HP Case Study Contents 2 1.Explain the notion of a business model. Illustrate your answer using an example of a broad differentiator. 3 2.What were the reasons provided by Carly Fiorina to justify HPs acquisition of Compaq? 4
3.Why were Fiorina's arguments for merger considered to be weak by analysts? 5
4.Discuss briefly Dell's and HP's business models 5
5.Explain why competitive advantage in the PC industry was moving away from Dell and toward HP. What was Dell's strategic response to the rising competitiveness of HP? 7
6.Explain the agency problem and suggest ways to reduce the chance of managers acting against the interest of share holders. 8
7.Under what conditions is: 9
a)Is Acquisition appropriate to enter a new market? 9
b)Joint ventures appropriate to enter a new market? 10
Explain the notion of a business model. Illustrate your answer using an example of a broad differentiator.
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Business model describes entire procedure of creation, delivery, and capturing of organizational values in both economic and social aspects. It represents core aspects of the business which include strategies, organizational structure, purpose, operational processes, policies, infrastructure, and trading practices. Entire functioning of the business is based over this business model as it provides guideline to the organization to carry out all its activities. Thus there is a need to define business model of any organization at first in an explicit manner to avoid all the discrepancies at first end. Business model directly focuses over customer needs as it is this particular aspect along with product differentiation strategy, i.e. to introduce new product to make sure that company is able to capture optimum market share. This model also specifies customer groups through market segmentation to directly focus over those market sectors that will provide maximum return to the associated product. Business model can also be held responsible for defining distinctive competencies of the company that will ensure that the company is positioned at highly appropriate and differentiated place in the market. Broad differentiator is the USP (Unique Selling Proposition) that allows company to differentiate its product from its competitor's product.
Nokia is one of the top companies operating at global level in cellular phone market. This is due to its extremely proficient business model which had established well linked structure within itself that makes it possible for the company to take care of its customers in a best possible manner. Its business model is based over three distinct features, i.e. innovation, reputation, and relationships. It is these features that lay the foundation for Nokia to gain competitive advantage over its competitors. It is also required that Nokia retain a balance in all these facets such that it is able to not only retain its previous echelon of market share, but also augment it in currently prevailing situations.
What were the reasons provided by Carly Fiorina to justify HP's acquisition of Compaq?
HP's acquisition of Compaq was one of the biggest acquisitions that took place in the market. It was derived by rapidly increasing market share of Dell which both HP and Compaq were not able to handle. It became highly difficult for both the companies to tackle competition provided by Dell alone. Thus Carly Fiorina took decision regarding acquisition of Compaq as it will provide several advantages to both HP as well as Compaq which will help them in strengthening their structure and make sure that they are able to deal with changing external environmental conditions. This was based over cutting of two major expenses, i.e. employee strength and administrative costs which are common to both HP and Compaq and can be eliminated will help them in ensuring that they are able to form strategies in a combined manner. This acquisition saved both HP and Compaq with a lofty amount of $2.5 billion per year. Also they were able to lay off 15,000 employees as a result of this acquisition. Though it was not accepted by all the people as some said that they are facing problems because of cost strategy of Dell against which this acquisition was providing no solution.
Why were Fiorina's arguments for merger considered to be weak by analysts?
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Fiorina's decision for merger of HP and Compaq in 2001 was not accepted by all, as some analysts referred to it as a weak decision. This was due to the fact that Dell's business strategy was to provide low cost PCs with the help of its efficient supply chain management. It was able to remove all the distributors from its supply chain and establish a direct link with its customers. This made it possible for Dell to capture sufficient market share within no time. But merger of HP and Compaq did not laid its focus over this particular aspect and took only cost cutting into consideration, which was pointed out by the analysts. Also HP despite of being a market leader in printer segment was lagging behind in consultancy area. According to Fiorina, through this deal, they would be able to raise their market share, but according to analysts, its market share would still not rise beyond 3% as it was expecting.
Discuss briefly Dell's and HP's business models
Dell's business model is quite a unique and was never seen before when it was brought into the market. It tries to establish a direct link between the company and its customers. Linking them directly made it highly difficult for the other organizations to match the product cost offered by Dell. This was also highly difficult for HP to make sure that people are able to retain their customer loyalty when they were offered significantly low price for the same product by other company. This removal of supplier cost was used directly for benefiting customers as it was a new entrant in the market and had to follow a differentiating strategy. An important aspect of Dell's new business model makes an inclusion of green technology, i.e. using those raw materials and techniques that cause minimum harm to the environment. This is referred to as Green IT. In this conduct, its business model also complies with the law at both global as well as internal level.
