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Both Dell and HP are two strong players in PC industry which refers to an industry where companies produces PCs (desktops and notebooks), handheld devices (smart phones and tablets), and workstations. However, with growing global expansion, Dell and HP’s performance differs. Dell, once the world’s largest PC maker in 2001, has continually lost its market share to HP and Acer since 2007 (Guglielmo 2009). The cause is rooted in two differences of these companies: company diversifications and core competences.

Therefore, how firms can continually survive in the PC business is more of an issue for Dell than for HP. Nevertheless, survival is not enough. Mainly because of the fast declining average selling prices (ASP) annually, both Dell and HP’s PC business face pressures from thinner profit margins (Menn 2010) Therefore, to win the battle, finding a new growth opportunity should be in the center of Dell and HP’s future strategy. Hence, this essay first presents the background of these two companies. It then looks at how PC business can survive by analyzing the causes of Dell and HP’s different performances in PC business.

Thirdly, it briefly evaluates four options as a future growth engine. 2. Background 3. 1. Motivations Motivation| Dell| HP| Pre 1970sMarket and Resource Seeking| Not born yet| Provide growth1959: Establish the first foreign marketing organization and manufacturing plant in Europe, but did not focus on PC business | 1980s-2000sCompetitivePositioning| Capture global scale1990: Expansion to EMEA: Europe, the Middle East and Africa 1993: Entries into APJ: Asia Pacific and Japan| Match Dell’s scale in PC2002: Merger with Compad Computer Corp. 1990s-2000sWorldwide Learning| Recruit skills, expertise2007: Decide to refocus on innovation and set up more R&D centers. 2009: 7 design centers | Leverage global intelligence1990s: HP Labs opens in Japan and Israel2010: 23 HP Labs operate in 7 countries| TABLE 1 Motivations Comparison Historically, HP started its global business earlier than Dell, but the focus was not on PCs until 2000. In contrast, Dell, focusing on PCs, quickly expanded its business globally since 1990 (Dell 2011). Therefore, to match Dell’s scale, HP merged with Compad in 2002 (HP 2011).

In terms of worldwide learning, HP began to leverage global expertise much earlier while Dell did not realized the importance of worldwide learning until 2007 (Dell 2007). 3. 2. Means Means| Dell| HP| Pre-requisites| One competenceLow cost business model| A portfolio of R&D competencesMeasurement, computing and communications, summarized as HP=MC2| Process| Born Global1990: Greenfield factories| Buy Global2002: Acquiring a global PC company, Compad| TABLE 2 Means Comparison Apart from motivations, companies need to possess specific competences to succeed in foreign markets (Bartlett and Beamish 2011).

Dell’s innovative direct sales and build-to-order model, which eliminates middlemen, gave it a unique low cost advantage. Since this advantage was embedded internally, Dell started its expansion by Greenfield rather than cooperate with local companies. On the contrary, HP had a portfolio of R&D competences rather than one (Prahalad and Hamel 1994). Instead of “Born Global”, HP’s PC business can be regarded as “Buy Global” since it expanded its global PC business by buying up global companies. 3. 3. Evolving Mentality | Evolving Mentality|

Dell| Pre 2007Global perspective | Transnational Perspective| HP| Pre 2002:Multinational perspective | | TABLE 3 Mentality Comparisons HP once had a multinational mentality, as evidenced by its decentralized organization structure and culture (Accenture 1998). In contrast, Dell once had a more global mentality because in the early years, Dell did not adjust its direct models and products that much from country to country (Hill and Jones 2007). However, both companies have shown a trend moving towards a transnational mentality in recent years.

For example, Dell claimed its Shanghai R&D center would focus on local and regional customers’ needs (Ministry of Commerce of the People’s Republic of China 2010) and it also introduced retail sales model in 2007 (Dell 2007), while HP reorganized its units to centralized divisions and laid off redundant workers in 2002 (McShane and Glinow 2002). 3. Survive the PC Business 4. 4. The Battle Although both companies have diversified into other industries, PC industry is still their most important source of revenue. For years, these two giants are battling for lead in PC market.

When measured by market share, HP has taken place of Dell as No. 1 seller in PC market since 2007 (FIGURE 1). When measured by revenue, HP also wins over Dell for almost five years (FIGURE 2). Also, Acer grew rapidly in market share partly because of its merger with Gateway in 2007 (Einhorn 2007), and almost matched Dell in 2009. FIGURE 1 Global PC Market Share (HP 2006-2010; Dell 2006-2010; Acer 2006-2010) FIGURE 2 Revenue from PC Sales (HP 2006-2010; Dell 2006-2010) 4. 5. Issues PC industry is characterized by fast declining ASP year over year.

