Computer Industry Analysis

This report relies on secondary research sources. Many of them from online sources such as; company websites, S&P Net Advantage industry reports and IBISWorld. Primary research includes the IBC mentor and additional faculty and library staff.

Beginning with the political and legal aspect of PEST, this industry is subject to several regulations. First, like any company in the US, the companies in the computer manufacturing industry must follow GAAP accounting laws. Some companies are subject to regulations regarding ethical business practices such as the Foreign Corrupt Practices Act and the Fair Labor Standards Act. The American Inventors Protection Act of 1999 addresses the rights of inventors as well as how they can effectively submit and use patents. Legal battles among major firms in the industry are quite common and depending on the ruling it may affect a firm’s profit margin. According to Businessinsider.com HP has recently sued and won against Oracle due to Oracle breaching the contract and “decided to drop support for HP’s Itanium servers for future versions of Oracle database software”. Due to low volume of sales HP may also claim damages which according to the article may rise to $500 million (Bort, 2012).

Many economic factors influence the macro environment surrounding the computer manufacturing industry. General economic conditions may affect revenues of companies involved. Many of the top companies in the industry outsource manufacturing, assembly, and production of key computer components. This outsourcing is in part due to global exchange rates and the savings generated from producing overseas. Due to decreasing prices of computer products, the numbers of consumers purchasing these products have risen steadily. This in turn means a higher demand of computer hardware related products from the manufacturers mentioned above along with higher profit margins for companies such as Toshiba, HP, and Acer which have struggled to achieve in the past few years.

During the global economic slowdown in 2008 and 2009, the computer hardware industry, like many other industries, grew at a slower rate. Factors such as consumer confidence, interest rates, and exchange rates have all affect this industry. Given the low level of consumer confidence in the general economy during the financial crisis, people across the US and other markets spent less on big-ticket items such as PC’s. However, in 2010 and 2011, the real GDP of the US grew at a 3.0% and 1.8% rate, increasing the overall confidence in the general economy and the willingness of consumers to spend more on computer related products (Cathers, 2012). At the end of 2009 the PC shipment growth increased only 5.1 % while in 2010 when general economic conditions were more favorable jumped to 13.7 % units shipped. However in 2011 and 2012 the PC’s shipped stalled again this time mainly due to substitute products such as Apple’s Ipad and other popular media tablets (Cathers, 2012).

Exchange rates also affect this particular industry because many of these companies have operations in and generate a large part of their profit from foreign countries. Companies such as Dell, Toshiba, and Acer have to account for the currency fluctuation and how it will affect the ultimate domestic dollar value. In order to hedge against exchange rate risks, these companies use financial instruments such as futures contracts, forwards, and financial swaps to lock in a current price for a future delivery.

Last but not least, interest rates have a large effect on how a company within computer hardware manufacturing operates. Given that interest rates affect the cost of borrowing for a firm, lower interest rates would benefit most firms and also encourage investment and innovation in new products in the computer hardware industry. As seen in the table in appendix V companies such as HP, IBM, CISCO and Dell have increased their overall Debt to Capital ratio due to favorable economic conditions and lower interest rates in the years of 2010 and 2011 compared to the years of 2007 and 2008. There are also firms such as Apple Inc. that needs no debt financing given that sits on a mountain of cash with which they only recently started to deploy it in the form of dividends. In September of this year, Federal Reserve chairman, Ben Bernanke, announced that interest rates will remain low at near zero in order to encourage more economic activity and encourage borrowing and spending.

Sociological

Main targets for the computer market include the United States, Europe, and Asia-Pacific, which account for 87.6% by value. India and China will be coming onto the Internet grid and provide the industry with expansion possibilities and revenue gains. This expansion can be attributed to rapid economic and population growth within these nations. The age demographic has been lowered due to computers becoming more prevalent. Companies are addressing this situation by creating a strong brand image as well as offering a large, customizable product range.

Research and development continues to be a major factor in the technological aspect of the computer industry. It is important to continue to implement advancements because of Moore’s Law, which states that computer technology will advance every 18 months. As o f June 2012 Microsoft was the company that spent the most on R&D expenses at 9.8 billion dollars. The other two firms that spent over 5 billion dollars in R&D are IBM at 6.3 billion and Cisco which spent 5.5 billion dollars, (See Appendix 1, pg 13) (Cathers, 2012). Also, the market trend is for an increasing demand for smaller and faster computers. Companies must market their developments on these trending features in order to remain successful. According to Cathers total server shipments increased 4.2% in 2011 (2012). Servers are another major part of the market that is growing at a high rate. IBM, Sun (which is now a part of Oracle), and HP are the major firms for this market.

