Our Objective
Assume that the company is going to be spun out and operated as a standalone business. We have been asked to lead the new company, cleverly named SpinCo Personal Computing. Our product line includes laptops, desktops, monitors, printers, phones, and webOS.
History
The 1960s In this decade HP was focusing on collaborating with different companies to bring up new technologies. In early 1960s HP collaborated with Sony and the Yokogawa Electric companies in Japan to develop several high-quality products. The critique rated them as the most advance product available in the market. Though commercially it couldnt become a big hit because of high cost involved in building HPlooking products in Japan. This collaboration was very successful in developing new products. In mid 1960s, HP spun off a small company, Dynac,in order to specialize in digital equipment. In 1966 HP entered the computer market with the HP 2100 / HP 1000 series of minicomputers. The 1970s In early 1970s HP revolutionize server business. The HP 3000 was an advanced stack-based design for a business computing server. This product played an important role in increasing HPs sale. It didnt take much time for HP to surpass IBM as the worlds largest technology vendor. Another success for HP came in 1968 with HP-9100A. According to Wired magazine, HP is given credit for the world's first marketed, mass-produced personal computer. HP avoided to call it a computer in order to remain far from competing with IBM. They called it calculator and priced it at $5000.
This was a golden era for HP. They earned global respect for a variety of products. Given below is the list of some advanced product launched under HPs banner: first handheld scientific electronic calculator in 1972 (the HP-35), the first handheld programmable in 1974 (the HP-65) the first alphanumeric, programmable, expandable in 1979 (the HP-41C) and the first symbolic and graphing calculator, the HP-28C.
HP computers were similar in capabilities to the much later IBM Personal Computer. Unfortunately they couldnt compete with IBM on the same ground because of high price. The 1980s In 1980s, HP forayed into Printer business and expanded their line of product. In 1984, HP introduced both inkjet and laser printers for the desktop. Along with its scanner product line, these have later been developed into successful multifunction products, the most significant being single-unit printer/scanner/copier/fax machines. The product became a big success but the HP was dependent on Canon and Xerox for technical issues. The print mechanisms in HP's tremendously popular LaserJet line of laser printers depend almost entirely on Canon's components, which in turn use technology developed by Xerox.
Figure 3 The current two-dimensional HP logo used on corporate documents, letterheads, etc.
In 2008, HP and Electronic Data Systems announced that they had signed a definitive agreement under which HP would purchase EDS. In September 2009, EDS was known as HP Enterprise Services. EDS was re-branded as "EDS an HP company. In November, 2009, 3Com and Hewlett-Packard announced that Hewlett-Packard would be acquiring 3Com for $2.7 billion in cash. The acquisition was one of the biggest in size among a series of takeovers and acquisitions by technology giants to push their way to become one-stop shops. Since the beginning of the financial crisis in 2007, tech giants have constantly felt the pressure to expand beyond their current market niches. The 2010s In April, 2010, Palm, Inc. and Hewlett-Packard announced that HP would be acquiring Palm for $1.2 billion in cash and debt. The addition of Palm brings HP a library of valuable patents as well the mobile operating platform known as webOS. The purchase of Palm, Inc.'s webOS began a big gamble to build HP's own ecosystem. On July 1, 2011, HP launched its first tablet named HP TouchPad, bringing webOS to tablet devices.
Profit To achieve sufficient profit to finance our company growth, create value for our shareholders and provide the resources we need to achieve our other corporate objectives. Underlying beliefs supporting this objective: Profit is the responsibility of all. Balance of long-term and short-term objectives is key to profitability. Profit allows us to reinvest in new and emerging business opportunities. Profit is highly correlated to generating cash, which brings more flexibility to the business at a lower cost. Profit enables the achievement of our corporate objectives.
Market leadership To grow by continually providing useful and significant products, services and solutions to markets we already serve-and to expand into new areas that build on our technologies, competencies and customer interests. Underlying beliefs supporting this objective: There are more places we can contribute than we will be capable of contributing: We must focus. To be average in the marketplace is not good enough, we play to win. We must be No. 1 or No. 2 in our chosen fields.
Growth
To view change in the market as an opportunity to grow; to use our profits and our ability to develop and produce innovative products, services and solutions that satisfy emerging customer needs. Underlying beliefs supporting this objective: 7
Employee commitment To help HP employees share in the company's success that they make possible; to provide people with employment opportunities based on performance; to create with them a safe, exciting and inclusive work environment that values their diversity and recognizes individual contributions; and to help them gain a sense of satisfaction and accomplishment from their work. Underlying beliefs supporting this objective: HP's performance starts with motivated employees; their loyalty is key. We trust our employees to do the right thing and to make a difference. Everyone has something to contribute: It's not about title, level or tenure. An exciting, stimulating work environment is critical to invention. A diverse workforce gives us a competitive advantage. Employees are responsible for lifelong learning.
Leadership capability To develop leaders at every level who are accountable for achieving business results and exemplifying our values. Underlying beliefs supporting this objective: Leaders inspire, foster collaboration and turn vision and strategies into action-with focused, clear goals. Effective leaders coach, relay good news and bad, and give feedback that works. Leaders demonstrate self-awareness and a willingness to accept feedback and continuously develop. Leaders speak with one voice and act to eliminate busy work. It is important to measure people on the results they achieve against goals they helped to create.
