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HEWLETT-PACKARD COMPANY IN VIETNAM Case Synopsis In late 1995, John*, a marketing manager of Hewlett-Packard Asia Pacific Limited, a subsidiary

of The Hewlett-Packard Company, was evaluating its strategic options for doing business in Vietnam. Vietnam represented a bright prospect for investment. The USA has lifted its embargo on the country in February 1994, and the country has adopted an open-door policy and has normalized relationships with many other countries, including China. The current economic development in Vietnam was rather slow and limited, and the infrastructures and the politicallegal systems appear to be underdeveloped. However, the long-term prospects appear very bright. Hewlett-Packards current operation in Vietnam is limited to the distribution of a small range of its products through local intermediaries. Hewlett-Packards competitors currently either have some form of set up (for example, representative office) in Vietnam, or they plan to do so in the near future. John took a field trip to Vietnam and they concluded that the future of the information technology market in Vietnam appears bright. The market size is expected to be around US$500 million in the year 2000. The company has identified seven market segments for the IT market. Several business units within HP had begun to distribute some HP products in Vietnam. John needed to recommend if HPAP should enter the Vietnam market in a more strategic fashion. If so, what form of market entry should be adopted and what detailed implementation plans should be developed. Case Analysis 1. Analysis of IT Market and Decision on Market Entry The IT market in Vietnam is in its infancy. The current market segments are government (35%), multinational corporations (35%), small- and medium-sized enterprises (25%) and home offices (5%). The market size is estimated to be US$30 million in 1995 and is forecasted to be US$500 million in the year 2000. The Porters five forces model can be used to examine the attractive and unattractive aspects of the market. Entry and Exit Barriers: Computer products have limited intrinsic proprietary attributes and most innovations are easily imitated. The computer industry in Vietnam, especially the low end segment, is characterized by fierce price retaliation and low switching costs from one manufacturer to another. The fact that the Vietnamese market favored US brands is a positive factor for HP. One barrier to entry for American multinationals is the problems associated with the lack of normalized ties between the US and Vietnam. Although the trade embargo has been lifted, ties have not yet been normalized, and thus, American banks are not able to provide credit. This is a key necessity in doing business in Vietnam, especially in larger projects, as hard currency is still hard to come by. American IT companies such as UNlSYS have invested heavily in at least 2 large IT bids, only to find that their European and Japanese competitors have the edge against them when it come to extending credit.

Another barrier to entry is the practice of "guan xi". As in other Asian countries, "guan xi" (explained in the case) is an important factor in doing business in Vietnam. Local and regional competitors can have some advantages over American multinationals. For example, they may have a better understanding of this culture and practice, and may have built up their own networks since they may have entered the market before the trade embargo was lifted. However, HP is already known in the Vietnamese market for its printer and high-end PC products, which is sold through the reseller channel today. HiPT, HP's main channel of distribution in Vietnam today have strong ties with MOSTE and through them, HP may be able to leverage these ties to its benefit. Since the computer industry in Vietnam is still in its infancy, and competitors have just entered or are just beginning to enter the market, other barriers to entry like distribution channels and customer loyalty are low. Overall, there are low to moderate barriers to entry. There will probably be few barriers to exit except big losses if large amount of investments have been committed there. One possible exit barrier may be obligations to joint venture partners, especially local ones who may demand large compensation for opting out of any cooperative ventures. Another possible exit barrier may be obligations to customers in Vietnam, especially those whom we are serving in other markets as well. These customers may expect continued service support which we may find difficult to withdraw. Bargaining Power of Suppliers: IT expertise is the most important "supplier" of production. However, skilled local expertise in IT is somewhat limited. With a hardworking and well-educated workforce in abundant supply in Vietnam, HP can quickly train a local first-tier workforce by structured training and on-the-job training in Singapore. In addition, HP can hire ex-Vietnamese HP personnel currently working in HP facilitates in the US or other experienced personnel to Vietnam to facilitate the management of the entity. Bargaining Power of Buyers: Computer products are increasingly becoming less differentiated and buyers are fairly sensitive to quality, technology and price. The buyers in the foreseeable future will be the public sector and major foreign companies. The deal sizes are forecast to be large as the government departments and foreign companies make initial investments in information technology infrastructure. These large customers tend to have moderate to strong bargaining power, especially since alternative suppliers may be available. Threat of Substitutes: Different types of computers, such as personal computers, minicomputers, RISC based workstations, and mainframes, can to a certain extent be substitutes for one another. However, due to the price differences, these substitutes generally serve slightly different market segments. In addition, most large players carry a full range of computers. Intensity of Rivalry:

