Porter’s Competitive Analysis

HP vs. Dell & Lenovo

Paulina Jaswiec

MBA 500, Essentials of Business Management

Porter's Competitive analysis

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Introduction

In 1979, the economist Michael Porter published the article called “How

Competitive Forces Shape Strategy”. Since that time Porter’s five forces have been

serving as a framework for understanding the notion of competition and strategy. Porter’s

five forces is a theoretical tool that helps analyze and understand the potential threats and

opportunities within an industry. Very often managers associate competition with direct

competitors only, whilst Michael Porter proves that there are four other forces, which

influence competition: buyers, vendors, potential entrants, and substitutes. The rivalry,

resulting from these five forces, shapes the industry’s structure and the competition

within the industry (Harvard Business Review, 2008).

In this paper Porter’s five forces will be used for analyzing the top companies in

the PC industry: HP, the focus company, and its main competitors Dell and Lenovo. As a

result of this research, a set of recommendations for the competitive strategy of the focus

company will be formulated.

It is important to note that competition within the PC industry is very intense.

Prices, advanced technologies, and innovations – all contribute to making the competition

within this industry extremely rigorous. Technical advancement opened the doors to

many opportunities in commerce. Companies, which used to serve different market

segments in the past, now fight for the same customers. All of this made the structure of

the PC market as competitive as never before.

Hewlett – Packard Company

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      Founded in 1939, Hewlett-Packard Company (HP) is one of the biggest PC

manufactures in the world. According to Business Insider (2012), HP is currently the

world’s 15th most valuable brand. The logo serves as a symbol of quality to customers in

170 countries. In 2011 HP held the most worldwide and U.S. market share in the PC

industry (Tech Crunch, 2011). But in 2012 the situation has changed. Once being the

biggest global PC manufacturer, HP has recently lost its position to Lenovo, which has

overtaken the global market share in Q3 2012 (Table 1).

Table1. Global PC Shipments (BBC News, 2012)

1.1 Global Q3 PC shipments - Gartner

Manufacturer Units (millions) Market share

Lenovo 13.77 15.7%

HP 13.55 15.5%

Dell 9.22 10.5%

The chart above shows the market share loss, which has been mainly been caused

by two factors. First of all, HP has been struggling over the past few years with changing

its strategies: starting with HP’s CEO Leo Apotheker’s decision to spin off the PC

business in 2011, and ending with the most recent one of HP’s new CEO Meg Whitman

to not only keep the core business – PC division – within the company, but to also unite it

with HP’s Printing Solutions Group. The latter is supposed to foster strengthening HP’s

core business and significantly reduce the costs. Secondly, over the past three years, the

company has changed three CEOs. Moreover, the departures of the first two were

associated with scandals, which impacted not only the public image of HP, but also

affected the internal personnel. Thus, the absence of clear strategy mixed with the lack of

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proper leadership has played a crucial role in HP losing the crown of the biggest PC

manufacturer in 2012.

On the other hand, there is still a huge potential in HP, especially now, that the

company has the new leader, Meg Whitman, and a clear strategy (differentiation though

the product quality and variety). But in order to better understand how to leverage this

potential, it is necessary to perform the SWOT analysis for HP, and to have a detailed

look at strategic moves as well as vulnerabilities of its main competitors Dell and Lenovo

to understand the market position of HP according to Porter’s 5 forces.

SWOT Analysis: Hewlett – Packard Company (Personal Systems)

Table 2 shows the internal strengths and weakness of HP, as well as its external

opportunities and threats.

Table 2. HP SWOT Analysis

S

- Strong brand- Size & scale- Innovation/R&D

W

- Size- Supply chain

O

- Recover PC market- Grow tablet PC business

T

- High competition- 3rd party suppliers

Strengths. As it has been already mentioned above, HP is currently the world’s

15th most valuable brand. Undoubtedly, HP’s brand represents one of the key strengths

of the company. Many customers associate HP brand name with innovation, quality and

reliability, which consecutively effect buyers’ decision to choose HP products over the

competitors. The second strength is the company size and scalability. HP is the biggest

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company of its kind. Because of its size, the company can easily access the necessary

resources, funds, or clients, which are not available to smaller competitors. The last, but

not the least strength is innovation and R&D. HP sees innovation as “an essential

ingredient to establish and maintain business advantage” (HP, 2012). HP has been

making huge investments in R&D, having received more than 36,000 patents as of 2011.