Global citizenship Good citizenship is good business. We live up to our responsibility to society by being an economic, intellectual and social asset to each country and community in which we do business. Underlying beliefs supporting this objective: The highest standards of honesty and integrity are critical to developing customer and stakeholder loyalty. The betterment of our society is not a job to be left to a few; it is the responsibility to be shared by all. This objective is essential to delivering on the brand promise. 8
The Situation
When IBM decided to spin out its PC division in April 2004, its motivations were clear: the division recorded a net loss of $258 million in 2003, $171 million in 2002 and $397m in 2001, and had required a total parent company equity infusion totaling nearly $1 Billion as of June 2004. IBM's summed up the PC unit's performance nicely in the filing. "The Business has a history of recurring losses, negative working capital and an accumulated deficit. The ability to settle obligations as they come due is dependent on IBM funding the operations on an ongoing basis."
The Deal
In 2004, IBM sold off its PC division to Lenovo. As consideration for the transaction IBM received at least US$650 million in cash and up to US$600 million in Lenovo Group common stock, subject to a lock-up period expiring periodically over three years. IBM became Lenovo's second-largest shareholder, with an 18.9 percent interest in Lenovo. Additionally, Lenovo assumed approximately US$500 million of net balance sheet liabilities from IBM. Lenovo funded the cash portion of the consideration through internal cash and debt. The transaction was completed in the second quarter 2005 and required the approval of Lenovo's shareholders and review by relevant regulatory organizations.
The Aftermath
IBM has undergone profound changes over the last 10 years. For example, in 2000, IBM made almost as much money selling hardware ($2.7 billion in pre-tax income) as it did selling software ($2.8 billion). By 2009, the profit mix had shifted dramatically, with software and services each bringing in $8.1 billion in pre-tax income (and accounting for 84 percent of overall profits). Meanwhile, hardware profits plummeted by almost 50 percent in 2009, to $1.4 billion, and accounted for just 7 percent of overall company profits. Top-line revenue (excepting those divested businesses mentioned above) rose from about $75 billion in 2000 to $104 billion in 2008. IBM's bottom-line profits increased at an even faster pace, growing from about $10 billion in 2000 to about $18 billion in 2009.
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Weaknesses No innovation Lack of technical expertise Poor leadership / direction No integration of acquisitions Empire-building (Palm, Compaq) Maintained status quo Opportunities Threats Low profit margins Innovative competition Commoditization of personal computers Substitute products (iPad, tablets) Possible software/hardware integration Using acquisitions to make a comprehensive product Undiscovered product applications Creating a new market segment
While HP has many strengths in the hardware industry, such as dominant market share and superior quality, the industry is threatened by low profit margins and substitute products. The emergence of smartphones and tablets is causing the threat of substitution to grow. If there is the possibility of losing market share to substitutes in an industry where the profit margin is already low, it would be prudent to decrease investments in that industry, or get out of the industry entirely.
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Chart Source: AllThingsD.com Is Innovation Dead at HP?, http://allthingsd.com/20110822/isinnovation-at-hp-dead/ Cutting R&D and patent applications highlight the larger problem of innovation. Throughout its early history, HP was always known as an innovative company. In recent years that simply has not been the case. HP might have come up with the slogan HP Invent, but instead it should have considered the slogan HP Acquire. (Figure 7) Under the CEOs of the past decade, HP has not been proactive in understanding important market trends, connecting to the evolving marketplace, fulfilling unmet consumer needs, and migrating customers to new solutions. Instead it has continued to acquire companies, often for a premium price, with little long-term planning and a poor job of execution. While HPs leaders have spent their time figuring out how to compete in old markets with old solutions, Steve Jobs has led Apple to unprecedented success in todays highly competitive environment. When Apple was struggling in the late 1990s, Steve Jobs didnt just invent new computers, he repositioned Apple products such as the iMac toward internet use and mobility. He also helped invent a new industry with its iTunes services and iPod, which paved the way for many of Apples other products. In short, he helped launched organic products that were differentiated from competitors in the PC industry. Apples next step could come with Cloud computing, with Apples iCloud scheduled to be released this fall.
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Ultimately, we think there are opportunities available for SpinCo. SpinCo can build on the strengths of HPs strong, global brand that is recognized for quality. HP spread its reach across a large number of areas through the acquisition spree of the past decade. A separate SpinCo would allow for a more focused approach. Assuming a new management team could be brought into place, we would target a mix of individuals with previous corporate experience in efficiency and execution in the hardware business (to help the short-term strategy as discussed below) as well as people known for thinking outside the box (to help long-term growth). These solutions will not occur overnight. That is why the PC and printer business is so important in the short-term. Although the profit margin on these products is fairly low, the huge volume combined with a high market share will allow for a revenue stream that should be relatively stable for at least the next few years. HP is by far the market leader both in the U.S. and worldwide in printers with 44% market share worldwide and 55% within the U.S. (Figure 8) In 2010 it was estimated that HPs printers and ink cartridges business constitutes 25% of the price estimate for HPs stock while the companys notebook and desktop PC business accounts for only 14%. (Figure 9) Although printers themselves are low margin products, HPs high margins on printer ink result in overall margins that are higher than that of the PC business. It is estimated that HPs printers and cartridges EBITDA margin has risen consistently from about 17% in 2005 to 22% in 2009. As Vyomesh Joshi, the MP imaging and printing groups (IPG) executive vice president stated, at a conference just a few weeks ago, "We have doubled profits in the last ten years. This is a $26 billion business with operating profits of over $4 billion annually.
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While relying on PCs and printers for short-term revenue, we would invest heavily in innovation. Acquisitions have become an important part of many large companies growth and innovation strategy. Certain strategic acquisitions could still be considered, but ideally we would try to improve upon the lack of organic growth that HP has experienced recently. One way to help grow organically would be to go back to the HP Way which had been largely abandoned by recent CEOs. Open offices, open collars, and open lines of communications between management and employees will foster a culture of innovation and creativity. Additionally this will help improve employee morale that had taken a significant hit with the cost-cutting of Mark Hurd. One direction for this innovation would be delivery of Cloud-led and Web connected innovation for consumers and businesses.
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