Top Banner
Do Not Copy or Post Copying or posting is an infringement of copyright. [email protected] or 617-783-7860. Mary Ho prepared this case under the supervision of Prof. Thomas M. Hout for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. ' 2006 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise (including the internet) without the permission of The University of Hong Kong. Ref. 06/275C 1 THOMAS M. HOUT HPS COMPUTER BUSINESS: CAN IT COMPETE? In 2002, Hewlett-Packard Company (HP) and Compaq Computer Corporation (Compaq) merged their business in a deal that many thought would fail. The merger had expanded HPs revenue from US$45 billion to nearly US$80 billion in 2004. However, the new companys profits did not meet investor expectations. While HPs management pointed to a weakened macro-economic environment and competitive price pressures in personal computers (PCs) and printers to help explain its disappointing margins, industry observers cited the managements inability to keep pace with changing market conditions as a key contributor. Specifically, critics chastised the HP management for failing to manage its computer business efficiently and for following Dell Inc. (Dell)s lead in a low-cost direct selling model. HP similarly trailed International Business Machines Corporation (IBM) in establishing itself as a high-end consulting service and server provider. Many analysts had long thought HPs stock was undervalued, and had endorsed the idea of splitting up HPs operations to unlock its true worth. In early 2005, HP was stuck in a highly competitive market with a sub-optimal infrastructure and strategy that could not be fixed easily. Under mounting pressure for change, the board of directors fired its chief executive officer (CEO), Carleton Fiorina, in February 2005. The new CEO, Mark Hurd, was appointed in March 2005. Hurd said that he had to spend his first six months focusing on execution and demand creation. The big debate over HP at the time was whether poor execution was to blame for its woes or whether HP had adopted the wrong strategy since its merger with Compaq. Why wasnt HP much stronger after the merger? Was Dells computer business really so good that HP could not compete? How could HP rediscover its dynamism and avoid a painful break-up? History HP was founded in 1939 by two Stanford engineers, William R. Hewlett and David Packard in a garage in Palo Alto, California. The companys first product was an audio oscillator an electronic test instrument used by sound engineers. In 1957, the company defined its goals HKU558
35
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

Mary Ho prepared this case under the supervision of Prof. Thomas M. Hout for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes.

© 2006 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means � electronic, mechanical, photocopying, recording, or otherwise (including the internet) � without the permission of The University of Hong Kong.

Ref. 06/275C

1

THOMAS M. HOUT

HP�S COMPUTER BUSINESS: CAN IT COMPETE?

In 2002, Hewlett-Packard Company (HP) and Compaq Computer Corporation (Compaq) merged their business in a deal that many thought would fail. The merger had expanded HP�s revenue from US$45 billion to nearly US$80 billion in 2004. However, the new company�s profits did not meet investor expectations. While HP�s management pointed to a weakened macro-economic environment and competitive price pressures in personal computers (PCs) and printers to help explain its disappointing margins, industry observers cited the management�s inability to keep pace with changing market conditions as a key contributor. Specifically, critics chastised the HP management for failing to manage its computer business efficiently and for following Dell Inc. (Dell)�s lead in a low-cost direct selling model. HP similarly trailed International Business Machines Corporation (IBM) in establishing itself as a high-end consulting service and server provider. Many analysts had long thought HP�s stock was undervalued, and had endorsed the idea of splitting up HP�s operations to unlock its true worth. In early 2005, HP was stuck in a highly competitive market with a sub-optimal infrastructure and strategy that could not be fixed easily. Under mounting pressure for change, the board of directors fired its chief executive officer (CEO), Carleton Fiorina, in February 2005. The new CEO, Mark Hurd, was appointed in March 2005. Hurd said that he had to spend his first six months focusing on execution and demand creation. The big debate over HP at the time was whether poor execution was to blame for its woes or whether HP had adopted the wrong strategy since its merger with Compaq. Why wasn�t HP much stronger after the merger? Was Dell�s computer business really so good that HP could not compete? How could HP rediscover its dynamism and avoid a painful break-up?

History

HP was founded in 1939 by two Stanford engineers, William R. Hewlett and David Packard in a garage in Palo Alto, California. The company�s first product was an audio oscillator � an electronic test instrument used by sound engineers. In 1957, the company defined its goals

HKU558

Page 2: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

2

and values, which were later published in Packard�s book entitled �The HP Way�. The management philosophy that Packard described � which included a down-to-earth management style and genuine concern for employees � was considered the backbone of the company�s culture. The founders led the company until 1978, when John A. Young, a veteran HP engineer, was appointed CEO. In 1992, he was succeeded by Lewis Platt, another HP veteran engineer who had been promoted from within the company. Platt retired in 1999, and recruited Carleton Fiorina from Lucent Technologies to be the next president and CEO. Fiorina was the first outsider to take the helm at HP. During her 5½ years as president and CEO, Fiorina took dramatic steps to reinvent HP, which included a 2002 deal to acquire Compaq. While the merger went smoothly, it did not solve many of HP�s strategic challenges. Fiorina stepped down in February 2005, and was succeeded by Mark Hurd in March 2005. For most of its time, HP went through a growing and maturing process. The company had evolved from a producer of scientific instruments to a technology firm with an extensive portfolio of products and services. From its inception up to the mid-1990s, HP enjoyed above-average growth of over 20% per year. By the late 1990s, revenue growth declined and HP faced pressure to increase profitability. In particular, HP�s computer business faced stiff competition from Dell, Compaq, IBM and Sun Microsystems, Inc. When Fiorina became the president and CEO in 1999, she introduced a number of changes to revitalise the company. Historically, HP had been highly decentralised and was managed like a holding company. Fiorina consolidated the company�s 83 business units into 17 units under four divisions.1 She also led the company�s major round of layoffs during 2001. In the late 1990s, HP was a significant player in the computer market and an undisputed leader in the printing industry. HP introduced its first computer in 1966, which was used to collect and examine data originating from HP electronic instruments. The company expanded into business computing in the 1970s with HP3000. It then introduced its first PC in 1980 and later released a family of computer systems in 1986 that were based upon RISC architecture.2 HP unveiled the 11-ounce 95LX palmtop PC in 1991, the three-pound OmniBook 300 in 1993, and the HP Pavilion PC in 1995. By 1997, HP had become the fastest growing PC company in the world, and was ranked the number four PC manufacturer globally. In the early 1980s, the Epson Company (Epson), Diablo and Qume dominated the printing market with their dot-matrix and daisy-wheel printers. In 1984, HP brought dramatic changes to the industry when it released the ThinkJet. The printer was made based on the thermal inkjet technology the company developed in the 1970s. HP also released its laser printer in the same year. In 1991, the company released the first network printer, LaserJet IIISi. It then introduced the first desktop colour laser, Colour LaserJet, in 1994. Since the mid-1990s, demand for printers soared as home PCs became more popular. As a result, HP dominated the Inkjet and Laserjet segments, as well as in the printer supply business. Printer supplies, including toner cartridges, were an annuity to HP once a printer was sold. They generated high margins and were a source of stable revenue stream. The pricing strategy of printer supplies was analogous to that of razor blades � manufacturers normally sold the razor cheap and then charged premium prices for the blades.

The Merger with Compaq

In 2001, HP was the second largest computer company (behind IBM), and its pre-merger revenue was US$45 billion. However, HP was struggling under difficult economic conditions. The company�s net earnings declined 89% on an 8% decline in revenue in 2001. Earnings 1 Perlow, L. and Kind, L., �The New HP: The Clean Room and Beyond�, Harvard Business School Case, February 22nd 2004. 2 RISC stands for Reduced Instruction Set Computer.

Page 3: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

3

from printing and services divisions helped offset the computer division�s US$450 million loss. Faced with the first worldwide recession since 1975 and a technology industry slump, HP hired McKinsey & Company in May 2001 to advise on the strategic direction HP ought to take. The consultants reviewed a variety of strategic options for HP, which included a split-up plan and a strategic licensing deal with Compaq. Founded in 1982, Compaq surpassed IBM in 1994 to become the world�s largest manufacturer of PCs. With its US$3 billion acquisition of Tandem Computers in 1997, Compaq doubled its sales force and support team, and gained access to the corporate data centres that Tandem�s fail-safe mainframe computers had served. Compaq�s US$9.6 billion acquisition of Digital Equipment Corp. (DEC) in 1998 was the largest acquisition in the history of the computer industry at the time. The acquisition gave Compaq, among other assets, DEC�s competent service and consulting staff of 22,000 people. The new Compaq was often described as a �mini IBM�. In 2001, Compaq was the third largest computer company, behind IBM and HP, with revenue of US$42 billion. The company had 66,000 employees in over 200 countries, and was ranked 27th in the Fortune 500 list. However, Compaq was pressured by intense competition and had been losing market share in the computer market since early 1998. Compaq�s integration with Tandem and DEC had also proved difficult, and this had translated into increasing explicit and hidden costs. When Fiorina approached Michael Capellas, Compaq�s chairman and CEO, about a licensing deal, he suggested a merger between HP and Compaq. Capellas�s idea excited Fiorina, who thought it was an opportunity that could not be missed. Before the merger, IBM was a leader in the computing service market, Dell excelled at direct-sales distribution, and a number of smaller companies competed for the remaining market. With the merger, Fiorina was confident that the new HP could gain the breadth of products and technologies necessary to compete against its major rivals. HP�s management identified some potential benefits from a merger with Compaq in a proxy statement provided to shareholders in 20013 4: • The merger could help to achieve economies of scale and generate cost savings. A

consolidated company would be better positioned to negotiate terms with suppliers. HP could also leverage Compaq�s progress in developing direct sales capabilities to compete effectively with Dell.

