The drivers of HP's recent success have been two-pronged. The company has undergone significant cost cutting measures. At the same time, the company has focused on driving growth in key areas such as software and services. Software and services are generally much higher margin than hardware. IBM, which generates most revenues from services, realizes operating profits nearly twice as high as either HP or Dell. This transition continued with HP's acquisition of business network producer Electronic Data Systems (EDS) in August 2008. In 2009, HP completed its acquisition of Palm for $1 billion, or $5.70 per share, giving HP a foothold into the smartphone market.
HP is the global leader in Personal Systems and Imaging and Printing. The company HP provides a wide range of products and services to its customers and is divided into six business segments:
Hewlett-Packard is the world's largest manufacturer of personal computers in the world in terms of unit volume and annual revenue. Its Personal Systems Group (PSG) is responsible for the development and sale of HP's commercial and consumer PCs, workstations, handheld devices, digital entertainment systems, and other related services and accessories.
Hewlett-Packard is the leading provider of imaging and printing systems in the world. HP's Imaging and Printing Group (IPG) provides consumer and commercial printer hardware, printing supplies, printing media and accessories, and scanning devices.
HP is one of the leading providers of servers in the world, offering a wide range of servers and storage products and solutions for small businesses and larger corporations. The Enterprise Storage and Severs (ESS) segment offers industry standard servers, business critical systems, and storage products and services. The recent acquisition of EDS will make HP the second largest producer (after IBM) of data systems and data processing for businesses and large enterprises.
This segment offers a large variety of information technology services, including technology services, consulting and integration services, and managed services. Technology services range from individual product support to business technology solution services for global corporations. Consulting and Integration covers the design and execution of technology solutions for customers. Managed services include outsourcing, managed web services and other services. HP Services works with HP's IPG and ESS segments in order to provide customers with full, end-to-end business solutions.
HP's Software segment provides management software solutions that assist large companies in managing their operations and information technology infrastructure through HP's OpenView software brand. HP Software's other major offering is the OpenCall brand which offers a platform for utilizing voice and data services for network providers. HP recently acquired the Mercury Interactive Corporation, an IT management software and services company, in order to further expand the offerings of HP's Software segment.
Hewlett-Packard offers financing, leasing, and other financial management services for its larger enterprise customers, small businesses, and educational and governmental customers in order to allow its customers to purchase complete end-to-end information technology solutions.
On April 29, 2010, HP acquired Palm for $1 billion in cash. HP paid $5.70 a share, a 23% premium, for Palm. Palm, famous for its Palm Pilot, has seen heavy competition from Apple's iPhone, RIM's Blackberry, and other smartphones running Google's Android software. Palm, whose newest phones Pre and Pixi were largely unsucessful, has seen its share price drop and it has been unprofitable since 2008.
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Although HP's main competitors are Dell and IBM, each of these companies has a different focus area. Dell makes most of its money on PC and server hardware, while IBM has shifted towards a IT services provider. HP provides both of those offerings but maintains a large cash cow business with its printers, which generate half of all operating profits.
In terms of revenue, HP is the largest producer of personal computers with Dell coming in at a close second. However the PC market is fragmented with the top ten companies accounting for only approximately 57% of global desktop sales. The notebook market is more concentrated with the top ten companies controlling over 80% of the market. In the server market--which is generally higher margin that PCs--HP is a close second to IBM, with Dell ranking third.
IBM is a far more profitable company than either HP or Dell. This can largely be attributed to IBM's 40+% gross profit rate from its high-margin services business, which generates over 50% of its overall revenue. As a more profitable enterprise, IBM has the opportunity to reinvest in its business and take back the leading spot in the IT industry.
While HP's two largest competitors are IBM and Dell, neither of these two companies produce printing and imaging hardware. This is one of the largest differences between HP and its competitors because such large portions of revenue (27%) and operating margin (over 40%) come from HP's Imaging and Printing segment.
The printer market can be divided into two product categories--inkjet printers and laser printers--where HP's major competitors include Lexmark, Canon, Epson, Xerox and Samsung. HP is the market leader for both types of printers.
A majority of revenue and nearly all profits in the Printing and Imaging segment come from the sale of ink cartridges, which extend the revenue streams from a printer hardware customer by 3 to 4 years. As such, one of the biggest threats to their cash cow business is the emergence of cartridge remanufacturers or refillers, especially for the inkjet market (laser cartridges are much more complicated). Various companies are getting into this game and cutting into HP's cartridge sales.
While HP has responded to this competitive threat by defending patents on its cartridges and creating their own programs to collect empty cartridges, continued growth from this sector will put pressure on both sales and margins of this business.
HP's April 2010 acquisition of Palm has boosted the company's market share in the competitive smartphone market. Palm accounts for 5% of smartphone sales in the US and 1.5% smartphone sales worldwide. Prior to the acquisition, HP, which has been selling its own iPaq since 2007, has only had 0.1% of the market share.
HP used to license Microsoft's Windows Mobile OS for its iPaq handsets. After its acquisition of Palm, HP also received Palm's webOS. Other competitors such as like Apple and RIM also control the hardware and software on its devices. However, other companies such as HTC, Motorola, Samsung, and Sony Ericsson use Google's Android OS on their phones.