Porter’s Five Forces Analysis of Hewlett Packard (HP)

Hewlett-Packard is categorized in the Diversified Computer Systems industry of the Technology sector. Within the Computer Systems industry Hewlett-Packard has many high profile competitors such as: Canon, Dell, IBM, Apple, and Cisco Systems. The Computer Systems industry contains a large range of products including but not limited to: desktop computers, personal notebooks, printers, scanners, cameras, and different software programs. Most companies, such as Dell, Apple or Gateway, tend to be limited to a small product range. Compared to other industry competitors, Hewlett-Packard has a wide variety of consumer products. This gives HP a competitive advantage in the consumer market due to their brand name coverage in the technology industry. Hewlett-Packard offers desktops, notebooks, handhelds (pocket PC’s), monitors, home networking, televisions, digital photography, printers and printing supplies. Hewlett-Packard does not specialize in just one product line. With new technology innovations, some of their previously lesser known lines have grown to be some of their largest. In the past five years, Hewlett-Packard’s imaging and printing division has grown substantially due to the popular home photography printing.

Porter’s Five Forces Analysis of Hewlett Packard (HP)

Porter’s Five Forces Analysis

Competitive Force 1: Rivalry among Existing Firms

Competition among existing firms is one of the biggest threats for Technology Industry companies. There are many large companies with a strong foothold in the technology industry, making each competitor’s revolutionary idea a factor in the consumer’s decisions. In the past ten years, the technology industry has grown exponentially. The size, quality, functions and appearance of all technological devices and software are continually improving. A good example of the technological revolution is the ever changing photography world. In the past decade, the camera has changed from a 35 mm camera, with removable exposures, to the now modernized, sleek digital camera which stores your images digitally until you are ready to print your pictures. With what seems like daily changes, companies have to stay on top of their research and development to keep their product up to date. The same updates are needed with computers, which are always become outdated faster than expected. All of these factors increase the competition among existing firms. There is a high degree of concentration in this industry within the largest companies including: Apple, Dell, HP, IBM, and Sony. At one point, IBM was the industry leader, setting the bar for price and quality, but over time, other major competitors have stepped up to the plate with new technology and price cutting initiatives. In today’s market there is not one particular company which dictates the overall computer pricing, as these leaders work together to avoid harsh price competition. Along with these larger companies there are also smaller competitors including: Gateway, Compaq, eMachines, and Velocity Micro. Many of these companies overlap in competition, with products ranging from desktops to cameras to mp3 players. In each of these markets, there are different industry leaders.

In the computer technology industry, there are incentives to hold a strong market share by setting lower prices or having new innovative ideas. Dell came into the market aggressively with a ground-breaking business strategy. They cut out the middle man, selling their products without a retail store, and were able to offer an industry leading low price. The other large competitors, such as HP, could not match this low price incentive, given their higher fixed costs involved in their sales. Hewlett-Packard’s only way to compete with industry leaders is to keep a low variable cost. To even begin competing in this industry, one must not only have the technology needed but also the economy of scale. In this modern world, a company in this area need not worry about excess capacity, due to the high level of demand for such sophisticated products. This also covers the problem of exit barriers, since at this time technology is only rising.

There is obviously a high degree of rivalry among existing firms in the technology industry. With new ideas and cost cutting initiatives being thought of everyday, those competing in this industry must keep up with these changes. This involves creating brand loyalty, diversifying your company, being able to create new ideas and being able to match your competitor’s advances. Implementing these ideas allows a chance to keep up with the technology industry leaders.

Competitive Force 2: Threat of New Entrants

Having new entrants into the technology industry may seem impossible, but when you think about the different areas they could enter into, it is not as hard as it seems. Yes, it may be difficult for a new technology company to come about, but there is also the angle of existing companies to creating new technological products. With this idea comes the threat of new entrants.

In order for a company to enter this industry it would require large economies of scale. To compete in this industry, a large amount of capital is required. New companies trying to make a foothold in the technology industry will suffer from economies of scale in research and development, brand advertising, and possibly physical plant and equipment. It takes a lot of research and development before a product can initially be launched, which is a large problem for new companies without sound financial backing. In order to keep up with competitors, most companies need to begin to generate revenue in the early stages of the company’s life, rather than having to spend excess amounts of money. The companies which are currently competing in the industry have already established themselves among the consumers as reputable producers of technological products. Not only have they put in capital, but also the time to gain their brand recognition. A new company cannot automatically buy brand recognition; it involves being set in the marketplace to gain consumer confidence.

If a company was attempting to enter into the industry it would be beneficial for them to have a new innovative product. This would allow them to gain a first mover advantage over the existing competition. For example, Apple has gained an advantage over the rest of the technology industry with their addition of iPod and iTunes in 2004. Since it was the first, iPod is now the benchmark mp3 player, making it difficult to rival their ever-changing technology. This is where the idea of already existing companies bringing in new products comes into play. For example, recently there has been the development of a portable USB port. This allows a PC user to insert a device (the USB) into their computer and save their work in the USB. They can then insert the USB into any other computer and have their work uploaded, quickly and simply. This has become a large industry, and many companies have begun producing these products.

Another barrier to entry is the already established distribution channels and relationships among suppliers. It is common in an industry which uses many different suppliers, for exclusive relationships to be developed. In cases such as this, many times it becomes difficult for new competition to gain such advantages. In the technology industry many of the components are produced overseas. These foreign barriers also create another problem for new entrants.

