Hewlett-Packard (HP)’s better than expected profit announcement on Tuesday – up 51 per cent on last year to $1.46 billion – proved what many industry observers had been suspecting for a while: that under the guidance of Mark Hurd the company could well be approaching a new era of dominance.
Q2 sales rose 5 per cent to $22.6 billion from $21.6 billion in Q2 2005, partly on the back of highly-profitable ink supplies. The company reported improvements in servers, storage, printing and also PCs, where it gained market share against Dell and others.
"The cycle here is reversed to what it was not long ago," imaging and printing analyst at IDC, Angele Boyd, told OPI+. "Dell could do no wrong and its profits were going up and up and its imaging and printing business, tied to its PCs, was also doing well. Now HP’s fortunes have reversed, not just in printers but in PCs. A rising tide lifts all boats."
On 9 May, Dell warned that its Q1 profit would fall short of expectations after it cut prices to boost revenue growth. The long-time industry leader in PCs has struggled with slowing growth in recent quarters amid competition from HP and Asian rivals Lenovo and Acer. Crucially, it has also struggled to capture the burgeoning European market, which has overtaken the US as the largest PC market in terms of shipments.
Analysts are confident that under Hurd HP’s fortunes are on a continuous upward curve. The CEO joined the company 14 months ago under a mandate to cut costs and boost stagnant revenues. He has already shed 1,600 jobs during the quarter as part of a cost-cutting plan and announced plans to slash 14,500 in total – about 10 per cent of the company’s workforce.
But HP’s fortunes are also the result of a solid strategy and efficient business model. In PCs, HP is growing faster than the industry as a whole. Dell, for the first time in history, is growing slower. "HP has spent the best part of the year restructuring its PC business and becoming more competitive. And now it is reaping the rewards," Gartner PC analyst Ranjit Atwal told OPI+. "It is targeting large accounts direct as well as small businesses and is getting in the right places at the right time… It is revamping and wearing its market leader hat with more credibility."
Dell, meanwhile, is finding it harder to reap growth and is not getting to market so effectively, claimed Atwal, particularly in the UK where its direct business model has not developed as fast as it has in the US. As a result, it is trying to impose price pressure in order to squeeze the market. Dell’s CEO Kevin Rollins recently announced plans to use its direct business model to capture the number one spot in emerging markets such as India, China, eastern Europe and Russia. The company is also talking about increased investments around the customer experience and a better focus on fundamentals and supply chain.
The success of HP has always been down to its comprehensive multi-pronged strategy, which means it is not focused on just one customer segment or just one product category, claims Boyd. "HP should be able to sustain imaging and printing growth for some time on its installed base to feed its investment strategy," she said.
But she added that although HP may be "untouchable" from a unit standpoint in printers, from a revenue standpoint it is not. "From a revenue standpoint HP is not always level as it has a lot of low-end products. Canon, Xerox and Ricoh all have a portfolio that stretches to high-end products and is more expensive per box. But HP is showing good progress."
So could Dell invest its PC talents elsewhere, in printers for example? In 2005, the company had 5.34 per cent of the market in hardcopy peripherals unit shipments by vendor, according to IDC, compared to HP’s 38.4 per cent, Epson’s 15.15 per cent, Canon’s 14.65 per cent and Lexmark’s 10.41 per cent. Many analysts believe that Dell’s success on the PC side through its direct logistics model is not something it could transfer even closely to related products such as printers, much less consumer electronics such as TVs.
In addition, in imaging and printing Dell’s product line is much narrower than HP’s, which means it largely competes in the small office space.
"Dell’s direct model in its entirety is superb," said Atwal. "But printing is more of an indirect model, so in this sector Dell can’t command dominance and it’s the same with other types of products such as TVs and monitors. It needs its model to have more impact quicker, but it doesn’t have the time to install the model in countries and segments – that’s the challenge. These sectors may sound like a good stream of extra revenue, but this is only good if there is no extra cost."
Meanwhile, it seems that HP can do no wrong at present, but Boyd believes there is one segment of its business that perhaps is not receiving as much attention as it could – services, document capture and document management. Revenue in HP’s services business declined 2 per cent from a year earlier. "It has have a presence in services and document management but it is a small business that is not getting as much investment as it should in my opinion," she said, adding: "But then again, when HP sees it needs to pick up in this area, it will."