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Comprehensive Analysis of the Computer Industry

COMPETITIVE FORCES

The U.S. computer hardware industry is one of the biggest in the world with Compaq, IBM, Dell, Gateway and Hewlett-Packard being the main players. This was one industry that was selling 150 million units in one year, (jpmorgan.com) but with the economy not looking so good, things are likely to change for PC makers too.

Now more than ever before, the companies in the computer industry are competing as fiercely as possible to make things better for their firms. They are fighting for new customers and are targeting markets they were not willing to exploit before. Traditional approaches and market strategies are giving way to newer ideas and innovative moves.

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RIVALRY AMONG EXISTING COMPANIES

Rivalry among competing firms

The competition among the firms fighting for market shares has been intense Just as growth was slowing in the computer industry, Dell launched an all-out price war in the fourth quarter of 2000 to gain market share. Hewlett Packard and IBM responded to this by saying the price war was “irrational”, (fortune.com). This helped Dell leap to number one in the worldwide market share and has left its competition scrambling to catch up. The only player to follow Dells lead has been Gateway and they lost 523 million in the first half of this year, laid off 3000 workers and closed 37 stores (Business week online).

The implications of this intense competition are that companies have no room for error or inefficiency. International Data Corp said that the price war has driven down prices on average 25% this year. This means shrinking profit margins and layoffs at all major companies, (Dell 5700, HP 6500, Compaq8500.) Even though consumers are benefiting from lower prices now, in the long run they may see less technological advancements in their computers and peripherals as companies cut cost to try to earn a profit.

IBM:
International Business Machine has been in operation since last many decades and offers a whole range of solutions from technologies, systems, products, and services to software and financing. The company has been divided in a three-tier structure of Technology, Personal Systems and Enterprise Systems.

Other major services offered by the world leader in technology innovation are divided in segments such as GLOBAL SERVICES SEGMENT, a SOFTEARE SEGMENT, A GLOBAL FINANCING SEGMENT AND AN ENTERPRISE INVESTMENT SEGMENT.

The Financial position of the company has been strong for many years though the recent slow-down may affect this technological giant too. Total revenues were estimated at $42.61 billion after and an increase of 10% in the period ending June 2001.

Net income also rose reaching a huge $3.79 billion due to better revenues from Global services. The good financial position reflects lower interest rates offered by the firm in its Global Financing Segment.

HEWLETT-PACKARD:

Hewlett-Packard Company is a big name in the computer industry because of its wide range of computing and imaging products. Think of a printer and the first name that pops up is that of H-P. The imaging segment of this firm excels in such products as copiers, scanners, ink-jet and laser printers, print servers, network-management software and all-in-one devices.

The Computing segment on the other hand is responsible for offering a wide range of computing systems for commercial and consumer markets. The information technology services segment is also world famous with for its consulting and Internet services.

The financial position of this company has been pretty stable but the nine-month period ending July 2001 saw the company’s revenues falling some 5% coming down to $33.7 billion. Net income suffered tremendously and reaching an all time low of $463 million showing an 82% decline.

GATEWAY:

Gateway Inc. is no small name in computer hardware industry with its personal computers and related products reaching every household and business. Its products range from desktops to laptops to servers and workstations, which are made available to individuals and businesses including governmental organizations and educational institutions.

The company has also been providing Internet service and software solutions along with diversified range of peripherals for some time now.

The financial position of the company at present is not all that positive with revenues falling some 23% after a six-month period ending June 2001. The revenues came down to $3.53 billion with Net loss estimated at $449.8 million versus an income of $249.7 million.

DELL:
Dell Computer Corporation is a big name in the computer hardware industry with a whole wide range of products in the market. They manufacture and distribute everything from desktop computers, laptops, and MP3 players to hardware peripherals and services. After a 13-week period ending in May 2001, the company reported a 10% rise in revenues while the net income fell some 12% to $462 million. This shows increased sales of servers and laptops with reduced profit margin.

NEW ENTRANTS IN THE INDUSTRY

Though it is believed that big players like Dell, Compaq, IBM, H-P etc are too secure in their market shares that they don’t need to worry about new entrants in the field, it would be unwise not to take into account the fact that many new firms are emerging. It is true that many new companies may emerge and die before they have had a fair share of chance because surviving in this field is not as easy as they make think. For one the industry is highly competitive with several giants swimming in the ocean with great authority. Their products have been around for years and are somehow imprinted in the minds of the consumers.