• By combining Compaq�s competencies in industry standard servers with HP�s Linux and Unix offerings, the consolidated company could have an industry-leading product line in servers. In addition, Compaq dominated the overall storage market. Adding HP�s capabilities in high-end storage, the consolidated company could become the market leader in both the enterprise storage segment and the storage area network segment. With an extensive portfolio of products and services, the merged company could be better positioned to provide integrated solutions to customers. As a result of having a larger sales team, the consolidated company would have more power to bid for customer contracts globally.

• The consolidated company could have a stronger services business. It would have 65,000 IT staff operating in 160 countries. The merger could provide an extensive customer base. The combined support business could produce a stable stream of cash flow.

• The merger was expected to generate cost synergies of about US$2 billion in 2003, the first full year of operations. Fully realised annual cost savings were projected to reach US$2.5 billion by mid-2004.5 HP expected to gain these synergies through streamlining

3 Hewlett Packard S-4 report, January 14th 2002. 4 Palepu, K., and Barnett, J., �Hewlett-Packard-Compaq: The Merger Decision�, Harvard Business School Case, September 14th 2004. 5 Buckler, G. (2001), �HP looks for a new way�, The Journal of Business Strategy, 22(5): 22.

Page 4: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

4

the two companies� product lines; efficiencies in administration; procurement, manufacturing and marketing; as well as savings from improved direct distribution of products. With improved profitability over time, HP could increase investment in the imaging and printing business.

After the merger, the new HP was the second largest global technology provider, behind IBM, with about US$87 billion in revenues 6 and many opportunities to create competitive advantages with their resources. Exhibit 1A to 1D analyse each segment of resources that HP and Compaq possessed, and compare the combined resource mix with that of IBM. In the PC market, both HP and Compaq had lost market share as Dell pursued an aggressive pricing strategy with its direct model. The new HP was expected to surpass Dell for the number one position in worldwide desktop PCs and notebooks, but Dell was expected to remain the leader in the US. Both Compaq and HP had very strong capabilities in the retail channel, particularly in the US. Since IBM had exited the retail channel, the market had been a two-horse race, which could be consolidated into one.7 The projected elimination of 15,000 positions from the combined workforces could also help to achieve cost savings. In merging HP and Compaq, overlaps or supplementary resources existed mainly in the PC and industry-standard server product lines.8 These strong product lines would enable the new company to cross-sell into each of HP and Compaq�s extensive customer base. In services, HP and Compaq�s resource mix looked very similar as they both relied on lower-margin customer services, with relatively small exposure to outsourcing and consulting. It was expected that these supplementary resources required higher levels of integration (which could result in high costs of integration).9 In the other resource mix categories, resources were complementary, which could facilitate growth into different fields.

Did the Merger Pay Off?

Market reaction to the news of the merger between HP and Compaq was generally negative. A number of analysts expressed scepticism about the success of such a massive integration. Members of both the Hewlett and Packard families also opposed the merger. The most notable critic was Walter Hewlett, HP�s director and son of HP co-founder William Hewlett. Rather than merge, Walter Hewlett believed that HP ought to strengthen its profitable printing business and sell all its non-core businesses. Hewlett voted against the merger for the following reasons10 11: • Although the merger could increase HP�s market share to about 70% in the low-end PC

business, neither HP nor Compaq had a strong PC business model. Furthermore, neither company had successfully developed capabilities in direct distribution to match Dell. Analysts estimated that approximately 3% of HP�s sales and 20�30% of Compaq�s sales were direct. Compaq had made limited progress in the US but almost none in the rest of the world and analysts estimated it could take several years for Compaq to match Dell. In

6 This represents combined revenue for the four reported quarters before the merger. 7 Roy, P. and Roy, P. �The Hewlett Packard � Compaq Computers Merger: Insight from the Resource-Based View and the Dynamic Capabilities Perspective�, Journal of American Academy of Business, Cambridge, September 2004. 8 Roy, P. and Roy, P. �The Hewlett Packard � Compaq Computers Merger: Insight from the Resource-Based View and the Dynamic Capabilities Perspective�, Journal of American Academy of Business, Cambridge, September 2004. 9 Roy, P. and Roy, P. �The Hewlett Packard � Compaq Computers Merger: Insight from the Resource-Based View and the Dynamic Capabilities Perspective�, Journal of American Academy of Business, Cambridge, September 2004. 10 Hewlett-Packard Schedule 14-A Proxy Statement, December 27th 2001. 11 Palepu, K., and Barnett, J., �Hewlett-Packard-Compaq: The Merger Decision�, Harvard Business School Case, September 14th 2004.

Page 5: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

5

addition, the PC market was expected to grow at less than half the rate of the imaging and printing market in the next several years. This meant that the merger could dilute HP�s shareholders� interest in the profitable imaging and printing business and increase their exposure to an unprofitable PC business.

• History showed that no significant technology merger had ever met expectations and therefore the integration risk of the merger could be substantial. In addition, the management of both HP and Compaq had no experience with a merger of this magnitude. Exhibit 2A and 2B summarise, in chronological order, the cumulative expertise in integration gained by HP and Compaq. As shown in the exhibits, there were 39 total acquisitions (9 for Compaq and 30 for HP) that could possibly add to the experience and capability for handling the merger. However, very few acquisitions were close to the asset size of the HP-Compaq merger of US$25 billion. Most of HP�s acquisitions were small (small private companies or a certain part of larger companies) and therefore such experience might not add to the new company�s integration capability. Even though Compaq might have more relevant experience with large acquisitions, some of its acquisitions (eg, the integration with DEC and Tandem) did not go smoothly. It was doubtful whether the new company could leverage the integration experience gained by Compaq.

• Market reaction to the merger had been harsh, with both the shares of HP and Compaq trading down almost immediately after the announcement. On November 5th 2001, two months after the initial announcement, HP�s share price trailed the pre-announcement level by 27%. During the same period, an index of comparable companies increased by 9.9%. Walter Hewlett viewed the market�s reaction as a sign of significant shareholder dissatisfaction. He also believed that the plunge in stock price confirmed his expectation that the merger could destroy value for HP shareholders.

• On the announced terms of the merger, HP�s shareholders would own 64.4% of the combined company and HP would contribute 66.5% of the combined company�s net income in 2002. Based on First Call�s revised estimate12, HP would pay 82.6 times Compaq�s 2002 earnings, rather than the agreed upon multiple of 22.2. William Hewlett was concerned that HP�s shareholders were getting too little of the combined company relative to HP�s contribution to earnings.

• Even if the cost synergies were achieved, Walter Hewlett believed that merger-related revenue losses could offset or exceed them. The deal could also divert management�s attention and take resources away from HP�s profitable imaging and printing business. In this fast moving market, HP could not afford to wait for its other businesses to become profitable. Diversion of the management�s attention during the integration process and under-investment in the imaging and printing business could have a negative impact on HP�s leading position. The merged balance sheet could be worse than HP�s original balance sheet, resulting in lower credit rating, greater equity risk and a higher cost of capital.

• HP�s strategic position would not change significantly after the merger. The proposed merger would not substantially improve HP�s market position in mid-range and high-end servers or in high-end services. Compaq�s market share in servers was primarily in the low end of the market, where margins were low. In the mid-range and high-end server markets, the consolidated company�s market share could not match that of IBM. In terms of storage, Compaq�s storage business was unattractive, and it was also relatively small and did not justify taking the risks of the proposed merger.

• The merger might not strengthen HP�s consulting and outsourcing capabilities. HP management acknowledged that high-growth consulting and outsourcing capabilities

12 The First Call Quantitative Services group is a leading distributor of global earnings expectations and related data for the institutional and non-institutional markets around the world. The First Call Earnings Estimates database offers a comprehensive and consistent source of global financial data.

Page 6: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

6

were needed to compete with IBM. However, Compaq�s service business, like that of HP, was focused on the lower-growth, lower-margin hardware support and maintenance segments.

Despite opposition from Walter Hewlett and other senior management, HP�s shareholders narrowly approved the merger in March 2002. On May 3rd 2002, HP and Compaq officially merged, commencing operations as a consolidated company. The new HP served more than one billion customers across 162 countries and had about 142,000 employees. 13 Fiorina became the company�s chairperson and CEO, while Capellas became the new HP�s president and CEO. HP issued 1.1 billion shares to Compaq�s shareholders for the merger, which accounted for about 37% of the total shares of the company. Analysts argued that the deal had resulted in a bargain sale of 37% of the profitable printing business.

The New HP

The new HP�s mission was to invent technologies and services that drove business value, created social benefit and improved the lives of customers. After the merger with Compaq, HP refined its value chain to support the mission.

Research and Development (R&D) HP used to spend over US$3 billion annually in focused R&D to develop products that addressed trends in the marketplace (see Exhibit 3B for annual expenditure on R&D). To be a low-cost provider of systems and customer devices, HP leveraged its partners� technology and industry-standard components to reduce R&D costs. These partners included companies such as Intel, Microsoft, SAP, Oracle, BEA and others.

Procurement and Manufacturing With expenditure on production materials amounting to more than US$40 billion per year, HP wanted to make sure it could secure the lowest price, the highest quality and the best support from suppliers. Reducing the cost of procurement was important to HP because 70% of the company�s revenue was used to buy parts for production. 14 Any savings in procurement would add to HP�s bottom line. For this reason, HP recognised that purchasing was a highly important strategic function. HP adopted a hybrid procurement approach to satisfy the different supply requirements of all of its business units. 15 After the merger, HP centralised purchases of key commodities common to all its businesses, including microprocessors, memory ICs16 and disk drives, to leverage its position with suppliers. For commodities that were unique to business units, such as chassis and power cords, HP had a decentralised approach and allowed the business units to manage their own commodities. The Global Procurement Services (GPS) group served as an international procurement organisation and the buying arm of the company. 17 It was a self-funded service organisation and was paid for the provision of services by the business units. The group�s functions were to support both corporate purchasing and purchasing at the level of the business units. HP had a Purchasing Council that helped develop the purchasing strategies used throughout the group. HP also had core teams that worked with new product development, and commodity teams that managed the parts purchased for its many business units. To leverage its purchasing 13 Davidson, A. (2004), �Merging HP and Compaq�, Strategy & Leadership, 32(2): 50. 14 Carbone, J. (2004), �HP Sources Globally to Cut Costs�, Purchasing, 133(11): 30-34. 15 Carbone, J. (2004), �HP Sources Globally to Cut Costs�, Purchasing, 133(11): 30-34. 16 Memory ICs stand for Memory Integrated Circuits. 17 Carbone, J. (2004), �HP Sources Globally to Cut Costs�, Purchasing, 133(11): 30-34.

