it proves good for a brand. In case of the technology brands this may be slightly difficult to achieve.
Higher dependence on PC segment:
The brand is dependent on the PC segment for the highest part of its revenue. This has continued to affect its gross margins. Over the last three years its gross margin reduced from 19.3 to 18.7%. This as also been adding to its operational costs.
Product innovation presents a major opportunity for the laptop and desktop makers. It is because people’s preference and taste are changing continuously and brands have to innovate the products to match their changing preferences and market situation. People want products theatre lighter and more efficient since they have to remain active throughout the day. Higher need for mobility has led to higher demand of slim laptops. The need for product innovation is now stronger than ever.
Digital Marketing offers several new opportunities for brands to grow. The growth of digital technology has created new opportunities for brands to market their products to a larger customer base. It is a great opportunity for the brand and it can engage its customers using digital channels as well as utilise new and improved marketing and customer engagement strategies. Moreover, new technologies like AI also offer a great opportunity for the brand to create better customer experiences as well as engage its customers in new ways.
Supply Chain Digitization:
Digitisation of the supply chain can help bring more efficiency as well as reduce costs and create better relationships with suppliers and customers. In today’s highly competitive environment of the technology industry, it is important to manage the supply chain strategically so as to achieve a source of competitive advantage. Moreover, digitising the supply chain will reduce costs as well as help ensure the availability of raw material at the right time.
Diversification can also help HP extend its brand presence. It is leading in the laptop and PC industry and can extend its presence into new business areas like cloud computing and other technology related areas which can also help it grow its business. The technology industry is evolving fast and there are several channels open for HP to explore. Being a financially strong business, it can easily move into new fields and create new channels of revenue for itself. This will also act to reduce its dependence on the PC business.
Declining PC market:
The PC market has declined a lot in this decade and that has led to reduced demand and sales for the PC brands. The demand for desktops and laptops will continue to fall as per predictions and this can be a major threat for the Personal Computer brands. HP too will bear the heat as the rising sales of smartphones and tablets continues to affect the demand for PCs and laptops.
legal and political regulations:
Legal and political regulations too pose a major threat before the brand. Around the world and especially in the technology industry, large businesses are facing heavy legal regulations and government oversight. Non compliance can result in heavy fines as resulted in the case of several technology giants in EU. Legal pressure is also adding to the compliance and operational costs of the brands. Brands have dedicated compliance teams to deal with legal issues. From HR to environment and product design and quality there are several areas where law has tightened its grip leading to higher pressure on technology brands.
Rising competitive pressures are a major threat for the desktop and laptop businesses. The number of brands in the computing industry is large and each one is aggressive about growth. Moreover, continuously changing technology environment also necessitates that brands continue to remain invested in innovation for faster growth. From Dell to Apple and Acer there are several brands in the PC industry that are battling for market share and sales growth. This has led to higher costs of marketing as well as higher R&D expenditure. Apart from that brands like HP have to continuously focus upon product and design innovation as well as customer engagement to remain competitive.
Rising labor and raw material costs:
Over time operational costs have increased in the computing industry driven by the high costs of labor and raw material. While brands have adopted better strategies of supply chain management, still costs of labor and raw material have kept rising consistently which has led to higher cost related pressures on brands.
Hewlett Packard PESTEL Analysis:
PESTEL is an acronym for Political, Economic, Social, Technological, Environmental and Legal. These are some important forces in the international business environment that affect businesses directly and indirectly. Understanding these forces helps mousiness managers analyse the opportunities and threats in the international business environment as well as predict their future course. PESTEL is a useful analysis for businesses that are planning to expand overseas into new markets.
Political forces have kept growing in importance for the business industry. They have continued to acquire a bigger role as governments globally have continued to grow the level of oversight. the political scenario globally has changed very fast during the last two decades. In the technology industry especially, government oversight has grown globally. The EU has tightened its grip over the technology brands which was visible in case of brands like Amazon and Microsoft that were fined severely by the EU. Political forces affect international businesses in other ways too. Political environment is related directly to the economic environment of a nation. The stabler the political environment, the stabler and stronger the economic environment of a country. Political chaos and disruption can affect the business environment and create pressures that can lead to disruption of the sales and distribution channels. this can lead to losses for the businesses. Moreover, trade relationships between nations also affect businesses and their sales and revenue.
Economic forces too have acquired major importance in the world of international business. The world has been through a period of recession some years ago. This period saw millions of people around the world losing their jobs. In such periods, people's purchasing power reduces and so does the sales and revenue of large corporations like HP. The sales of brands like HP directly depends upon the purchasing power of the people. To remain immune from such economic fluctuations to a large extent, HP has brought products in a varied price range unlike Apple. However, that too cannot manage the negative effect of economic downfall in its entirety. Since the economic recession has passed and employment rose around the world people's dispensable income has increased. The condition is especially good in the advanced economies like US, China and Japan and the fast growing economies like India. It has led to better sales and revenue. Overall, economic forces have played a central role in the growth of technology and computing industry.
