Now services

May 15th 2008 SAN FRANCISCO
From The Economist print edition
Having bested Dell for the time being, Hewlett-Packard takes on IBM

DURING the first half of this decade Carly Fiorina, then boss of Hewlett-Packard (HP), was forever answering the same frustrating questions about Dell and IBM, HP's two more successful rivals. Dell, she said, offered computers that were “low-tech and low-cost”, whereas IBM offered “high-tech and high-cost”. Only HP, she said, was preparing to give customers “high-tech and low-cost”.
It was easier said than done. When Ms Fiorina tried to buy the computer-services arm of PricewaterhouseCoopers in 2000 to compete with IBM, the leader in that field, IBM beat her to it. And when she bought Compaq to take on Dell, the leading PC-maker, shareholders revolted. In 2005 the board fired her and hired Mark Hurd, a disciplined operations type, to focus on execution rather than vision.
Three years on Mr Hurd has mostly done that. HP, having fully digested Compaq at last, has surpassed Dell to become the world's biggest PC-maker. This means that Mr Hurd is now ready to take on IBM, which has more than 7% of the $748 billion market for services, such as running the data centres of large companies and governments, or handling entire functions, such as personnel or claims processing. The second-largest services firm, Electronic Data Systems (EDS), has much lower profit margins. HP lags in fifth place.
Mr Hurd's answer, announced this week, is to buy EDS for $13.9 billion. He is getting a big name: EDS, founded by Ross Perot in 1962, pioneered the business of outsourced data-management. But the company has been through turbulent times. Mr Perot sold EDS to General Motors in 1984—an unhappy combination that ended in 1996, when EDS was spun off. It then suffered during the technology bust and made a big loss. Under a new boss, it went into profit again, but with unimpressive margins. Its subsequent boss, Ronald Rittenmeyer, will now become head of the combined services arm of EDS and HP, which will be almost as large as IBM's.
The prospect of digesting yet another big acquisition after Compaq may seem daunting. Middle managers at HP still subscribe to the gentle, collegiate “HP way” of doing things. The culture is that of Silicon Valley—relaxed and casual—and the cafeteria is big on ahi tuna. At EDS, based in Plano, Texas, the style is “military, buttoned-down, and staid,” says Rick Sturm, the founder of Enterprise Management Associates, a consultancy. People wear ties. The cafeteria is full of steak and fries. Compared with other services firms, which increasingly hire and operate in India, EDS is overwhelmingly American.
Mr Hurd, who came to California from Ohio, is likely to feel the culture clash less than his colleagues in the ranks. His demeanour makes him “an EDS guy sitting on top of the HP way,” says one consultant. Culture aside, EDS's big selling point is to be the largest services firm that is independent of any hardware or software vendor. It will continue to advise clients to buy systems from all vendors, says Mr Hurd, but those clients are now likely to pay more attention when the boxes come from HP.
Nonetheless, the deal marks another step in HP's impressive comeback. This week Mr Hurd increased his estimate of this year's revenues to over $114 billion, despite the weak economy. The verdict on Mr Hurd is that he has skilfully executed the strategy of his flamboyant predecessor. The verdict on that predecessor, Ms Fiorina, has also improved. Her idea was controversial, but apparently right. Fittingly, Ms Fiorina seems to be making her own comeback now. As a supporter of John McCain, she is playing a bigger role in his presidential campaign by the week.

Article Review:
The merging between HP and EDS is considered as a horizontal integration in the service sector. The merging will be able to increase their service arm to as big as the IBM’s, which means HP will have the similar market size in the service sector and therefore be able to compete with IBM in terms of market power.
The purchase will allow HP to enjoy internal EOM and reduce the production cost. In this case, the company will most likely to enjoy marketing economics. As the firm size increase, it can increase its scale of advertising and do bulk distribution which lowers the unit cost because of the large output level.
It will also be able to do more research and development in the long run as it will have larger profit to invest in. This is critical to HP if it wants to take on IBM who is famous of its ‘high-tech’.
However, on the downside of this strategy the merger may be just another failure as the previous one between HP and Compaq. The most serious problem would be the brain drain caused by axing thousands of well qualified people and cutting research funding in order to pay the purchase of EDS. This will seriously reduce the competitiveness of HP as compared with IBM. Now HP is nothing but another white box vendor like Dell. If HP cannot make its own identity there is no way for it to beat IBM.
Also as said in the article, the clash in the different cultures between HP and EDS may be another problem. It will take some time for the two styles to integrate which may lower the efficiency of the company.