Hewlett-Packard (HP): A Critical Analysis of Declining Profitability

By Helena Mullock

1. Introduction

Rapid and dramatic changes in consumer technology market in the global scale are compromising the effectiveness of competitive advantage for many players in the marketplace. Hewlett-Packard Company (HP) can be specified as one of the giants in the industry and the company is finding difficult to address modern challenges in its market in an effective manner.

HP is experiencing loss of sales and profitability due to a combination of certain factors discussed in this paper. Behind the overall 7% sales decline in the third quarter of 2012 lay 25% decline of sales of PCs and 15% decline of consumer printers (Walters, 2012).

The public acknowledgement of the issue of declining profitability and pessimistic sales growth forecast made by HP President and CEO Ms. Meg Whitman on October 3, 2012 has caused the fall of HP share prices by 11% on the same day.

Moreover, according to estimations of a global research agency, Millward Brown (2012), HP brand value has declined 35% in 2012 compared to 2011, and the company has moved down from 18th place to 26th in the list of Top 100 Most Valuable Global Brands within the same period.

This article represents a critical analysis of declining profitability of HP using an analytical method. The article starts with introducing HP corporate profile and relevant background information. This is followed by a critical analysis of major factors contributing to the loss of profitability at HP. Namely, factors discussed in a detailed manner include increasing popularity of computer tablets, economic uncertainties in Europe, and leadership challenges. Moreover, this article proposes recommendations for HP senior level management in dealing with its current problem of declining profitability and contributing to long-term growth of the company.

2. HP: Corporate Profile

Founded in 1939 by W.R. Hewlett and D. Packard, HP has been incorporated in 1947 and since then the company has been steadily expanding. Today, Hewlett-Packard Company is a global provider of products, technologies, software, solutions and services to individual and corporate consumers, as well as, government agencies. HP employs about 349600 full time employees and the company has generated a net revenue of USD 127.2 billion during the fiscal year of 2011 (Annual Report, 2012).

HP corporate strategy consists of maintaining strategic focus on core products and services, leveraging the company portfolio and scale, fuelling the level of operational effectiveness (Annual Report, 2011).

The company consists of the following six reporting systems (Sander and Bobo, 2011):

  1. Personal Systems Group
  2. Imaging and Printing Group
  3. Enterprise Storage and Servers
  4. HP Services
  5. HP Software
  6. HP Financial Services

The following table illustrates HP quarterly result during financial year of 2012:

Q1, FY2012 Q2. FY2012 Q3, FY 2012 Q4, FY 2012
GAAP net revenue ($B) $30.0 $30.7 $29.7 $30.0
GAAP operating margin 6.8% 7.2% (29.7%) (21.7%)
GAAP net (loss) earnings ($B) $1.5 $1.6 ($8.9) ($6.9)
GAAP (loss) diluted EPS $0.73 $0.80 ($4.49) ($3.49)
Non-GAAP operating margin 8.6% 8.9% 9.2% 10.4%
Non-GAAP net earnings ($B) $1.8 $1.9 $2.0 $2.3
Non-GAAP diluted EPS $0.92 $0.98 $1.00 $1.16

Figure 1 HP Quarterly performance during financial year of 2012

Source: HP official website

3. Overview of Diversified Computer Systems Industry

Market capitalisation of global diversified computer systems industry has been valued at USD 252 billion and an average net profit margin in the industry has been estimated to be 10.2% (Yahoo! Finance, 2013).

Major global players in consumer electronics and diversified computer systems industry include IBM, HP, Acer, Lenovo, Apple, Sony, Dell and others. Diversified computer systems industry is associated with high capital requirements to enter the industry and product-life cycle within the industry is shortening due to the competition (Thomas, 2012).

Figure 2 represents the distribution of market share of 5 global PC vendors according to a recent data.

declining profitability

Figure 2 Market share of 5 global PC vendors by unit shipments

Source: International Data Corporation (2012, online)

One of the most significant challenges in the industry relates to market saturation. Specifically, the market expansion for personal computers (PC) has been forecasted to be below 1% in 2013, and analysts adopt a sceptic approach about the industry growth prospects until 2016 (Ricadela, 2012).

Moreover, a highly intensifying level of competition can be specified as another significant challenge for companies operating in diversified computer systems industry. Namely, manufacturers from emerging economies like China and India possess considerable threat to US and European industry leaders such as IBM, HP, and Dell due to their access to cheaper resources in general, and cost-effective human resources in particular.