In more developed markets like United States, Western Europe, Australia, Singapore, Hong Kong and Japan, the computer industry is highly fragmented and intensely competitive, with the largest manufacturer's market share at only 10% to 20%. Since Vietnam is still an emerging market, competition in Vietnam is not as intense. It is expected, however, that demand will build up over the next few years and more players will enter the market. In the short term however, there is a window of opportunity for first mover advantage in getting market share, as there are no clear leaders in the market yet. With clearly thought-out and well-defined strategies, it is possible for the leading computer companies to develop a loyal customer base. Overall, the attractive aspects of the market are: (a) the potential growth is high, since in the past few years, the market has doubled in size and growth is expected to be more rapid over the next few years; (b) competition is currently not intense and there are few substitutes; and (c) the IT2000 plan by the Vietnam government shows that it is committed to the business area. The unattractive aspects of the market are: (a) the IT boom is at least two years away; (b) there is a lack of infrastructure for IT in Vietnam; (c) the business environment, including the legal framework, is uncertain; (d) there is a lack of IT personnel in Vietnam; (e) the IT market in Vietnam is currently generally small; and (f) the entry barriers for the market are low. Is this the right time to enter the market? Students will give a yes or no answer, but they must support their answers. For yes, the support could be: (a) some of our competitors, such as IBM, have already developed a presence there; (b) we currently have contacts and ties in the market; (c) it will take time to build up the business, and we have to start now; (d) we need to have a presence in the Vietnam market to serve some of our home customers who are there; (e) the HP brand is already well known in the Vietnam market; and (f) the barriers of entry in the market are low. For no, the support could be: (a) the current political, legal and business environment is uncertain and there is too much risk; (b) there is currently a lack of funds and credit squeeze in Vietnam; (c) the market size is still small and will not be attractive in the near future; (d) we can still serve home customers in Vietnam with our operations from other parts of Asia, for example, Singapore. What are the advantages for going into the Vietnam market now? Some advantages are: (a) to gain early market share; (b) there is no clear leader in the market yet, so we may be able to establish leadership in the market; and (c) we can make above average profits. What are the barriers for doing so now? Some barriers are: (a) the relationship between US and Vietnam is not normalized now, and as a US company, there is still some risk in doing business in that country; (b) there is a lack of IT personnel in Vietnam; and (c) there is credit squeeze and lack of funding in the country.

2.

