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HP Faces Questions As Rivals Cut Costs

It's slashing costs from its complicated supply chains, but will that be enough?
HP thinks it has an answer to Dell's configure-to-order supply chain. Clarke contends that HP now has the same capabilities as Dell to configure a product to customer specifications and deliver it in five days, thanks largely to capabilities it acquired through Compaq. HP's goal is to increase the 27% of PC sales made directly to about 50% over the next few years.

Analysts have their doubts, which were magnified by the recent Dell and HP financials and Dell's promise of further price cuts. "HP's limited build-to-order and direct-ship capability for commodity PCs and Intel-based servers remains a significant medium- to long-term concern," Richard Gardner, an analyst for Smith Barney Citigroup, wrote in a research note last week. "When component prices resume more normal declines, this will once again emerge as a significant source of cost disadvantage for HP versus Dell."

Others think too much focus on price could hurt the company. "The real question for HP's future success is not necessarily its ability to compete with Dell on price but its ability to deliver complete solutions," says Jon Derome, an analyst with the Yankee Group. "They need to fulfill the promise of companies seeking smaller numbers of suppliers by being able to more cost-effectively bring bundled solutions to market."

HP execs like to compare the one year it took them to realize $3.5 billion in savings to the two years it took Exxon and Mobil to hit similar savings after they merged in 1999. "This has been the most successful merger in this industry to date, and one of the most successful implementations and mergers across all industries," Clarke says. It just might be. But in the cut-throat world of computer hardware, even that won't be enough if the savings don't keep coming.