Secondly, these sharks are only too willing to swallow any smaller fish they find in the ocean; most young successful companies are bought out even before they have tasted the fruit of success completely. And often time’s buy-out seems to be the only option left to the smaller firms when swimming upstream becomes difficult and in some cases downright impossible.

With this recent decline in the computer industry, it is very unlikely that any new companies would step into the market. This is because these days are dangerous even for those who have literally ruled the technological world for decades, so its only too obvious how the smaller firms would fare.

New entrants will have to be very careful if they decide to enter the industry, if they don’t have a clear marketing strategy they can just forget about surviving. The survival of the fittest is the rule in this industry, and as many companies around the world are emerging, it just goes to show how competitive the market is and how each passing day would lead to tighter competition.

SUBSTITUTE PRODUCTS

So how will the companies fare with this looming speculation of the computer industry’s downfall? Wall Street is sure that the industry will still see a growth of 16.6% but this is not a big number for an industry that had been enjoying a 20% each year for a decade now.(jpmorgan.com) With the market for PCs facing a decade low, tech industry, on the whole, may not suffer as much from the struggling economy. There are still products such as MP3 players, Digital Cameras, Laptops and handheld computers, which are more likely to grow in the years to come.

It is only obvious then that many computer companies can bask in the success generated by these devices and the peripherals required with them. Some five manufacturers were in the business of digital music players just a year ago and none of them were highfliers. But today, 50 or more companies have entered this field including such big shots as Dell Computer Corporation which has a $300 digital jukebox in the market and Compaq is planning to introduce its own MP3 player built in its handheld computer. Intel Corporation did not stay behind when it became clear that the market for this device is likely to grow some 595 this year to a huge $1 billion, Intel is now working on its own digital music player. But they may face fierce competition because the best known MP3 brand Rio by SonicBlue Inc. is available at a very economical price of just $200.

The companies will now be focusing more intensely on the production of handheld computers because the market will grow for this device in this year. Hewlett-Packard and Compaq will be competing with Palm, Casio and rising star, Handspring. It is said that the sales of this device are likely to grow some 31% touching the gigantic figure of 8.7 million units this year. Handspring Visor is likely to see lots of growth because of economical price at which its device is offered, $149 and also because the device can be turned into a MP3 player and a cell phone. (jpmorgan.com)

It is also reported that the server market will see some growth too this year in spite of the recent dot-com failures around the globe. The server working with e-commerce and Internet, costing from $100,000 to $1 million and running on Unix platform will see positive growth, according to Forrester Research.

This is due to the fact that some giant companies such as Citibank Corporation and General Motors need powerful servers to run their thriving online business. This will benefit Sun Microsystems which will see a growth of some 40% in sales and 43% increase in profits in the fiscal year 2001. The industry for this product is estimated to grow some 20%, which is a positive piece of information for all those in the server manufacturing business.(jpmorgan.com)

CONSUMER BARGAINING POWER

With so many brands available in the industry, it is clear that consumers have a wide range of options. Therefore to attract new customers, every computer firm must offer something of value which is hard to ignore. This is why consumers have good bargaining power in this industry, choices are wide and manufacturers are only to keen to attract as many customers as possible.

The current slow-down in the industry has given consumers even more power than they had before. They are now in demand, more than ever before and they can certainly cash in on this.

SUPPLIER BARGAINING POWER:

Suppliers are not necessarily as powerful in this industry as in some other. This is due to the fact that the interest of new people in this industry is ever-increasing which leads to the creation of new firms and the availability of a wider range of products. This leads to the reduced bargaining power of the suppliers and gives consumers leverage.

Though certain companies with their strong position may dictate terms in the industry, setting downtrends, which are followed by others in the industry, still they can not exercise this power beyond a certain limit.

A clear example is that of Microsoft in the software industry. When this firm went a little too far with its powers, others in the industry jumped in to safeguard their rights and thus cutting down Microsoft’s powers to half. The same applies to the hardware industry, even if one firm is setting all the trends, it is unwise to drag other firms along without proper consultation and not all consumers are impressed with a company’s big-name unless the quality of its offer products.

HEWLETT-PACKARD AND COMPAQ MERGER

On September 4, 2001, Hewlett-Packard Company and Compaq Computer Company announced that they would merge two companies thus creating an $87 billion global technology giant. H-P Chief, Carly Fiorina, 46, is expected to stay as the chairman and CEO while Michael Capellas of Compaq will serve as the president.