As of 2011, Apple Inc. is the company within the industry with the highest revenue at 99 billion dollars followed closely by HP with 87.9 billion dollars. The innovations developed by the major companies (Apple, HP) have helped keep the industry in the black despite the poor economic situations (appendix I).

Outsourcing is implemented on a large scale by computer manufacturing companies. China, Japan, and India are popular countries to outsource to because of cheap labor and the benefits gained from using a global workforce. This process also allows the companies to be more familiarized with worldwide demand which leads them to develop products to meet the changing demands. In the end, companies will become more profitable and be able to continue providing to the needs of a global market.

Within the computer manufacturing industry, many factors determine how companies remain competitive. Porter’s 5 Forces is an effective analysis to use for looking deeper into the internal side of the industry.

Porter’s 5 Forces

Bargaining Power of Buyers

According to a MarketLine industry profile (2012) buyer power is moderate because computers have high price sensitivity and low player differentiation. Buyers are interested in quality and specifications thus making consumer loyalty low. Should one company not offer a product a product to suit the customer’s needs, they will find one that will. Buyer power is reduced slightly as computers are increasingly seen as a necessity due to the importance of online communication and information processing.

Due to a limited number of suppliers, bargaining power of suppliers is strong in the computer hardware industry. Suppliers are usually large, international companies giving them much power as there are few substitutes. Some retailers specialize in selling computer hardware only which strengthens supplier power. However some computer manufacturers rely heavily on retailers to sell their products, which weaken supplier power for these companies. Their power is also weakened by retailers who sell a wide range of products, so their net incomes are not reliant on computer hardware sales alone (MarketLine, 2012, p. 13).

For entry into the computer hardware industry, new companies find it reasonably easy for moderate success. Small scale businesses have the opportunity to drastically reduce outlays of capital by avoiding larger retail outlets. Online shopping has grown in popularity over the years, thus creating more opportunity for small retailers to build online operations. These online outlets will reduce fixed costs for all shoppers. However, avoiding larger more established companies like Apple or Hewlett-Packard becomes difficult as smaller companies look to become similar in scale. In order to compete with higher rates of success, smaller companies must consider the prices and tactics larger business use within the market. Overall, the threat of new entry is moderate for this industry.

Overall, the threat of substitutes in the computer hardware industry is reasonably low as the performance of modern PC’s is unavailable through other technologies. There are however, a few growing threats entering into the computer hardware industry. The first threat of replaceable technology revolves around the gaming industry. The newest generation of gaming consoles consists of increased “domestic” functionality while also providing ample amounts of hard drive storage. Another threat is tablet technology. Internet capability found in PC’S has been replaced with sleeker, more fashionable tablets. These tablets could potentially erode notebook sales drastically. PC markets are combating the introduction of tablets by creating their own brand of tablet. This is one of the few tactics that may help reduce the increasing threat of substitutes in the industry, however, the current threat of substitutes would be considered low.

Rivalry overall is moderate in this industry, due to many large retailers operating in it. Consumers have numerous options to choose from and switching costs for them are low. For the retailers, storage costs are high so quick product turnaround is vital since new updates, features, and technology are always hitting the market. Any retailer that is having trouble making sales becomes an open target for acquisition. Lastly, recent economic downturns have tightened profit margins for all retailers, which have stiffened competition. The rivalry is reduced slightly by the growth the industry is experiencing.

Many companies have strong portfolio offerings that offer a diverse range of products. Hewlett-Packard for example, does not offer just PCs, but they also offer services such as imaging and printing, software, and financial services. This in turn helps the firm leverage against a future downfall in a certain segment and also offers clients multiple services at the same time (HP 10K report). Since this industry has a strong global presence, it is important for them to appeal to the new opportunities presented by the new markets of India and China coming onto the grid. Research and development is a strength of this industry because in order to remain competitive, companies pour millions of dollars every year in researching the newest technological advancements.

Weaknesses within the industry arise from many companies introducing alternatives to PC’s such as the release of smart phones, tablets, eReaders, and other digital devices. According to the Gartner technology information firm PC shipments only grew 2% last quarter, 4% less than expected, and are reaching a tipping point in their product life cycle (Schachtel). Also since the Computer Hardware Manufacturing industry is a worldwide market, companies have to be aware of the instability of economies in various countries.

The PC hardware manufacturing industry has many opportunities for growth and advancement as developing countries increase their need for technology. India and China have the two largest populations in the world, and account for almost 2.6 billion people combined (World Bank, 2012). These countries possess the greatest potential for market development as the PC industry tries to expand its global markets. In India alone, according to Gartner research firm,” there has been an increase of about 13% in the units shipped for the third quarter over the same period a year ago.” (Martin, 2011). PC growth in India is about 10% higher than the worldwide market growth average. Dell holds the highest market share in India at 15%, followed closely by Hewlett-Packard, and Lenovo. However, in order for companies to be successful in these countries, they must invest in face to face operations in order to gain the consumers’ trust.

