HP: Goodbye Personal Computers, Hello Services!

Do you remember when basketball legend Michael Jordan announced his retirement shortly after winning his third consecutive world championship with the Chicago Bulls? Or when football Hall of Fame quarterback John Elway retired after leading his Denver Broncos to their second consecutive Super Bowl win?

Quitting “on top,” while occupying the champion’s position, has been an admirable tradition of professional sports figures for many years. It is, however, far more unusual for leading businesses to walk away from their own dominant market shares.

Nevertheless, that is exactly what market share leader Hewlett Packard (HP) recently announced it would do in the personal computer business. And Michael Dell, founder and CEO of HP’s closest rival, did nothing to disguise his glee.

Call It Compaq

To be fair, HP never claimed to maintain a longstanding tradition in the personal computer industry. In fact, the Silicon Valley icon has always focused more intensively on test equipment, servers, calculators, printers, and similar devices.

In 2001, though, then-CEO Carly Fiorina authorized HP’s purchase of Compaq, the world’s second largest personal computer company. That allowed the newly combined HP-Compaq entity to leap-frog Dell and become the market leader. HP and Dell then shared the top two spots in the global personal computer industry from 2003 to 2010 (except for 2009, when Acer briefly nudged past Dell to snare the #2 position), and have engaged in a spirited rivalry throughout that time.

That explains Michael Dell’s bit of biting sarcasm when HP surprised the world by announcing that it would sell or spin off its personal computer business. Dell “tweeted,” via a posting on his public Twitter page, the following sardonic suggestion: “If HP spins off their PC business….maybe they will call it Compaq?”

The IBM Thinkpad

Although it is indeed highly unusual for a firm with the leading share of a market to voluntarily sell or spin off its business, HP’s move is somewhat reminiscent of IBM’s decision to sell its once-dominant Thinkpad personal computer division to Lenovo in 2005. In each situation, a successful computer manufacturer concluded that it could optimize profits by refocusing on service lines of business instead of on manufacturing activities.

In a broader sense, this strategy is reflective of the general shift from a manufacturing (and agricultural) economy to a service economy in the United States. Other iconic American manufacturing firms, such as Kodak to Xerox, have implemented similar initiatives.

Are these firms following sound business strategies? And are they helping, or hurting, the American economy and the prosperity of its citizens?

Shifting To Services

The financial accounting model is arguably constructed in a manner that leads investors to favor service organizations over manufacturing firms. That is because manufacturers often need to borrow significant amounts of capital to invest in the construction of buildings and the purchase of equipment; on the other hand, service firms can simply and cheaply utilize human labor (or, even more profitably, automated programs and other functions) to earn revenues.

By avoiding large investments in long term assets, service firms tend to post higher Return On Investment (ROI) and Return On Asset (ROA) statistics. Such performance measurements are closely tracked, and highly valued, by professional investment advisers.

This distinction explains why corporations from Marriott to McDonald’s have shifted from property ownership contracts to franchising and management service contracts over time. IBM, and now HP, appear to have adopted this strategy too.

Can America Prosper?

Although individual corporations can improve their financial results by shifting away from manufacturing activities, can entire nations do so as well? Can America and other nations continue to prosper if they surrender their capabilities to produce tangible goods?

America was once the dominant global manufacturing powerhouse; in fact, it still rivals China for the position of the world’s largest manufacturer. But the American service sector outgrew its manufacturing sector during the late 1950s; today, the service economy is more than twice the size of the manufacturing economy in terms of GDP.

Meanwhile, America has prospered for over half a century while undergoing a long term evolution from the manufacturing sector to the service sector. And although the American financial services industry continues to exhibit weakness, other service industries — such as health care, for instance — are expected to display strong growth well into the future.

The Hamburger vs. Facebook

America’s service sector employees are occasionally caricatured as burger flippers, working for minimum wage at fast food outlets. However, its service economy also encompasses software programmers who are admired around the world; many Egyptians, for instance, publicly thanked Facebook and Google for their roles in facilitating their successful political revolution.

It is always painful, of course, for nations to watch domestic manufacturing industries lose market share to foreign competitors. Nevertheless, firms like HP may indeed find success by aggressively shifting to service offerings, and may yet lead the American economy back to prosperity by doing so.