The merger will result in some 15,000 job cut-down and the acquisition may also lead to a slight decrease in combined sales in 2002 and 2003. (jpmorgan.com)

Carly Fiorina had this to say about the merger: “This combination vaults us into a leadership role with customers and partners. Together we will shape the industry for years to come.”

This merger is one of the most significant deals among the manufacturers of PCs. The last important merger took place in 1998 when Compaq had taken over Digital for a massive $9.6 billion.

The Merger was decided upon after both companies encountered plummeting profits and job cuts during the recent slow-down in the computer industry. Hewlett-Packard had recently slashed some 6,000 jobs while Compaq was forced to cut some 8,500 jobs.

It has been decided that Compaq shareholders will be entitled to 0.6325 of newly issues H-P shares for each share of Compaq. Out of the total stocks, H-P shareholders will make up some 64% while the rest of 36% will go to Compaq.

The first half of the year 2002 will possibly see the close of this deal, which is expected to result in cost savings worth $2 billion in the 2003 fiscal year and some $2.5 billion in 2004.

The new giant is expected to accumulate annual earnings of $3.9 billion and will have some 145,000 employees. Since H-p is taking over, the new giant company will be based in Palo Alto, California, which has been H-P’s home for many years now.

The company will be divided in four operating units, a $20 billion imaging and printing unit; a $29 billion device unit; a $23 billion information technology infrastructure unit; and a $15 billion services unit.

PROBLEMS WITH MERGERS AND ACQUISITIONS

Now that it is known that the merger is taking place, let us see what problems the world leader may have to encounter after the acquisition. It is common knowledge that many corporate marriages fail to last for long, because the acquired companies are not as easy to manage as was supposed. For one the marketing strategies of two companies differ widely, no matter how similar the fields they excel in are, still any two companies can never be the same in their marketing approach.

The same can be the case with H-P and Compaq as they have been known for their own unique products and the consumers will be expecting the two giants to produce even better brands, brands that would be just as big and exclusive as the company producing them.

Jonathan Angel, a senior editor with industry weekly Technology Marketing supports that speculation saying,
“There is a big, big danger if they don’t execute this quickly, they will lose customers on both sides, they don’t know if a product they buy today will be a dead product line or whether it will be supported.”

This problem has not escaped the H-P Chairman and CEO, Carly Fiorina who presents a solution by proposing that H-P should remain the brand name while Compaq’s name will be used for secondary production line. But its easy said than done, as Bernd Schmitt, director of the center on global brand leadership at Columbia Business School puts it:

“Both are currently struggling, but both are major brand names, to come up with an entirely new name would be extremely risky and cost a lot of money. But the problem with merging names is confusing customers.”

The merger, as we already mentioned, has created the biggest PC manufacturing company but the question is, will consumers be impressed by the big name alone? Well that doesn’t seem to be the case, it has been noticed before that corporate marriage fail because consumers are confused about the true identity of the brand they are buying and for customers around the globe, this is very important. They need to know which brand they are purchasing, but with a merger, this may become a problem as consumers would be left wondering whether they bought H-P or Compaq. Even if they are convinced that the brand is exclusively H-P’s, it will not be easy to convince that Compaq wasn’t playing a role somewhere in the production.

Chances are, that consumers will view the products offered by the merged company as a new brand in the market. So what if both H-P and Compaq have been in the market for a long time, this is the first time they are bringing out products as a combined unit. While some are skeptical about the new company and how the products would be perceived, some experts of the field believe that the merger may prove very positive and healthy for the whole computer hardware industry.

Len Roberts, chairman and CEO of RadioShack, the country’s largest electronics retailer, with 7,100 locations is one such person, “Hewlett-Packard and Compaq coming together will spur the next big product cycle, I think the issue the Street is missing is that this is the ultimate bet on broadband. What they are missing is the impact Hewlett-Packard and Compaq could have on broadband and the demand for more powerful platforms, networks and services in homes and small business”

Though Wall Street did not react positively to the news of the merger, industry experts are viewing the acquisition as a good sign, which might bring some consolidation to the plummeting computer market. Andrew Neff, PC industry analyst at Bear Stearns, went on to say that it would not be that bad if Dell decided to buy IBM’s personal computer business or if Japanese companies like Toshiba or NEC take over Gateway Inc.