Page 7: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

7

power, HP established a Procurement Council comprising the purchasing directors of business units and headed by the vice-president of procurement. The council had monthly meetings, and besides leveraging HP�s purchasing power, the group focused on professional development, IT tool-sets and practices, and processes that could be used throughout the company. The core teams, comprising members of procurement, marketing and development were employed to help design supply strategies at HP. HP reduced cost from suppliers through its Absolute Best Cost (ABC) process. 18 ABC could identify the best price HP could get for a part. It determined the feature set the customer wanted to add to the part, the costs for the features, and the customers� willingness to pay for them. HP also conducted risk assessment on parts. It reviewed past records of cost, supply and demand and performed regression analysis on a part. It then used the projection data to reach a better agreement with suppliers. For instance, the supplier could have an agreement with HP to set a price ceiling in return for a volume commitment. This could achieve a win-win situation for both HP and its suppliers. HP also controlled cost through e-sourcing. It made electronic requests for quotations (RFQs) and private offers. 19 A private offer was a kind of electronic RFQ, but it was sent to an individual supplier. HP could conduct a half dozen at the same time for the same part, while keeping confidentiality. HP did reverse auctions with some suppliers but not all. The reason was that reverse auctions could affect the suppliers� motivation to share technology with the company. Reverse auctions worked well for commodities where there were low barriers to entry and it was easy to find and qualify new suppliers. HP controlled its strategic purchases of components used by its electronics manufacturing services (EMS) and original design manufacturing (ODM) providers. 20 Like most original equipment manufacturers (OEMs), HP outsourced much of its manufacturing to reduce cost, and used EMS and ODM providers in various ways to support its different business models. For instance, with its �no-touch� model for notebooks, HP�s ODMs designed, manufactured and shipped a product with HP�s name on it to HP�s customers. With its low-touch model for desktops, an EMS provider built the product, but HP configured the product. With high-value products, such as larger sophisticated servers, HP built the entire product except for the printed circuit boards. In each of these models, HP controlled sourcing for strategic components such as dynamic random access memory (DRAMs), drives and software. For such parts, HP corporate purchasing negotiated contracts with suppliers. The GPS group purchased the parts and sold them to the company�s manufacturing partners. HP thought it was important to mask the price of the parts from its EMS providers to keep the prices confidential. In the 1990s, HP used to outsource both manufacturing and purchasing. However, it realised in the mid-1990s that it had given too much control and purchasing responsibility to contract manufacturers. The main drawback was that HP lost visibility in its supply chain because it did not have as close a relationship with the suppliers. When the contract manufacturer got a price advantage for a part, the savings were not necessarily passed on to HP. To avoid losing windfall profits, HP decided to take back some control. The GPS group was responsible for identifying new sourcing opportunities. It comprised around 300 people who were distributed around the world, and a majority of them were based

18 Carbone, J. (2004), �HP Sources Globally to Cut Costs�, Purchasing, 133(11): 30-34. 19 Carbone, J. (2004), �HP Sources Globally to Cut Costs�, Purchasing, 133(11): 30-34. 20 Carbone, J. (2004), �HP Sources Globally to Cut Costs�, Purchasing, 133(11): 30-34.

Page 8: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

8

in Asia. 21 These employees were close to where HP�s outsourced manufacturing was located. The staff provided market intelligence and performed factory audits, precluding the need for HP�s staff in the US or Europe to commute to those regions. When new sourcing opportunities were identified, GPS transferred knowledge from the business units into the supply base so that HP and the potential new supplier could optimise a design. The GPS group also monitored inventory and provided information to HP�s business units. GPS had real-time visibility and could balance inventory. It also helped HP to manage price volatility. Through consolidation of purchases and price masking, HP had successfully reduced direct materials cost by about US$1.2 billion from 2001 to 2003.

Distribution Between 2001 and 2005, HP put tremendous effort into refining its distribution channels to maximise sales of computers, increase internal efficiency and enhance consumer loyalty. Like many other commodity manufacturers, HP had traditionally relied on indirect channels for distribution and had a wide variety of channel partners. The characteristics of each of the indirect channels are described below. • Retail stores: Retail stores included computer product superstores, consumer electronics

superstores and office product superstores. 22 Computer product superstores offered a broad range of PCs and PC-related products. In consumer electronics superstores, PCs and PC-related products were only one of many types of consumer electronics offered. Salespeople tended to encourage customers to buy more expensive products to earn more commission. The sales mix of office product superstores included printers, copiers, fax machines, telephones, office furniture and related supplies.

The above retailers normally took delivery of computers directly from manufacturers. In stores, retail displays and sales representatives played an important role in assisting customers to make selections among products.23 Large retailers typically carried only a few brands of computers due to limited retail space.

• Distributors: Some large distributors supplied a full range of computer hardware and software to resellers. The resellers were typically small owner-managed firms and they worked with business customers to design, buy, configure, install and support computer networks.24

• Integrated resellers: Some integrated resellers were big enough to purchase directly

from manufacturers. They operated distribution centres, fielded extensive sales and service organisations, and in some cases, managed the computer networks of customers.25

It normally took four to five weeks to pass a PC from manufacturers through the indirect channels to customers.26 In general, there was little variation in advertised retail prices across channels. This was because of the insertion of manufacturer�s advertised (MAP) clauses into the co-operative advertising contracts with the channel partners, which stipulated that the manufacturer would not reimburse the reseller for co-operative ads that involved a price below a specified level.

21 Carbone, J. (2004), �HP Sources Globally to Cut Costs�, Purchasing, 133(11): 30-34. 22 Prescott, E., and Kalyanam, K., �HP Consumer Products Business Organisation: Distributing Printers via the Internet�, Harvard Business School Case, March 22nd 2000. 23 Rivkin, J., and Porter, E., �Matching Dell�, Harvard Business School Case, June 6th 1999. 24 Rivkin, J., and Porter, E., �Matching Dell�, Harvard Business School Case, June 6th 1999. 25 Rivkin, J., and Porter, E., �Matching Dell�, Harvard Business School Case, June 6th 1999. 26 Fortuna, S., and Pappachan, P., �Compaq Reengineers the Channel: Will it be enough to slow Dell�s momentum?�, Deutsche Morgan Grenfell Technology Group, June 11th 1997.

Page 9: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

9

Channel partners performed a number of value-added functions for HP. These included breaking bulk orders and delivering products to retail stores; offering sales assistance, advertising, after-sales customer service and support; managing credit or collections from consumers; and conducting returns processing.27 HP�s teams helped manage logistics and inventory for its major accounts. The cost of all these support services to HP was 1.5% of sales, in addition to the cost of co-operative advertising funds. HP also provided price protection for inventory that became obsolete on the retail shelf and this resulted in a reimbursement of 1�2% of sales to the retailers. Inventory buy-backs, price protection and advertising support reduced the margins earned by the company. Before the mid-1990s, direct distribution was not popular among the computer makers. In a direct distribution process, manufacturers took orders directly from customers, either over the telephone and internet or by means of an internal sales force. Delivery was usually done by third-party shippers. In 1996, Dell�s direct distribution model took the computer industry by storm and disrupted the traditional route through which products were sold. When most computer makers supplied machines based on orders from retailers, distributors and resellers, Dell took orders directly from customers, especially corporate customers. It developed a user-friendly website (www.dell.com) that allowed customers more flexibility � they could obtain product information, configure a computer system, check pricing, place an order and track an order�s progress. Dell�s direct model eliminated many inefficiencies of the indirect distribution process. By building to order and arranging just-in-time delivery of parts from suppliers, Dell reduced inventory cost and eliminated obsolete components. As a result, the company only had about 13 days of inventory, versus 75 to 100 days in an ordinary indirect model. Dell�s production process, from order entry to shipping, took only about 36 hours. Doing away with middlemen, Dell retained more margin and could pass part of it on directly to customers. With its low-cost direct distribution strategy, Dell drove down computer prices, which resulted in reduced operating margins throughout the industry. Between 1994 and 1998, Dell�s profits increased from US$149 million to US$1.5 billion. During the same period, it grew twice as fast as its major rivals in the computer market and tripled its market share. The company could not have achieved such success had the trends toward standardisation on technology not taken place. At that time, falling prices in PC components, and standardisation on the Windows operating system and Intel processor technology facilitated mass production. Users became more knowledgeable about PC installation, which facilitated the migration toward direct distribution by the adoption of standard software products like Microsoft applications. 28 As a result of the technological and market changes, many PC users no longer required the technical know-how of the indirect channel during the buying process. Dell�s financial return and rapid growth caused HP and other competitors to replicate the process by building their own direct models. However, many of them met resistance and faced alienation from their channel partners. Some computer companies that failed in direct efforts had tried to re-embrace the indirect channels, but they found that the channels resented their disloyalty and their sales suffered. In October 1998, HP launched a modest effort to set up direct sales on the internet. HP Shopping Village, a web service previously providing refurbished HP computers to individuals, was expanded to allow consumers to buy new PCs directly from the company. Business customers could use a similar website to purchase HP PCs. Similar to that of IBM, HP�s website required business customers to complete purchases through resellers. Through the direct channel, HP got a continuous stream of real-time 27 Prescott, E., and Kalyanam, K., �HP Consumer Products Business Organisation: Distributing Printers via the Internet�, Harvard Business School Case, March 22nd 2000. 28 Su, W. �Can Anyone Disrupt Dell�s Direct Model?�, IDC Research, February 2004.