Analysis of Market Segments

The case provides two basis of segmentation by industry and by customer benefits sought. We shall examine the segments by industry and relate these segments to the benefits they look for. The first segment is the financial services industry. This industry is experiencing regulatory liberalization and investment in this sector is expected to total around US$1.32 billion. It is experiencing explosive growth and has government support. This sector is seen as crucial for other developments. This sector, however, may not take off due to the current lack of hard currencies in Vietnam. The positive aspects of this sector are: (a) it tends to view IT as a tool for competitive advantage and will likely invest in IT and become a heavy user of IT; (b) this sector may not be price sensitive; (c) global integration is probably a requirement and HP has this capability; and (d) this segment will be very demanding when it comes to reliability and service since IT is critical to their operation and HP is capable of providing this level of reliability and service. The negative aspect of this segment is that the technology required is fairly standard and entry barrier, thus, may be low. Overall, this sector represents an attractive segment for HP. The second segment is the telecommunications segment. This sector is still in its infancy. Although explosive growth is expected for this sector, the timing is uncertain. The sector is currently a public monopoly, and may not be opened up in the near future and, thus, real explosive growth may come much later. The positive aspect of this market are: (a) it may be a heavy user of IT; (b) it requires complex technology which HP probably has the capability; and (c) reliability is an important requirement and HP has this capability too. The negative aspects of this sector are: (a) it may develop its own IT technology; and (b) the sector is currently government-based and this type of customer may have strong bargaining power. Overall, this sector represents a fairly attractive segment for HP since HP is quite familiar with the requirements of this sector. The third segment is the hotel and tourism segment. This sector currently has investment of US$2.2 billion and growth is expected to surge. The positive aspect of this segment is that reliability is an important requirement and HP has this capability. The negative aspects of this segment are: (a) it may be price sensitive, (b) the technology is fairly standard and entry barrier may be low; and (c) this sector may be a light user of IT at the initial stages of development since management may elect to adopt a manual system of operation. Overall, this sector may not be an attractive area for HP as growth potential is uncertain and HP is not familiar with this sector. The fourth segment is the manufacturing sector. IT growth in this sector is expected to be slow as Vietnam is expected to attract low value-added and labor-intensive manufacturing operations. Even if IT is utilized, the technology involved may be fairly rudimentary at the initial stages. The Vietnam population lacks the skill to handle sophisticated IT equipment at this stage. Overall, this sector is attractive to HP only in the long run as the sector moves into more sophisticated manufacturing operations, since HP has strong expertise in this area. The fifth segment is the utilities sector. This sector is expected to experience explosive growth, but the incorporation of IT in the short and medium term may be uncertain. The sector may also not be opened up to the private sector and the government-related customer is likely to have strong bargaining power. HP appears to lack extensive experience in this sector. Overall, this sector may only be fairly attractive to HP since it 4

lacks experience in this sector. The sixth segment is the oil and gas sector. The sector appears to be taking off with huge growth and with a fairly high degree of private-sector involvement. This sector, however, may not be a heavy user of IT and HP seems to be quite inexperienced in this sector. The last segment is the government sector. The positive aspect is the government focus on IT and its IT2000 plan. The negative aspects of this sector are: (a) it has relatively high bargaining power; (b) it will likely be price sensitive; (c) it lacks the funds and skilled manpower to manage IT; and (d) it may be a relatively light user of IT in the near future. This sector represents only a mild opportunity for HP and the company may want to participate in this sector mainly to improve its profile in the country. Some students may suggest other segments, for example, the retail sector. These can be analyzed in the light of other information provided in the case and those from other sources. For the retail sector, the technology required may be fairly standard and so entry barrier may be low. The retail sector is not really taking off in Vietnam and their operation tends to be labor-intensive, requiring light usage of IT. How can the segments be prioritized? One way is to identify some criteria and to assess the segments against these criteria. Some useful criteria which can be used are: (a) probable level of usage of IT; (b) price sensitivity; (c) speed of IT diffusion in the segments; and (d) customer buying criteria and their fit with company capability. Since resources are limited, it is important that HP focuses its efforts where they can have the most effect. Based on the case information, one way to prioritize the segments is to rank the target industries against the benefit segments. The level of investment the industries and HP is likely to receive, the adoption rate of IT in each industry, as well as their fit to HP's installed-base and presence worldwide can analyzed. Table 1 of this note shows the relevant analysis. From this analysis, finance and telecommunications are the top segments HP should target. Utilities and government are selected as secondary target segments. 3. Competitive and Company Analysis We can examine the competitors and the company by focusing on various areas. Performance Table 6 of the case provides some figures. In terms of revenue, IBM is number one with HP a distanced second with less than 40% of IBMs revenue. DECs revenue is about half of HPs while Unisyss and Compaqs were around half of DECs. In terms of net income in 1994, both IBM and DEC had made losses, with both of them facing increased losses from 1993. Unisys had the highest net profit margin of around 7.3%, while both HP and Compaq had net profit margin of around 6.4%. In terms of productivity, Compaq had achieved the highest revenue per employee of US$716,021 while HP was a fairly distanced second with revenue per employee of US$234,719.

