Hewlett-Packard

The company was founded in a one-car garage in Palo Alto by Bill Hewlett and David
Packard, and initially produced a line of electronic test equipment. HP was the world's leading
PC manufacturer from 2007 to Q2 2013, after which Lenovo came to rank ahead of HP. It
specialized in developing and manufacturing computing, data storage, and networking
hardware, designing software and delivering services. Major product lines included personal
computing devices, enterprise and industry standard servers, related storage devices,
networking products, software and a diverse range of printers and other imaging products. HP
marketed its products to households, small- to medium-sized businesses and enterprises
directly as well as via online distribution, consumer-electronics and office-supply retailers,
software partners and major technology vendors. HP also had services and consulting business
around its products and partner products.
Hewlett-Packard company events included the spin-off of its electronic and bio-
analytical measurement instruments part of its business as Agilent Technologies in 1999,
its merger with Compaq in 2002, and the acquisition of EDS in 2008, which led to combined
revenues of $118.4 billion in 2008 and a Fortune 500 ranking of 9 in 2009. In November 2009,
HP announced the acquisition of 3Com, with the deal closing on April 12, 2010. On April 28,
2010, HP announced the buyout of Palm, Inc. for $1.2 billion. On September 2, 2010, HP won
its bidding war for 3PAR with a $33 a share offer ($2.07 billion), which Dell declined to
match.
Hewlett-Packard spun off its enterprise products and services business as Hewlett
Packard Enterprise on November 1, 2015. Hewlett-Packard held onto the PC and printer
businesses, and was renamed to HP Inc
Bill Hewlett and David Packard graduated with degrees in electrical
engineering from Stanford University in 1935. The company originated in a garage in
nearby Palo Alto during a fellowship they had with a past professor, Frederick Terman at
Stanford during the Great Depression. Terman was considered a mentor to them in forming
Hewlett-Packard.[9] In 1938, Packard and Hewlett begin part-time work in a rented garage
with an initial capital investment of US$538. In 1939 Hewlett and Packard decided to formalize
their partnership. They tossed a coin to decide whether the company they founded would be
called Hewlett-Packard (HP) or Packard-Hewlett. HP incorporated on August 18, 1947, and
went public on November 6, 1957.
Of the many projects they worked on, their very first financially successful product
was a precision audio oscillator, the Model HP200A. Their innovation was the use of a small
incandescent light bulb (known as a "pilot light") as a temperature dependent resistor in a
critical portion of the circuit, the negative feedback loop which stabilized the amplitude of the
output sinusoidal waveform. This allowed them to sell the Model 200A for $89.40 when
competitors were selling less stable oscillators for over $200. The Model 200 series of
generators continued until at least 1972 as the 200AB, still tube-based but improved in design
through the years.

1
 One of the company's earliest customers was Walt Disney Productions which bought
eight Model 200B oscillators (at $71.50 each) for use in certifying the Fantasound surround
sound systems installed in theaters for the movie Fantasia.
They worked on counter-radar technology and artillery shell fuses during World War
II, which allowed Packard (but not Hewlett) to be exempt from the draft
HP is recognized as the symbolic founder of Silicon Valley, although it did not
actively investigate semiconductor devices until a few years after the "traitorous eight" had
abandoned William Shockley to create Fairchild Semiconductor in 1957. Hewlett-Packard's
HP Associates division, established around 1960, developed semiconductor devices primarily
for internal use. Instruments and calculators were some of the products using these devices.
HP partnered in the 1960s with Sony and the Yokogawa Electric companies in Japan
to develop several high-quality products. The products were not a huge success, as there were
high costs in building HP-looking products in Japan. HP and Yokogawa formed a joint venture
(Yokogawa-Hewlett-Packard) in 1963 to market HP products in Japan. HP bought Yokogawa
Electric's share of Hewlett-Packard Japan in 1999.
HP spun off a small company, Dynac, to specialize in digital equipment. The name
was picked so that the HP logo "hp" could be turned upside down to be a reverse reflect image
of the logo "dy" of the new company. Eventually Dynac changed to Dymec, then was folded
back into HP in 1959. HP experimented with using Digital Equipment Corporation (DEC)
minicomputers with its instruments, but after deciding that it would be easier to build another
small design team than deal with DEC, HP entered the computer market in 1966 with the HP
2100 / HP 1000 series of minicomputers. These had a simple accumulator-based design, with
registers arranged somewhat similarly to the Intel x86 architecture still used today. The series
was produced for 20 years, in spite of several attempts to replace it, and was a forerunner of
the HP 9800 and HP 250 series of desktop and business computers.
The HP 3000 was an advanced stack-based design for a business computing server,
later redesigned with RISC technology. The HP 2640 series of smart and intelligent terminals
introduced forms-based interfaces to ASCII terminals, and also introduced screen labeled
function keys, now commonly used on gas pumps and bank ATMs. The HP 2640 series
included one of the first bit mapped graphics displays that when combined with the HP
2100 21MX F-Series microcoded Scientific Instruction Setenabled the first
commercial WYSIWYG Presentation Program, BRUNO that later became the program HP-
Draw on the HP 3000. Although scoffed at in the formative days of computing, HP would
eventually surpass even IBM as the world's largest technology vendor, in terms of sales
Although Programma 101 was the first commercial "desktop computer", HP is
identified by Wired magazine as the producer of the world's first device to be called a personal
computer, the Hewlett-Packard 9100A, introduced in 1968. Programma 101 was called
"computer personale" (in Italian), at Fiera di Milano, 1966. HP called it a desktop calculator,
because, as Bill Hewlett said, "If we had called it a computer, it would have been rejected by
our customers' computer gurus because it didn't look like an IBM. We therefore decided to call
it a calculator, and all such nonsense disappeared." An engineering triumph at the time, the
logic circuit was produced without any integrated circuits; the assembly of the CPU having
been entirely executed in discrete components. With CRT display, magnetic-card storage, and

2
printer, the price was around $5,000. The machine's keyboard was a cross between that of a
scientific calculator and an adding machine. There was no alphabetic keyboard.
Steve Wozniak, co-founder of Apple, originally designed the Apple I computer while
working at HP and offered it to them under their right of first refusal to his work, but they did
not take it up as the company wanted to stay in scientific, business, and industrial markets.
Wozniak said that HP "turned him down 5 times", but that his loyalty to HP made him hesitant
to start Apple with Steve Jobs.
The company earned global respect for a variety of products. They introduced the
world's first handheld scientific electronic calculator in 1972 (the HP-35), the first handheld
programmable in 1974 (the HP-65), the first alphanumeric, programmable, expandable in 1979
(the HP-41C), and the first symbolic and graphing calculator, the HP-28C. Like their scientific
and business calculators, their oscilloscopes, logic analyzers, and other measurement
instruments have a reputation for sturdiness and usability (the latter products are now part of
spin-off Agilent's product line, which were later spun off from Agilent as Keysight
Technologies). The company's design philosophy in this period was summarized as "design for
the guy at the next bench".
The 98x5 series of technical desktop computers started in 1975 with the 9815, and the
cheaper 80 series, again of technical computers, started in 1979 with the 85. These machines
used a version of the BASIC programming language which was available immediately after
they were switched on, and used a proprietary magnetic tape for storage. HP computers were
similar in capabilities to the much later IBM Personal Computer, although the limitations of
available technology forced prices to be high
In 1984, HP introduced both inkjet and laser printers for the desktop. Along with
its scanner product line, these have later been developed into
successful multifunction products, the most significant being single-unit
printer/scanner/copier/fax machines. The print mechanisms in HP's tremendously
popular LaserJet line of laser printers depend almost entirely on Canon Inc.'s components
(print engines), which in turn use technology developed by Xerox. HP develops the hardware,
firmware, and software to convert data into dots for printing.
On March 3, 1986, HP registered the HP.com domain name, making it the ninth
Internet .com domain ever to be registered.
In 1987, the Palo Alto garage where Hewlett and Packard started their business was
designated as a California State historical landmark.
In the 1990s, HP expanded their computer product line, which initially had been
targeted at university, research, and business users, to reach consumers. HP also grew through
acquisitions. It bought Apollo Computer in 1989 and Convex Computer in 1995.
Later in the decade, HP opened hpshopping.com as an independent subsidiary to sell online,
direct to consumers; in 2005, the store was renamed "HP Home & Home Office Store."
From 1995 to 1998, Hewlett-Packard were sponsors of the English football team Tottenham
Hotspur.