Page 10: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

10

information regarding the supply chain (including sales and inventory information), advertising response (banner ads and site referrals) and customer behaviour (page views, site path, shopping time of the day, day of the week, phone versus internet orders, shopping basket, etc.). After the merger, the new HP leveraged Compaq�s progress in developing a direct sales channel and gradually increased the amount of business it did directly with customers. In February 2005, analysts estimated that about 15�20% of HP�s sales volume flowed through the Dell-like direct model. 29 Like other computer makers, HP used a variety of direct distribution channels. These included: • Extranet: This involved an electronic transaction that was completed through a

controlled-access (private) website designed to address the requirements of a specific customer or organisation. 30 To assess their website�s ease of use, computer companies could measure the ratio of internet-assisted to internet-unassisted orders; the lower the ratio, the easier the site was to use. There could be value in having customers call for help with an order, as service representatives could take the opportunity to up-sell.31

• B2Bi32: This channel involved the use of internet protocol standards (e.g. XML) to send

or receive data during the buying process. The transaction was completed by a programme that was integrated directly into a customer�s procurement and/or ERP33 system. 34

• EDI: This channel involved the use of non-internet protocol standards to electronically

send or receive data during the buying process (eg, flat file, FTP). 35 The transaction was completed by a programme that was integrated directly into a customer�s procurement system. Many large companies had been using EDI and were very comfortable with its capabilities. Rather than replacing it with newer technologies, some large companies had chosen to extend their existing EDI networks� capabilities by using internet technologies to connect with the IT systems of smaller suppliers.36

The new HP managed to increase sales through the direct model without alienating its partners in the indirect sales channel. This was because it often redirected sales leads to the indirect channels if that were the more profitable way to fulfil an order.37 It had mechanisms in place to determine the more profitable route, depending on the complexity and configuration of the order. The customer might be unaware of who fulfilled the order, or the customer might be directed to a channel partner for technical advice.38 The new HP�s online 29 McCullough, A., �HPQ: Going to the Full Court Printing Press�, Credit Suisse First Boston Equity Research, February 17th 2005. 30 Rosenthai, R., �Dell, HP and IBMs Sales Channels for PCs and x86 Servers: Current Market Share by Sales Channel and Future Market Growth�, IDC Research, October 2003. 31 Rosenthai, R., �Dell, HP and IBMs Sales Channels for PCs and x86 Servers: Current Market Share by Sales Channel and Future Market Growth�, IDC Research, October 2003. 32 B2Bi stands for business to business integration. 33 ERP (enterprise resource planning) is an industry term for the broad set of activities supported by multi-module application software that helps a manufacturer or other business manage the important parts of its business, including product planning, parts purchasing, maintaining inventories, interacting with suppliers, providing customer service, and tracking orders. ERP can also include application modules for the finance and human resources aspects of a business. 34 Rosenthai, R., �Dell, HP and IBMs Sales Channels for PCs and x86 Servers: Current Market Share by Sales Channel and Future Market Growth�, IDC Research, October 2003. 35 Rosenthai, R., �Dell, HP and IBMs Sales Channels for PCs and x86 Servers: Current Market Share by Sales Channel and Future Market Growth�, IDC Research, October 2003. 36 Rosenthai, R., �Dell, HP and IBMs Sales Channels for PCs and x86 Servers: Current Market Share by Sales Channel and Future Market Growth�, IDC Research, October 2003. 37 Waxman, J., and Rosenthal, R., �HP and IBM�s Evolving Strategies for Direct and Indirect Channels�, IDC Research, June 2004. 38 Su, W., and Rosenthal, R., �The Evolution of HP.com and ibm.com: More than Just Bricks to Clicks�, IDC Research, June 2004.

Page 11: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

11

distribution and delivery system offered multiple ways for customers to access its products. Reseller agents could use the system on behalf of their small and medium sized business (SMBs) customers; large customers used the system for direct and indirect fulfilment through resellers; and HP�s call centre staff used the solutions as they interacted with customers. HP relied on extranets to handle the bulk of its transactions and manage its account with SMBs. There had been a strong growth of extranets for such accounts, thanks to a new system that could spot a repeat customer to HP.com. Consequently, an HP representative could ask whether the customer would like to build an extranet, and the system then allowed the representative to build it in a simple process. As of 2004, HP had about 40,000 active HP.com business to business sites worldwide. HP also had call centre staff who could cross-sell and up-sell existing customers. IDC 39 estimated that the typical percentage of a customer�s business that went through an extranet was 55%. Depending more on customer profile than size, buyers might be steered towards tele-sales, with the goal of up-selling using HP�s knowledge or ability to track trends. HP�s call centre had staff that routed and handled incoming orders without sales quota, as well as inside sales staff for some channel partners and end users, who did have a quota. The inside sales staff could take advantage of HP�s relationships with reseller partners and other service providers to sell supplementary services that HP did not offer. If a customer wanted to set up a storage area network, for example, then HP could sell the necessary hardware and bring in a channel partner to provide the software and services. Call centre staff were important not just for small business customers who wanted guidance about what to buy, but also for local buyers at large and global companies. Such buyers might not know what products they needed to have because they did not know what their home office had negotiated with HP or what their company�s policy was. For HP�s larger customers, integration with the company�s procurement system, or ERP software, through HP.com had become a necessity. Such companies wanted and needed control over what was bought and how. HP usually absorbed the cost of integrating with a customer�s platform, especially if the customer was using a standard platform without much customisation. HP had also been providing large customers richer product information, including product usage notes and sales team information. HP had begun providing content for specific vertical industries and job functions. It had revamped its Large Enterprise Business site on HP.com to make it easier for HP�s enterprise customers to find relevant information, including a library with white papers and case studies as well as an enhanced online chat tool. In addition, HP�s information on solutions and services drove offline professional service sales. HP also offered additional online tools to make it easier to buy from their channel partners. For business customers, these included locator services to find the right reseller. Customers could identify local retailers based on their zip code and check the price and availability of specific products. HP had made considerable progress in extending extranets to SMBs. Blurring the line between tele-sales and extranets had apparently enabled HP to increase sales while simultaneously reducing administrative and product support costs. HP could gain by monitoring how customers used its sites. Its advantage was a wider range of customer products and it could therefore monitor a more diverse set of internet users. HP collected all the opt-in data it could from both individual and corporate users of its site. As a result, it had tens of millions of rich customer profiles that it drew on for sales and marketing purposes as well as site design.

39 IDC is the premier global provider of market intelligence, advisory services, and events for the information technology and telecommunications industries. IDC helps IT professionals, business executives, and the investment community make fact-based decisions on technology purchases and business strategy. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company.

Page 12: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

12

As of early 2005, Dell was still the leading player in direct sales, followed by the new HP and then IBM. Dell used public platforms for most types of clients, with large clients using extranets and the very largest using B2Bi. HP maintained its leadership in private e-commerce (mostly EDI and also B2Bi). However, EDI was a mature technology, and the volume of goods and services ordered via EDI was unlikely to grow by more than a small percentage each year. The best way for HP to make the most of its leadership in EDI was to invest in such technologies to keep up with their customers� changing needs and make the transition to B2Bi. As HP upgraded its channels with new technologies, it had to balance the abilities, needs and concerns of the companies that each channel serviced. Dell had no worries in this regard since its resellers and distributors typically bought through the same channels that end-user clients did (eg, Premier Pages). More importantly, Dell generated a much smaller percentage of revenue through resellers and distributors than HP did, so Dell�s relations with them were not as vital. However, HP�s resellers and distributors would not accept new enhancements to e-commerce if they thought those enhancements would replace them. On the other hand, consumers who wished to make their own purchase online would feel ignored if e-commerce tools were never upgraded because HP was focused on its channel partners� needs. The risk of upgrading the channels was high for HP, but so was the payoff. Provided that the new enhancement made it faster, easier and less expensive for channel partners to do business, they could become more loyal to their manufacturer, and more productive and profitable to HP. In early 2005, convergence was driving traffic to the indirect channel because of the increasing complexity associated with converging technologies. HP appeared to be well-equipped to tackle the opportunities in this area by having a hybrid strategy that combined direct distribution and channel partners. Just as Dell had used the direct model as a strategy to gain an edge in the PC market, HP could leverage the indirect channel to make gains against computer companies that had not caught on to the convergence trend.

The New HP�s Performance

From 2002 to 2004 In 2004, the new HP had 150,000 employees and operations in 178 countries. The company competed in nearly all major IT product market, with operations organised into seven business segments: • The Imaging and Printing Group (IPG): The group was responsible for the company�s

printer, imaging and supplies business; projectors; and digital cameras • The Personal Systems Group (PSG): The group was responsible for the company�s

desktop and notebook PCs, handheld products, personal storage appliances and workstations

• Enterprise Storage and Servers (ESS) • HP Services (HPS) • HP Financial Services (HPFS) • Software • Corporate Investments. Despite efforts in refining the value chain, the new HP was unable to deliver promising results (see Exhibits 3 to 6 for HP, Dell and IBM�s financial performance). In the PC industry, price competition had become more aggressive while differences in product performance had decreased. Apparently, HP was unable to lower its overheads enough to compete efficiently with Dell. In the corporate computer market, HP was squeezed between Dell at the low end of the market and IBM at the high end. In the printing industry, HP�s worldwide market share

Page 13: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

13

had taken a hit (see Exhibit 7). The company�s US inkjet printer market share fell to 48% at the end of 2004 from 57.4% in the preceding year, and its US laser printer market share declined to 38% from 45.7% in the same period. In corporate data-storage systems, HP lost market share to focused rivals such as EMC. In technology consulting and services, HP lagged behind IBM, Accenture Ltd. and Electronic Data Systems Corporation (EDS). In consumer electronics, HP encountered strong competitors including Sony and Kodak. By 2004, it was clear to the market that HP�s merger with Compaq had fallen short of expectations. As part of the proxy fight in 2002, HP committed to corporate operating profit margins of 8% to 10%, and margins of 3% in its PSG division. In the fiscal year ending October 31st 2004, the company posted operating profit margins of only 6.3% and the PSG division reported margins of only 1.2%. Following the profit shortfall, some directors at HP were chagrined that Fiorina had not moved quickly to strengthen the company�s position against major competitors. Although Fiorina fired three top executives for the miss, the board�s doubts about its CEO grew. By November 2004, HP�s directors began holding periodic conference calls in Fiorina�s absence to discuss her performance.

