Two Business Model Designs in the Computer Industry: HP vs. IBM

In its June 19th issue BusinessWeek had an interesting article on the fact that HP has overtaken IBM in sales revenues this last quarter. The article nicely describes how both companies operate on completely different grounds and in very different environments even if they seem to be in the same industry.

While reading I processed the information about HP and IBM through the business model lens. Actually, this allowed for a nice visualization of the strategy and business model of both companies, which I sketched out in the figure below.

I only looked at five rough business model building blocks of each company: the value proposition, the target customer segments, the distribution channels, the revenue streams and the value configuration. This already gives a nice picture of the difference between the two business models even if it is only a simplified and very rough representation of reality (in the graphic I only put 4 business model building blocks).

HP’s value proposition gravitates mainly around consumer technology, such as printers (& cartridges), handheld PDA’s, home computers etc. They focus strongly on the consumer market segment. The revenue streams from selling consumer tech to consumer markets are generally characterized by thin margins and high volume in growing markets. In the case of HP revenues from replacement ink cartridges, which command 50%+ margins form the exception. The value configuration of HP’s core activities is essentially sequential, following Porter’s value chain of a production company.

IBM’s value proposition gravitates to a large extent around professional services, such as business IT consulting and services. They focus strongly on the business market segment - mainly on larger companies. The revenues from consulting and services generally command high margins, but are characterized by low growth. The value configuration of IBM’s core activities essentially follow a cyclical problem solving approach (analysis-design-evaluation).

Finally, it is also interesting to look at both companies’ competitive environments. HP, which focuses on consumer tech operates in an environment that features countless competitors and regular insurgents of which some can be quite disruptive. Innovation (or at least invention) still seems to play a larger role in consumer tech than in professional services. Interestingly, IBM is the global leaders in patent registration, which might seem counterintuitive with regard to their business model. Contrary to HP, IBM operates in a more stable market with large competitors such as Accenture the consulting company. Insurgents are rarer in this area, since the barriers to enter the market are higher than in consumer tech.

It will be interesting to follow how both companies and their business models evolve. The BusinessWeek article stressed the fact that HP has overtaken IBM in terms of revenue. However, at the end of the day it is only profits that count. Size alone doesn't matter...