3
 In 1999, all of the businesses not related to computers, storage, and imaging were spun
off from HP to form Agilent Technologies. Agilent's spin-off was the largest initial public
offering in the history of Silicon Valley. The spin-off created an $8 billion company with about
30,000 employees, manufacturing scientific instruments, semiconductors, optical networking
devices, and electronic test equipment for telecom and wireless R&D and production.
In July 1999, HP appointed Carly Fiorina, formerly of AT&T and Lucent, as the first
female CEO of a Fortune-20 company in the Dow Jones Industrial Average. Fiorina received
a larger signing offer than any of her predecessors. Fiorina served as CEO during the
technology downturn of the early 2000s and led the merger with Compaq that was "disastrous",
according to CNN and led to the firing of 30,000 U.S. employees. Under her leadership, the
company doubled in size. Her tenure as CEO was beset by damaging leaks.[28] The HP Board
of Directors asked Fiorina to step down in 2005 following a boardroom disagreement, and she
resigned on February 9, 2005
Sales to Iran despite sanctions
In 1997, HP sold over $120 million worth of its printers and computer products
to Iran through a European subsidiary and a Dubai-based East distributor, despite U.S. export
sanctions prohibiting such deals imposed by Bill Clinton's executive orders issued in 1995. The
story was initially reported by The Boston Globe, and it triggered an inquiry by the SEC. HP
responded that products worth US$120 million were sold in fiscal year 2008 for distribution
by way of Redington Gulf, a company based in the Netherlands, and that as these sales took
place through a foreign subsidiary, HP had not violated sanctions.
HP named Redington Gulf "Wholesaler of the Year" in 2003, which in turn published
a press release stating that "the seeds of the Redington-Hewlett-Packard relationship were
sowed six years ago for one market — Iran." At that time, Redington Gulf had only three
employees whose sole purpose was to sell HP products to the Iran market. According to former
officials who worked on sanctions, HP was using a loophole by routing their sales through a
foreign subsidiary. HP ended its relationship with Redington Gulf after the SEC inquiry.
On September 3, 2001, HP announced that an agreement had been reached
with Compaq to merge the two companies.[35] In May 2002, after passing a shareholder vote,
HP officially merged with Compaq. Prior to this, plans had been in place to consolidate the
companies' product teams and product lines.[36]
Compaq had already taken over Digital Equipment Corporation in 1998. HP therefore
still offers support for the former Digital Equipment products PDP-11, VAX and AlphaServer.
The merger occurred after a proxy fight with Bill Hewlett's son Walter, who objected
to the merger. Compaq itself had bought Tandem Computers in 1997 (which had been started
by ex-HP employees), and Digital Equipment Corporation in 1998. Following this strategy, HP
became a major player in desktops, laptops, and servers for many different markets. After the
merger with Compaq, the new ticker symbolbecame "HPQ", a combination of the two previous
symbols, "HWP" and "CPQ", to show the significance of the alliance and also key letters from
the two companies Hewlett-Packard and Compaq (the latter company being famous for its "Q"
logo on all of its products).

4
 In 2004, HP released the DV 1000 Series, including the HP Pavilion dv 1658 and 1040
two years later in May 2006, HP began its campaign, "The Computer is Personal Again". The
campaign was designed to bring back the fact that the PC is a personal product. The campaign
utilized viral marketing, sophisticated visuals and its own website (www.hp.com/personal).
Some of the ads featured Pharrell, Petra Nemcova, Mark Burnett, Mark Cuban, Alicia
Keys, Jay-Z, Gwen Stefani, and Shaun White.[citation needed]
In January 2005, following years of under performance, which included HP's Compaq
merger that fell short,[40] and disappointing earning reports, the board asked Fiorina to resign
as chair and chief executive officer of the company. Following the news of Fiorina's departure,
HP's stock jumped 6.9 percent. Robert Wayman, chief financial officer of HP, served as interim
CEO while the board undertook a formal search for a replacement.
Mark Hurd of NCR Corporation was hired to take over as CEO and president,
effective 1 April 2005. Hurd was the board's top choice given the revival of NCR that took
place under his leadership
In 2006, HP unveiled several new products including desktops, enhanced notebooks,
a workstation and software to manage them, OpenView Client Configuration Manager
2.0.[44] In the same year, HP's share price skyrocketed due to consistent results in the last
couple quarters of the year with Hurd's plan to cutback HP's workforce and lower costs.
In July 2007, HP signed a definitive agreement to acquire Opsware in a cash tender
deal that values the company at $14.25 per share. This combined Opsware software with the
Oracle enterprise IT management software.
In the first few years of Hurd's new role, HP's stock price more than doubled. By the
end of Fiscal 2007, HP hit the $100 Billion mark for the first time. The company's annual
revenue reached $104 Billion, allowing HP to overtake competitor IBM.
On May 13, 2008, HP and Electronic Data Systems (EDS) announced[48] that they
had signed a definitive agreement under which HP would purchase EDS. On June 30, HP
announcedO that the waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 had expired. "The transaction still requires EDS stockholder approval and
regulatory clearance from the European Commission and other non-U.S. jurisdictions and is
subject to the satisfaction or waiver of the other closing conditions specified in the merger
agreement." The agreement was finalized on August 26, 2008 at $13 billion, and it was publicly
announced that EDS would be re-branded "EDS a HP company." The first targeted layoff of
24,600 former EDS workers was announced on September 15, 2008. (The company's 2008
Annual Report gave the number as 24,700, to be completed by end of 2009. This round was
factored into purchase price as a $19.5 billion liability against goodwill. As of September 23,
2009, EDS is known as HP Enterprise Services.
On November 11, 2009, 3Com and Hewlett-Packard announced that Hewlett-Packard
would be acquiring 3Com for $2.7 billion in cash. The acquisition is one of the biggest in size
among a series of takeovers and acquisitions by technology giants to push their way to become
one-stop shops. Since the beginning of the financial crisis in 2007, tech giants have constantly
felt the pressure to expand beyond their current market niches. Dell purchased Perot
Systems recently to invade into the technology consulting business area previously dominated

5
by IBM. Hewlett-Packard's latest move marked its incursion into enterprise networking gear
market dominated by Cisco.
On April 28, 2010, Palm, Inc. and Hewlett-Packard announced that HP would buy Palm for
$1.2 billion in cash and debt.[53] Before this announcement, it was rumored that
either HTC, Dell, Research in Motion or HP would buy Palm. Adding Palm handsets to the HP
product line created some overlap with the iPAQ series of mobile devices but was thought to
significantly improve HP's mobile presence as iPAQdevices had not been selling well. Buying
Palm gave HP a library of valuable patents, as well as the mobile operating platform known
as webOS. On July 1, 2010, the acquisition of Palm was final.[54] The purchase of Palm's
webOS began a big gamble – to build HP's own ecosystem.[55] On July 1, 2011, HP launched
its first tablet named HP TouchPad, bringing webOS to tablet devices. On September 2, 2010,
HP won its bidding war for 3PAR with a $33 a share offer ($2.07 billion) which Dell declined
to match. After HP's acquisition of Palm, it phased out the Compaq brand.
On August 6, 2010, CEO Mark Hurd resigned amid controversy and CFO Cathie
Lesjak assumed the role of interim CEO. Hurd had turned HP around and was widely regarded
as one of Silicon Valley's star CEOs. Under his leadership, HP became the largest computer
company in the world when measured by total revenue. Accused of sexual harassment against
a colleague, the allegations were deemed baseless. The investigation led to questions
concerning between $1000 and $20000 of his private expenses and his lack of disclosure
related to the friendship. Some observers have argued that Hurd was innocent, but the board
asked for his resignation to avoid negative PR. Public analysis was divided between those who
saw it as a commendable tough action by HP in handling expenses irregularities, and those who
saw it as an ill-advised, hasty and expensive reaction, in ousting a remarkably capable leader
who had turned the business around. At HP, Hurd oversaw a series of acquisitions worth over
$20 billion. This allowed the company to expand into services of networking equipment and
smartphones. Shares of HP dropped by 8.4% in after-hours trading, hitting a 52-week low with
$9 billion in market capitalization shaved off. Larry Ellison publicly attacked HP's board for
his ousting, stating that the HP board had "made the worst personnel decision since the idiots
on the Apple board fired Steve Jobs many years ago.
On September 30, 2010, Léo Apotheker was named as HP's new CEO and President.
Apotheker's appointment sparked a strong reaction from Oracle chief executive Larry
Ellison, who complained that Apotheker had been in charge of SAP when one of its
subsidiaries was systematically stealing software from Oracle. SAP accepted that its
subsidiary, which has now closed, illegally accessed Oracle intellectual property. Following
Hurd's departure, HP was seen by the market as problematic, with margins falling and having
failed to redirect and establish itself in major new markets such as cloud and mobile
services. Apotheker's strategy was broadly to aim at disposing of hardware and moving into
the more profitable software services sector. On August 18, 2011, HP announced that it would
strategically exit the smartphone and tablet computer business, focusing on higher-margin
"strategic priorities of Cloud, solutions and software with an emphasis on enterprise,
commercial and government markets" They also contemplated selling off their personal
computer division or spinning it off into a separate company,[68] quitting the 'PC' business,
while continuing to sell servers and other equipment to business customers, was a strategy
already undertaken by IBM in 2005.

6
HP's stock continued to drop, by about a further 40% (including 25% on one day, August 19,
2011), after the company abruptly announced a number of decisions: to discontinue its webOS
device business (mobile phones and tablet computers), the intent to sell its personal
computer division (at the time HP was the largest personal computer manufacturer in the
world), and to acquire British big data software firm Autonomy for a 79% premium, seen
externally as an "absurdly high" price for a business with known concerns over its accounts.
Media analysts described HP's actions as a "botched strategy shift" and a "chaotic" attempt to
rapidly reposition HP and enhance earnings that ultimately cost Apotheker his job. The
Autonomy acquisition had been objected to even by HP's own CFO.
On September 22, 2011, the HP Board of Directors fired Apotheker as chief executive,
effective immediately, and replaced him with fellow board member and
former eBay chief Meg Whitman, with Raymond J. Lane as executive chairman. Though
Apotheker served barely ten months, he received over $13 million in compensation. HP lost
more than $30 billion in market capitalization during his tenure. Weeks later, HP announced
that a review had concluded their PC division was too integrated and critical to business
operations, and the company reaffirmed their commitment to the Personal Systems Group. A
year later in November 2012 wrote-down almost $9 billion related to the Autonomy
acquisition (see below: Takeover of Autonomy), which became the subject of intense litigation
as HP accused Autonomy's previous management of fraudulently exaggerating Autonomy's
financial position and called in law enforcement and regulators in both countries, and
Autonomy's previous management accused HP of "textbook" obfuscation and finger
pointing to protect HP's executives from criticism and conceal HP culpability, their prior
knowledge of Autonomy's financial position, and gross mismanagement of Autonomy after
acquisition
On March 21, 2012, HP said its printing and PC divisions would become one unit headed by
Todd Bradley from the PC division. Printing chief Vyomesh Joshi is leaving the company.
On May 23, 2012, HP announced plans to lay off approximately 27,000 employees, after
posting a profit decline of 31% in the second quarter of 2012.]The profit decline is on account
of the growing popularity of smart phones, tablets, and other mobile devices, that has slowed
the sale of personal computers.
On May 30, 2012, HP unveiled its first net zero energy data center. HP data center plans to use
solar energy and other renewable sources instead of traditional power grids.
On July 10, 2012, HP's Server Monitoring Software was discovered to have a previously
unknown security vulnerability. A security warning was given to customers about two
vulnerabilities, and a patch released.[84] One month later, HP's official site of training center
was hacked and defaced by a Pakistani hacker known to as 'Hitcher' to demonstrate a web
vulnerability.
On September 10, 2012, HP revised their restructuring figures; they are now cutting 29,000
jobs. HP had already cut 3,800 jobs – around 7 percent of the revised 29,000 figure – as of July
2012
On December 31, 2013, HP revised the amount of jobs cut from 29,000 to 34,000 up to October
2014. The current amount of jobs cut until the end of 2013 was 24,600. At the end of 2013 the
company had 317,500 employees. On May 22, 2014 HP announced it would cut a further