2005 In 2005, HP reported mixed results in the January quarter. There was solid revenue growth in the PSG division, which was offset by slower than expected growth in the core printing business. Revenues from the PSG division were up by 11% from the previous year, which slightly outpaced industry growth of 11%.40 This was the most profitable quarter for the PSG since 2000. Solid cost control, price protection from key component vendors and a less aggressive pricing strategy all contributed to the rise in operating margins. However, HP continued to lag behind Dell in both growth and profitability. Drilling into products, HP�s notebook revenue increased by 9% from the previous year (versus Dell�s 17%) and desktop revenue rose by 8% (versus Dell�s 10%). 41 HP suffered a persistent cost disadvantage compared with Dell. There were concerns that the more aggressive pricing environment could limit HP�s future profitability. Given that HP had relatively greater exposure to the consumer market, strengthening commercial demand and slowing consumer demand might continue to favour Dell. Accordingly, some analysts believed that HP�s operating margins in the January quarter represented a high watermark for the company. Although the IPG group remained the crown jewel in HP�s business, it was facing a new array of challenges. Competitors, including Epson, Canon Inc. and Lexmark International Inc. (Lexmark), had expanded their product categories, collaborated with partners and were pushing new sales strategies. Dell was specifically targeting HP with its aggressive pricing strategy. Although the company only entered the market in early 2003, it had quickly picked up market share in the low end of the business. Dell claimed that its inkjet printers cost 10�15% less than HP�s.42 It also reported that the total cost of its laser printer, toner and services was 30�40% less expensive that that of HP�s. 43 While Dell�s share was still a fraction of HP�s market share, it presented a growing challenge for HP. A growing base of Dell printers meant that Dell could eat into HP�s lucrative business of selling ink refills to existing customers, thereby making it more difficult for HP to subsidise its computer business. As HP stepped up efforts to diversify into other printing-related products such as copiers, it faced battles with established companies including Xerox Corp. and Ricoh Corp.44

40 McCullough, A., �HPQ: Going to the Full Court Printing Press�, Credit Suisse First Boston Equity Research, February 17th 2005. 41 McCullough, A., �HPQ: Going to the Full Court Printing Press�, Credit Suisse First Boston Equity Research, February 17th 2005. 42 Tam, P. W., �HP�s Printer Business Takes a Hit as Rivals Muscle In�, The Wall Street Journal, March 10th 2005. 43 Tam, P. W., �HP�s Printer Business Takes a Hit as Rivals Muscle In�, The Wall Street Journal, March 10th 2005. 44 Tam, P. W., �HP�s Printer Business Takes a Hit as Rivals Muscle In�, The Wall Street Journal, March 10th 2005.

Page 14: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

14

During the quarter ending January 31st 2005, the IPG group began to show the effects of increased pressure as it lost share in the low-end consumer inkjet and photo printer markets, primarily to Lexmark and Canon (and also to Epson and Dell). Although revenue increased by 2.7% to US$6.07 billion, operating margins declined from 16.6% in the preceding quarter to 15.4%.45 The trends were worrisome because HP�s printing business supplied roughly a third of total revenue and three-quarters of its overall profit. While HP could have more leeway to price aggressively than its competitors due to its high operating margins, there were concerns that an increasingly aggressive competitive environment could lead to further pressure on operating margins.

The Challenges Ahead

With slower growth rates and reduced profit margins, Gartner Inc. 46 forecasted that the computer industry would face consolidation, with three of the top 10 manufacturers exiting the market by 2007.47 Although the market had registered double-digit shipment growth from 2003 to 2005, tougher times were expected. PC unit growth was forecasted to average 5.7% annually from 2006 to 2008, which was half the average for the years from 2003 to 2005 � 11.3%. It was projected that PC revenue growth would average 2% annually from 2006 to 2008, which was less than half the 4.7% average for the years from 2003 to 2005. Emerging markets would account for more than 60% of the PC market growth from 2006 to 2008. With PC replacements still in full swing, 2005 could still be a reasonably strong year for PC companies. Worldwide PC shipments were projected to total 195.4 million units in 2005, a 9.7% increase from 2004, according to a forecast by IDC (see Exhibit 8). However, the end of the replacement cycle was likely to strain viability for even the largest PC companies in 2006 and beyond. Meanwhile, mobile PCs continued to attract more new users as mobile prices fell and wireless became more pervasive. A growing number of users were replacing their old desktops with more portable mobiles, and this was one of several factors helping to boost mobile PC growth. Gartner forecasted that worldwide mobile PC shipments would grow 26.5% in 2005, while desk-based units would only grow 4.6%. In May 2005, mobile PCs made up just below 30% of all PC shipments. 48 As computer companies struggled to maintain growth in a competitive market environment characterised by weak replacement activity and the increasing significance of emerging markets, price competition would likely intensify. Analysts expected that computer companies could be forced to continue maximising supply chain efficiencies and to differentiate on price, service levels, features and other characteristics. Computer companies that had yet to do so might attempt to diversify into related markets pursuits, such as consumer electronics, to bolster margins. Others might attempt mergers with rivals to improve margins through economies of scale. By the end of the first quarter of 2005, the top ten worldwide PC companies, by unit shipment, were Dell, HP, IBM, Fujitsu/Fujitsu Siemens, Toshiba, Acer, NEC, Legend, Gateway and Apple Computer. Of the top 10 worldwide PC companies, only Dell had been consistently profitable from 2002 to early 2005. Exhibits 9A to 9D present the ranking and market share of the top five companies in different markets. Dell remained the top computer company worldwide, expanding its lead with worldwide growth of over 13% from the previous year.

45 Shope, B., Borbolla, E., and Moskowitz, M., �Hewlett-Packard�, JP Morgan US Equity Research, February 17th 2005. 46 Gartner Inc. is the world's leading provider of research and analysis about the global information technology industry. 47 �Gartner Says Three of Top 10 PC Vendors Will Exit the Market by 2007�, Gartner, Inc. Press Release, November 29th 2004. 48 Gartner Press Release, May 26th 2005, [www document] http://www.gartner.com/press_releases/asset_127812_11.html (accessed July 23rd 2005).

Page 15: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

15

HP also had a solid quarter, growing total worldwide shipments in line with the market. The company saw a small increase in share internationally and maintained leadership in Europe, Middle East and Africa (EMEA). Both HP and Dell grew at a much faster pace in their non-domestic markets than in the US. IBM had a relatively slow quarter with growth of 2%, trailing double-digit growth in prior quarters. Strong notebook growth pushed portable PCs to nearly 48% of IBM�s client PC shipment mix. Analysts expected that the PC divisions of the top technology companies were vulnerable to being spun off if their drag on margins and profitability were deemed too great by its parent. In fact, IBM had disposed of its PC division to Lenovo Group Limited, the largest PC maker in China, in a deal that was valued at approximately US$1.75 billion. The deal was completed in May 2005. IBM would take a minority stake in Lenovo. Before the deal, IBM had been edging itself out of the commodity hardware business by selling its PC factories in North Carolina to Sanmina-SCI and its hard drive unit to Hitachi. Meanwhile, a number of analysts cast doubt on the durability of HP�s business model. Some analysts said that splitting the company into two as either printers and PCs or consumerss and enterprises was vital to improve long-term profits. Steven Milunovich of Merrill Lynch believed HP�s parts would be more valuable than the whole company if they were split up. Milunovich assigned competitor Lexmark�s price/earnings multiple of 17 to HP�s printer business, which was expected to earn US$1.04 per share in 2006, and determined a prospective stock price of US$18. Milunovich valued HP�s computer business at US$2 per share, or 0.2 times sales � the same price-to-sales ratio at which IBM sold its PC business to Lenovo. HP�s server, software, storage and maintenance businesses were assigned a value of US$6 based on industry multiples. Finally, Milunovich thought HP�s outsourcing and consulting operation could be worth US$1 per share. By adding in US$2 of net cash, which was expected to climb to US$3 in 2006, HP could be worth US$30 per share if the parts were valued independently. Given the prevailing stock price at the time, it appeared that the market only recognised the value of its printer business and gave minimal credit to all the other businesses [see Exhibits 10A and 10B for HP�s stock price performance relative to Dell and IBM]. Meanwhile, other analysts believed that HP should remain a single entity. Christopher Grisanti, a principal at Spears Grisanti & Brown49, said keeping all businesses under one roof could facilitate cross-selling. However, he also thought the stock of HP was undervalued.

