How R&D, Innovation And Integration Will Help Reverse HP’s Market Share Decline

HP Market Share Highlights

• Declined from 4.9% to 3.4% between Q1 2003 and Q3 2011 in the IT market
• Fell in IT Service and Hardware categories, while growing slightly in Software
• Fell continuously in the Americas and EMEA and despite growth, remains small in Asia Pacific
• Has not recovered from 2008’s step decline in large accounts
• Has done badly in Finance and Transport/… sectors
• Has been maintained in Manufacturing and Health sectors
• Should consider investing more than 2.6% of its revenues in R&D
• Should focus on breaking internal silos by training and redeploying smart managers
• Should build more integrated solutions with less dependence on broad horizontal partnerships

HP is the world’s largest IT supplier – its $128 billion revenues in the year to the end of September gave it a 3.5% market share. However its internal and external troubles led to a change in CEO.
We know you’ll be interested in a multi-dimensional view of its evolving market share drawn from the ITCandor Market Model. Our analysis here is drawn from combining HP with the larger companies it’s acquired over he period between 2003 and 2011 (specifically EDS, 3Com and Autonomy), which excludes most of the non-organic growth in revenues over the period. In addition to our extensive research into its revenues, profit and headcount, we have also attended a number of key meetings and teleconferences in which it has outlined its strategy over the last few months.
The data presented here is available for HP and all other vendors if you’re interested in studying market share development in detail of course.

HP’s IT Market Share Has Slipped From 4.9% To 3.5%

You’ll see a view of HP’s market share evolution in Figure 1. It demonstrates falls in IT from 4.9% to 3.5%, in Hardware from 8.3% to 6.3% and in IT Service from 3.8% to 2.7%. It grew its share in Software from 0.3% to 0.5% over the same period.
Looking at the Hardware category in more detail (see Figure 2), you’ll see some interesting developments. In particular:

• It has gained share in both Server and Networking areas, while it has lost share in Peripheral and PC. Its share of storage systems has remained static over the review period
• In the Server market it has benefited from its clear market lead in x86 systems, in the shift in usage to smaller sized companies and in the slingshot of the 2008 recession in which RISC and mainframe replacement was accelerated
• In the PC area it has been very active in seeking out new customers in emerging countries, but has lost out to a number of (typically) Asian vendors; its acquisition of Palm has added very little to its revenues, although it promises to help it expand into smart phones and tablets and to use WebOS as a unifying operating environment for all of its products
• As a traditional Peripheral vendor its business model is based on selling cheap proprietary machines with tied ink and laser cartridges and other supplies – included in its hardware revenues shown here. Of its hardware divisions its Imaging and Printing Group (IPG) has been most successful in building services revenues – not included in its hardware revenues shown here; it has strong opportunities in addressing the 3D printing market, which will allow it to build on its linked supplies business
• Its acquisition of 3Com has allowed it to promote its Networking products as an alternative to Cisco’s; despite announcing it was ‘Cisco-free’ internally, we believe this does not apply to the kit used in its acquired EDS business

While HP has been a big spender on acquiring other companies, it has not been a leader in spending on R&D. It’s $3,254 million spending in its last financial year was just 2.6% of revenues – less than Oracle ($4,288m – 12.0%) and IBM ($6,026m – 6.0%). Its announced intention to create more innovative products will require additional R&D spending.

HP’s Share Has Declined In The Americas And EMEA

HP’s IT market share has grown in Asia Pacific, although it has declined in both the Americas and EMEA (see Figure 3). It has major opportunities in developing stronger business in Asia Pacific, perhaps in partnership with indigenous suppliers. Developing a strong play in smart tablets (but not smart phones according to HP) could help it in Western regions: while in storage systems market it can leverage its Autonomy acquisition to leverage hardware sales, especially if It succeeds in its ambitious aim to bring all kinds of structured and unstructured data under management. Its strong play in Cloud Computing with its Hybrid Delivery and partnership approaches will help it build revenues, although is unlikely to increase its market share per se.

A Significant Decline In Large Business Market Share

The downturn of 2008 led to a significant decline in HP’s large business market share (see Figure 4), although its business in medium and small business were less affected. We believe that its apparently dead-ended Itanium strategy in the server market has made it less attractive as a server supplier to large companies, while it has also experienced some settling of its revenues as a result of its EDS acquisition.
HP’s market share in the consumer area was unaffected by the downturn in 2008, although its decline in 2011 is partially due to Apple’s massive success with its iPhone and iPad. To rebuild its share with large business it should go beyond closely integrating x86 blades with Itanium servers to running its NSK and HP-UX operating systems on x86 as well, perhaps partnering with Intel or AMD to make custom processors to retain its proprietary platform approach.

A Slippage In Transport/Communications/Utilities And Finance Sector Share

A view of HP’s IT market share by industry sector is shown in Figure 5. It demonstrates that its strongest positions are in the Agriculture/Construction/Mining, Manufacturing and Health sectors. The two areas it has experienced the biggest declines have been the Finance and Transport/Communications/Utilities sectors, where its share has failed to recover having declined steeply in the 2008 downturn. In the current Euro Crunch downturn it should concentrate on Health, Finance and Retail as stronger businesses according to our forecasts.

Some Conclusions – Increased R&D, Innovation And Integration Will Help In The Euro Crunch Recession

Our analysis shows that acquiring companies to shore up established revenues, focusing on low-cost manufacturing and expanding internationally was not enough to guarantee HP’s success. Without adequate innovation it has lost out to newer suppliers – especially Asian companies who have strong local demand.
HP’s success in the last decade was due to its adoption of a strong horizontally integrated strategy, which became less important as Apple, IBM, Oracle and others built successful vertically integrated solutions. HP’s dependence on partners such as Microsoft, Oracle and Cisco became impossible to maintain as it found it difficult to differentiate with the first and found the other two adopt alternative strategies. Innovating within a standard is no longer a strategy for success – it needs to follow other vendors in producing unique offerings and take responsibility for creating superlative user experiences. This is not to say that it shouldn’t continue to build Microsoft operating systems into its servers and PCs, or restrict the applications which run on its hardware – just that it is no longer enough to depend on broad horizontal players to create its ‘value add’.
HP should start by spending more on R&D to build new product types such as 3D printers and smart tablets. It has plenty of ideas for innovation, especially in its IPG division for printing services and it the Services group itself for Cloud services, which will be a strong countervailing business in the next few years. It has already begun to integrate Autonomy into its business, claiming to be able to help its customers to accommodate all structured and unstructured data into their business intelligence and data warehousing processes. Building connected solutions here and in many other areas should allow it to reverse its market share decline in vital sectors such as Finance and Transport/Communications/Utilities.
We believe integration will be Meg’s biggest challenge – especially in training and redeploying its managers to help break down internal silos and apply more innovation in building a more vertically integrated company. It is reassuring to see that her initial moves have been in this direction. She will need to hold the tiller firm as the new recession batters HP and all other vendors in the coming months.
Please comment below to let us know your view of HP’s challenges and position.