7
11,000 to 16,000 jobs, in addition to the 34,000 announced in 2013. "We are gradually shaping
HP into a more nimble, lower-cost, more customer and partner-centric company that can
successfully compete across a rapidly changing IT landscape," CEO Meg Whitman said at the
time.
In June 2014, during the HP Discover customer event in Las Vegas, Meg Whitman and Martin
Fink announced a project for a radically new computer architecture called The Machine. Based
on memristors and silicon photonics, The Machine is supposed to come in commercialization
before the end of the decade, meanwhile representing 75% of the research activity in HP
Labs.[91]
On October 6, 2014, Hewlett-Packard announced it was planning to split into two separate
companies, separating its personal computer and printer businesses from its technology
services. The split, which was first reported by The Wall Street Journal and confirmed by other
media, would result in two publicly traded companies: Hewlett Packard Enterprise and HP
Inc. Meg Whitman would serve as chairman of HP Inc. and CEO of Hewlett Packard
Enterprise, Patricia Russo would be chairman of the enterprise business, and Dion
Weislerwould be CEO of HP, Inc.
On October 29, 2014, Hewlett-Packard announced their new Sprout personal computer.
In May 2015, the company announced it would be selling its controlling 51 percent stake in
its Chinese data-networking business to Tsinghua Unigroup for a fee of at least $2.4 billion.
On November 1, 2015, as previously announced, Hewlett-Packard changed its name to HP Inc.
and spun off Hewlett Packard Enterprise as a new publicly traded company. Because of this,
HP Inc. retains Hewlett-Packard's stock price history and its stock ticker symbol, HPQ, while
Hewlett Packard Enterprise trades under its own symbol, HPE
HP's global operations are directed from its headquarters in Palo Alto, California, USA. Its
U.S. operations are directed from its facility in unincorporated Harris County, Texas,
near Houston. Its Latin America offices are in unincorporated Miami-Dade County, Florida,
U.S., near Miami; Its Europe offices are in Meyrin, Switzerland, near Geneva, but it has also a
research center in the Paris-Saclay cluster, 20 km south of Paris, France. Its Asia-Pacific
offices are in Singapore.
It also has large operations in Leixlip, Ireland;[105] Austin, Texas; Boise, Idaho; Corvallis,
Oregon; Fort Collins, Colorado; Roseville, California; Saint Petersburg, Florida; San Diego,
California; Tulsa, Oklahoma; Vancouver, Washington; Conway, Arkansas; and Plano,
Texas(the former headquarters of EDS, which HP acquired). In the UK, HP is based at a large
site in Bracknell, Berkshire with offices in various UK locations, including a landmark office
tower in London, 88 Wood Street. Its recent acquisition of 3Com will expand its employee
base to Marlborough, Massachusetts. The company also has a large workforce and numerous
offices in Bucharest, Romania and at Bangalore, India, to address their back end and IT
operations. MphasiS, which is headquartered at Bangalore, also enabled HP to increase their
footprint in the city as it was a subsidiary of EDS which the company acquired.
HP produces lines of printers, scanners, digital cameras, calculators, PDAs, servers,
workstation computers, and computers for home and small-business use; many of the
computers came from the 2002 merger with Compaq. HP as of 2001 promotes itself as

8
supplying not just hardware and software, but also a full range of services to design, implement,
and support IT infrastructure.
HP's Imaging and Printing Group (IPG) was described by the company in 2005 as "the leading
imaging and printing systems provider in the world for printer hardware, printing supplies and
scanning devices, providing solutions across customer segments from individual consumers to
small and medium businesses to large enterprises
Staff and culture
The founders developed a management style that came to be known as "The HP Way." In
Hewlett's words, the HP Way is "a core ideology ... which includes a deep respect for the
individual, a dedication to affordable quality and reliability, a commitment to community
responsibility, and a view that the company exists to make technical contributions for the
advancement and welfare of humanity. The following are the tenets of The HP Way
We have trust and respect for individuals.
We focus on a high level of achievement and contribution.
We conduct our business with uncompromising integrity.
We achieve our common objectives through teamwork.
We encourage flexibility and innovation.

The term ‘offshore financial center’ (referred to as an ‘OFC’ in this chapter) is typically used
for a country or a jurisdiction with financial centers comprising of financial institutions that
deal primarily with non-residents and/or in foreign currency on a scale out of proportion to the
size of the host economy. Nonresident owned or controlled institutions play a significant role
within such financial centers.1 While this is a brief description of a typical financial center,
there is no consensus among scholars and practitioners on what actually constitutes an OFC
even though various attempts have been made to define OFCs, since they started to have an
impact on international financial markets in the early 1970s.2 As OFCs are of significant
interest to the International Monetary Fund (the “IMF”), a lot of research has been undertaken
at the IMF to define the term. In the year 2000, IMF issued a background paper3 where an OFC
has been defined as a center where the bulk of financial sector activity is offshore on both sides
of the balance sheet, (that is the counterparties of the majority of financial institutions liabilities
and assets are non-residents), where the transactions are initiated elsewhere, and where the
majority of the institutions involved are controlled by non-residents. Thus, as per the IMF
background paper, a jurisdiction with the following characteristics could be considered as
OFCs:
 Jurisdictions that have relatively large numbers of financial institutions engaged
primarily in business with nonresidents;
 Financial systems with external assets and liabilities out of proportion to domestic
financial intermediation designed to finance domestic economies; and
 More popularly, centers which provide some or all of the following services: low or
zero taxation; moderate or light financial regulation; banking secrecy and anonymity

9
 The origin of OFCs can be traced back to the 1960s and 1970s when many developed nations
and sovereign governments were attempting to regulate capital flows through the imposition
of restrictive domestic regulations. These restrictions, in many cases were intended to provide
governments with more control over monetary policy. These developments encouraged banks
and other financial institutions to shift deposits and borrowing activities to less regulated
institutions at offshore centers which had lesser regulations and restrictions.
In explaining the creation and growth of present-day offshore centers, practitioners and
academics have put forward at least four factors4 :
 the establishment of capital controls with a view to reducing unsustainable balance of
payments deficits recorded primarily by the United States in the late 1950s and also, by
many OECD countries in the 1960s;
 the imposition of high taxes, coupled with a tightening of monetary policy, in an attempt
to curb balance of payment deficits resulting from fiscal imbalances, particularly in
some OECD countries;
 the removal of foreign exchange restrictions on the conversion by non-residents of
current earnings in Western Europe; and
 the fact that U.S. banks’ interest in conducting business transactions in foreign
currencies and to extend their reach to new territories was spurred by the Glass-Steagall
Act of 1933, which barred commercial banks from entering the investment banking
business.
Role of Offshore Financial Centers
While it is generally perceived that corporations or individuals used OFCs primarily
because of the minimal taxes and the banking secrecy/anonymity afforded by the OFCs, there
are a number of bona fide purposes for which OFCs could be and are used by corporations or
individuals for conducting business. Some of such considerations are:
 OFCs allow businesses to reduce costs by providing centralised group services
or shared services within a multinational group
 OFCs allow effective movement of capital and resources, providing
opportunity for global investments;
 OFCs provide facilities to manage financial affairs confidentially and provides
legal protection from unjustified claims;
 OFCs permit the use of intermediary holding companies to overcome strict
exchange control regulations;
 OFCs are low tax jurisdictions which help corporations save significant taxes
and reduce the impact of transfer pricing rules in home countries.
Tax Havens
The term ‘tax haven’ does not have a comprehensive definition. This is primarily
because of the comparative nature of tax benefits provided by any jurisdiction. Because of the
relative nature of the advantages provided, every country may be a tax haven to some degree.
In this regard, the OECD Tax Haven Report (1997) states that ‘any country might be a tax
haven to a certain extent, as there are many instances where high tax countries provide
opportunities or devise policies to attract economic activities of certain types or in certain
locations’. 5 However in the interest of clarity, OECD has set out the following criteria (to be
considered cumulatively) to determine whether a jurisdiction is a tax haven:

10
 1. Whether the jurisdictions imposes no or nominal taxes;
2. Whether there is lack of transparency;
3. Whether there are laws or administrative practices that prevent the effective
exchange of information for tax purposes with other governments on taxpayers
benefiting from the no or nominal taxation.