The Future Strategy

On February 9th 2005, HP stunned the world by announcing Fiorina�s dismissal. On March 29th 2005, it appointed Mark Hurd as the new CEO and president. Hurd, aged 48, was formerly president and CEO of NCR Corp. In a meeting with journalists, Hurd said HP had a fundamentally sound balance sheet and a strong presence in the large enterprise, small and medium size businesses, and consumer markets. However, he also conceded the company was not performing to its potential. While some analysts believed it was time to spin off the PC or printer divisions, HP�s board still believed that the various businesses were better off under one roof. In response to a question about spinning off the printer business, Hurd said:

49 Spears Grisanti & Brown LLC is an investment counseling and management firm.

Page 16: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

16

I would prefer to analyse the situation and see if there are other ways that we can...get this company to its optimal operational performance.50

The stock market cast an early vote of confidence on Hurd�s leadership, sending HP�s shares up by approximately 10% following his appointment. Some analysts believed that HP might undertake some sort of structural change to unlock incremental shareholder value. Given that HP had already taken more than US$3 billion in costs out of its infrastructure since 2001, a cost reduction strategy alone might not bring significant benefits to the company in the future. Meanwhile, Hurd inherited a huge group of assets and had to figure out what to do with a struggling computer business that was marginally profitable. In January 2005, Fiorina had made the decision to combine the IPG and PSG groups in an attempt to maximise efficiency, lower the time taken to reach the market and intensify competitive focus. In June 2005, Hurd reversed Fiorina�s decision and announced plans to split the combined IPSG operations and manage them as �separate, highly focused organisations�. The move was among the first significant changes made by Hurd since his appointment. By separating PCs from the printer business, HP had taken a small step towards disaggregation. For the second quarter of 2005, HP�s PC shipment growth rate exceeded the worldwide average as the company performed well in the EMEA and Asia-Pacific regions. HP�s introduction of a new mobile PC range completed its mobile PC portfolio. It allowed HP to compete effectively in the mobile PC market with a growth of over 50%. 51 In July 2005, Hurd unveiled another program designed to simplify HP�s structure, reduce costs and place greater focus on its customers. To improve costs, HP planned to reduce its workforce over the next six quarters by 14,500 employees, or about 10% of its regular full-time staff. Beginning in fiscal 2007, HP expected approximate ongoing annual savings of US$1.9 billion, composed of US$1.6 billion in labour costs and US$300 million in benefits savings. In fiscal 2006, HP expected savings of between US$900 million and US$1.05 billion. Approximately half the savings would be used to offset market forces or reinvested in the business to strengthen HP�s competitiveness. The remainder was expected to flow through to operating profit. To simplify the company and bring its sales force closer to customers, HP planned to dissolve the Customer Solutions Group (CSG) � a stand-alone business group responsible for sales to enterprise, small and medium size businesses and public-sector customers. It would merge the sales function and related accountability directly into three individual business units: Technology Solutions Group (TSG), Imaging and Printing Group (IPG) and Personal Systems Group (PSG). This could give each business unit greater financial and operational control of its business. The market�s question was whether such restructuring moves could rebuild HP�s competitiveness. Some analysts said HP�s restructuring plan did not seem to signal a strategic shift in the company�s thinking of its computer business. They still had doubts about whether Hurd could manage HP�s assets more successfully than his predecessor, and bring benefits to the company and its shareholders.

50 Burrows, P. and Elgin, B., �Memo to: Mark Hurd�, Business Week, New York: April 11th, 2005, no. 3928, p. 38. 51 Gartner Press Release, July 18th 2005 [www document] http://www.gartner.com/press_releases/asset_132413_11.html (accessed July 23rd 2005).

Page 17: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

17

EXHIBIT 1A: HP�S RESOURCE MIX (2001)

EXHIBIT 1B: COMPAQ�S RESOURCE MIX (2001)

Source: Wagonfeld, J., Rubenstein, J. and Block, D., 2001 �The Hewlett-Packard/Compaq Merger: Piecing the Puzzle Together,� Bank of America Report.

HP

43%

22%

19%

16%

PrintingAccessIT infrastructureServices

Compaq

0%

48%

33%

19%

PrintingAccessIT infrastructureServices

Page 18: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

18

EXHIBIT 1C: THE NEW HP�S RESOURCE MIX (2001)

EXHIBIT 1D: IBM�S RESOURCE MIX (2001)

Source: Wagonfeld, J., Rubenstein, J. and Block, D., 2001 �The Hewlett-Packard/Compaq Merger: Piecing the Puzzle Together,� Bank of America Report.

The new HP

22%

36%

25%

17%

PrintingAccessIT infrastructureServices

IBM

21%

36%

26%

17%

PrintingAccessIT infrastructureServices

Page 19: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

19

EXHIBIT 2A: COMPAQ�S ACQUISITION EXPERIENCE

Target Asset

Size (US$) Resource

Relatedness Date

Announced Date

Completed Silicon Graphics

Inc. $135m Supplementary Apr 3rd 1991 May 24th 1991

Thomas-Conrad Corp.

N/A Complementary Oct 18th 1995 Oct 18th 1995

NetWorth Inc. $342m Complementary Nov 6th 1995 Jan 8th 1996 Microcom Inc. $280m Complementary Apr 10th 1997 June 26th 1997

Tandem Computers Inc.

$3b Supplementary June 23rd 1997 Aug 29th 1997

Digital Equipment Corp.

$9.6b Supplementary Jan 26th 1998 June 11th 1998

Shopping.com $220m Complementary Jan 11th 1999 Mar 8th 1999 Zip2 Corp. >$220m Complementary Feb 16th 1999 Apr 5th 1999

InaCom Corp-Product

Customisation & Logistics Ops

$370m Complementary Jan 4th 2000 Feb 16th 2000

Source: Roy, P. and Roy, P. �The Hewlett Packard � Compaq Computers Merger: Insight from the Resource-Based View and the Dynamic Capabilities Perspective�, Journal of American Academy of Business, Cambridge, September 2004.

Page 20: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

20

EXHIBIT 2B: HP�S ACQUISITION EXPERIENCE

Target Asset

Size (US$) Resource

Relatedness Date

Announced Date

Completed Eon Systems Inc. N/A Complementary Dec 1st 1989 Dec 1st 1989 Apollo Computer

Inc. $550m Supplementary Apr 11th 1989 May 19th 1989

Optotech Inc. � Certain Assets

N/A Supplementary Nov 29th 1989 Nov 29th 1989

Applied Optoelectronic

Technology Corp.

>$10m Complementary Dec 19th 1990 Jan 28th 1991

Avantek Inc. $90.7m Supplementary Aug 7th 1991 Nov 4th 1991 Texas Instruments Inc. � Computer

and Services Business

N/A Supplementary June 23rd 1992 Oct 2nd 1992

Colorado Memory Systems Inc.

N/A Complementary Sept 21st 1992 Oct 23rd 1992

Four Pi Systems Group

N/A Complementary Mar 22nd 1993 Apr 1st 1993

EEsof Inc. N/A Complementary Aug 24th 1993 Oct 11th 1993 CaLan Inc. N/A Complementary June 6th 1994 June 15th 1995

Veratest Inc. N/A Complementary Oct 27th 1994 Oct 31st 1994 Convex Computer

Corp. $250m Supplementary Sept 21st 1995 Dec 20th 1995

ElseWare Corp. N/A Complementary Dec 21st 1995 Dec 21st 1995 SecureWare Inc. �

Internet System Security

Technology

N/A Complementary Feb 22nd 1996 Feb 22nd 1996

Division Inc. $6m Complementary June 20th 1996 June 20th 1996 DP-TEK

Development Co. � Certain Assets

$30m Complementary July 7th 1996 July 7th 1996

Trellis Software & Controls Inc.

N/A Complementary Aug 5th 1996 Aug 26th 1996

VeriFone Inc. $1.2b Complementary Apr 23rd 1997 June 25th 1997 ForeFront Group

Inc � Internet Printing

Technology

$2.3b Complementary Sept 23rd 1997 Sept 23rd 1997

Nuview Inc. � Nuview Managex

N/A Supplementary Nov 11th 1997 Nov 11th 1997

Heartstream Inc. $145m Supplementary Dec 29th 1997 Mar 17th 1998 Scope

Communications Inc.

N/A Complementary Oct 20th 1998 Oct 20th 1998

Open Skies Inc. Resold in 2000 Complementary Oct 22nd 1998 Oct 22nd 1998 Telegra Corp. N/A Complementary Apr 9th 1999 May 15th 1999

Page 21: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

21

DAZEL Corp. N/A Complementary May 5th 1999 June 7th 1999 Security Force Software Inc.

N/A Complementary Aug 4th 1999 Aug 4th 1999

Qosnetics N/A Complementary Sept 20th 1999 Sept 20th 1999 Bluestone Software

Inc. $480m Complementary Oct 24th 2000 Jan 18th 2001

Storageapps Inc. $350m Complementary July 25th 2001 Sept 24th 2001 Trinagy Inc. N/A Complementary Aug 9th 2001 Aug 28th 2001

Source: Roy, P. and Roy, P. �The Hewlett Packard � Compaq Computers Merger: Insight from the Resource-Based View and the Dynamic Capabilities Perspective�, Journal of American Academy of Business, Cambridge, September 2004.

Page 22: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

22

EXHIBIT 3A: HP�S BALANCE SHEET Figures in US$�000 PERIOD ENDING Jan 31st 2005 Oct 31st 2004 Oct 31st 2003 Oct 31st 2002Assets

Cash And Cash Equivalents 13,302,000 12,663,000 14,188,000 11,192,000

Short Term Investments 298,000 311,000 403,000 237,000

Net Receivables 11,475,000 21,754,000 19,030,000 11,909,000Inventory 7,120,000 7,071,000 6,065,000 5,797,000Other Current Assets 9,520,000 1,102,000 1,310,000 6,940,000Total Current Assets 41,715,000 42,901,000 40,996,000 36,075,000

Long-Term Investments 6,949,000 2,168,000 2,698,000 7,760,000Property Plant and Equipment 6,690,000 6,649,000 6,482,000 6,924,000Goodwill 15,850,000 15,828,000 14,894,000 15,089,000Intangible Assets 3,939,000 4,103,000 4,356,000 4,862,000Accumulated Amortisation 0 0 0 0Other Assets 0 2,378,000 2,423,000 0Deferred Long-Term Asset Charges 0 2,111,000 2,859,000 0

Total Assets 75,143,000 76,138,000 74,708,000 70,710,000

Liabilities Current Liabilities Accounts Payable 19,935,000 20,911,000 21,893,000 17,245,000Short/Current Long-Term Debt 2,803,000 2,511,000 1,080,000 1,793,000

Other Current Liabilities 4,835,000 5,166,000 3,657,000 5,272,000

Total Current Liabilities 27,573,000 28,588,000 26,630,000 24,310,000

Long-Term Debt 4,408,000 4,623,000 6,494,000 6,035,000Other Liabilities 5,436,000 3,973,000 3,838,000 4,103,000Deferred Long-Term Liability Charges 0 1,390,000 0 0

Minority Interest 0 0 0 0Negative Goodwill 0 0 0 0Total Liabilities 37,417,000 38,574,000 36,962,000 34,448,000

Shareholders� Equity Common Stock 29,000 29,000 30,000 30,000Retained Earnings 16,011,000 15,649,000 13,332,000 11,973,000Treasury Stock 0 0 0 0Capital Surplus 21,849,000 22,129,000 24,587,000 24,660,000Other Shareholder Equity -163,000 -243,000 -203,000 -401,000Total Shareholder Equity 37,726,000 37,564,000 37,746,000 36,262,000

Net Tangible Assets 17,937,000 17,633,000 18,496,000 16,311,000

Source: HP Annual Reports and Yahoo! Finance.