Well, that may not actually happen, but then in this industry with its current troubles, nothing is certain and almost anything is possible. Andrew Neff may have been just speculating, when he talked about more mergers likely in the future, it would not be wise to deny the possibility of such a thing ever happening because Andrew was sure in the beginning of the year that H-P and Compaq might cut a deal.

Like many others in the industry, Andrew believes that it would take some time before people can come to terms with the fact that the two major brands have come together. “Whenever you have a major move like this, the industry tries to absorb it, and that may take at least a year,” he says. “You could get other moves on a smaller scale in the interim.”

Industry analysts are also warning the merged company of possible loss of customers not because of the confusing brand identity but because the big names in the markets such as Dell, Sun Microsystems and Gateway will try their best to cash in on the confusion. They would make all possible attempts to snatch customers while H-P would be struggling with the challenges of the merger. And challenges it will have to face on a global level, for this company is anything but small and therefore the magnitude of problems would be at par with the size of the company.

The reasons why companies are thinking of mergers in the computer industry are as follows:

GLOBAL PERSPECTIVE AND CAPACITY

With the companies moving to newer pastures, it is only natural that they face increased competition. The computer industry around the globe becomes more and more competitive with many new names emerging every year. This only scares the giants of the industry, which have been encountering a slow-down for the first time in decades. Naturally, they look out for possible mergers in order to create a name so big that people would be impressed by the size alone.

PRICING PROBLEMS TO STEAL BIGGEST MARKET SHARE, LED BY DELL AT THE MOMENT.

Mergers are also likely because of the pricing problems. If two companies merge they feel they can offer more competitive prices and thus steal the biggest market share. This must have been on H-P’s mind too because so far Dell ahs been enjoying the lion’s share of the market.

DECREASING DEMAND AND NOT SO POSITIVE ECONOMY CONDITIONS.

Slow-down in the economy is not something new for the companies now, it has become common knowledge that little hope exists for computer industry to rise for some time. In the second quarter of this year, the number of computers sold fell for the very first time in 15 years and this just goes to show that the struggling economy is definitely going to affect the computer industry. And if this was not enough to force the merger, Dell came out to be the only winner as it was able to grow a little while all others were facing stagnation.
“It’s like any industry in the later stage of its life cycle,” Neff points out, referring to the same thing happening to aerospace and automobiles industry some time back.

HOW MERGER AFFECTED THE SHARES OF OTHER COMPUTER COMPANIES

When the news of the merger came out, it was obvious that the other players in the market will be affected, some more seriously than others. It was clear that the biggest merger of the PC industry was seen as a threat to other existing companies in the industry because the emerging powerhouse is more likely to take over others in PC, server and handheld computer business in a short span of time. Keeping this in mind, investors tried to find out who will be able to survive and who will sink in deeper waters.

LOSERS:

LEXMARK: This printer firm lost 9% on the shares fearing that Compaq’s merger with the best printer brand in the world might hit this company real hard. Lexmark was formerly a unit of IBM and it had been in business with Compaq, selling ink-jet printers with Compaq brand name since 1998. John Leo of Northern Technology Fund says, “Lexmark could lose to the more robust H-P organization,”

PALM: There is a strong chance that Palm may suffer badly as a result if the biggest merger. Though the company has been in the business of manufacturing handheld computers for some time now and grosses top market share in this area, there is a possibility that H-P and Compaq’s iPaq and Jornada models may well take over the market.

SUN MICROSYSTEMS. Bob Turner at Turner Investment Partners is of the view that Sun Microsystems may have to face some decrease in market share as H-P can succeeded in server manufacturing very easily.

WINNERS:

DELL: Dell is one company that can sit back and relax while the merger takes place because the company’s shares rose some 4% when the news of the merger came in. With investors believing that H-P and Compaq will be facing so many problems for some time, they may not be able to focus of the PC area where Dell is already the most successful. Though it is clear that Dell will now have a much stronger and fiercer competition at hand, Carl Howe of Forrester Research says, “This monster is harder to kill.”

IBM: IBM is not likely to get hurt by the merger because their role in the services business has been massive and H-P and Compaq have tried to copy the moves of this giant in the past. Which just goes to show that it will be some time before they can even think of taking over IBM’s services shares, if ever.

REFERENCES:

1. Timothy F. Bresnahan and Shane Greenstein, March 1999, Technological Competition and the Structure of the Computer Industry

2. Business Week: Innovation in America, October, 1989

3. Competition in computer Market, On overview By JP Morgan at http://www.jpmorgan.com/MarketDataInd/Research/pc_industry/pc_ind.pdf

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