Transparency is considered a significant criteria as it ensures that there is an open and

consistent application of tax laws among similarly situated taxpayers and that information
needed by tax authorities to determine a taxpayer’s correct tax liability is available (e.g.,
accounting records and underlying documentation). Similarly, exchange of information in tax
matters is important as, the OECD encourages countries to adopt information exchange on an
“upon request” basis. Exchange of information upon request describes a situation where a
competent authority of one country asks the competent authority of another country for specific
information in connection with a specific tax inquiry, generally under the authority of a bilateral
exchange arrangement between the two countries. An essential element of exchange of
information is the implementation of appropriate safeguards to ensure adequate protection of
taxpayers’ rights and the confidentiality of their tax affairs.
Example of countries with tax benefits
Selecting an offshore financial center
The selection of an OFC is dependent upon a number of factors which can be classified into
tax and non-tax factors. Some of these significant factors have been listed below:
Tax Factors: The most significant tax factors are:
 Basic tax rates
 Tax incentives
 Nil or low withholding taxes
 Treaty network
 Anti-avoidance rules
 Stability of tax laws

Non-Tax Factors: The selection of an OFC requires one to consider a number of points
in addition to the tax benefits provided by the jurisdiction. These are factors which determine
the ease of doing business in a particular jurisdiction and the cost involved in setting up
operations and ongoing costs involved. These factors include:
 Political and economic stability
 Commercial and financial infrastructure
 Currency stability
 Access to capital markets
 Government practices and procedures
 Reputation and image of the country
 Exchange control restrictions
 Legal infrastructure, including dispute resolution mechanism
 Ease in formation and liquidation of entities

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  Flexibility afforded by corporate laws and compliance requirements thereunder,
including permissibility to ‘migrate’ legal entities
 Set up and ongoing cost
 Availability of competent and trained professional staff
Offshore Intermediary Entities
This section deals with the various offshore intermediary entities, which are generally
interposed within a group for a particular transaction or purpose, located in jurisdictions which
provide specific tax and non-tax advantage. The focus of this section is to outline the features
and planning opportunities offered by such jurisdictions which can be based on various
parameters such as flexible incorporation, licensing regimes, lower or nil withholding taxes on
outbound payments, flexible use of trusts and special corporate vehicles, incentive regimes,
etc.
Captive Insurance Company
Generally, a wholly owned subsidiary of a multinational group of companies insures
or reinsures the risks of companies that belong to the group, which require all of the risk
insurance, owing to the costs involved in obtaining external insurance
A captive insurance company (“CIC”) is an insurance company within a group that
has no insurance business otherwise, and which is set up in order to insure the companies within
the group from any business risk that may arise.
A CIC may be used to insure certain risks that the normal insurance market will not
accept and to obtain broader types of insurance that commercial insurance companies do not
have the flexibility to provide or to reduce the costs of premiums that would normally be paid
to an independent insurer.7 Unlike general insurers, a CIC insures any business risk, including
those not generally covered by regular insurance companies such as pollution, loss of key
customers, terrorism risks, etc. Although a CIC primarily engages in insuring risks of the parent
or other related entities, it can also insure risks that may be faced by a third party.8 A CIC gives
the group insurance facilities by utilising its own financial resources to fund any anticipated
losses or future insurance claims that may arise.9 Under the captive insurance arrangement, the
insured entity pays premiums to the captive insurance entity so as to be indemnified for loss
arising upon the happening of a specified event. Such premiums are claimed as deductions by
the insured company. However, it is also possible to establish a CIC for the primary reason to
generate deductions.
Accordingly, CIC are typically taxed on insurance premiums and are allowed a
deduction for insurance payments and provisions for insurance payments. Companies that pay
insurance premiums to captives have been allowed to claim such costs as deductions.
Generally, the benefit arising of the arbitrage accrues when CIC is located in a low tax
jurisdiction. The captive insurance transaction which results in deductible insurance premiums
in hightax jurisdictions and taxable insurance premiums in a low-tax or taxfree jurisdiction,
attracts special attention from tax authorities. The benefits may be subject to anti-avoidance
measures, such as transfer pricing, anti-tax haven or controlled foreign company rules.
The deduction for premiums paid by the members of the group may also be disallowed
on the basis that the nature of the arrangement does not provide sufficient risk-shifting or risk-
distribution to constitute true insurance, or that the members of the captive group constitute a

12
single economic family. It may be interesting to note that the Australian Taxation Office
released Practice Statement to provide “Guidance on the Treatment of Non-resident Captive
Insurance Arrangements”10 pointing towards artificiality of the arrangement, and therefore
listed out the following factors which may help to determine the commercial legitimacy of the
arrangement and whether the actual insurance business is being conducted or not:
 Whether the entity is exposed to a significant loss and assumed a significant insurance
risk;
 Whether it is authorised to conduct an insurance business in the local jurisdiction;
 Whether it actually has the financial capacity to pay an insurance claim.

If the aforementioned factors indicate that the scheme is artificial, the following
factors may impact the deductibility of insurance premiums paid to a non-resident CIC:
 Whether deductions claimed are proportionate to the actual insurance coverage
provided;
 Whether the deductions are acceptable for transfer pricing purposes;
 Whether the captive insurance entity is a resident under the central management and
control test (and therefore may be a part of an Australian tax consolidated group);
 Whether income of the entity has Australian source (and subject to tax in Australia in
the absence of a tax treaty restrictions);
 Whether premiums paid are subject to taxation under the rules for taxation of foreign
insurers;
 Whether the entity is a controlled foreign corporation;
 Whether the general anti-avoidance rule may apply to the arrangement.

Although the world’s leading captive jurisdiction is Vermont (in the United States),
Vermont is considered an onshore captive jurisdiction. The primary OFC jurisdiction for
captive insurance companies is Bermuda and Cayman Islands. Bermuda had 845 active
captives with $118 billion in assets under management and $19.6 billion in gross written
premiums in 2010.11 This is mostly owing to the possibility of swift incorporation and its
geographical proximity to the U.S, where most parent companies of captives are situated.

Singapore has also taken steps, such as extension of the captive insurance tax incentive
scheme till February 2018, an exemption on qualifying income derived from the carrying on
of offshore insurance business, to ensure that Singapore remains as a competitive captive
location. Other jurisdictions that are favoured for setting up of CICs are the Cayman Islands,
Guernsey, Anguilla, Luxembourg, Barbados, the British Virgin Islands and Turks & Caicos.

Benefits of using a CIC

 Flexibility: Captive insurance companies offer great flexibility in respect of the types
of risks insured. Commercial insurance companies often do not cover risks associated
with environmental issues, such as hazardous waste, nuclear risks, and pollution.
Captives can be used to provide insurance coverage in these areas.
 Reduced premium payments: Creating a captive allows premium payments without any
extra costs involved in payments made to an outside insurer. Thus, the same coverage
can be obtained at a lower cost.

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  Flexibility as to risks: Captives offer greater flexibility as to how to insure risks. If the
cost of an insurance premium is low in the open market, the captive can purchase it in
the market while if the cost is high, the captive can provide insurance at its own risk.
 Access to reinsurance markets: An offshore CIC gives a business access to the
international reinsurance market, thereby allowing for possible expense reduction. (v)
Tax benefits: As the investments are primary source of income for an insurer, the
investment income maybe tax free for a captive if domiciled in the right OFC.
 Independent profits: Generally, a wholly owned captive cannot insure its parent unless
it also insures third party risk. Owing to the possibility of acquiring third party risk, the
captive insurance company can diversify its business and earn its own profits as an
independent commercial body.
 Higher efficiency: Owing to the element of control associated with a captive insurance
company, the processing of insurance claims is much more efficient than in the case of
a third party insurer.
Employee Leasing Company
An employee leasing company (“ELC”) is a company set up in a jurisdiction that
offers skilled and cost-effective man-power resource that provides for staffing of the company
including managing the selection process, setting up and actual staffing operations on behalf
of the client company. It involves a contractual relationship between the ELC and the company
taking such employees also known as “subscribing company”. As per a typical employee
leasing arrangement, ELC is obligated to perform specified employer responsibilities of the
subscribing company to the leased employees including all personnel-related administrative
activities, including payroll, benefits programmes, payment of payroll taxes, workers’
compensation, and securing of workers’ compensation insurance, etc. The subscribing
company has to pay leasing fees (that are in most cases deductible), while every other expense
is handled by the ELC.
This format of offshore staff employee leasing is a preferred outsourcing option
because it provides a simple format for including an offshore workforce to an organisation
without giving up supervision and control and generally leads to building teams. Additionally,
the subscribing company is relieved of the usual burdens accompanying the implementation of
traditional recruitment processes and staff maintenance. The need for investing in a typical
human resources team is done away with and internal costs are reduced
Jurisdictions of preference for ELC
The popular jurisdiction for ELC where the subscribing company is located in the
following regions has been as under:
 Asia and Pacific region: Bangladesh, China, India, Indonesia, Malaysia, the
Philippines, Sri Lanka, Thailand and Vietnam.
 Europe and the Middle East and Africa region: Bulgaria, the Czech Republic, Egypt,
Hungary, Mauritius, Morocco, Poland, Romania, Russia, Slovakia, South Africa,
Turkey and Ukraine.
 American region: Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Panama and
Peru.

Benefits of using an ELC

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 Cost effective: The entire workforce is leased by the intermediary offshore company;
the corporation does not have to pay anything more than the leasing fees, which is usually
claimed as a deductible item. Thus, costs are considerably reduced. Further, as these workers
are not considered employees of the subscribing company, the personal injuries and workers’
compensation claims are not responsibility of the subscribing company.
Less administrative burden: As the workforce is under the supervision and control of
the ELC, this leads to comparatively lesser management burden for the subscribing company.
The subscribing company is relieved of the usual burdens accompanying the implementation
of traditional recruitment processes and staff maintenance

High-skilled labour: Since jurisdictions like India and Philippines are able to provide
high-skilled, English speaking labour at much lower cost, employment provided from
companies set up in such jurisdictions provides for a competitive advantage.