Social factors too have a major impact on technology businesses. From marketing to sales and HR, the effect of social and cultural factors can be felt everywhere. Changing social trends too affect the level of demand of certain products. Worldwide digital technology has brought major changes and every society has embraced it with excitement. From the most advanced countries to the developing countries, the wave of digital technology has connected millions worldwide. Social media has also fueled a major change at the social and cultural level. At the social level, people are adopting more and more technology and a lot of work around the world depends on computer alone. Businesses are also focusing on social and cultural factors in terms of marketing and social strategy.
Technology has become a central force in the world of international business. More or less every second thing here is dictated by technology from sales growth to the effectiveness of marketing and HR strategy. technology has not just helped brands grow their reach and market themselves with higher efficiency and effectiveness but also expand their market share and consumer base. From the supply chain to production and sales everywhere brands are investing heavily in modern technologies including digital technology and Artificial Intelligence. Digital technology and social media are helping brands engage their customers better. HP is a technology brand and so the relevance of technology in its business is even higher. The brand also makes a big investment in Research and Development every year.
Environmental factors are now more important than ever for the businesses worldwide. Whether a technology business or any other business, sustainability has grown important than ever. Sustainability is not just a passing fad but the brands investing in sustainability are reaping its benefits in both shirt and longer term. Apart from lowering operational costs, it is also helping brands maximize output while growing customer loyalty and retention. It is not just the sustainability laws that have caused this shift but there are other factors too that have encouraged this change. Reduction in costs, better reputation as well as higher customer loyalty are also the benefits of sustainability. This is an important reason that brands like HP are investing heavily in sustainability and making their products and processes more sustainable.
Legal factors are now also central to the growth and management of businesses. Worldwide legal oversight of businesses has grown a lot. from labor to product quality and safety as well as environment, there are several laws in areas that businesses must comply with. Noncompliance results in severe fines and leads to major losses. In the recent years several technology brands have incurred heavy fines in EU. It is why large technology brands like HP have dedicated compliance teams that take care of the legal matters. Moreover, laws vary from nations to nations and from market to market and so brands have to take care of each region's laws where they are doing business. A tussle with law can also hurt a brand's reputation.
HP Five Forces Analysis:
Bargaining power of suppliers:
HP sources from a large group of suppliers worldwide. As an entire group, the suppliers do not wield much bargaining power which is mainly because of their small size. However, some of the major suppliers like Intel, AMD and Microsoft hold some bargaining power because of their large size and financial strength. Like most other computing brands, HP too has a large part of its supply chain in Asia and particularly China. The overall bargaining power of its suppliers is moderately low. HP is a large and financially strong brand which acts to moderate the bargaining power of its suppliers.
Bargaining power of customers:
The bargaining power of customers is higher in the 21st century. It is because the modern customer is not just a well informed customer but he also has more control in his hands. He has several options before him and to build brand loyalty is difficult. Every customer wants the best quality at the lowest price. Moreover, the level of competition in the computing industry is very high due to which every brand has to do a lot to retain its existing customers. Proliferation of digital technology has led to increase in the bargaining power of the customers who a are more quality conscious than ever. Overall, bargaining power of the customers is very high for which brands are investing a lot in marketing as well as research and development to bring new and innovative products and keep their customers engaged.
Threat of substitute products:
The threat of substitute products in the computing industry has grown. This is also a cause behind the decline in computer sales overall. There are a large number of competitors making similar products and apart from that there is competition from smartphones and tablets. People are now looking for products that offer higher portability as well as increased functionality. All these factors have led to growth in the threat from substitute products.
Threat of new entrants:
The threat of new entrants in the computing industry is absolutely minimum which is because of the large barriers to entry. There is a very large investment required for starting a computing brand. Apart from operations and infrastructure, there are other factors too like skilled human resources as well as marketing where major investment is required. The high level of competition and the growing costs of raw material also deter new entrants. There are legal barriers as well to stop any new player from entering the field. while all these barriers stop new players from entering the market, the exit barriers are also high and considering all these factors the threat from new players is absolutely minimum.
Intensity of rivalry among existing players:
The level of competition among the existing players is very high. There are several influential players in the market including Apple, Acer, Dell and Asus. All these brand invest heavily in research and development as well as marketing. Brands keep innovating to bring new, more efficient and stylish products to the market to expand their market share. Fast technological growth has also brought higher competition. Technological advancements are happening at a fast pace and every computing brand is investing in remaining ahead of its competitors. The overall rivalry among the existing computing brands is very high.
HP VRIO Analysis:
Resources/Capabilities of Hewlett Packard
Apart from US, HP pays income taxes in 58 other countries. It is a global brand that targets developed as well as developing countries. Its global presence provides it access to a large and global population of customers.
HP has maintained a strong brand image as an innovative technology brand. A good and strong brand image has led to higher customer loyalty and popularity.
HP has managed a very large product portfolio of laptops, desktop computers, printing, imaging as well as other related technologies. A large and varied product portfolio means access to a large pool of customers of varying composition. Its products are made for both the higher end and lower end customer segments.
HP has a very large customer base. It enjoys high level customer loyalty because of its innovative brand image and technology.
