HP: PCs a Key to the Future

Executives of HP's vastly expanded PC division tout the importance PCs play in the company's overall efforts to sell servers, printers and software.

Executives heading up Hewlett-Packard Co.s vastly expanded PC division, which more than doubled in size with the acquisition of Compaq Computer Corp., on Friday touted the importance of PCs in driving sales of other products, and vowed to defend its market share against Dell Computer Corp.

In a conference call with reporters today, Duane Zitzner, executive vice president in charge of HPs Personal Systems Group, reasserted the importance PCs play in the companys overall efforts to sell servers, printers and software.

"I happen to believe this business is really, really important for this corporation to be in. Ive said that for a number of years. It can drive excellent profitability for the company," Zitzner said. "Were going to drive huge volumes."

His comments appeared targeted at rebuffing suggestions that the buyout of Compaq would hurt HP by increasing its exposure to an already struggling market segment, an assertion repeatedly made by shareholder Walter Hewlett during his seven-month proxy fight to block the $19 billion deal.

Undoubtedly, PCs will play a major role in HPs future, with the acquisition instantly making the company, based in Palo Alto, Calif., the worlds top PC supplier.

"We have an installed base of something like 85 million machines in the PC space," Zitzner said.

But HP faces a formidable challenge to keep those customers and attract new ones, especially as it moves to consolidate brands and lower operating costs to improve profitability.

Overall, the company is taking a twofold approach to PC sales. In the commercial desktop and notebook market, HP will phase out its previous enterprise PCs and adopt Compaqs better selling commercial product line. The decision was based in large part on Compaqs more efficient production model that relies heavily on more cost-effective made-to-order manufacturing.

Workstations will be consolidated under the HP brand, with the company continuing to offer systems equipped with its own PA-RISC chips as well as Intel Corp.s 32-bit and 64-bit processors.

But HP is taking a completely different approach to consumer sales, with the company disclosing this week that it will continue to sell both HP Pavilions and Compaq Presarios through direct-order and retail outlets.

Zitzner said the decision to keep both brands was aimed at preserving their established market share, with the Pavilion and Presario ranking as the worlds top two selling consumer PC product lines.

Although both brands will continue to be offered, HP executives said the company is looking at eventually targeting the brands at different market segments, such as positioning one as a high-end brand featuring the most powerful processors and graphics capabilities, and the other as a relative low-cost alternative, designed more for the home-office users. HP executives said further details about the strategy will be revealed over the next few months.

"Over the next 90 to 180 days, youll see us drive and change the product lineups to really highlight the product differentiations between the two brands," said Jim McDonald, marketing director for the Personal Systems Group.

But as it tackles those restructuring challenges, HP faces the potential erosion of its market share by Dell, of Round Rock, Texas. In recent months, Dell executives have repeatedly claimed that many former HP and Compaq customers have switched to Dell over concerns that the merger will prove disruptive.

While its difficult to gauge how much business Dell has garnered at HPs expense, the company has shown itself to be the competitor to beat in the PC arena. Leveraging its efficient made-to-order model, Dell last year became the worlds largest PC vendor, ending Compaqs seven-year reign.

Dell executives have publicly stated their confidence that theyll reclaim that title from the "new HP" in just a few quarters.

In response to a question about the Dell threat, HP executives admitted that while overall sales leadership is important, the company will focus more on the bottom line, profitability.

"Market share is a very important measure of our success," McDonald said. "However, profitability and earnings per share are an even more important measure of our success."

Nevertheless, HP said it will strive to remain competitive in the PC market, where low pricing has become the key driver for sales.

"Were not going to let Michael Dell have this one easily," McDonald said, "and were going to be very, very aggressive."

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