Overall, innovation is key in the business culture, which brings advantage over

competitors.

Weaknesses. Although the size of HP was mentioned as one of its strengths, it can

also be considered as one of its weaknesses. Being a big size company can hinder the

speed of the response to a competitor’s strategic move, as well as the selection of a tactful

market moves/decisions. The latter ones are also affected by the level of bureaucracy,

which are more typical for bigger companies in comparison to smaller ones. The other

weakness, supply chain, can be quite dangerous for HP. For example, HP uses Intel as the

only provider of processors. If at any point, there is a disagreement between HP and Intel,

it could directly threaten HP’s market position.

Opportunities. One of the main opportunities for HP is to recover their PC

business and regain the position of the global PC manufacturer. The company has all the

necessary means to become successful in becoming a good leader, using clear strategy,

and further advanced in technology. The other potential opportunity for HP is to expand

its role on the PC tablet market, where HP’s current strategy is to “aggressively attack”

the tablet market.

Threats. High competition is the most dangerous threat for HP, especially when it

comes to prices. For instance, Dell and Lenovo, being able to offer lower prices than HP,

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can eventually drag HP’s margins to zero. The other potential threat, third party suppliers,

should also be dealt with, as shortages, contractual risk, and oversupply might cause a lot

of damage to HP’s cost management.

Competitor Analysis: Lenovo Group Limited

Being born into an industry that already exists, Lenovo has had the opportunity to

examine what works and what does not. This analytical approach allowed the company to

assess its barriers to entry and devise strong cost leader competitive strategy to carry out

its success placement in the industry. Michael E. Potter, author of Competitive Strategy,

describes the cost leader competitive strategy as primarily being focused on the efficiency

of a low-cost business, while still keeping up a healthy profit margin by spending less on

promotion and sales. As a company, they realize the significance of the vis-à-vis, and

focus on maintaining a strong position to have a competitive advantage in combating

their rivals. The target market embodies small/large businesses and extends its contacts in

the education, medical and government fields. Product lines appeal too most buyers

varying from low-end to high-end segments. The company takes a portion of profit to

reinvest into R&D advancements to keep up with trends and updating old products.

What is Lenovo doing to improve their competitive situation?

Lenovo has a vision of spreading its wingspan globally, and already started using

its cash cow (the desktop PC) to attain these goals. By viewing the global market as open,

Lenovo has begun to build nests in countries such as Japan, and Germany. Growth

strategy is attained by sharing operation, and function costs with local manufacturing

centers by forming joint alliances (MarketLine, 2012). As an outcome both sides

increases production, cut transportation cost, fulfill the current growing demand, offer

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economic growth to the country and lastly increase jobs in the market (MarketLine,

2012). Lenovo is also aware of the new trends in its target market (the corporate world),

which require higher demand for integration of mobility in business. The preferences in

the corporate world are becoming more obvious with a higher demand of laptops as a

pose to the dusk collecting stationary desktop computer, which glues employees to their

workstation. This situation offers new opportunity for inventing multiple varieties of

laptops ranging from low-end to high-end segments with the focus of three things:

performance efficiency, durability, and overall lightweight characteristics. If the focus

strategy is executed right, it will generate additional revenue and increase company

percentage of the overall market share. (Gray, 2007)

Vulnerability of Lenovo

Being a young company with weak brand identification in a world of experienced

and fierce competition jeopardizes the success of Lenovo (MarketLine, 2012). It is

essential to stay on track of making profitable moves in order to be financial health, and

withstand the impact of competitor’s strategies. For new companies with little experience

it can become cumbersome to manage: forecasting which investments/strategies will

payoff the most, knowing when it the worst/best time to invest in R&D (how often to

create/ update products), at what time to invest in marketing to derive a strong company

identity, and when to invest in promotion & sales to aggressively achieve customer

awareness.