HP has maintained heavy focus on technological innovation. Its spends a heavy sum each year on research and development. For 2015, 2016 and 2017, its expenditure on research and development was 1.2 Billion dollars.
HP Core Competencies:
Most important core competency of HP are its technology capabilities. The brand invests more than a billion each year in research and innovation. Apart from that as of 2017, its worldwide patent portfolio included at least 18000 patents.
Skilled human resources are an important asset for any brand in the 21st century. The brand had 49000 employees as of 2017 and places great focus on hiring, retention and training of skilled professionals.
HP has maintained a strong brand image which depends upon its innovative technological capabilities and focus upon research and development.
HP Value chain analysis:
Value chain plays a critical role in increasing the productivity of a business. Michael Porter's value chain model help managers understand the role of value chain and manage it at each and every stage. From product conception to final sales and after sales service, all the stages are a part of the value chain and managing it strategically helps create superior value.
Inbound logistics: -
HP produces a limited number of its branded products and the rest of them are manufactured by outsourced manufacturers (OMs). In some circumstances it just resells the products manufactured by the third party suppliers. Its inventory management and distribution practices have enabled it to reduce the holding periods to the minimum. HP notes in its annual report, "Like other participants in the information technology (“IT”) industry, we ordinarily acquire materials and components through a combination of blanket and scheduled purchase orders to support our demand requirements for periods averaging 90 to 120 days". Since inventory holding times are reduced, HP does not hold materials shipped from its suppliers for long which are shipped soon from its distribution centers.
HP is a global brand with operations around the world. Apart from US it is liable for income tax in 58 more nations. US is its biggest market. It has several offices worldwide from Africa to Americas, Asia Pacific, Europe and Middle East.
Outbound logistics: -
HP has its brand resellers all over the world and its distribution partners resell its products to its customers all over the globe. HP does not hold its inventory for long. It uses two different methods of fulfilling demand that include building products to order and configuring products to order. This has helped it maximize manufacturing and logistics efficiencies by producing high volumes of basic product configurations. It takes the delivery of its products shortly before distributing it to its customers worldwide through its distributors.
Marketing and sales: -
The computing industry has grown highly competitive and this has led to brands investing more in the marketing of their products. HP too invests a lot in marketing and promotion of its products. It uses both digital and traditional channels for the marketing of its brand. In 2017, it spent 544 million dollars on advertising.
Procurement is an important function in the supply chain and HP has outsourced most of its manufacturing to the outside vendors. It has a procurement function to take care of all the procurement and has entered into procurement contracts with several outside vendors.
HP is a technology brand and deals in technology products as well as uses technology heavily for the production, supply and marketing functions. It also invests heavily in research and development, For the last three years, its investment in R&D has been around 1.2 billion dollars. With growing competition, investment in technological innovation has become essential to remain head of the others.
Skilled human resources are an important requirement for any brand to grow fast in the technology industry. As of 2017, it employed 49000 people. It also spends a lot in the hiring, retention and training of the employees. Since HR management has become critical to the growth of a technology brand, HP has also adopted advanced training programmes for its employees.
Firm infrastructure too plays a critical role in the management of a business and a brand. HP has managed a culture of learning and innovation. HP was divided into two in 2015. HP now handles the computer and printing business. Its business is divided into three segments that include Personal Systems, Printing and Corporate Investments.
According to its 2017 annual report,"The Personal Systems segment offers Commercial and Consumer personal computers (“PCs”), Workstations, thin clients, Commercial tablets and mobility devices, retail point-of-sale (“POS”) systems, displays and other related accessories, software, support and services for the commercial and consumer markets.
The Printing segment provides Consumer and Commercial printer hardware, Supplies, solutions and services, as well as scanning devices.
Corporate Investments includes HP Labs and certain business incubation projects".
HP Financial analysis:
HP's revenue rose past 56 Billion dollars in 2014 and than has kept declining till 2016.In 2016, its revenue fell to 48 Billion and then rose to 52 Billion dollars in 2017. This was a 7.9% increase over the previous year. Gross Profit of the brand rose to 9.6 Billion dollars in 2017 from 9 Billion dollars in 2016. The gross profit of the brand has also kept falling consistently. HP's gross margin was 18.4% for fiscal year 2017 compared with 18.7% for fiscal year 2016. The primary factors that caused the reduction in gross margin were lower Personal System gross margin driven by higher commodity costs, unfavorable foreign currency impacts and higher mix of Personal Systems revenue, partially offset by productivity improvements in Printing.
:- The computer market is shrinking and this has led to fall in sales of all the computer and laptop brands. HP must try to add new products to its product line like smartphones and tablets to increase market share and revenue.
:- It must focus upon digitizing its supply chain to reduce costs and maximize efficiency.
: - The gross margins of HP have continued to reduce which can be controlled if it focuses upon tablets and other mobile devices. Its range of tablets is limited and improving their range could prove great for the brand's financial health.
:- It can grow through acquisitions and diversification. It should try to acquire businesses that can help it extend its market share. Apart from that it can diversify into new and related technology business areas to grow its brand.
Hewlett Packard Annual Report 2017.