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Computer Industry Analysis
The computer hardware industry consists of companies that manufacture and assemble
personal computers, computer hardware, and computer peripherals. This industry is highly
competitive, which means that companies must continuously be innovative in order to sustain a
competitive advantage. The major companies of this industry include Oracle, IBM, HP, Dell,
Apple, and Toshiba. This analysis will focus on computer manufacturing since it is the largest
component of the industry, containing 43.7% of the market’s total value. The computer
industry has been rapidly growing and shows no signs of slowing despite the recent economic
downturn.
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.
PEST
Political
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
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Computer Industry Analysis
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).
Economical
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
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Computer Industry Analysis
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
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Computer Industry Analysis
Main targets for the computer market include the United States, Europe, and AsiaPacific, 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.
Technological
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
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Computer Industry Analysis
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.
Bargaining Power of Suppliers
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Computer Industry Analysis
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).
Threat of New Entrants
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.
Threat of Substitutes
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
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Computer Industry Analysis
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
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.
Findings (SWOT)
Strengths
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
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Computer Industry Analysis
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
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.
Opportunities
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
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Computer Industry Analysis
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
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Computer Industry Analysis
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.
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Computer Industry Analysis
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=sh
owIndustrySurvey&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-effectiveness483111/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/
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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-infy2013-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-pcindustry.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_sale
s_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
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Computer Industry Analysis
Appendix I
Revenues of major firms within the computer manufacturing industry 2011-2012.
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Appendix II
Tablet sales on an individual company bases for 2011
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Appendix III
Graph covering the influences of the Porter’s 5 Forces analysis
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Appendix IV
Forecasts for the market value of the computer hardware industry for 2011-2016
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Appendix V
Balance Sheet Ratios
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Appendix VI
Worldwide PC Shipment Growth