Some OFCs specialise in shipping/air transport and allow registration for foreign
ship/aircraft owners. Often companies in jurisdictions with strict regulatory framework and
high taxes establish an international shipping/aircraft company in the OFC, so as to take
ownership of a ship/aircraft which is then registered in the OFC. Such jurisdictions offer low
registration fees and minimal regulations on shipping operations. Further, these jurisdictions
offer a minimal tax on profits of the company or dividends paid by the company or profits on
eventual sale. Thus, the use of offshore shipping companies in OFCs can eliminate direct or
indirect taxation on shipping services. Structuring businesses in the right way across multiple
jurisdictions can help achieve tax benefits and cost efficiency. Taxation is perhaps the most
important of all the factors that combine to influence where companies register ships and
aircraft.

Panama and Liberia were the pioneers of offshore shipping industry who opened their
doors to ship owners regardless of their nationality. Despite OECD’s efforts to shut down their
operations, they remain world’s two largest shipping regimes besides Cyprus, Malta, and
Singapore, and more recently the British Virgin Islands which offer such facilities. Another
offshore shipping jurisdiction that has risen to prominence in recent years is the Isle of Man

For international aircraft companies, Bermuda, the Cayman Islands, Bahamas, Aruba,
Isle of Man offer beneficial regimes. The Isle of Man has become widely regarded as a one-
stop shop for worldwide aviation business supported by well-established banking sector
experienced in financing aircraft, insurance companies which can provide cover without the
addition of an insurance premium tax and corporate service providers experienced in
structuring companies to take advantage of the beneficial tax regime. Malta has also positioned
itself as one of the world’s largest shipping registries with a new aircraft registry, by the
Aircraft Registration Act, 2010 and providing a tax package wherein there is no withholding
taxes on lease/royalty payments made by lessees to non-residents in respect of aircraft operated
in the international transport of passengers or goods, no withholding taxes on interest payments
made by Maltese lessees to non-resident financial lessors; competitive depreciation allowance
for aircraft and engines; tax credits for companies engaged in the repair or maintenance of
aircraft; tax refunds to shareholders on distribution of profits.

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 Benefits of using an international shipping/aircraft company
 Ease in registration and other facilities: These jurisdictions offer flexiblility in terms of
ownership, registration, administration and operation of ships and aircraft.
 Tax neutrality: Owing to the specific characteristics of the jurisdiction concerned, the
tax liability on profits earned, dividends paid and profits on sale become limited.
 Availability of specialised advisors: Since these jurisdictions specialised in shipping/air
transport, there is an availability of a wide variety of firms with expertise in the area.
Offshore trading company

An offshore trading company (“OTC”) is generally a company set up in an OFC which

purchases goods from exporters in one or more foreign jurisdictions and sells them to importers
in other foreign countries. An OTC could also be established as a neutral ground for setting up
a trading joint venture. Typically, an OTC buys goods from related companies or third parties,
and sells them at a profit to the foreign subsidiary, thereby creating a shift of profits away from
the foreign subsidiary into offshore trading company which is located in a low tax jurisdiction.
The sales income received by the OTC may be paid as dividend to its shareholders tax free.
The OTC is generally preferred owing to accumulation of profits in one entity with tax benefits,
which can later be reinvested.

The preferred jurisdictions for setting up of offshore trading companies are Mauritius,
the British Virgin Islands, Netherland Antilles, Jersey, Madeira, Cayman Islands, Gibraltar and
Isle of Man. The United Kingdom is one particularly developed jurisdiction which is used as
an offshore trading location.

Encourage trading operations: Certain offshore trading jurisdiction actively encourage

trading operations by offering dutyfree zones, or warehousing facilities. Apart from ensuring
fiscal suitability and confidentiality, the choice of an offshore jurisdiction for trading purposes
will depend on a variety of factors, of which some particularly important ones may be good
transport links, availability of skilled local labour, ease of obtaining entry and work permits,
proximity to markets, local cost levels, effectiveness of local banking and commercial services,
modern telecommunications and e-commerce infrastructure, availability of duty-free zones and
ease of establishment of offshore entities.

Tax benefits: If an OTC is set up for import and export in a tax free OFC, profits
accumulated in the OFC can be reinvested tax free, until distributed to the back to the parent
entity.

Neutral ground: An OTC provides for a neutral ground where all the trading parties
have equal knowledge of the local laws. An offshore trust is created when assets are transferred
to a person known as trustee, who acquires legal ownership and becomes responsible for the
management of the assets and distribution of the assets to beneficiaries (which could include
the transferor), as per the terms of the trust deed. The offshore trust accrues benefits and
distributions to a person or group of persons known as the “beneficiaries” of the trust.
Generally, an offshore trust has the additional benefit of far greater offshore asset protection

16
than the onshore trust. The trustee and/or the trust company charged with the management of
the trust are bound by a fiduciary duty to uphold the agreement

Generally, offshore trusts can be used separately or together for asset protection
purposes. Although the transferor/settlor usually provides a letter of wishes, detailing how he
would like the money to be managed, and distributed, the trustees have legal control over the
assets

Some examples of common law based OFCs with wellestablished trust law
frameworks are Bahamas, Barbados, the British Virgins Islands, the Cayman Islands, the Cook
Islands, Gibraltar, Jersey, Mauritius and Hong Kong
Asset protection: Assets in an offshore trust are protected against various risks,
including political, economic and legal risks in the settlor’s country. Since the assets do not
belong to the settlor, there lies no obligation on the settlor to disclose such assets in his own
country.

Tax benefits and estate planning: By transferring assets to a trust, the settlor reduces
his personal wealth, and consequently his personal income tax liability is also reduced.
Moreover, if set up in a low/nil tax OFC, there will be no tax on its assets and income and tax
will only be payable when assets are distributed to beneficiaries.

Foundation

A foundation (individual or corporate) is a distinct juristic entity, having no members

or shareholders in it, and is generally established to reflect the wishes of the founder captured
in the charter document. The founder provides for the initial assets of the foundation known as
the endowment. The foundation can be established for a fixed or indefinite period of time and
the objects of the foundation can be charitable, commercial or family purposes.

Unlike a common law trust, a foundation is a legal entity more akin to a company and
as such, it is usually entered into the company’s registry in the jurisdiction concerned. Unlike
in a trust, the assets of a foundation are administered as per what is set out in the charter and
regulations and is thus, on a contractual basis and not a fiduciary basis. Similarly, rights
enjoyed by the beneficiary are contractual in nature. A foundation generally holds shares and
stocks, investment portfolios, real and intellectual property, bank deposits, life assurance
policies and most other types of assets. A foundation is established for several reasons such as
preservation of wealth against uncertainty, tax efficient transfer of wealth, efficient estate
planning, consolidation of worldwide assets, minimisation of state taxes, etc. When a
foundation is established in a suitable offshore jurisdiction, provided that residents of the
offshore jurisdiction do not receive benefits, local tax liability can be excluded.

Panama is the primary jurisdiction for layered asset protection, estate planning, etc.
since the law does not permit freezing of assets in Panama and also because there is no tax
liability on foreign income in Panama. Some favourable taxation rules for foundations are
found in Austria, Switzerland and Liechtenstein (the Stiftung) as well, where private

17
foundations have a tax exemption or reduced taxation of capital gains on the disposal of
shareholdings. Foundations have also been introduced in the Bahamas, Isle of Man and Jersey

Asset/Wealth Protection: The primarily use of trusts is estate and inheritance planning.
Since the foundation is not owned by anyone, the assets cannot be claimed/frozen if the
founder, council members, protector or beneficiaries have unpaid debt.

Recognition: A foundation is recognised in important jurisdictions that follow both

common/civil law such as Austria, Belgium, France, Germany, Luxembourg, Netherlands,
Switzerland, the United Kingdom, etc.

Estate planning: A foundation can be used to hold assets which can be transferred
from generation to generation without being affected by the rule against perpetuities in certain
jurisdictions. This can also be used for inheritance tax planning or for avoidance of forced
heirship rules.

Privacy: Since the foundation’s charter and regulations function as per the wishes of
the founder, there is no requirement for registration

Consolidation of worldwide assets: Offshore foundations are used to consolidate

worldwide assets and can be held by the single entity.

Royalty Routing Company

Nature of the Entity Generally, a company owning intellectual property (“IP”) can
either gift or sell its IP rights to an offshore company that licenses some or all of such rights,
for the use of the IP to an intermediary or agency company called a royalty routing company
created in an OFC offering tax benefits such as a tax treaty network, reduced/nil rate of
withholding tax on cross-border royalties or accumulation of royalty income in a nil or low tax
jurisdiction. An onshore intermediary company may exploit the rights by licensing its IP for
use by companies in multiple jurisdictions. The royalty fees are passed to the onshore
intermediary company which may be subject to nil or a low withholding rate due to beneficial
tax treaty provisions. Generally, the onshore intermediary company retains a fee for the work
done in negotiating contracts and then the onshore intermediary company remits the balance to
the offshore company free of any further withholding taxes. The transfer of IP rights can also
be structured as loan transactions where the IP rights are transferred to an intermediary royalty
routing company in a tax treaty country for a loan consideration. Subsequently, the
intermediary royalty routing company can license the rights to the host country situated in a
country where there is a low rate of withholding tax on royalty. Additionally, the accumulated
royalty can be set off against the amortisation of the cost of the property rights and interest
deduction on loan can also be claimed.

Cyprus, Ireland and Netherlands are considered the best jurisdictions for royalty
routing owing to no withholding taxes for royalties and other tax and regulatory benefits. The
use of Malta for royalty routing structures has also increased in the recent past.

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 International Holding Company

A holding company is a company established purely for the purpose of holding shares
of another company for investment purposes. An offshore international holding company is a
company which is established in one offshore jurisdiction and holds shares of or invests into
companies, usually located in other offshore jurisdictions. The intermediary holding company
is generally set up to achieve a favourable taxation treatment in circumstances where a direct
transaction between the parent jurisdiction and beneficiary jurisdiction would result in
unfavourable tax consequences with respect to capital gains, dividend distribution, and royalty
payments. Holding company jurisdictions are selected after taking into account several
determinants such as time of incorporation, type of investment involved, substance
requirements in domestic tax law and treaties, possible advantages such as IP favoured regimes,
EU directives, participation exemptions, etc.