HP on the other hand follows a business strategy of decentralization being directly commanded from center at the same time. It has diversified domains of operations that help in making it possible for the company to make maximum use of the market opportunities. HP also ensures that it relate all its product line in such a manner that it acts in a constructive manner for the organization. Like it is a market leader in printer section, so it try to integrate it with its PC selling which will help it in making use of its image in one segment to make profit in another segment. HP is also seeking to expand its business model by entering into a new segment, i.e. cameras. Along with it, HP is initiating Print 2.0 strategy which is totally based over three aspects,
Providing next generation digital printing which lowers the cost and increases speed.
Making web printing easier.
Making publishing platform to all customer segments by extending its digital content creation.
Explain why competitive advantage in the PC industry was moving away from Dell and toward HP. What was Dell's strategic response to the rising competitiveness of HP?
Competitive advantage in PC industry was shifting away from Dell towards HP as HP had achieved its targets of cost cutting by identification of redundant cost within the organization. This step increased its profit margin that raised company's profit beyond pre-defined limits. It also made it possible for the organization to make further investment in other projects to gain competitive advantage. Also Dell's entry into printer and various other electronic items was not considered to be a good decision as it was not able to attain market share except PCs. All these parameters led to moving away of competitive advantage in PC industry from Dell towards HP. Another factor that leads to this shift was that Dell's main competitive advantage was cost efficiency and without it Dell did not had any extra USP. After the acquisition, HP also started cost effectiveness in its production, which provided stiff competition to Dell and as a result HP was able to raise its market share beyond certain pre-defined level, i.e. expand its supremacy from printers to computers and notebook segment.
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In response Dell broadened its echelon of differentiation in order to raise its market penetration and deal with its prime competitors, i.e. HP and Apple. Dell bought Alienware PC maker to raise its differentiation along with making a move towards physical retailing industry by opening Dell PC stores at various locations. Finally Dell also adopted a cost saving strategy by using cheaper chips manufactured by AMD rather than Intel with which it was formerly dealing with. Along with all these cost cutting measures, Dell also entered into printer segment, which was ruled by HP. But Dell was not able to attain success in that segment. Also initiations like breaking up of contract with Intel were considered to be as wrong decisions in business aspects according to analysts as Dell was not able to fulfill its long term business commitments due to its immediate needs.
Explain the agency problem and suggest ways to reduce the chance of managers acting against the interest of share holders.
Agency problem refers to conflict arising due to different interests of shareholders, creditors, and management associated with an organization. Such kind of conflict general arises when there is a discrepancy that how the organization should be run. This problem arises as shareholders are more interested in maximizing their profits without concerning much about the long term benefits that they might gain, but management is more interested in long term profits rather than short term profits along with enjoying a number of perks which is generally not acceptable by the shareholders. Best way to sort this problem out is by maintaining a balance between long term and short term profit with which both management and shareholders are concerned.
There are several ways in which agency problem could be resolved, like
Proper compensation plans should be followed by the organization in order to make sure that management is not deprived of the profits that are generated by their operational efforts. This should also be approved by Board of Directors such that all the ambiguities could be avoided at later stages of organizational functioning.
Auditors could be appointed to find a balancing position between management and shareholders of the organization such that negotiation could be justified for both the ends.
Specialist monitoring can also be used by shareholders as it will ensure that all the management activities are taking place as per the planned manner without making any deviation during their execution.
Under what conditions is:
Is Acquisition appropriate to enter a new market?
Acquisition refers to integration of an acquired firm by another firm. Whenever acquisition occurs, only a single entity is left with no name of other entity. But acquisition may create problem if initiated in new market as acquirer is completely new to the market while acquired company has lost its identity. This might create operational problem for the resulting entity as they do not have much experience in this domain. Also there is a possibility that already existing staff is laid off from the organization, in such a case if some problem arises, management might not be able to cope up with the situation. But if no major changes are made in operational aspects of the company, acquisition to enter new market will not totally be considered as a wrong decision. Like acquisition of Compaq by HP lead to a positive resulting entity as both of them were operating in the same sector. This step could be advantageous for the company also as an organization is entering into another sector which acts as hedging its risk due to investment in two different domains. But disadvantage associated with it is that company which is acquiring does not have any experience of the new sector, thus there might be difficulties in dealing with new problems arriving in front of management.
Joint ventures appropriate to enter a new market?
Joint ventures can be referred to as best possible option to enter into the new market as in this kind of merger, both the entities retain their identity and ensure that both the merging units are making maximum use of the agreement. In such a case, a company though new in a particular market will get total support from its partner regarding its deficit areas. In this way, they could complement each other by fulfilling each other's need and making sure that decisions taken are beneficial for both the entities. Thus joint ventures are highly appropriate to enter into new market. Prime advantage of a company entering into new market with a joint venture is that risk associate with it is significantly low as its partner already possess certain market share and with extra resources provided by other company it will lead it towards capturing of more market share with proper management. Prime disadvantage associated with it is that risk associated with the market does not get reduced. Like, if entire sector is not performing well, venture would not be able to take care of their profits as they have single revenue source.