Page 23: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

23

EXHIBIT 3B: HP�S INCOME STATEMENT Figures in US$�000 PERIOD ENDING Jan 31st 2005* Oct 31st 2004 Oct 31st 2003 Oct 31st 2002Total Revenue 21,454,000 79,905,000 73,061,000 56,588,000Cost of Revenue 16,537,000 60,150,000 53,648,000 41,579,000Gross Profit 4,917,000 19,755,000 19,413,000 15,009,000Operating Expenses Research Development 878,000 3,506,000 3,652,000 3,312,000Selling General and Administrative 2,704,000 11,024,000 11,012,000 9,033,000

Non-Recurring 3,000 205,000 1,081,000 3,274,000Others 167,000 603,000 563,000 402,000Total Operating Expenses 3,752,000 15,338,000 16,308,000 16,021,000

Operating Income or Loss 1,165,000 4,417,000 3,105,000 -1,012,000Income from Continuing Operations Total Other Income/Expenses Net -115,000 -31,000 -8,000 -40,000

Earnings Before Interest And Taxes 1,050,000 4,386,000 3,097,000 -1,052,000

Interest Expense 0 190,000 209,000 0Income Before Tax 1,050,000 4,196,000 2,888,000 -1,052,000Income Tax Expense 107,000 699,000 349,000 -129,000Minority Interest 0 0 0 0Net Income From Continuing Ops 943,000 3,497,000 2,539,000 -923,000

Non-Recurring Events Discontinued Operations 0 0 0 0

Extraordinary Items 0 0 0 20,000Effect Of Accounting Changes 0 0 0 0

Other Items 0 0 0 0Net Income 943,000 3,497,000 2,539,000 -903,000Preferred Stock And Other Adjustments

0 0 0 0

Net Income Applicable To Common Shares

943,000 3,497,000 2,539,000 -903,000

* quarter data

Source: HP Annual Reports and Yahoo! Finance.

Page 24: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

24

EXHIBIT 3C: HP EARNINGS VARIANCE

Figures in US$ million Segment Revenues Q403 Q104 Q204 Q304 Q404 Q105 ESS 3,854 3,716 3,978 3,352 4,108 4,047 Y/Y Growth 1.1% 4.6% 8.0% -4.7% 6.6% 8.9% Software 219 200 222 223 273 240 Y/Y Growth 20.3% 10.4% 24.0% 17.4% 24.7% 19.8% HP Services 3,231 3,161 3,492 3,466 3,659 3,815 Y/Y Growth 5.4% 6.8% 15.2% 12.4% 13.2% 20.7% Imaging and Printing 6,247 5,910 6,098 5,648 6,543 6,067 Y/Y Growth 11.1% 5.4% 10.4% 7.8% 4.7% 2.7% Personal Systems Group 5,996 6,188 5,991 5,904 6,539 6,873 Y/Y Growth 19.1% 20.3% 16.9% 18.9% 9.1% 11.1% Financing 461 441 473 492 507 555 Y/Y Growth -14.1% -14.7% -5.5% 11.3% 9.9% 25.9%

Operating Margins ESS 131 154 120 (208) 107 71 Op margins % 3.4% 4.1% 3.0% -6.2% 2.6% 1.8% Software (22) (46) (49) (45) (5) (40) Op margins % -10% -23% -22% -20% -2% -17% HP Services 393 258 329 309 367 281 Op margins % 12.2% 8.2% 9.4% 8.9% 10.0% 7.4% Imaging and Printing 1,006 968 953 837 1,089 932 Op margins % 16.1% 16.4% 15.6% 14.8% 16.6% 15.4% Personal Systems Group 21 62 45 25 78 147 Op margins % 0.4% 1.0% 0.8% 0.4% 1.2% 2.1% Financing 26 29 35 42 19 45 Op margins % 5.6% 6.6% 7.4% 8.5% 3.7% 8.1%

Revenue by geography US Y/Y Growth 4.7% 0.1% 0.8% 1.4% -0.3% 4.0% Europe Y/Y Growth 14.2% 16.7% 16.5% 13.7% 11.2% 12.1% Asia-Pacific (ex. Japan) Y/Y Growth 16.5% 8.9% 21.7% N/A N/A N/A Japan Y/Y Growth 4.7% 4.0% 21.3% N/A N/A N/A Total Asia-Pacific Y/Y Growth 13.3% 7.6% 21.6% 11.3% 12.6% 15.0% Rest of America Y/Y Growth 14.7% 23.3% 29.2% 23.4% 26.7% 17.9%

Source: Morgan Stanley Equity Research, February 16th 2005.

Page 25: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

25

EXHIBIT 3D: HP NET REVENUES � COMPUTERS

Figures in US$ million 2001 2002 2003 2004 Jan 05* Commercial desktops 10,409 8,582 7,570 8,255 2,091 Consumer desktops 7,046 5,205 4,506 5,282 1,711 Commercial notebooks 4,196 3,532 4,004 5,103 1,164 Consumer notebooks 2,386 2,729 3,319 4,027 1,174 Workstations 1,286 953 925 1,020 285

* quarter data Source: Morgan Stanley Equity Research, July 11th 2005.

Page 26: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

26

EXHIBIT 4A: DELL�S ANNUAL INCOME STATEMENT Figures in US$�000 PERIOD ENDING Jan 28th 2005 Jan 30th 2004 Jan 31st 2003

Total Revenue 49,205,000 41,444,000 35,404,000 Cost of Revenue 40,190,000 33,892,000 29,055,000 Gross Profit 9,015,000 7,552,000 6,349,000

Operating Expenses Research Development 463,000 464,000 455,000 Selling General and Administrative 4,298,000 3,544,000 3,050,000

Non-Recurring Others

Operating Income or Loss 4,254,000 3,544,000 2,844,000 Income from Continuing Operations Total Other Income/Expenses Net 191,000 194,000 183,000

Earnings Before Interest And Taxes 4,445,000 3,738,000 3,027,000

Interest Expense 0 14,000 0 Income Before Tax 4,445,000 3,724,000 3,027,000 Income Tax Expense 1,402,000 1,079,000 905,000 Minority Interest 0 0 0 Net Income From Continuing Ops 3,043,000 2,645,000 2,122,000

Non-Recurring events 0 0 0

Net Income 3,043,000 2,645,000 2,122,000 Preferred Stock And Other Adjustments 0 0 0

Net Income Applicable To Common Shares 3,043,000 2,645,000 2,122,000

Source: Dell Annual Reports and Yahoo! Finance.

EXHIBIT 4B: DELL - THE MARKETS IT SERVED WORLDWIDE PC AND SERVER SALES, FIRST SIX MONTHS OF 2003 Small Business 18% Medium Business* 16% Large Business** 29% Home 21% Government 7% Education 9% **Large Business (More than 500 Employees Per Site) *Medium Business (100�499 Employees Per Site) Source: Chief Executive, �Dell: One Company, Two CEO�s: Michael Dell Knew He Couldn�t Manage Alone. So He�s Struck a Partnership with Kevin Rollins.�, November 30th 2003.

Page 27: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

27

EXHIBIT 5: IBM�S ANNUAL INCOME STATEMENT

Figures in US$�000 PERIOD ENDING Dec 31st 2004 Dec 31st 2003 31st Dec 2002Total Revenue 96,293,000 89,131,000 81,186,000Cost of Revenue 60,261,000 56,113,000 50,902,000Gross Profit 36,032,000 33,018,000 30,284,000

Operating Expenses Research Development 5,673,000 5,077,000 4,750,000Selling General and Administrative 19,384,000 17,852,000 18,738,000

Non-Recurring -1,169,000 0 -1,100,000Others 0 0 0

Operating Income or Loss 12,144,000 10,089,000 7,896,000Income from Continuing Operations Total Other Income/Expenses Net 23,000 930,000 -227,000

Earnings Before Interest And Taxes 12,167,000 11,019,000 7,669,000

Interest Expense 139,000 145,000 145,000Income Before Tax 12,028,000 10,874,000 7,524,000Income Tax Expense 3,580,000 3,261,000 2,190,000Minority Interest 0 0 0Net Income From Continuing Ops 8,448,000 7,613,000 5,334,000

Non-Recurring Events Discontinued Operations -18,000 -30,000 -1,755,000

Net Income 8,430,000 7,583,000 3,579,000Preferred Stock And Other Adjustments 0 0 0

Net Income Applicable To Common Shares

8,430,000 7,583,000 3,579,000

Source: IBM Annual Reports and Yahoo! Finance.