Together with the increasing component costs from 2009, both Dell and HP are facing squeezing profit margins (HP 2010; Dell 2010). In the first quarter of 2011, HP’s gross margin for its Personal System Group (PSG) is as low as 6. 4% (Epstein 2011). Similarly, Dell’s gross margin of PCs is often 3 to 5% (Wang 2010). This indicates that if both companies want to keep their PC business profitable, they have to further lower their costs and/or boost increasing demands every year. However, Dell faces a more severe problem than HP for three reasons. First, Dell shows its inability in creating demands.

Since 2006, Dell started losing market share to other competitors such as Acer, while HP continued to win customers during the same period (FIGURE 1). Second, although PC business is both Dell and HP’s core business, Dell’s revenue has a much greater reliance on PC sales, accounting for more than 50% of its total revenue (FIGURE 3). This makes Dell more vulnerable than HP to falloff in demand. Third, Dell shows little progress in cost control (FIGURE 4). Its past success in 1990s was based on its low cost business processes, which is already quite superior.

Therefore, limited room was left to Dell to further reduce costs. Moreover, after its entries into emerging markets, costs even grew higher with the introduction of retail sales to its old model. FIGURE 3 PC Sales as a Percentage of Total Revenue (HP 2006-2010; Dell 2006-2010) 4. 6. Sustainable Global Success? The primary reason for Dell’s non-sustainable success is its specialization in PC combined with its emphasis on the old success model, which prevented Dell from reaching any of the following goals or a combination of them at a high level: global efficiency, flexibility and worldwide learning.

In other words, Dell’s past success was largely based on supply chain efficiency, but with limited help of global efficiency which defines the firm’s ability to cut costs by global integration and to increase value of outputs through local responsiveness (Bartlett and Beamish 2011). In contrast, since 2002, HP was trying all three means: economies of scale, economies of scope and national differences to achieve those goals. That is, HP quickly established competences in global efficiency, flexibility and worldwide innovation and closing efficiency gap with Dell (FIGURE 4).

Although in 2007 Dell began to shift from the old business model, its only core competence as a low cost leader was eroded. Also, such shift did not give Dell a new competitive advantage. Therefore, this fundamental difference has led to today’s enlarging gap between Dell and HP’s performance. In this regard, HP’s leadership in PC business will prove more sustainable than that of Dell. FIGURE 4 Inventory Days (HP 2006-2010; Dell 2006-2010) 4. 7. 1. Global Efficiency With a quick global expansion, Dell’s direct sale and build to order model limited its ability to leverage global efficiency through economies of scale.

For example, when it entered the emerging markets such as India, Dell once intended to increase economies of scale by centralizing the assembly activities in its factory in Malaysia which serves all markets across Asia Pacific (Fortune 2011). However, unlike customers in US, customers from emerging markets prefer retail sales to direct sales. Such preference made Dell’s products not as competitive as those of its competitors, and thus sales volume was seriously affected with only 7% market share, while HP had 20. % market share in 2006 in India (Singh 2007; Corcoran 2006). Because Dell built to orders, low sales volume led to low production volume. Therefore, Dell had difficulty in reaching high economies of scale by expanding its direct sales into emerging markets while centralizing the production. Moreover, such business model incurred long delivery time and high transportation costs, which could be borne only by Dell. In contrast, for HP, since it used intermediaries, a large part of the transportation costs were shared by intermediaries.

Thus, in terms of markets where customers prefer retail sales, direct model and centralized production activity are almost mutually exclusive. That is, Dell could either stick with its direct sales model but build a local factory to reduce the high transportation costs and delivery time, or centralize production in its Malaysia factory but turn to a retail sales model to ensure that production volumes are enough to generate economies of scale. Indeed, Dell chose the former, though it also used retail sellers later on.