Table 1 Analysis of Target Segments Industry Benefit Segment Investment Level Adoption Rate of HP Presence in IT Sector 5

Financial Services Telecommunications Hotel and Tourism Manufacturing Utilities Oil and Gas Government Size

Mission critical, mission sensitive Mission critical, mission sensitive, or Technology Economy Geographical presence Mission critical, mission sensitive Technology Depending on sectors

High High Medium High High High Medium to High

High High Low Low Medium

Yes Yes No Yes No

Low (initially) to In specific High (mature) countries High (IT-2000 No plan)

In terms of size based on capitalization, assets and employment, the various players can be rated as follows: IBM large Hewlett-Packard medium DEC medium Compaq medium Bulls small Unisys small Involvement in Asia-Pacific Region DEC IBM Unisys 10% of its activities in the Asia-Pacific, including Japan. Has representative office in Hanoi since 1992. Has representative office in Hanoi since 1992. Considered a global player and has strong presence in the Asia-Pacific. 5% of activities from Asia-Pacific region and 7 % from Japan. Has a representative office in Vietnam and has 15 marketing staff stationed in Vietnam. Targeting to set up a subsidiary operation in Vietnam. Recently installed equipment for the banking sector for SWIFT in Vietnam. Compaqs products are widely available in the Asia-Pacific region. They have established strong and intensive distribution network in the region. They also have production facilities in some Asia-Pacific countries. There is no information on their current level of involvement in the Vietnam market. Considered a global player but has only small set-ups in many Asia-Pacific countries.

Compaq -

Bull -

HP -

Has strong and long (over 25 years) presence in many Asia-Pacific countries such as Hong Kong, Singapore, Japan, Taiwan and Korea. Has presence in emerging Asia-Pacific markets such as the Philippines, Indonesia, and China. Currently represented by several distributors in Vietnam.

Key Areas of Operation/ Differentiation DEC Leading supplier of networked computer systems, software and services. Strong client base in government, banking and finance, insurance and telecommunications. Experienced in healthcare, transportation, utilities and retail. Is a total solution provider. Has 1500 consultants worldwide. Provides insights, experience and specialized skills to customers. Key focus in finance, retail and manufacturing. Manufactures and markets computer-based networked information systems and software. Offers related services such as IT outsourcing and systems integration. Specializes in business-critical solutions based on open information networks in transaction-intensive environments. Focuses on airlines, public sectors, financial services and telecommunications. Leading manufacturer and supplier of PC (desktops, portables and servers) in the world. Strong in both consumer and corporate computing markets. Strong in indirect marketing through distribution channels for their products. Open systems. Stress on global coverage. Open systems, client-server computing system. UNIX computing. Global support.

IBM -

Unisys -

Compaq -

Bull HP -

The strengths and weaknesses of the various competitors are summarized in Table 2 of this note. Overall, Hewlett-Packard is in a strong competitive position and is in good shape to enter the Vietnam market. For open system, HPs key threats are from Unisys and Bull who also have expertise in this area, but both these competitors are weak in size and influence. For the attractive finance and telecommunications sectors, HPs key threats come from DEC, IBM, and Unisys who have experiences in these areas. Of these, both IBM and DEC are formidable threats and HP may want to develop stronger market presence in Vietnam since both these players already have a presence in this market. Initially, the Vietnamese customers may not have the resources and expertise to use complex computer systems, and they may start with stand-alone computers and simple server systems. Here, Compaq may be a strong contender. Vietnam is an emerging market and the premium price position of HP may not work well in this market. Initially, HP should focus on simple computer systems and stress 7