Holding company jurisdictions are chosen with special regard to the investment being
made. Although low-tax jurisdictions such as Mauritius, Cyprus, and Singapore, etc. serve as
favourable holding jurisdictions, a jurisdiction like Netherlands is generally preferred owing to
the infrastructure and facilities available. Netherlands also has several beneficial features such
as an extensive treaty network with beneficial withholding rates, participation exemption, a
competent innovation box regime, etc. For specific investments such as an IP holding company,
jurisdictions with IP and research and development related benefits such as Ireland are
preferred. Other favourable jurisdictions for investment into the US and Europe are Hong
Kong, Singapore, the United Kingdom, etc.

Exemption from capital gains: Profits realised by the holding company in a favourable
jurisdiction on the sale of shares in the subsidiary is generally either exempt from or subject to
a low rate of capital gains tax in the holding company’s jurisdiction. (ii) Incoming Dividends:
Incoming dividends remitted by the subsidiary to the holding company in a favourable
jurisdiction are either exempt from or subject to low withholding tax rates in the subsidiary’s
jurisdiction. Moreover, dividend income received by the holding company from the subsidiary
is generally exempt from or subject to low corporate income tax rates in the holding company’s
jurisdiction. (iii) Outgoing dividends: Outgoing dividends paid by the holding company to the
ultimate parent corporation is generally either exempt from or subject to low withholding tax
rates in the holding company’s jurisdiction. (iv) Other favourable regimes: Specialised IP
protection or research and development related regimes will provide for tax benefits in case of
such assets or activity. Limited company i.e. a company limited by guarantee and a company
limited by shares. A hybrid company can have two or more classes of members. The first class
will be the registered members i.e. the shareholders who are the controlling members. The
registered members have no right to distributions of profits but have voting and administrative
powers. The principle power of the shareholders is to elect directors to manage the company.
The second class will be the beneficial members who are anonymous and are entitled to share
in the profits of the company although distributions from the company can only be authorised
by the directors. Subsets of members with different rights can also be created through the
addition of other classes of beneficial members. Hybrid companies are recognised in OFCs
such as Isle of Man and Gibraltar and are generally popular business structures owing to the

19
anonymity provided to its beneficiaries. Moreover, difficulty of classification of such entity in
foreign jurisdictions also makes it popular as an intermediary.

Only low-tax OFCs recognise hybrid entities as they are utilized specifically to obtain
tax benefits. Isle of Man and Gibraltar hybrid companies are most commonly used owing to
geographical considerations and low issued share capital requirements.

Economic interest separate from control: There is a strict separation between the
registered members and the beneficiaries, thereby making the beneficiaries anonymous. Such
a position can be utilised to the parent company’s advantage where it is resident in a jurisdiction
with strict controlled foreign corporation rules

Flexibility in financing and distribution: The main attractiveness of such a structure is

the flexibility it offers in the financing and distribution of profits within the company

Low share capital requirement: Hybrid companies are inexpensive to set up owing to
low share capital requirements, which make them ideal for an intermediary entity.

Asset protection and estate planning: Hybrid companies can be used for holding assets
for several years as there is no rule against perpetuities applicable and the beneficiaries are
anonymous. Provision of Protector: The articles of association may provide for the appointment
of a third party as a protector who supervises assets and whose authority is required before any
disposal
Protected cell companies (“PCC”)

The concept of PCC’s originated in 1997 in the Island of Guernsey on the English
Channel. It was set up under the Protected Cell Companies Ordinance of 1997. PCCs were
conceptualised in response to the need to adopt a captive approach towards risk management
in the Guernsey Fund industry wherein assets of one class were available for the liabilities of
another. Ever since, PCCs have become popular special purpose vehicles (SPV) in offshore
jurisdiction for structuring investments. A PCC is based on the concept that a single company
is divided into several parts, known as cells. The assets and liabilities of each such cell are kept
independent of each other and it is managed in such divided fashion. A PCC is divided into
two parts:

cellular assets and (ii) non-cellular assets. The non-cellular assets are called the “core”
and consist of “management shares or common shares”. The Management shares are held by
the promoters or their nominees and do not yield any dividend. Thus, they are known as voting
non-profit shares. A PCC is a single incorporated legal entity with a single Board of Directors
(“BoD”) that usually consists of a core and one or more cells for the purpose of protecting
cellular assets. Cells consist of shares that are divided into classes. The first directors of a cell
are appointed by the cell company. Thus, although the cells share the same directors and
administrative system, each cell maintains separate records for measuring profits or loss. PCC’s
can either be newly incorporated or, alternatively, an existing company can be converted to a
PCC. The BoD is required to identify a specific cell to which a particular transaction relates
and the liabilities to the creditors are only with regard to that particular cell. Although cells and

20
the cell company may have the same directors, there is no requirement that a cell must share
the same board as the cell company. The directors of a PCC have a duty to keep cellular and
non-cellular assets separate and separately identifiable. On liquidation, cell holders get assets
and liabilities relating to that particular class of shares only. Inter-cell transactions are not
permitted in a PCC structure.

The establishment of cell companies is allowed in several jurisdictions such as

Cayman Islands, Jersey, Guernsey, Singapore, Mauritius, Bermuda, Gibraltar, Seychelles and
the British Channel Islands.

Self-insurance: The evolution of the concept of a protected cell company has allowed
smaller companies to maintain self-insurance without going for the more expensive option of
renting up a captive insurance company as each participant’s assets are necessarily protected.
(ii) Asset protection: Since each individual’s participation in a fund or venture is adequately
protected, it provides for protection of assets of the individual contributories. (iii) Privacy:
Since assets and liabilities of each participant are kept independent for the purpose of
measuring profits and losses, there is a sufficient level of privacy in funds or joint ventures
established in this format.

dictions or a financial center which allows a multi-national company to register in

their jurisdiction and obtain a banking licence, by which banking operations such as managing
cash, raising capital for the group, providing finance to individual subsidiaries and managing
financial risk can be undertaken. An offshore banking licence allows the holder to operate a
bank in one country that provides services to depositors who are residents in other countries.
The licence is issued by the country in which the bank is operated, which is not necessarily the
country in which the holder is a citizen or resident. Usually these countries have low or even
zero tax rates, meaning depositors can lower their tax bills by banking there, rather than in their
own country. Such jurisdictions are used for banking activities largely because of privacy and
asset protection. A high return on investment is also a factor that comes into play while
choosing a jurisdiction. However, owing to allegations claiming the use of bank secrecy laws
for tax avoidance and money laundering, banking regulations have been tightened in several
OFCs.

Switzerland and Cayman Islands are the top jurisdictions for offshore banking in the
world owing to secrecy, convenience and return on investments. Seychelles, Isle of Man,
Luxembourg, Andorra and Lichtenstein are also increasingly used for offshore banking

Secrecy and confidentiality: Offshore banking jurisdictions provide for very tightly
bound bank secrecy laws which keep all information regarding customers and account details
completely private

Tax benefits: Storing of funds in a jurisdiction with significant tax benefits can be
useful for factors such as low or nil withholding rates on interest payments, etc. Interest is
generally paid by offshore banks without tax being deducted. This is an advantage to

21
individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return
is agreed, or who feel that they can illegally evade tax by hiding the interest income

Easy access to deposits: Lower level of regulation allows easier access to the money
stored by the company.

Higher returns: Some offshore banks may operate with a lower cost base and can
provide higher interest rates than the legal rate in the home country due to lower overheads and
a lack of government intervention.

Other benefits: Offshore banks can sometimes provide access to politically and
economically stable jurisdictions. This will be an advantage for residents in areas where there
is risk of political turmoil, who fear their assets may be frozen, seized or disappear. However
it is often argued that developed countries with regulated banking systems offer the same
advantages in terms of stability.

This chapter traces the origin and meaning of OFCs and tax havens while making at
attempt to dispel the notion that all OFCs attract businesses because of the ‘nil’ tax regime and
the secrecy afforded to such businesses and transactions and that all tax havens are zero tax
jurisdictions which do not tax its citizens and residents. While the OFCs and tax havens have
long been criticised because of the tax arbitrage advantage provided by such jurisdictions and
also because of it was suspected that the ‘below standard’ anti-money laundering rules aided
money laundering and terrorism financing. Tax havens and OFCs have also been criticised for
not co-operating in cases of tax evasion and seeking refuge under their secrecy laws. While
some of these allegations may be true, it is also true that OFCs and tax havens play a significant
role in the world economy and with the steps being undertaken by such jurisdictions to tackle
issues of money-laundering and terrorism financing by instituting strict KYC regimes, such
jurisdictions will continue to play a significant role in the global financial system. It may also
be important to consider that the tax advantages provided by the OFCs and tax havens afford
tax neutrality to a transaction, by eliminating tax burdens on the proposed transaction or
structure in the primary operating market for such business and not imposing any additional
tax in such offshore jurisdiction. As regards confidentiality, a majority of the tax havens and
OFCs have implemented anti-money laundering laws and have also signed exchange of
information treaties to assist tax authorities from jurisdictions where there is a case of tax
evasion. BVI are a British overseas territory with a population of 25,000 inhabitants. In spite
of the small size, they host over 800,000 offshore companies . Financial services represent 36%
of BVI’s GDP (£206 million). In terms of employment, however, it just represents 13% of the
total employment. Notably, the BVI’s financial sector employs about 2,100 people in financial
services. The main area of specialization of the BVI is the incorporation of corporations (known
as International Business Corporations), trusts that are financial holding companies, asset
management companies, captive insurers, and the like .