Competitor Analysis: Dell

Dell, the pioneer of sustaining a healthy balanced finance portfolio has achieved

its goals buy remaining efficient is all its divisions in the organization and in return

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offered competitive prices. Dell’s objective is to coexist on the low-end segment where

profitability is more realistic. This strategy was attained by standardizing their product

models in order to drop price margins, so that they could offer the ability to invest in

customer service and the customization of a product to fit individual needs (through

features). To further minimize costs, Dell has implemented a strong relationship with

suppliers to ensure the best prices, created a strategy to have no manufacturing costs

since parts are ordered & assembled, no operating costs by having no physical retailer

location, and achieves a low over production margin by offering built to order systems

(Gartner, 2012b). Michael E. Potter, author of Competitive Strategy, describes the cost

leader competitive strategy as primarily being focused aggressively attaining efficiency

of a low-cost business, while still keeping up a healthy profit margin by spending less on

promotion, sales and R&D.

What is Dell doing to improve their competitive situation?

On Dell’s website you will find the company philosophy, “Reliability- Service-

Support.” Dell calls the relationship between the customer and themselves an open

agreement, that allows for free flow of communication to address problems and recognize

opportunities to change. This perspective helps Dell follow customer needs and changes

in tends. In addition revisions have been made to their sensory system to maintain

customers up to date by: keeping track of customer preference, previous orders, and a

time log of updates on hardware/software. Also investments have been made in RD&E to

engineering new features, and sociable technologies for relevant products (Thomson

Reuters, 2012). Dell defends its position by proving that. Aside from developing features,

no major R&D developments were constructed due to economic health.

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Vulnerability of Dell

Protected by market positioning it has become sleepy and less responsive to the

competitors moves. While other companies update products to keep up with the new

market conditions, they have stayed focused on remaining efficiency with the goal of

achieving higher profit margins annually. As a result, no technological specialization is

accomplished and customers are left with buying old-fashioned products with updated

features. The computer demand goings up and prices plummet can pose to be a serious

threat to the company because the accessibility to more comparable options has in result

educated buyers in comparing product and conducting cost analysis. In addition,

navigating through a poorly engineered and outdates website poses high risk to buyer

who already have no idea what they are investing in online. With the future pressures of

cheaper modern alternatives, it is evident to forecast residual erosion for Dell when it

comes to customer’s satisfaction and spending (Thomson Reuters, 2012).

Porter’s Five Forces: Hewlett – Packard Company (Personal Systems)

Table 3. Porter’s Five Forces Analysis: HP

Threat of entry. New companies entering a particular industry are always willing

to win the market share. If barriers to entry were high enough, the existing competitors

would be protected from the new entrants; so this threat would be low (Porter, 1998).

BuyersHIGH

EntrantsLOW

SubstitutesMODERATE

Suppliers

HIGH

CompetitionHIGH

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HP is competing in a very challenging industry. It is a well-known fact that the

PC industry is considered a low margin one. Thus, it does not look appealing for the new

entrants. Besides, in order to compete within this industry, against such computer idol's

as HP, Dell, Lenovo, etc. a new entrant must make huge investments, which would

require a lot of upfront capital. When speaking about the market share, it is highly

unlikely that a new entrant would be able to win over from such famous and well-

established brands like HP, Dell and Lenovo. The only way to enter and be successful in

the PC industry is to discover a unique cutting-edge idea in technology, followed by

successfully developing it into reality. But given the investments, for example, HP is

making into the R&D and Innovations, again the chance that a new entrant could win this

battle is fairly low. Therefore, the threat of new entrants in relation to HP can be

considered as low.

Bargaining power of buyers. Buyers influence industry by forcing to lower the

prices, demanding more services or higher quality. The power of buyers can cost the

profitability of the industry (Porter, 1998).

The bargaining power of buyers is very high in relation to HP. Nowadays

customers have lots of choice on the PC market, the consequence of which is price

reduction. But low prices are not the only thing that customers bargain for. Together with

this, they want higher quality products and better customer service. Having such

competitors as Dell or Lenovo (with their cost leadership strategies), it is extremely hard

for HP to keep customers loyal. Even though HP’s strategy is to be a differentiator

through high quality and product variety, most of the time it is not enough for customers

to stay loyal. Hence, the bargaining power of buyers is high in case of HP.

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Bargaining power of suppliers. Suppliers can put pressure on the industry by

raising the prices or reducing the quality of the goods or services. This can directly lead

to the decrease of the profitability of the industry, which might not be always able to

recover the costs at its own expense (Porter, 1998).

A computer consists of a lot of small components, which are provided by different

suppliers. For example, when it comes to processors, HP’s only supplier is Intel. Intel is

the global leader with 80% of the market share (International Data Corporation, 2012).