on quality and value for money. They may want to use their extensive experience in computer education to help customers learn to assimilate the tool. 4. Modes of Entry The case listed five possible modes of entry into the Vietnam market. These modes can be evaluated using some common criteria. Students may also identify other possible modes of entry. Control Control over its strategy and operation will be greatest with the direct presence option, followed by majority joint venture with local partner, cooperative venture/ franchising, distribution (ex-HP employee) and distribution (independent partner). Table 2 HP and Some of Its Competitors Company Compaq DEC Strengths Leader in Intel PC desktops and servers. Strong current demand for ALPHA products and world-wide support and service infrastructure. The best performer among computer hardware and service vendors. Recognized as leader in open-systems client-server computing. No. 1 in UNIX computing. No. 3 in Intel PC servers. No. 1 in customer satisfaction. Worldwide support and service infrastructure. Strong network management offering. Huge installed base of mainframe customers. Largest IT company status and enormous resources. Worldwide support and service infrastructure. No. 2 in Intel PC worldwide. Strong in selected focus industries and areas. Weaknesses New entrant in mission-critical, missionsensitive enterprise computing market. Weak financial position. No strong UNIX client-server offerings. Uncertainty in long-term future of new ALPHA products. Functional silos (independent corporate entities within HP) create chunks within products and solution offerings which competitors could attack.

HP

IBM

Mainframe market growth was stagnant. Lacked a credible open-system clientserver image. Spent millions on OS/2 with little results. Mainly a system integrator in selected industries today. Downsized over last several years.

UNISYS

Costs and Profits The issue of costs and profits are not so clearcut. The options involving greater commitment (for example, direct presence or majority joint venture) will result in heavier fixed costs and overheads. Variable costs, may however, be lower due to HP performing many of the tasks and marketing functions. The options involving less commitment (for example, using distributors) may result in lower fixed costs, since all the set-up and 8

overheads will be borne by the distributors. Variable costs may be higher since these distributors will have to be paid a margin for performing various tasks and functions. Overall, the costs and profits will depend on volume and turnover. If turnover is low, overhead and fixed costs may become burdensome, leading to losses. If turnover is high, margins paid to distributors become an erosion of the profit margin. If long run profit is the key driving force, options involving greater commitment may be favored, since if we engage distributors in the market, they may become entrenched, and it may be difficult to break a distributor relationship in the long run. The long term use of distributors may result in continuous payment of margin and may represent an erosion of our profit margin. If distributor power is high, it may also represent a threat in the future. The use of options involving greater commitment will result in high fixed costs and overheads, and steps have to be taken to generate volume and contribution for these overheads, unless the headquarters are willing to bear the overheads for a period of time. Resource and Investment Requirements Resource and investment requirements will be highest with direct presence, followed by majority joint venture with local partner, cooperative venture/ franchising, and distribution. Market Knowledge and Contacts A local partner will be able to provide the local knowledge and contacts. As such, the options of using distributor (local partner), cooperative venture/ franchising with local partner, and joint venture with a local partner will enhance this area. Going all alone ourselves (direct presence) may be weakest in providing local knowledge and contacts. Speed of Market Penetration The use of distributors or cooperative ventures/ franchising may enable HP to penetrate the market quickly. Direct presence and majority joint venture will result in slower penetration of the market since HP has to go through the process of setting up the business from scratch and this involves time and efforts. Decision? There is no right or wrong answer here. It is a matter of where the priority is. If control is important to HP, then a heavier commitment (direct presence) is called for. If risk and uncertainty is considered too high in the Vietnam market, then management may opt for less commitment. It is also possible to use a combination of some options. HP can use primarily distributors, but set up a branch office in Vietnam to control and support the operation of distributors. This will help to maintain the image of HP, yet lessen the resource and investment requirements.