Seeing that the computer systems industry is so research-intensive, there are many patents and copyrights already in existence. This creates legal barriers for the companies trying to gain a new market share. With such high barriers of entry into the technology industry, it is apparent why we haven’t seen a new company come into the market. Although, it is unlikely for a new company to gain market share in this industry, you still have to be aware of the possibility of new products entering the industry. This is the main threat of new entrants.

Competitive Force 3: Threat of Substitute Products

In this modern technology era that we live in today, technology companies service the everyday and practical needs of the consumer. In most businesses and homes today, people use some form of computers, software, printers, networks, cameras and televisions. There is currently no substitution for these sophisticated devices unless you resort to the old technology. The problem is that we rely upon the technologies of these new devices in our everyday day lives.

Before the invention of the computer, the most commonly used mechanical device in the business world was the typewriter. Many people do not use this substitution to the computer in this day and age. The computer took over the typewriter long ago and will continue to be the most popular tool for consumers in the future. The invention of the digital camera has paved the way for a whole new line of home accessories for home photography. Digital cameras have replaced the old 35 mm cameras that were used by every family just ten year ago. There is currently no substitution for the quality and the convenience of the cameras produced today.

Overall, you could say there are limited threats of substitute products currently in this industry. While new products are invented regularly, it is hard to think of something that has the possibility of replacing the computer all together. It also seems that a digital camera is a technologically advanced as it is going to get for a good amount of time. For this reason, there is a limited threat of substitute products.

Competitive Force 4: Bargaining Power of Buyers

Factors that affect the bargaining power of buyers are price sensitivity and relative bargaining power. The computer industry is comprised of several other companies such as Apple, Dell, Hewlett Packard, and Gateway. Some of these companies specialize only in producing computers; while others produce computers along with other electronic products such as printers, cameras, and other hardware. Each company needs to be aware of their buyers through their price sensitivity and the bargaining power of buyers.

Price sensitivity determines the extent buyers choose to bargain on price. Buyers are typically less-price sensitive because of the amount of differentiated products. The buyers’ price sensitivity also depends on the importance of the product to the buyer. For example, computers are used every day in people’s lives. This makes the computer industry very valuable to customers. In return the buyers are going to be sensitive to the price of the product due to the importance of the product in their lives. This causes the buyer to shop around more for a similar product at a better price. The shows that buyers are price sensitive, which encourages other companies to compete for a lower price and better quality. Some computer companies such as Hewlett Packard already compete on quality. The importance of the product quality to the buyers determines whether or not price becomes an important determinant in the buying decision.

Buyers have a relatively strong bargaining power in the computer industry. A buyers’ relative bargaining power depends on volume of purchases bought by a single buyer, number of alternative product available to the buyer, and buyer’s cost of switching from one product to another. First, there are several major electronic stores, such as Best Buy and Circuit City, which carry a large quantity and variety of computers. This makes stores product cost of computers cheaper because they can purchase a large inventory at one time. Buyers also have strong bargaining power because there are several computer companies in the industry, all with a similar product that performs similar functions. This allows the buyer to “shop around” for the best deal on a computer. The switching cost is relatively low because most software programs can run on any computer. Also, other electronic items such as cameras and printers are compatible to be set up on any brand of computer.

Buyers relative bargaining power depends on volume of purchases buy a single buyer, number of alternative product available to the buyer, and buyer’s cost of switching from one product to another. Buyer’s bargaining power also increases due to the number of alternative products available. Local electronic stores have high competition from products that offer the same hardware but at a cheaper price. Buyers benefit from the number of alternative products available and the competitiveness of the companies. Overall in the computer industry buyers have a relatively strong bargaining power.

Competitive Force 5: Bargaining Power of Suppliers

Suppliers are powerful when there are few substitutes, the product is critical for buyer’s business, and when they pose a credible threat of forward integration. Suppliers are most powerful when there are only a few companies and few substitutes available to their customers. The computer industry has several companies that all produce similar products that are needed by the customers for their daily business.

Suppliers are powerful when there are only a few companies and few substitutes available to their customers. In this industry, suppliers show a low bargaining power due to the amount of substitutes available. Several companies such as Apple, Dell, Hewlett Packard, and Gateway all produce computers that compete with each other.

Each computer company is very powerful over their suppliers of hardware for the computer. There are several companies and several substitutes available to the customers which make the supplier’s bargaining power low. Suppliers also have power over buyers when the suppliers’ product or services is critical to buyers’ business. Suppliers realize that technology is leading the world today.

From calculators to personal computers, the human population is relying more on technology for everyday use. This lets suppliers control the industry price. Even though there is intense competition in the computer industry, suppliers realize how important computers are to everyday business and can maintain a sustainable price to meet the demand. There is very little threat from the suppliers to forward integrate. The threat is minimal because Intel, AMD, and Microsoft can not sell directly to customers because they do not make personal computers, imaging devices, or servers. For the competitors to advance in this area it would cost too much and there are too many disadvantages due to barriers of entry.

Suppliers have high bargaining power when there are few substitutes, the product is critical for buyer’s business, and when they pose a credible threat of forward integration. Suppliers have a low bargaining power when it comes to substitutes products, but are able to maintain an overall high bargaining power because computers are critical to everyday business. Although suppliers possess little integrations and high competition, they still maintain a high bargaining power through the high demand for technology.

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