Intel has all the power to define its prices, leaving HP with no influence on it. This is

quite a dangerous situation for HP, which can directly impact the company profitability,

in case Intel decides to increase its prices. Having no other processor supplier, HP is

confined within the strict limits. Therefore, the bargaining power of suppliers can be

considered high for HP.

Substitute products. In every industry companies compete with substitute

products, which limit the potential profits by placing price ceilings. The higher is the

pressure from the substitutes and the more attractive their price is, the more impacted the

profit of the company competing against them would be (Porter, 1998).

PC industry in general is threatened by substitutes. The introduction of the

advanced technologies in mobile devices and tablets has decreased customer demand for

PCs. Gartner’s principal analyst, Ms.Kitagawa, says that customers demonstrate less and

less interest in purchasing PCs due to availability of the other technology products, such

as smartphones and tablets (Gartner, 2012a). Such a change poses a definite threat to

HP’s PC business. Though, this threat cannot be considered high for HP, as HP has

already introduced its own tablet device, as well as it has capacity to develop its

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smartphone business (Palm). Therefore, the threat of the substitute products is moderate

for HP.

Rivalry among the existing competitors. Competitive rivalry exists in every

industry. If one company decides to improve its market position by decreasing the prices,

or introducing a new product, or service, other companies within this industry would start

feeling the impact. The more intense the rivalry is, the higher is the chance to lose the

competition (Porter, 1998).

HP competes on the extremely rival market. Its primary competitors, Dell and

Lenovo, have a strong position on the market (Table.1). Lenovo has been taking on

opportunities and strengthening its position in emerging markets, as well as it launched

an aggressive channel program in the U.S., which led to overtaking the market share from

HP. Dell is slightly behind, but nevertheless holds a solid market share. Both competitors

stick to the cost leadership strategy, whilst HP bets on being differentiated through the

quality and variety of products. In order to win the competition, and return place #1 in PC

making business, HP’s CEO Meg Whitman took a decision to unite HP’s Personal

Systems Group with Printing Solutions Group. This decision will help significantly

reduce the costs, and introduce lower prices on the market.

Based on the analysis of HP Personal Systems and its primary competitors, Dell

and Lenovo, represented in this paper, the following list of strategic actions can be

recommended to HP, in order to leverage its potential and regain the lost market share.

Strategic Recommendations to HP Personal Systems

1. Increase the customer demand by lowering the prices. In order to compete

with Dell and Lenovo, HP must re-establish its pricing policy to make products more

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competitive. With the merge of HP Personal Systems and Printing Solutions Group, this

recommendation seems very achievable. With the well-known HP brand, high quality

and lower prices, HP can win back its customers, and return their loyalty.

2. Narrow down the products portfolio. Although HP’s strategy is to be

differentiated through products’ quality and variety, the choice that the customer has to

make when selecting a PC is extremely difficult: tens of different models are available.

James Hesket in his article in Harvard Business Review explains the phenomenon of

having too many choices through the explanation of human psychology. He states that

“too much choice is like having no choice, and buyers start to feel that”. In other words,

if a customer has too many varieties of products available, the chance that this customer

will decide to go to a competitor increases. By consolidating the existing product lines,

HP can increase its products’ value proposition.

3. Keep investing in R&D. This is something that is and will continue to be

HP’s competitive advantage over Dell and Lenovo. In contrast to both competitors, HP

makes a huge focus on R&D and Innovations by making significant investments.

Moreover, HP has all the capabilities in order to enter the blue ocean, and leave the

current fierce competition behind. With the right strategy and R&D investments in place,

breakthroughs seem achievable by HP.

4. Expand the tablet business. According to Gartner reports, recently PC

shipments have been decreasing; Q4 2012 was the worst quarter in EMEA (Europe,

Middle East and Africa) shipments for the past 4 years. Ranjit Atwal, Gartner’s research

director, says that the lack of appeal and innovative technology in PCs, mixed with the

current economic challenges, result in leading customers to move to other devices

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(Business Day Live, 2012). Tablet computers have become increasingly popular with

customers. At some point tablets will start replacing PCs. Therefore, it is important to be

prepared for this market change. By expanding tablet offerings, HP’s market position in

this segment can increase significantly. Investing into this segment now will definitely

pay off in future.

Following these four strategic recommendations, HP will increase its profits and

will improve its market position in the long term.

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