4. Factors Causing to Profitability Loss for HP

The major factors negatively impacting the level of profitability for HP include, but not limited to increasing popularity of tablets and mobile devices, economic uncertainties in Europe, leadership challenges at HP, and acquisition of Autonomy software company.

4.1 Increasing Popularity of Tablets and Mobile Devices

Increasing level of popularity of tablets, a market dominated by Apple’s IPad can be specified as a factor playing a major role in HP’s declining profitability, as HP has failed to offer competitive tablets to consumers.

As it can be seen in Figure 3, after the release of Apple’s IPad on the fall of 2010 the amounts of PC shipments by leading manufacturers such as Dell, Acer, Lenovo and HP had experienced a rapid decline.

declining profitability

Figure 3 Global PC Shipments by Manufacturer

Source: Business Insider (2013, online)

Moreover, increasing ranges of mobile devices with increasing variety of integrated functions are proving to be substantial threat to HP traditional markets of PCs and printers. Market tendencies indicate that conveniences associated with portability and increasing level of functionally of tablets and mobile devices are proving to have detrimental impact upon HP market performance.

4.2 Economic Uncertainties in Europe

About a third of all HP revenues come from Europe (Annual Report, 2011), therefore prolonging macroeconomic uncertainties in Europe negatively impacting on the level of consumer spending is another substantial factor with negative effect on HP profitability.

Specifically, as Figure 4 indicates, the level of consumer spending and household expenditure within European Union (EU) has dramatically declined at the start of global economic crisis in the beginning of 2008, and this pattern has repeated beginning from the third quarter of 2010 with obvious negative implications on the performance of businesses trading in Europe, including HP.

Figure 4 EU Consumer spending barometer and household expenditure

Source: Visa Europe (2013)

Moreover, deepening economic problems in Greece, weakening EURO, and emerging policy issues within the EU (Thomson, 2012) encourage economists to adopt a rather negative approach towards growth prospects within the EU in the near future, and this fact has negative implications on HP growth prospects in the region as well.

4.3 Leadership Challenges at HP

With the previous two CEOs Cathie Lesjak and Leo Apotheker lasting on the top job at HP only several months and current CEO Meg Whitman being appointed only about a year ago, leadership challenges at HP are evident.

Current President and CEO of HP, Meg Whitman has been likened to Rocky Balboa (Pimentel, 2010) in a way that amid her proven previous success records at online auction site E-Bay, her skills are proving to be outdated to deal with increasing level of challenges in diversified computer systems industry.

Furthermore, HP Board of Directors has been branded as ‘dysfunctional’ (Adams, 2011) for the failure of full Board to held consultations with Leo Apotheker prior to his appointment, and other scandals in HP Board of Directors such as leak of information and claims of sexual harassment against one of its members in 2010.

All of the leadership issues at HP described above can be specified as partial cause of the company’s declining profitability problem in a way that  leadership problems have negative implications on the quality of decisions taken at all management levels and they also have negative implications on the level of employee motivation.

4.4 Acquisition of ‘Autonomy’

A UK based software company, Autonomy was acquired by HP for nearly USD 12 billion under the leadership of former CEO Leo Apotheker in order to enter a software business.

However, accounting wrongdoings and financial misrepresentation scandals associated with Autonomy that later emerged had caused damages to HP brand at various levels.

HP management claim that these wrongdoings, that include allegation of over-valuation of more than USD 5 billion have taken place in Autonomy before being acquired by HP (Peston, 2012), nevertheless, they have proved to be costly to HP in terms of finance, as well, as negative impact on company brand image.

5. Strategies to Deal with Challenges at HP

On the basis of above discussions, a range of strategies can be proposed to HP strategic level management so that the issue of declining profitability can be dealt with in an effective manner. Specifically, strategies being proposed consist of introducing systematic changes in relation to crucial business processes, increasing the level of funding of company research and development programs and making systematic investments in leadership development programs. Moreover, HP is recommended to be improving the quality of corporate culture in a constant and systematic manner.

5.1 Introducing Systematic Changes

HP senior level management need to introduce systematic changes within the company making the company more flexible, so that HP can keep in pace with dynamic changes in the industry. Defined as “a set of techniques that aid in evolution, composition and policy management of the design and implementation of an object or system” (Atkin and Brooks, 2009, p.55), change management plays an integral role in improving the current situation in the company. Specific aspects of the business to be covered by change need to include corporate strategy, Board functioning, decision making processes, and recruitment and selection processes for key management positions.