Page 28: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

28

EXHIBIT 6: COMPARATIVE RATIO ANALYSIS

HP Dell IBM Valuation ratios P/E ratio (TTM) 20.03 31.23 16.27 Beta 1.99 1.5 1.64 Price-to-sales (TTM) 0.87 1.99 1.38 Price-to-book (MRQ) 1.83 17.28 4.28

Dividends Dividend yield 1.32 N/A 1.01 Dividend yield (5-year average) 1.6 0 0.6 Dividend payout ratio (TTM) 26.23 0 14.49

Growth rates (%) Sales (MRQ) vs QTR 1 year ago 7.24 16 3.31 Sales � 5-year growth rate 13.53 14.26 1.92 EPS (MRQ) vs QTR 1 year ago 15.28 31.56 7.22 EPS � 5-year growth rate -5.03 14.17 3.73 Capital spending � 5-year growth rate 13.39 5.75 -6.02

Financial strength Current ratio (MRQ) 1.5 1.19 1.22 Total debt to equity (MRQ) 0.19 0.09 0.78

Profitability ratios (%) Gross margin (TTM) 23.54 18.48 37.42 Gross margin (5-year average) 26.12 18.47 37.45 Operating margin (TTM) 4.99 8.74 11.02 Operating margin (5-year average) 3.59 7.86 10.61 Net profit margin (TTM) 4.31 6.36 8.51 Net profit margin (5-year average) 3.01 5.91 8.59

Management effectiveness (%) Return on assets (TTM) 4.76 15.23 7.97 Return on assets (5-year average) 3.74 14.22 7.85 Return on Investment (TTM) 7.48 38.05 12.15 Return on Investment (5-year average) 6.26 31.45 12.85 Return on equity (TTM) 9.39 53.56 27.82 Return on equity (5-year average) 7.86 40.91 31.65

Efficiency Revenue/employee (TTM) in US$ 551,669 886,302 294,683 Net income/employee (TTM) in US$ 23,748 56,354 25,082 Receivable turnover (TTM) 6.99 12.82 3.82 Inventory turnover (TTM) 9.46 94.59 18.62 Asset turnover (TTM) 1.11 2.4 0.94

TTM = Trailing twelve months MRQ = Most recent quarter

Source: Reuters [www document] http://www.investor.reuters.com (accessed July 17th 2005).

Page 29: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

29

EXHIBIT 7: TOP WORLDWIDE PRINTER SELLERS

Vendor Q3 1998 Market share

Q3 2004 Market share

HP 41.8% 23% Epson 16.3% 16% Others 41.9% 60.5%

Total market in 1998 = US$19.1 billion Total market in 2004 = US$37.2 billion 1998 includes only single-function printers 2004 includes multi-function printers Source: Gartner, in Tam, P.W. �Fallen Star: HP�s Board Ousts Fiorina as CEO � Amid Languishing Stock, Computer Chief Resists Pressure to Delegate � A Big Merger�s Missed Goals�, The Wall Street Journal, February 10th 2005.

Page 30: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

06/275C HP�s Computer Business: Can It Compete?

30

EXHIBIT 8: US AND WORLDWIDE PC SHIPMENTS AND GROWTH, 2002�2006

Region 2002 2003 2004 2005* 2006*

US Units (M)

Consumer 17.1 20 21.8 23.4 25.6 Commercial 30.5 32.7 36.5 39.3 42.2 Total 47.6 52.7 58.3 62.7 67.7

Worldwide Units (M)

Consumer 49.8 56.6 64.2 69.9 75.9 Commercial 88.4 98.2 113.9 125.5 136.3 Total 138.2 154.8 178.1 195.4 212.2

US Growth (%)

Consumer 17.3% 8.9% 7.6% 9%

Commercial 7.2% 11.7% 7.6% 7.4%

Total 10.8% 10.6% 7.6% 8%

Worldwide Growth (%)

Consumer 13.6% 13.5% 8.8% 8.7%

Commercial 11.2% 15.9% 10.2% 8.6%

Total 12% 15% 9.7% 8.6% *Forecast data (Shipments are in millions of units) Source: IDC Worldwide Quarterly PC Tracker, March 2005 [www document]

http://www.idc.com/getdoc.jsp?containerId=prUS00100905 (accessed May 21st 2005).

Page 31: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

31

EXHIBIT 9A: WORLDWIDE PC SHIPMENTS, TOP 5 VENDORS, FIRST QUARTER 2005 (PRELIMINARY)

(Units Shipments are in thousands)

Q1 2005 Q1 2005 Market Q1 2004 Market Growth Rank Vendor Shipments Share Shipments Share 2005/2004

1 Dell 8,727 18.9% 7,682 18.5% 13.6% 2 HP 7,110 15.4% 6,431 15.4% 10.6% 3 IBM 2,335 5.1% 2,290 5.5% 2.0% 4 Fujitsu/Fujitsu Siemens 2,144 4.6% 1,868 4.5% 14.8% 5 Acer 1,834 4.0% 1,368 3.3% 34.0% Others 24,018 52.0% 21,987 52.8% 9.2% All Vendors 46,167 100.0% 41,626 100.0% 10.9% Notes: • Shipments to distribution channels or end users included. • OEM sales are counted under the vendor/brand by which they are sold. • PCs include Desktop, Notebook, Ultra Portable, and x86 Servers. • PCs do not include handhelds. Data for all vendors are reported for calendar periods. • IBM client PC shipments will be tracked under the Lenovo name once the sale of IBM�s PC

division is legally completed.

Source: IDC, April 18th 2005 [www document]

http://www.idc.com/getdoc.jsp?containerId=pr2005_04_14_170722 (accessed May 21st 2005).

06/275C HP�s Computer Business: Can It Compete?

Page 32: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

32

EXHIBIT 9B: US PC SHIPMENTS, TOP 5 VENDORS, FIRST QUARTER 2005 (PRELIMINARY)

(Units Shipments are in thousands) Q1 2005 Q1 2005 Market Q1 2004 Market Growth

Rank Vendor Shipments Share Shipments Share 2005/2004

1 Dell 4,976 34% 4,590 33.4% 8.4% 2 HP 2,658 18.2% 2,567 18.7% 3.6% 3 Gateway 830 5.7% 422 3.1% 96.5% 4 IBM 627 4.3% 615 4.5% 2.0% 5 Apple 565 3.9% 388 2.8% 45.5% Others 4,964 34% 5,152 37.5% -3.6% All Vendors 14,620 100% 13,734 100.0% 6.5%

3 Gateway (Merged) 830 5.7% 1,080 7.9% -23.1% Notes: • Shipments to distribution channels or end users included. • OEM sales are counted under the vendor/brand by which they are sold. • PCs include Desktop, Notebook, Ultra Portable, and x86 Servers. • PCs do not include handhelds. Data for all vendors are reported for calendar periods. • Data for Gateway includes shipments for eMachines starting in Q2 2004, and only Gateway data

for prior quarters. This reflects the legal status of the companies, which merged during the first quarter of 2004.

• IBM client PC shipments will be tracked under the Lenovo name once the sale of IBM�s PC division is legally completed.

Source: IDC, April 18th 2005 [www document]

http://www.idc.com/getdoc.jsp?containerId=pr2005_04_14_170722 (accessed May 21st 2005).

06/275C HP�s Computer Business: Can It Compete?

Page 33: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

33

EXHIBIT 9C: EUROPE, MIDDLE EAST, AND AFRICA (EMEA) PC SHIPMENTS, TOP 5 VENDORS, FIRST QUARTER 2005 (PRELIMINARY)

(Units Shipments are in thousands) Rank Vendor Q1 2004 Q1 2005 Market share Market share YoY Growth

Shipments Shipments Q1 2004 Q1 2005

1 HP 2,399 2,598 18.2% 17.0% 8.3% 2 Dell 1,700 2,074 12.9% 13.6% 22.0% 3 Acer 907 1,263 6.9% 8.3% 39.2% 4 Fujitsu Siemens 993 1,233 7.5% 8.1% 24.2% 5 IBM 664 687 5.0% 4.5% 3.4% Others 6,516 7,396 49.4% 48.5% 13.5% Total EMEA 13,179 15,250 100.0% 100.0% 15.7%

Shipments are branded shipments for all form factors (including desktop, notebook, and x86 servers) and exclude OEM sales for all vendors. Source: IDC EMEA, Preliminary Results, 1Q05, April 15, 2005 [www document]

http://www.idc.com/getdoc.jsp?containerId=pr2005_04_15_020909 (accessed May 21st 2005) EXHIBIT 9D: ASIA-PACIFIC (EX. JAPAN) PC SHIPMENTS BY VENDOR, 3Q 2004

(PRELIMINARY)

Rank Vendor Q3 2004 Q3 2003 Market Share Market Share

1 Lenovo 13.1% 12.9% 2 HP 10.0% 9.3% 3 IBM 7.7% 6.6% 4 Dell 7.1% 6.2% 5 Founder 5.6% 5.5% Others 56.5% 59.6% Total 100% 100%

Source: IDC, October 2004 [www document]

http://www.idc.com/getdoc.jsp?containerId=pr2004_10_21_174306 (accessed May 21st 2005).

06/275C HP�s Computer Business: Can It Compete?

Page 34: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

34

EXHIBIT 10A: HP�S SHARE PRICE PERFORMANCE52

Share price = US$24.94 as of July 15th 2005 Source: Reuters [www document] http://www.investor.reuters.com (accessed July 17th 2005).

52 This chart contains 5-year weekly data.

06/275C HP�s Computer Business: Can It Compete?

Page 35: HP_compaq

Do

Not

Cop

y or

Pos

t

Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

35

EXHIBIT 10B: COMPARATIVE ANALYSIS � SHARE PRICE PERFORMANCE OF HP AGAINST DELL AND IBM53

Note: Volume for HP only

Source: Reuters [www document] http://www.investor.reuters.com (accessed July 17th 2005).

53 This chart contains 5-year weekly data.

IBM

Dell

HP

06/275C HP�s Computer Business: Can It Compete?