The International Business Corporations (IBCs) are limited liability companies that
are set up either as subsidiaries of onshore companies or as independent companies in tax
havens . IBCs are used for a variety of purposes; the principal amongst them is to shift the
profitable part of a business to a low tax country. The BVI are world leaders in the formation

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of IBCs. The BVI are also the second largest global domicile for investment hedge funds
(Sullivan, 2007)4 . In addition, the BVI have also a strong position in insurance markets, where
they tend to specialize in smaller captives (insurance companies). The vast majority of the
offshore entities in the BVI (corporations, funds, and so on) are set up in the BVI and are
subject to BVI law, but conduct all of their business (and hold all of their assets) elsewhere. In
this way, the BVI function as a registration center. Registration centers refer to offshore
financial centers that receive foreign money to be re-invested in the country of origin in order
to benefit from a preferential tax regime, also known as “round tripping”.

The Chinese reputedly use BVI for such purposes, since a very large share of foreign
investment into China is made by Chinese citizens via the BVI (i.e.: Chinese investors investing
in China, but the investment is registered as foreign direct investment since the money comes
through the BVI). In fact, the two biggest sources of foreign investment into China in 2007
were Hong Kong and the BVI. The BVI tax haven has no taxes in place for BVI offshore
companies that do not carry out business in the jurisdiction. International business companies
therefore pay zero taxes on the profits, interests, dividends and other types of incomes earned
outside of the jurisdiction. BVI offshore corporations pay no corporate tax, capital gains tax,
estate tax, withholding tax or income tax. Allan offshore company pays in the BVI is an annual
fee which is paid to the relevant government authorities. For this reason the BVI can be
regarded as a pure offshore tax haven. In addition, BVI imposes no taxes on offshore bank
accounts.

This makes the BVI an ideal jurisdiction in which to set up offshore bank accounts.
The development of BVI as a tax haven started in 1984 when the BVI authorities enacted the
International Business Companies Act. The International Business Companies Act introduced
a new legislation that allowed the formation of offshore companies that were exempt from local
taxes. Since then, the BVI have become one of the most important tax havens in the world. In
2000, a report from KPMG to the British government estimated that about 41% of all offshore
companies in the world were formed in the BVI (report cited in Palan et al., 2010). On 12 April
2007, the Financial Times reported that the BVI were the world’s second largest source of
foreign direct investment (behind Hong Kong), with more than US$123,000,000,000. Almost
all of this was directly attributable to investment through the territory's offshore finance
industry. This makes the BVI the largest registry of international companies in the world and,
thus, they hold an important place in the global financial infrastructure. Like in other tax
havens, most of the registered BVI companies undertake all of their financial activities outside
of the BVI. Therefore, money and transactions do not flow through the BVI. In 2004, the
International Business Companies Act was replaced by the BVI Business Companies Act. The
BVI Business Companies Act differs from the International Business Companies Act in that it
refers to both offshore and local companies.

Prior to the BVI Business Companies Act, it was possible to incorporate a company
under two different statutes: the International Business Companies Act (for offshore
companies) and the Companies Act (for local companies). The main objective of the BVI
Business Companies Act was to make the BVI more competitive vis-à-vis other tax havens. In
order to accomplish this, it encompasses five features.

23
 First, the BVI Business Companies Act considerably eases the requirement for
corporate benefit. Second, it eliminates financial assistance and the concept of share capital
with regard to company shares.

Both of these eliminate the requirements relating to maintenance of capital and

distributable reserves for dividends. Third, it removes restrictions with regard to the declaration
of dividends. Fourth, it allows for an extension of the types of companies that can be formed.
Under the old International Business Companies Act, it was only possible to form a company
limited by shares. Under the new act, it is possible to form a company limited by shares, an
unlimited liability company, a company limited by guarantee which can issue shares, a
company limited by guarantee which cannot issue shares, a restricted purpose company and a
segregated portfolio company5 . Fifth, the companies are no longer required to have a stated
corporate objective, thereby removing a number of difficulties relating to directors’ duties.
Apart from incorporating companies, the other area of specialization of the BVI is trusts.

The BVI have a special regime for trusts (in addition to the regime for companies, the
above referred to IBCs): the Virgin Islands Special Trust Act. The Virgin Islands Special Trust
Act makes the BVI jurisdiction very attractive for certain types of trusts as it provides settlors
with a level of freedom and protection that was previously either absent from or insufficient in
alternative trust laws. For instance, trustees are released from obligations under the English
Trust Law (also known as Prudent Man of Business Rule).

Amongst other things, this means that trustees are not under the obligation to
maximize share value or have management responsibilities. In addition, the Virgin Islands
Special Trust Act can be used for matrimonial settlements, and for corporate and personal
succession planning, since it may prevent the forced sale of a company to pay for financial
settlements. It can also be used for commercial purposes, because it provides the directors with
the ability to make quick decisions, the freedom to diversify (or not) assets and to enter into
commercial arrangements.

According to the IMF (2010), the BVI’s continued ability to attract company
registration business relies on being viewed internationally as a well-regulated and policed
jurisdiction with a strong legal framework and efficient corporate services. The Financial
Services Commission holds the supervisory role. Also in the opinion of the IMF (2010), the
Financial Services Commission devotes significant attention to international information
sharing and cooperation. For example, the Financial Services Commission has signed the
International Organization of Securities Commissions multilateral memorandum of
understanding for information sharing. The Financial Services Commission is an independent
supervisory authority with broad powers to regulate the full scope of financial services offered
from or in the BVI.

The Financial Services Commission Act, which came into effect in 2002, established
the Financial Services Commission as an independent statutory body. The Financial Services
Commission is allowed to regulate, supervise, and enforce financial services activities carried
out in or from the jurisdiction. This includes the right to issue binding guidance, apply terms
and conditions to licenses and take a range of enforcement actions. The Financial Services

24
Commission is also responsible for overseeing compliance of companies and limited
partnerships with the corporate or partnerships legislation. Furthermore, the IMF (2010) claims
that the Financial Services Commission has demonstrated both its willingness and ability to be
a full partner in international information sharing and cooperation.

It was for this purpose that the Financial Services International Cooperation Act was
repealed in 2006. The Financial Services International Cooperation Act laid down the
requirements for information sharing with foreign regulators and foreign law enforcement
agencies. Since then, the Act has been amended to incorporate informationsharing provisions
that have expanded and clarified the Financial Services Commission’s authority. This
amendment was carried out in response to concerns raised during discussion of international
cooperation initiatives and the process of negotiating to become a signatory to the International
Organization of Securities Commissions Multilateral Memorandum of Understanding
Concerning Consultation and Cooperation and the Exchange of Information. The Financial
Services Commission has become a full-signatory to this memorandum of understanding.

In spite of this, the BVI are still seen as a very secretive jurisdiction. For instance, the
BVI rank 15th in terms of the Financial Secrecy Index (FSI) of the Tax Justice Network
(Murphy, 2010)6 . In fact, while the BVI have the largest number of IBCs registered in any
territory, they do not maintain records of those that have discontinued operations. Also, the
BVI often permit the migration (known as continuance) of companies (and foundations) in and
out of the jurisdictions in a way which onshore jurisdictions do not.

Thus, for instance, it is possible for a fully-fledged and operational BVI registered
company with BVI directors to become a fully-fledged and operational Jersey registered
company with Jersey directors without any break in its legal existence. It is not a merger or a
transfer of assets – it is the legal continuance of the same company from one jurisdiction to
another. In addition, BVI have signed a Tax Information Exchange Agreement with a number
of industrial countries (The Czech Republic, Germany, Portugal, Ireland, The Netherlands,
New Zealand, France, Denmark, Finland, Iceland, Norway, Sweden, The UK, Australia, and
The US)7 .

However, the BVI have no double tax treaties with foreign countries which make
offshore clients’ tax information and financial status safe within the BVI. An added advantage
to offshore trading companies incorporated in the BVI is that the jurisdiction has no exchange
controls in place, which makes it easy to move funds around. In spite of the Tax Information
Exchange Agreement, the BVI provide exceptional privacy and confidentiality for their
offshore clients. In keeping with international banking regulations, offshore banks operating in
the offshore jurisdiction of the BVI follow the “know your client” rule. However, they always
maintain the privacy and secrecy of the client, and the secrecy is protected by BVI legislation.
In fact, according to banking secrecy laws of the BVI, information regarding offshore bank
accounts and bank accounts in the jurisdiction can only be disclosed with the consent of the
offshore bank account holder or if a court order has been issued handed down. Disclosure of
information about an offshore bank account is punishable by BVI law.

25
 The BVI as a tax haven also provide confidentiality and privacy to the beneficial
owners and directors of offshore business corporations through the BVI’s offshore business
corporations’ act. The names of the offshore company’s shareholders, directors and the
company’s minutes of meetings and resolution documents are not filed with the Registrar of
Companies. Information about the beneficial owners is not made public.

This means that this information does not become public. Such information is only
known to the registered agent of the company who is also responsible for keeping the
information. The offshore business legislation provides further privacy by allowing offshore
corporations in the BVI to be incorporated using nominee directors and shareholders. In the
offshore tax haven of the BVI an offshore business corporation can be incorporated using just
one shareholder and one director. The director can be another BVI corporation.

The financial statements and audits of the BVI’s offshore corporations are private, and
the financial statements are not to be filed with the government authorities in the BVI. The
financial statements of offshore companies in the tax haven BVI can be kept at any location
convenient to the corporation’s members, meaning that no register is required in the BVI.
Summing up, first, the tax haven BVI is specialized in the incorporation of companies and in
trusts. Second, the BVI are a tax haven in the traditional sense of the word, since foreign firms
are not taxed there. Third, BVI are seen by international organizations as a well regulated
financial center. Fourth, in spite of this, there are still in place many legal impediments for the
exchange of information with foreign jurisdictions, which in practice makes the BVI an
attractive location for tax evasion.

