HP Poised to Unseat IBM

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While IBM has exited the PC business and Dell is focused mostly on a slow-growing corporate market and moribund demand for desktop models, HP is taking advantage of brisk demand from consumers, particularly for laptop computers. The company's laptop sales grew 24%, and the company is exploiting its vast retail presence in the U.S. and in emerging markets such as India, Russia, and Brazil. Indeed, HP passed struggling Dell to become the PC market leader in the third quarter (see BusinessWeek.com, 10/19/06, "Dell Loses Its PC Lead").

Look for HP to exploit its growing popularity among consumers. HP is beginning to use its lead in consumer PCs to stake out more ground in the larger consumer electronics space—say, with a new Net-connected TV that can wirelessly grab photos, music, or videos from a PC in another room to show in the living room. "People talk about how we're doing against Dell, but they don't realize that we're redefining the consumer electronics space," says Satjiv Chahil, HP's PC marketing chief.

Breathing Room

With HP's businesses doing well across the company, Hurd & Co. now have the freedom to manage the company differently. Hurd points out that in the past, top management often had to maximize printer profits rather than invest in the future for that unit, to compensate for losses elsewhere and still hit Wall Street's targets. For example, he says problems at the big corporate computing unit in 2003 and 2004 forced the company to be less aggressive on pricing for its printers.

That sent the profits for the Imaging and Printer Group skyrocketing, since a greater percentage of sales came from hugely profitable ink cartridges. The cost, however, was that selling fewer printers means lower ink sales in the future—much as reduced razor sales would crimp razor-blade sales down the road for a company like Gillette. "If TSG's [HP's corporate computer unit] not making money, we may have to tell IPG to not sell so many printers," says Hurd.

Now, HP's improved profitability means its best-performing units won't have to hold back. And suddenly, it seems HP has a lot more units that are looking to be unshackled, rather than simply trying to avoid losses.

Burrows is BusinessWeek's Computers editor in the Silicon Valley bureau.