The Tables Have Turned

Just a few years ago, Dell Computer was the darling of the PC industry. Hewlett-Packard was an also-ran. Today the tables have turned. Over the last year, Hewlett-Packard’s market share has jumped from 18.5% to 20% of the global PC shipments. Dell’s market share has fallen from 15.7% to 13.7%. The change in market share is customers saying that HP offers a better value proposition. (See the Perspective, “The Two Best Consultants in the World” on StrategyStreet.com.)

HP has strenuously reduced its costs at the same time it has gained market share. HP, at one time, was in the middle of the PC pack in costs. Today, its PC operating margin is 4.6%, better than Dell’s operating margin. The superior cost performance of HP is the competitors acknowledging that HP has a lower overall cost.

HP has gained much of its market in the retail side of the business, especially with lower-end products. Most Standard Leaders don’t like lower-end products because they offer low margins and not much reputation (see StrategyStreet/Diagnose/Products and Services/Innovation for Customer Cost Reduction/Price Point Bias).

HP is gaining some of its new market share with very low pricing, a characteristic that used to belong to Dell. Wal-Mart’s recent experience with HP is indicative of the company’s current aggressiveness. Wal-Mart wanted to sell a personal computer for less than the price of the hot Netbook products. Netbooks are mini laptops costing less than $500. Wal-Mart did the consumer research to produce specifications for the proposed full-sized laptop product and passed those to some PC companies. Several responded positively. Dell offered a product for just under $400. Toshiba and Acer offered a product priced just below $350. HP beat all the competitors, though, with a $298 machine.

Dell is allowing Hewlett-Packard to take market share with its low prices because it sees little profit in the low-priced machines. But there is a problem here. HP has already proven itself capable of using its large size to streamline logistics and extract lower purchases of costs from its suppliers. It has smartly redesigned its products to reduce their costs. How is it, then, that Dell, or anyone else, believes that they will be better off by ceding market share to Hewlett-Packard on the basis of low prices? Will Hewlett-Packard become weaker? Will the PC companies losing share become stronger? This is another example of companies in a Leader’s Trap.