Many articles in the past few days have been written about the decision for HP to separate the PC business from the remainder of the company. Of course we only read what is published, which is a risk, but let us see if there is sense behind it.
One article shared that the PC business has very small margins (read as profit) on the revenue that is brought in. OK, that is probably true since the consumer PC business has become a commodity, with very little brand loyalty or even difference between brands. This is compared to HP’s other business areas (think printer ink and the software/services business) where the margins are significantly higher (one article estimated it to be 3x to 4x higher) Ok, assume it is true.
Now if HP has money to spend on growth and development, where should it be invested? It is the same as comparing your savings account to a CD (certificate of Deposit) where the CD is getting 2.5% interest, while the savings account is getting around0.5%. Where would you put your money? the CD of course.
Now look at HP. Should they invest in the PC business with their cash? Probably not. But the PC business is around 50% of their revenue, so it is not worth closing. That is why we are hearing options of selling it or spinning it off to a new company. Once separated, the money gained from the PC market can be invested back into the PC business, without a comparison to the old HP. HP has been successful in the PC market, but I expect that it is bogged down with some of the policies of a corporate HP that may make their PC business less competitive, well it could be true. So it makes some sense to split the finances.
What is the risk? The lack of cash flow from PCs may make the remainder of the company at risk to changes in the software/services sector. They may also lose some leverage with suppliers to their printer and server business because they no longer buy so many semiconductors and such.
No one knows the future and no one knows what is best, but the decision does make some sense.
I worked at Texas Instruments when the same issues came up. In the 90’s, TI was a mix of many sectors of business; Trucking, defense contracting, oil exploration, printers, PCs, semiconductors, calculators and more. In the mid 90’s they decided to focus on Semiconductors, since the margins were over 20% while the other segments were around 5%, so they sold off everything except semiconductors and used the money to build more manufacturing capacity. Well it turned out OK for them as a company.
But the back story is that it is not as rosy for the employees. I was with the defense group and we were sold to Raytheon. Quite soon Raytheon sold my site to a competitor who soon transferred all the work to their legacy sites and shut us down. Now the site is empty, all the people have moved on and the equipment was sold.
The HP issue is an investor issue right now, but to all the employees, this is quite personal. We are not seeing stories about that side of this issue.
Thanks for the information, Rick. You have touched on some of the unseen effects of such decisions. It seems that when a thing is “commoditized”, it suddenly becomes a tarnished part of the business that is to be avoided, spun off, or otherwise removed, like some cancer. No one ever seems to think the cancer can be cured or there is a way to make that business profitable again. But there are examples in industry of that very thing happening. It comes largely from improving quality. That is a very general statement, but the marketing appeal of better products and services makes customer demand increase and it even allows companies to begin charging premium prices for those things that used to be commodities. Can you think of an example of this? There are many, yet the first impulse of company leaders is to remove the offending appendage. This shows a lack of creativity and constancy of purpose and a pure reliance on the marketplace. It shows that companies are more interested in going with the flow than in creating something that works – or even taking appropriate risks. I think HP has made some errors in business judgment, but that does not mean the baby and bathwater both should be thrown out. I think the competitive landscape helps a company decide strategy, but it’ s not the only thing to consider. And the financial aspects of high vs. low margin is also not the only thing to consider. The point is, you have to first decide as a company what you want to do … period. What is your purpose? Once you have that figured out, the rest should follow.