Beating Dell: Why HP Acquired Compaq
The question of choosing a proper corporate-level strategy is one of the most important final steps in the process of running the company as it is directly connected with businesses and industries any particular company wants and should compete in, the value-creating activities the company should be involved in, and, taking into consideration the previous variables, the long-run profitability of the company (Hill & Jones, 2010). Considering the case of HP, starting from 2001 it may be noted that this company used a strategy of horizontal integration. Horizontal integration may refer to the expansion through M&A of firms producing substitute goods or providing substitute services (Lipczynski & Wilson, 2004).
In 2001 both companies (Hewlett-Packard and Compaq) suffered from strong competition from Dell, so their agreement to establish a single company was their response to the slumping demand for the production and their attempt to effectively compete with very powerful rivals.According to Hill and Jones (2010), the strategy of horizontal integration is one of the best methods to maximize the long-run profitability if the companies carry out their activities within a specific market or industry. To put it in a more understandable manner, companies concentrate their economic activities and create productive intra-industry value chains within one business. Staying inside a particular industry may lead the companies to a lot of advantages connected with better focus on productive use of different business resources: financial, managerial, functional and technological. Although in the fast-growing industries (and the industry of computer technologies falls within the range of fast-growing ones) there is a substantial need for capital resources, establishing its own competitive advantage would lead to even higher profitability in the long-term perspective.
Another advantage of company’s expansion by means of horizontal integration strategic measures is the increase of competence in the single sphere, where the company is sure to receive acceptably high profits. Such profitability level becomes possible due to the producing products of high value by using the available company’s resources. This strategy clearly corresponds with Porter’s analysis of five forces. When the company wants to succeed in any industry it has to analyze different factors such as new competitors and the barriers they encounter while entering the industry, the bargaining power of consumers, suppliers as well as producers of substitute goods and services and the current players in the market, which may be far more experienced in the market and possess more specific resources to compete in the industry.
As announced by Fiorina, the accomplishment of horizontal integration agreements would bring benefits to both companies: after the acquisition the annual revenues of a newly merged company would reach the level of USD 84.4 billion. Such indicators, according to the then CEO, would be possible to achieve by means of providing an extensive range of goods and services in the sphere of computer technologies. The idea of importance of such revenues is justified by the positioning of HP among such giants of computer technologies as …