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Hewlett Packard’s Merced Decision

Introduction to the company, competitors and situation. What is Merced? What is its market demand? HP was founded in 1939 in Northern California. It is an international company involved in manufacturing instrumentation, healthcare, computer and communications products. In 1997 it had grown to $43B in sales and $3. 1B in net profits. It is an industry leader that has developed new products and outstanding corporate culture. In 1997 HP redirected its efforts on enterprise computing by launching the Enterprise Systems Group. In 1997 the group had a sales of almost $10B. However, the market was estimated to be more than $60B.

HP had maintained number one position in UNIX server vendor by sales since 1993 through its HP-UX products. The company had been able to stay ahead of competitors, for example Sun Microsystems had not been able to manufacture their own RISC processors. On the other hand as HP is developing IA-64 architecture, its competitors, notable Sun has started a campaign that HP is not committed to RISC-Unix systems. This has eroded HP’s customer base. In addition, Sun has launched a campaign to persuade smaller competitors that had their own UNIX operating system into using Solaris, that is Sun’s UNIX operating system.

In this manner it had been able annex Siemens-Nixdorf, NCR, and Fujitsu to its bag. The current situation is that HP needs to decide whether it should recommend a large share of its outlay to its Performance Architecture (PA) that is UNIX based or should shift its resources to the development of a new chip. The changeover was imminent but the problem was when the changeover should take place. The new chip was having an IA-64 architecture that was being developed with Intel and the date of launch of the workstations and severs based on the new chip depended on the launch time recommended by the partner that is Intel.

The current situation was critical because any reduction in the resources allocated to the PA would lead to erosion of market share and revenue. Sun had already started a campaign that HP was not focused on UNIX systems and so the customers should change over to Sun systems. On the other hand allocating resources to the new IA-64 systems was important. It was the technology to which the company would have to change over. The dilemma has worsened because HP’s partner in IA-64 Intel has decided to delay the launch of the new system by further six months. Merced is the new chip developed by Intel for data transfer.

This chip along with its corresponding architecture called IA-64 will be the backbone of the new enterprise computer systems to be developed by HP. Based on this computer chip HP needs to develop workstations and servers. The market demand for Merced is related to the time it will have in the market before the second generation McKinley chip is launched. McKinley has a much higher performance level. The current delay in the launch of Merced by Intel has pushed back the launch of Merced to a point where it will be launched just one year ahead of McKinley.

This means that market demand has been severely restricted. Merced has the objective of opening up the high end of the market directly to Intel microprocessor chips. This would provide high returns if the project went on time and was successful. SWOT Analysis: The strength of HP was that it was a leader in the field of RISC/Unix server market. It had maintained leadership since 1993 and continued to do so even now. In other words if HP allotted further resources to its proprietary technology, the PA then it could continue to maintain a leadership position well up to 2002.

Another important strength of HP is its initiative with Intel for the development of IA-64. This agreement with Intel for Merced puts HP ahead of competitors in the enterprise computing market. In addition, it allows HP to target the high end of the enterprise server market by using the microprocessor chip. This is a great boost to the positioning of the company in the market place. The weakness of HP is that it has not been able to generate profits in the last seven quarters and is under pressure to perform. Moreover, the RISC chips that had been the mainstay of HP’s recent growth have now reached a limit of performance.

A leap in technology is required. Another weakness is that HP does not have the resources to pursue Merced and RISC-Unix platforms simultaneously. It would have to withdraw resources from RISC-Unix based projects and focus on IA-64. The opportunities for HP are that if it focuses on the RISC-Unix platform it can continue to maintain leadership position till 2002 and reap profits. The other opportunities are that if HP is able to launch its Merced based systems quickly enough it can skim the cream of the top end of the market and this would lead to high margins and profits.

The other opportunity arises from the launch of McKinley; its excellent performance will open up more segments of the market leading to high rates of profits. The fundamental opportunity for HP is to establish a leadership in IA-64 based enterprise systems. These systems are bound to replace the existing systems in future and open up new market opportunities for HP. The threats for HP are that Intel may announce further delays in the launch of Merced and this would further reduce the time between the launch of Merced and this may delay the launch of Merced and McKinley.

In addition, it may require that HP postpone the launch of Merced and may decide to go in directly for the launch of McKinley. In addition, there is a threat that the moment HP diverts its resources to the development of Merced based system there is a radical fall in its revenues of RISC-Unix based systems because of the marketing opportunism of Sun. In this manner HP may be caught between precipitously falling sales of HP-UX products and delay after delay from Intel for the launch of Merced. This can lead to further fall in the profits for the company.

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