HP – Saying No To An Unprofitable PC Business

Does anyone believe, like me, that the reason that HP is getting out of PC manufacturing is really that there is little profitable growth left in the industry?  And that this is really a good move?  Many of the blogs and comments I have read seem to display a sharp, emotional, mocking tone about HP’s decision. I think it is a good decision. 

Prices and profit margins, in the laptop market, are going down together.  Every consumer that wants a PC has one.  Growth will come from overseas markets at super low, stripped down prices.  Tablets will soon replace laptops.  While this is a growth market, Apple has locked in the high end market and 4- 5 players will compete for the remaining market, which will soon be based upon price.  For tablets, the whole game on increased household penetration breaks open when the tablet comes in under $300 or so (oh yeah, no profits again).  Consumer fascination for tablets is strong now, but in the near future, the hardware makers may not be the ones making the profits, while the software and cloud services will be profitable.   

PCs are a Mature Category

In most markets that are in a growth phase, competitors each try to establish their rightful market share through product differentiation and consumer awareness.  Some will win and some will lose based on their skills and proprietary technology.  Those fascinated with computers want to believe that the industry should act like a growth industry, but that is not the case.  In a mature market, a consolidation is the correct strategy; one or two players must emerge winners to regain profitability to the category.  If you don’t see that you will be number one and make profits, it is time to exit.  

Lets take a quick summary of Porter’s 5 Forces for the global laptop industry  Thanks to Aditya Shah, Abhinav Dalal’s report on the global state of the laptop industry (2009)

1. Competitive Rivalry From within the industry – very high as major players fight on price differentiation -- HP, Dell, Toshiba, Acer, Lenovo, Apple
2. Bargaining Power of suppliers – Technology (Intel and AMD processors) lack the consumer brand power in term of consumer excitement so not much power from them.  Windows operating system is ubiquitous (unless it is Apple) so Microsoft has lots of power.
3. Bargaining Power of Customers – High – in both businesses that buy PCs for employees and large retail formats.  Growth in this PC market will be overseas in less developed countries where price will be even more of an issues.
4. Threat of New Entrants – The barriers to entry in hardware are actually high due to high R&D investment needed to get enter the market, high costs, low prices and low margins.  It is difficult to gain a foothold if you are not yet in the business.
5. Threat of Substitutes – High – due to the move to cloud computing, tablets, mobile phones, etc.  The PC is will soon be giving way to these new formats.

I totally agree that HP has not been an innovator and that innovation could have been a game changer after it bought Compaq. Its company history is based on top scientific quality and high prices - think scientific calculators, and top-end personal printers that virtually are synonymous with their respective markets.  HP should have entered PCs and tablets at the top end of the quality/price game, but it made the mistake of having me-too technology.  My last post regarding the key to success in innovation, pointed out that innovation must be at least as profitable as the product it replaces.  This is a serious concern if HP were to invest in the needed innovation to win, only to find that the consumer buys on price alone.

Yes, it is easy to laugh at at the supposed blunder of HP’s decision and announcement to get out of this business, believing that they never should have bought Compaq (true), but now saying they are crazy to sell it off.   I think there is something more basic about this executive decision – there is no money left in this business.  Business is about making money, not wearing badges and looking good.  Sometimes the right decision isn’t welcomed by the pundits who don’t have to pay the shareholders.  It wasn’t smart for HP to go all in to get a me-too player in Compaq – but maybe it is very smart to get out.  Today’s decision is the smart one.

I’d love to know what you think.