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HP/Compaq revisited

I’m not going to say ‘I told you so’ yet, but so far so good.

Regular readers know I was one of the few supporters of the HP/Compaq merger. Most people looked at AOL/Time Warner as an example of what would happen to HP/Compaq–mixing two cultures has never worked to the point where the resulting merged company equals the sum of its parts. Though I took a lot of heat for this position, I stood by it. I thought this merger between two companies that made complementary (and sometimes competing) products would result in enough economies of scale and efficiencies to overcome the culture clash. Most importantly, I thought Compaq was on the right track with its development of a just-in-time PC manufacturing model, which HP needed to help stop the bleeding in its PC business. Whatever my arguments, I thought the merger had to be better than Walter Hewlett’s plan to turn the company into another Xerox.

It’s been a little more than a year since the merger was finalized by the Federal Trade Commission (FTC), so it’s a good time to check in and see how the merger is doing. While it hasn’t been an unqualified success, I would say: so far so good. It has been able to wring a considerable amount of costs out of its operation without damaging its ability to grow its brand or to take the lead in certain development areas. It hasn’t turned its PC business into a clone of Dell, which some analysts bemoan. But that hasn’t hurt as much as those analysts expected. I’ll try to tackle all these issues in the space provided.

First, the PC business. Robert X. Cringely and others have predicted that HP would go in the toilet because it insists on continuing to use resellers rather than becoming another Dell. The two components to Dell’s success are direct sales and just-in-time manufacturing. The direct model enables it to cut costs on the sales side and, presumably, pass those savings onto consumers. It works great for big amorphous companies that don’t do a lot of new initiatives. They get solid computers pretty cheaply. It doesn’t work well with organizations that have fluid computer needs and require outside help to implement them. That’s what resellers are for. Because HP is focusing on these types of customers, continuing with resellers hasn’t hurt it so much.

The thinking is, everyone can’t be Dell. If everyone tried to be Dell, everyone but Dell would fail. In order to survive, companies have to find customers that don’t like aspects of Dell’s business. That’s why CDW–the anti-Dell–is so successful. They do what Dell can’t, because they don’t do it like Dell. They shun JIT manufacturing and keep a lot of inventory. This enables them to fill orders quickly. As long as they still turn their inventory over quickly, they make a lot of money. And customers who don’t want to wait the customary two weeks that it takes to get a Dell buy direct from CDW. In the case of HP, they are developing JIT because their customers don’t typically need low-end parts sent overnight delivery to them. But they will not sell direct because their customers typically use their resellers as implementation partners. If HP does it right, it can control costs on the supply side by ramping up JIT and aggressively scouting for cheap suppliers. It will continue to spend on the sales side and it hopes its customers will continue to pay that premium. So far so good.

As for branding, am I the only one who’s impressed with the new ad campaign? I didn’t think so. Everyone loves to see cool technology at work. So I love to watch the commercials–especially the Bang & Olufsen–that emphasize cool technology at work by companies that HP serves. I don’t know how you justify a $400 million branding campaign, but in the age when it’s tough for a little tabloid to make a few dimes on advertising, you have to be impressed.

But business models and branding only go so far. In the end, the technology will be what makes or breaks the new HP. That is why I don’t want to pronounce the merger an unqualified success. The early results are mixed. I’m very impressed with its commitment on the Media Center PC. I think it’s a quickly emerging category and HP is really the only PC manufacturer going after it, as our June issue will show. On the business side, I’m not as convinced that an Itanium-only server strategy will win. I see enough demand for AMD’s new Opteron 64-bit platform to warrant a diversified strategy. But HP is a founding collaborator with Intel on Itanium. So I’m not surprised that it would only push Intel-based 64-bit servers. Any time you reduce the flexibility of your customers, however, it gives them a reason to go elsewhere.

On the whole, we have not seen the doom and gloom predictions of most of the analysts with respect to HP/Compaq. Rather, we see a fairly vibrant company that continues to play a lead role in certain areas of technology while consistently getting healthier. I’ll check back next year and see if I can then pronounce it an unqualified success.

James Mathewson is editor of ComputerUser magazine and ComputerUser.com

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