Additionally, other means such as economies of scope also did not work well for Dell, because of Dell’s specialization in PCs. Unlike HP who sells a mix of products, Dell relied too much on PC business. Therefore, it seems not possible for Dell to share physical assets, external relationships and learning across many different products. However, HP has done well in this regard (TABLE 4). By comparing HP with companies who best developed scope economies, HP is getting close to them (TABLE 4). Economies of Scope| HP| Benchmarks|

Shared Global brand name| HP * Value: 26867 million USD, ranking 11th , 2010 * Growth Rate: 12% * Product Variety: full range of printers, scanners, cameras, PCs, smartphones as well as a variety of IT services| Coca Cola * Value: 70452 million USD, ranking 1st , 2010 * Growth Rate: 2% * Product Variety: More than 500 different products| Shared external relationships| HP * Common distribution channels are maintained so that if any master data related to one distribution channel can be viewed and used by other distribution channels. Matsushita * It markets its diverse product mix through the same distribution channel. Matsushita, as a follower, surpassed Philip partly because of its high global efficiency. Philips operated in a more decentralized way. | Shared R&D Capabilities| HP * It plans to develop a Web Operating System (WebOS) in 2011. WebOS will then be installed in all HP’s products: Printers, Computers and Smart phones. | Apple * IOS, an advanced operating system, is shared by all Apple’s products: Ipods, Ipads, Iphones and Mac computers. | TABLE 4 The Extent to Which HP Achieves Scope Economies Interbrand 2010; Bartlett and Beamish 2011) Indeed, HP’s supply chain efficiency is still lower than that of Dell (FIGURE 4), partly because it sells a range of products through distributors. Demand visibility is reduced and thus it makes sale forecast more difficult for HP than for Dell. However, HP achieved and is more able to achieve higher global efficiency, which partly defines a successful global company (TABLE 5). Moreover, even Dell introduced retail sales model in 2007, it has already lost the battle because retail sales model eroded Dell’s only core competence of low costs.

Costs were not just from growing supply chain costs but mostly from increasing marketing budgets. Means| Dell | HP | Economies of Scale| * Moderate scale economies| * Great scale economies since 2002 | Economies of Scope| * Limited diversification leads to limited scope economies| * Effectively achieve scope economies| National Differences| * Almost fully use of factor cost differences | * Almost fully use of factor cost differences| Table 5 Global Efficiency Comparison 4. 7. 2. Flexibility and Responsiveness

In terms of the input side, HP had more flexibility than Dell in balancing the operations in three regions: EMEA (Europe, Middle East and Asia), Americas (US, Canada and Latin America) and APJ (Asia Pacific and Japan). Because growth rates in these regions are various, companies who have relatively equal presence in these regions can better ward off the external risks and take advantage of national differences (Bartlett and Beamish 2011). Prior to 200, Dell focused more on mature markets, mainly the Americas markets (FIGURE 5). However, at the same time, HP has already presented in most emerging markets mainly in EMEA and APJ (FIGURE 6).

One reason that Dell had to rely on the revenue from mature markets is that its direct sales model works well for those customers. However, since 2007 Dell has increasingly used third party resellers to increase flexibility, it claimed to shift the focus to emerging markets. Hence, HP and Dell could ultimately reach parity in terms of supply side flexibility. FIGURE 5 Dell: Revenue by Region (Dell 2006) FIGURE 6 HP: Revenue by Region (HP 2006) When it comes to the output side, Dell’s direct sales model should have given it advantages in sensing and responding to changing customer needs.

However, it did not. Specifically, Dell failed to foresee the changing trend towards personalized notebooks in non-commercial markets. It was not until 2008 did Dell start to focus on product design (Dell 2008). By contrast, as early as 2006, HP has already launched a range of personalized design notebooks targeting a mass consumer (Krazit 2006). The cause was partly due to Dell’s organizational structure. Before 2007, Dell adopted an area division, and both commercial and non-commercial customers were not clearly divided within one area division (Dell 2006).

However, these two groups of customers’ preferences became more and more differed. If Dell changed product strategies, both groups might be affected. Therefore, even if Dell had sensed the change in then non-commercial market, it could not respond effectively to the changes On the contrary, although HP benefited limitedly from direct contact with customers, a capable manager and a clear division of commercial and consumer clients within PSG, had given HP more flexibility in sensing and responding to market changes. Todd Bradley, the former CEO of Palm joined HP, as the vice president of PSG in 2005.

He predicted that the future trends would go to personalized PCs, and HP should emphasize heavily on marketing (Lal and Ross 2009). Thus, in terms of timing, HP gained an advantage in marketing in the consumer client markets earlier than Dell. 4. 7. 3. Worldwide Learning When flexibility and global efficiency reach parity, achieving worldwide learning may be a solution to survive in the PC industry. TBD 4. Win Globally 5. 7. 4. New growth opportunities comparisons 5. 7. 5. IT Services? 5. 7. 6. Integration 5. 7. 7. A Evolving Global Role