HP management is likely to face resistance to change proposals within the company at various levels because the change proposals might imply loss of power for certain individuals and parties, as well as, promoting sense of uncertainty about the future. Such resistance to change needs to be dealt with by HP management through communicating reasons behind each individual change proposal to corporate stakeholders in an effective way. Moreover, taking into account the importance of implementing changes at current stage for the company, HP management is recommended to deal with in compliance with change amongst employees in a decisive manner.

Appointment of a change agent represents an important aspect of introducing changes at HP successfully. Namely, HP CEO and President Meg Whitman is recommended to assume the role of the change agent and accordingly, she needs to adopt a proactive approach in terms of communicating the reasons for the changes, the impact of changes in the manner in which changes are going to be implemented.

5.2 Increasing the Level of Investment on Research and Development

Shortening product life cycle in diversified computer systems industry has caused the importance of research and development to be greater than ever before. Moreover, it can be argued that product life cycle for consumer electronics products such as desktop and mobile computers has reduced significantly to cover the timeframe of only several months (Strum, 2012). In such a business environment research and development needs to be adopted as one of the primary sources of competitive advantage for HP, and accordingly HP needs to be introducing new products with innovative and advanced features on a regular basis.

It has to be acknowledged that implementing this recommendation in practice by HP management would necessitate investments of significant amounts. Nevertheless, HP management need to accept the fact that the company’s long-term growth opportunities are going to be compromised unless new products and updated versions of current products are offered to consumers in a regular manner.

5.3 Investing in Leadership Development Programs

Current detrimental situation at HP has been partially caused by ineffective management practices at various levels. Therefore HP senior level management need to address the root of the problem by committing to investments in effective leadership development programs. Devising and implementing leadership development programs at HP in a competent manner can provide a focus to achieve enhanced level of employee performance, and accordingly, contribute to its long-term growth prospects (Ryan, 2012). Moreover, surprisingly, HP official corporate website contains no mission statement and formulation of vision for the company. This situation can be interpreted as missing an effective opportunity of positively impacting the level of performance in a cost-effective manner.

 In other words, the formulation of company mission statement and clear formulation of corporate goals and vision do not require significant financial investments to be implemented; nevertheless, they can have a massive positive impact in terms of providing focus for the workforce and increasing the level of their motivation. Accordingly, HP is recommended to take a full advantage of this opportunity by formulating company mission statement and vision for long-term future in a clear and unambiguous way. Moreover, the positive impact of this opportunity can be further enhanced by including HP employees at all levels in the process of formulating company mission statement and vision for long the future.

5.4 Improving Corporate Culture

Corporate culture can be defined as “patterns of behaviour which differentiate one organisation from another” (Salama, 2011, p.18) it has tremendous impact on all aspects of corporate performance. The current problems faced by HP that include lack of creativeness and innovation, costly management mistakes and leadership issues are related to corporate culture in a direct manner.

Accordingly, HP senior level management needs to promote an effective corporate culture that should value performance and contribution to the achievement of organisational aims and objectives. Moreover, the type of corporate culture to be promoted at HP need to be able to motivate employees at all levels and to contribute to the level of their creativeness and innovation.

Importantly, teamwork, and sharing information and knowledge need to represent core values of corporate culture at HP, so that the company can be able to increase its competitive advantages in the marketplace through high level of flexibility in terms of adapting to changes in external environment.

6. Conclusions

HP is one of the major and reputable players in diversified computer systems industry but the company is facing significant challenges today due to a set of costly mistakes and failure to keep in pace with the rapid changes in the industry. This article has found the main factors negatively affecting the HP profitability levels to include the increasing popularity of tablets and mobile devices, economic uncertainties in Europe, leadership challenges at HP, and acquisition of Autonomy.

Moreover, market saturation for personal computers, and other consumer electronics products, coupled with increasing level of competition and shortening product life cycles are additional significant problems that need to be addressed by HP. Strategic level management at HP need to take decisive measures so that these issues can be addressed in an effective way.

This report recommends HP senior level management to be introducing systematic changes in relation to crucial business processes, to increase the level of funding of company research and developments programs and commit to systematic investments in leadership development programs. Also, HP management has been recommended to appreciate the importance of effective corporate culture and adopt a proactive approach towards fostering such as culture.


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Category: Economics