HP's announcement that it is considering spinning off its PC business surprised a lot of people given that it's the largest seller in the industry. But it was an inevitable consequence of the value chain strategy that the company pursued in a highly constrained innovation space — one in which the hardware platform is defined by Intel and the software experience is defined by Microsoft.
This constrained innovation space is a direct result of Intel's commoditization strategy. Back in the early 1990s, when Intel was seeking to "pace" the market for PCs, it introduced a set of standards for desktop PCs that commoditized all of the hardware components beyond the microprocessor. The "ATX" standard drove complete interchangeability of motherboards, add-in feature cards, memories, disk drives, power supplies, cabinets — components that Intel did not manufacture. Commoditization of everything else meant lower bill-of-material costs for PC assemblers, which translated into lower selling prices for consumers and higher sales volumes. And since the software experience was standardized and controlled by Microsoft, consumers could have consistent product expectations regardless of the brand of the PC. This changed the basis of competition for PC manufacturers. Companies like Dell rose to the forefront on its "late configuration" model, customizing for consumers with its build to order model.But where were the opportunities for innovation if you were a branded PC manufacturer? The color of your PC or the shape of your keyboard? Or maybe in all the useless "crapware" that branded sellers loaded on to your PC in exchange for subsidies from hopeful software vendors that wanted to entice you with trial versions of their product?
Intel's model of driving the production of undifferentiated commodities among its OEM system partners ensured that none of them would have sufficient margins over the long term to be able to afford to do anything innovative. Some resorted to industrial design. IBM was able to sustain some differentiation when it first introduced its ThinkPad line of notebooks in the early 1990s, but much of that came from its early investment in color TFT flat panel displays that were so important to making notebooks competitive with desktops.
Over the long haul, competition eventually took margins to unsustainably low levels for everyone except Intel and Microsoft. I was the assistant to Jack Kuehler, the president of IBM, in 1989-90, and I recall him telling me even then that over the long term PCs were not a business that IBM could stay in. The economic model just did not work for a company that wanted to invest in innovation and differentiation.
Certainly Dell rode its consumer direct, late configuration model for a while, until notebooks disrupted the desktop business and retail delivery became an important sales channel. HP thought it could win with scale. After purchasing Compaq in 2002, the company drove a commodity strategy by consolidating purchasing power in its supplier network and focusing on retail channel execution. By playing its Taiwanese suppliers off against each other, it was able to be the low-cost player. "The HP-Compaq merger was paid for in Taiwan," was a refrain I heard frequently. Taiwanese suppliers fought over the privilege of bringing new technology to Apple, but nobody wanted to bring exciting things to HP.In this model, nobody made enough money to invest in innovation except Intel and Microsoft. For a publicly traded company like HP that is judged on profitability and gross margin performance, earning a return that would satisfy investors by playing in the commodity part of the value chain was ultimately impossible.
No comments:
Post a Comment