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HP Simplifies Designs & Leverages Their Value Chain

September 24th, 2009 Comments off

HP_logoThe second section of today’s Wall Street Journal had a piece about the efforts of HP the past few years to develop a cut-rate laptop computer that sells for $298 at Walmart.  Clearly pulling this off required substantial thought and careful analysis of costs to make sure that such a product didn’t lose money.  A couple things in the article, in particular, caught my eye as being strongly related to the concepts we discuss in class.

First, at several points in the HDFRI textbook, we discuss the idea that there are costs that are “designed-in” or “locked-in” during the design stage.  Decisions about how many parts there are, how those parts get assembled, the materials that are required, any special tools that are needed, etc. all are made very early in the process and once those costs are “baked-in” they can not be eliminated/reduced.  In HDFRI Chapter 12, specifically, we talk about the fact that very often the design of a product needs to be entirely retooled to effectively reduce costs to any great degree.

In the Value Chain module, we discuss the cooperation between value chain members and the advantages such cooperation can have for multiple parties — an advantage that could not be leveraged by one one firm acting alone.

H-P laid the groundwork for its move into the low-end of the PC market two years ago, said people familiar with the matter. At the time, H-P changed how it ordered PC parts and how it ships PCs to sellers, among other things, these people said.One change was to reduce the designs used for the skeletons of notebook PCs, said these people. “Simplifying the specifications of the product” saves money by allowing contract manufacturers to make large numbers of the same product, said Lorcan Sheehan, a consultant with ModusLink, which advises H-P and other PC makers.

Another change H-P made was to work more closely with retailers like Wal-Mart to forecast PC demand. By getting orders in earlier, H-P could save on component and manufacturing costs, which are cheaper if they’re ordered far in advance.

Another aspect of the article is that Walmart wanted to sell computers at very low prices, but rather than just accepting whatever the PC manufacturers offered at those prices, they took the time to learn the features that customers valued and those that they didn’t and they made trade-offs of eliminating some features in order to meet their price targets.  There are elements here of Target Costing, which we also discuss in Chapter 12.

Wal-Mart specifically wanted to sell a full-size PC for back-to-school-season at around the price of a netbook, which are sub-$500 mini-laptops, said Wal-Mart’s Mr. Nzigamasabo.

Wal-Mart surveyed customers to see what kinds of tradeoffs in performance they were willing to make for a discount machine, said Mr. Nzigamasabo. For example, he said, students were willing to give up battery life, but not a CD drive.

Wal-Mart passed on its findings to PC companies and later reached deals with Dell for a sub-$400 laptop, and Toshiba Corp. and Acer for sub-$350 laptops. H-P beat those vendors with its $298 machine.

Once again, often times looking at “real life” scenarios makes the concepts that we discuss in class and through the textbook easier to understand.  I think this article does that for several things that we will cover this semester.

H-P Wields Its Clout to Undercut PC Rivals. Justin Scheck. Wall Street Journal. (Eastern edition). New York, N.Y.: Sep 24, 2009. pg. B.1