China is the largest country in the world and offers a huge potential market, as China continues to develop economically and technically, their demand for computer hardware and accessories has continued to grow. “Final results from the International Data Corporation (IDC) show that PC shipments in the Chinese market (18.5 million units) have exceeded those of the United States (17.7 million units) in the second quarter of 2011.” Although China has temporarily surpassed the United States, they are not expected to fully surpass the US in full year shipments until this year. Projected numbers for 2012 predict Chinese PC shipments to hit around 85.2 million units, compared to the 76.6 million units shipped in the United States (IDC, 2011). All of these sign point toward a continued increase in PC industry growth within emerging markets.

Threats

Threats to this industry are easily identifiable. There is a likely decline for PCs (desktops) because consumers want more portability and better functionality. According to pcworld.com tablet shipments increased by 75% in the second quarter of 2012 compared to the same quarter in 2011. At the same time, shipments of Windows PCs dropped by 73% of all products included in the survey (Shah, 2012). Also, there is intense competition between the large companies within the industry which make it difficult for new, smaller companies to become effective. Governments all around the world pose threats to this industry because of environmental regulations and currency fluctuations.

After conducting this research, it can be concluded that the computer manufacturing industry is on the rise and will continue to be important and profitable in the future. In order to remain successful, companies must remain focused and prioritize research and development to maintain a competitive advantage. The population and economic developments of India and China provide a large opportunity for all firms to expand in these new markets. Smaller companies will need to increase their profit margin to become successful in this industry in order to compete with the advertising and brand recognition of larger companies. If they do not do this, they will continue to be bought-out by the dominate companies within the industry. Investing in this industry would be safe due to continued increases in demand and the rate at which technology is growing. Computers will continue to become more advanced, attempting to satisfy the ever-changing desires of consumers today.

References

Bort, Julie (2012, August 1). HP Wins Its Lawsuit Against Oracle. Retrieved from http://www.businessinsider.com/hp-wins-its-lawsuit-against-oracle-2012-8

Cathers, Dylan (2012,October,25). Computers. Hardware Retrieved from http://ida.lib.uidaho.edu:2883/NASApp/NetAdvantage/showIndustrySurvey.do?task=showIndustrySurvey&code=coh

IBISWorld. (2012, August). Computer manufacturing in china:market research report. Retrieved from http://www.ibisworld.com/industry/china/computer-manufacturing-in-china.html

IDC(2011, August 23). China Surpassed the United States to Become the Largest PC Market in the World in the Second Quarter of 2011, According to IDC [Press Release]. Retrieved from http://www.idc.com/getdoc.jsp?containerId=prUS22997711

LinkedIn. (n.d.). Face-to-face operations effectiveness. Retrieved from http://www.linkedin.com/company/thoughtburst-inc./face-to-face-operations-effectiveness-483111/product

MarketLine. (2012). Computer Hardware in the United States. MarketLine, 0072-0049, 2-26. Retrieved from http://web.ebscohost.com/bsi/filteredpublication

Martin, Rick (2011, November 12). PC Industry Shows Double-Digit Q3 Growth in India [Report]. Retrieved from http://www.techinasia.com/india-pc-growth/

Nichols, Ryan (2010, August 31). Cloud Computing by the numbers: What do all the Statistics Mean. Retrieved from http://blogs.computerworld.com/16863/cloud_computing_by_the_numbers_what_do_all_the_statistics_mean

Press Trust of India. (2012, September 12). Pc sales to grow 15 percent in 2012-13: Mait. Retrieved from http://gadgets.ndtv.com/laptops/news/pc-sales-to-grow-15-percent-in-fy2013-mait-263318

Schachtel, Alexander (2011, July 19). Here's the Big Picture Trend in the PC Industry. Retrieved from http://wallstcheatsheet.com/breaking-news/heres-the-big-picture-trend-in-the-pc-industry.html/

Shah, Agam (2012, August 1). Windows PC Sales Hit a Low as Tablet Sales Soar in Q2, Canalys Says. Retrieved from http://www.pcworld.com/article/260183/windows_pc_sales_hit_a_low_as_tablet_sales_soar_in_q2_canalys_says.html

Smith, T. W. (2010, October 28). Industry surveys computer: hardware. Retrieved from http://www.slideshare.net/StevenDuque/computershardware-standardandpoors1010

Appendix I

Revenues of major firms within the computer manufacturing industry 2011-2012.

Tablet sales on an individual company bases for 2011

Graph covering the influences of the Porter’s 5 Forces analysis

Forecasts for the market value of the computer hardware industry for 2011-2016

Balance Sheet Ratios

Worldwide PC Shipment Growth