Monday, May 24, 2004
Innovation Vs Distribution
The question of whether a firm should invest heavily in in-house research was very much in vogue during the dot-com boom. In particular, several academic papers examined whether it was better to follow the example of a Lucent, which did a lot of internal R&D or run a firm the way Chambers ran Cisco -- identify lucrative technology and then buy it rather than spend money on developing it internally. The crowning of Cisco as the world's largest company, even as Lucent tanked, seemed to settle that question. Until, of course, the tech bust lowered Cisco to the ranks of a biggish technology company.
Steve Lohr writes about a variation on this theme whilst comparing the printer business of HP (the innovator) and Dell (the distributor).
The confrontation between Hewlett-Packard and Dell is more than a particularly lively bout of competition in the $106 billion-a-year printing industry. It is a clash - and an intriguing test case - of two different models of innovation and corporate strategy.
With its engineering roots and its corporate tagline "HP Invent," Hewlett-Packard is committed to spending heavily on research and then funneling that home-grown technology into new products. Those products, in turn, must be able to command profits high enough to keep financing the corporate invention machine. Hewlett-Packard's printing business is a showcase of success for internal innovation. Dell, by contrast, is pursuing a "virtual" research-and-development model. It does some engineering development work itself, but that typically amounts to tweaking an existing product. Dell's main role is to scour the world for technology, fine-tune the products of corporate partners, wring costs from the supply chain and sell products directly to customers.
Today, Dell is an upstart in computer printing compared with Hewlett-Packard. Dell sold an estimated 1.5 million printers in its first nine months in the business last year. This year, analysts estimate that Dell will sell 4 million printers or more. Its revenues from printers and ink cartridges have already blown past the $1 billion-a-year threshold, the fastest takeoff ever for Dell in a new product category.
Yet the printing group at Hewlett-Packard reported nearly $23 billion in revenue last year. It sold 43.6 million printers, more than double its nearest rival, Epson, reports IDC, a research firm. The business is big and immensely profitable: it accounted for about 30 percent of Hewlett-Packard's sales last year, but 80 percent of its earnings.
The Dell strategy is obvious: build a printer business, attack Hewlett-Packard's crown jewel and, thus, hobble its principal rival. And Hewlett-Packard is trying to return the favor by cutting prices aggressively on PC's with the goal of grabbing sales in the corporate PC market, which is Dell's stronghold.
Steve Lohr writes about a variation on this theme whilst comparing the printer business of HP (the innovator) and Dell (the distributor).
The confrontation between Hewlett-Packard and Dell is more than a particularly lively bout of competition in the $106 billion-a-year printing industry. It is a clash - and an intriguing test case - of two different models of innovation and corporate strategy.
With its engineering roots and its corporate tagline "HP Invent," Hewlett-Packard is committed to spending heavily on research and then funneling that home-grown technology into new products. Those products, in turn, must be able to command profits high enough to keep financing the corporate invention machine. Hewlett-Packard's printing business is a showcase of success for internal innovation. Dell, by contrast, is pursuing a "virtual" research-and-development model. It does some engineering development work itself, but that typically amounts to tweaking an existing product. Dell's main role is to scour the world for technology, fine-tune the products of corporate partners, wring costs from the supply chain and sell products directly to customers.
Today, Dell is an upstart in computer printing compared with Hewlett-Packard. Dell sold an estimated 1.5 million printers in its first nine months in the business last year. This year, analysts estimate that Dell will sell 4 million printers or more. Its revenues from printers and ink cartridges have already blown past the $1 billion-a-year threshold, the fastest takeoff ever for Dell in a new product category.
Yet the printing group at Hewlett-Packard reported nearly $23 billion in revenue last year. It sold 43.6 million printers, more than double its nearest rival, Epson, reports IDC, a research firm. The business is big and immensely profitable: it accounted for about 30 percent of Hewlett-Packard's sales last year, but 80 percent of its earnings.
The Dell strategy is obvious: build a printer business, attack Hewlett-Packard's crown jewel and, thus, hobble its principal rival. And Hewlett-Packard is trying to return the favor by cutting prices aggressively on PC's with the goal of grabbing sales in the corporate PC market, which is Dell's stronghold.