Management Approach
Early in the company’s history, the two founders endorsed formal management procedures,
and Hewlett-Packard was one of the first corporations to use the “management by objective”
approach. They also created an informal workplace, encouraging the use of first names among
employees, even for themselves. Packard and Hewlett were also known for “management by
walking around,” visiting as many departments as possible without appointments or scheduled
meetings and talking with line workers as often as with managers in order to understand how
the company was operating. Hewlett-Packard became one of the first businesses in the United
States to endorse the idea that employees, customers, and the community have as valid an
interest in company performance as do shareholders. As a result, it consistently ranked among
the best places to work for women and minorities. It also became one of the leading contributors
to charitable organizations, donating as much as 4.4 percent of its pretax profits.

Marketing Strategy of HP – HP Marketing Strategy

Founded in the year 1939 HP has emerged as the global giant providing IT products & services
to each and every segment of the society whether it is individual consumers, small and medium
enterprises, private, or government organisations.

26
It has a large number of enterprise products in its product portfolio which consists of hardware
and software solutions and in the year 2015, it splits HP Inc into two publicly traded entities
namely HP Inc. and Hewlett-Packard enterprise where the latter one is for forming a separate
entity for PC and printer business.
HP a name popularly known for their PC’s and printers, but when it comes to the company as
a whole they have used demographic and geographic segmentationvariables to address
the needs of the retail and corporate customers.
Targeting is one of the important pillars of the marketing strategy. HP uses differentiating
targeting strategy to provide customised products & services to the enterprises.
HP uses a mix of value/ product and pricing based positioning strategies to compete in the
market.Marketing mix – Here is the Marketing mix of HP.SWOT analysis – Here is the SWOT
analysis of HP
The diversified product portfolio for both enterprise and retail customers which consists of
personal computers, other related products and printers. Data analytics, software development,
network and IT related infrastructure developed for the enterprises is helping the company to
generate revenue by offering the bouquet of products and services under one roof.
Strategic mergers and acquisitions like those with Compaq Computer
Corporation, Indigo N.V., Snapfish, synstar, Pixaco, lefthand networks and much more are
helping HP in using the advanced technologies and resources these companies bring in with
them. HP’s Personal computer and Imaging & printing related other products are businesses
which are stars in the BCG matrix.
The enterprise solution offered by the company such as network infrastructure, software
services, data analytics and IT support system is also starred in the BCG matrix due to having
such a broad product portfolio.
HP is using multiple distribution channels to make its products and services available to its
customers. Retail outlets, authorised showrooms & service centres, direct sales channel,
OEM’s (Original equipment manufacturer) and resellers are helping the company to make its
products and services to reach to the end custome With such a high brand visibility and high
top of mind awareness (TOMA), HP leads the market. The world’s largest PC maker works
with GMR Marketing Co. to increase its visibility through sponsoring different activities and
events happening worldwide.
HP competes with other large corporations in the same business segments at different levels
such as technology, product portfolio depth, IT and network infrastructure, availability of the
resources, branding, distribution channels and retaining the pool of talents that HP have. To
stay competitive HP continuously adjust the prices of their products and services.
Many corporations with a long history such as IBM, Samsung and many others compete with
HP at different products/ services segments The market is overcrowded with a vast number of
companies small and big like MNC’s which are eating up each other’s market share and making
it difficult for the companies to sustain in the market which have products and services with
short life cycles. The market for each segment of a business of HP is vast and sometimes HP
has to compete with their own OEM partners in different business segments

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HP have product portfolio focusing on satisfying the needs of the individual customers and
enterprises. It caters to the enterprises ranging from the small & medium enterprises to private
companies to government institutions.
INNOVATION
Invention defines HP, and the 50-year history of HP Labs exemplifies the kinds of research
projects that result in market-changing innovation. The light-emitting diode (LED), the
handheld scientific calculator, and inkjet printer technology are among the results of HP Labs
research and development efforts. And after 50 years, HP Labs is as vibrant and innovative as
ever.

HP Labs was the brainchild of Bill Hewlett, Dave Packard, Barney Oliver, and others who had
a vision for the future of technology. This vision was not constrained to humanity either. When
Barney Oliver retired from HP, he helped lead the search for extraterrestrial life as senior
manager at the SETI Institute. Clearly these technology leaders had potent visions of the future,
visions that they believed Labs could help HP achieve .

But as a company that prides itself on invention, HP must also demonstrate innovative user
experiences. The HP mission is to engineer experiences that amaze, while the HP vision is to
create technology that makes life better for everyone, everywhere. Both of these statements
describe the tremendous importance that HP has placed on end-to-end experiences that provide
real customer value.
Bridging the social and the technical
Enter the Immersive Experiences Lab. The members of this Lab design for innovation by
considering people first. The Lab’s mission is to understand people and their practices in order
to craft the best experiences with future technologies. The Immersive Experiences Lab exists
to understand and fulfill the promise of valuable, delightful experiences through data-driven,
user-focused solutions.
Mirjana Spasojevic, PhD is the driving force behind the Immersive Experiences Lab. She is a
tech industry veteran who leads the Lab, and who previously worked for HP from 1995 to
2005. She rejoined HP in 2015 after co-founding Kindoma, a company that enabled children
and grandparents to read and play together even when they were apart. She also founded and
directed the IDEA team at Nokia Research Center in Palo Alto, a team that developed ground-
breaking ideas in augmented reality and mobile technology .

The Immersive Experiences Lab works inside HP to drive the “people first” message in a
variety of ways. For example, the Lab hosted industry experts from People Rocket who led a
design thinking workshop for members of the Office of the CTO. The first workshop was all
about helping a diverse audience learn more about user-centered design. The response was
extremely positive: Participants got their hands dirty with prototyping materials as they became
familiar with some of the methods that members of the Lab use on the job. The Immersive
Experiences Lab also worked through follow-up sessions to explore new ideas, some of which
led to field studies of novel technology concepts that will be described in future issues of this
Journal.

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Working with the best and brightest
The Immersive Experiences Lab has an all-star team of designers, researchers, prototypers, and
free thinkers who push the boundaries of what HP can do next. Lab members are trained to
look several years ahead and design the interactions and experiences that people will actually
want to have with new technologies. Megatrends and weak signals of what lies ahead from a
technology perspective inform research perspectives .

However, researchers cannot simply ask people, “How much virtual reality will you want in
the year 2026?” Instead, Lab team members apply tried-and-true methods and techniques to
dig into the details of people’s lives. The results of those inquiries drive design decisions about
next-generation interactions and experiences .

Specifically, they use various qualitative and quantitative research methods, cutting-edge
design skills, and a mix of modern and traditional prototyping techniques. Lab members
develop these skills through academic programs that focus on human-computer interaction
(HCI), user-centered design, and other related disciplines .

For example, the Human Centered Design and Engineering (HCDE) department at the
University of Washington teaches a variety of courses on HCI design and research. These
courses teach critical skills such as how to conduct ethnographic field research, how to design
and run interviews, and how to analyze different kinds of data. Alex Thayer, PhD is the Senior
Manager of the Immersive Experiences Lab and an HCDE PhD graduate, while summer intern
Mia Suh is entering her fourth year in the HCDE PhD program .

Tight connections with academic programs and professors provide a vital way for the lab to
stay ahead of the technology curve. By sponsoring the annual CHI conference in 2016, the lab
became even more visible beyond HP. CHI is one of the premier venues for professors,
students, and industry experts alike to publish and discuss their work. The lab worked together
with the HP Sprout organization and ran a booth throughout the conference, which drove
significant interest in Sprout as a tool for academic research labs.

The day after CHI, the Immersive Experiences Lab hosted an all-day summit at HP for a select
group of “VIP” guests from academia. The summit included a tour of the Customer Welcome
Center, presentations from key HP technologists, and invited talks from the distinguished
guests. The sessions included a live demo of the ShareTable application (pictured below),
which uses Sprout to connect people across distances more effectively. By the end of the
summit, the professors and students who attended had a clear understanding of why HP is
uniquely poised to deliver on the promise of a Blended Reality future
Understanding people to drive business value
The members of the Immersive Experiences Lab understand the value of being connected to
the latest developments in the academic world. However, they also understand how to help HP
succeed by applying radical ideas and cutting-edge techniques on the job. Patents and
publications are important products from an industry research lab. But the lab also works with
HP business units to drive results .

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What makes this lab special is the focus on people first. Rather than starting with a promising
technology and finding applications for it, the members of the Immersive Experiences Lab ask
questions about how and why real people might benefit from new tools, new interactions, and
new devices. This means asking lots of “how” and “why” questions that illuminate interesting
habits and beliefs, rather than asking “what” people might want to incorporate into their lives
Importantly, researchers in the Lab conduct studies in the real world. They investigate how real
people live their lives in all of their messy glory. Again, by starting with people and their
practices, the Immersive Experiences Lab determines how technology can improve the lives of
people around the world. As researcher and Lab member Mithra Vankipuram says, "We need
to get out there, get our hands dirty, and really understand how people deal with all these
technologies. We want to know how people handle it all ."

This is what it looks like to "design for innovation." It requires empathy for real people, their
real-world challenges, and how to resolve their pain points in innovative yet useful ways. It
also takes years of experience to develop the sensitive observation skills required to translate
information into insights. Basically, it takes a lot of hard work
Exploring the “wacky edge”
As a result of placing so much importance on people first, the Immersive Experiences Lab is
pushing the boundaries of what an industry research lab can study. The lab operates at the
"wacky edge" of how humans and technology will coexist in the future. And it is certainly true
that some lab projects are quite uniquen n .

For example, members of the Immersive Experiences Lab are currently exploring everything
from new content creation tools in virtual reality to kinetic jewelry that can crawl across your
clothing. This lab has brought together an exceptional team of people who have the skills to
answer this question, even in the context of jewelry that can crawl up your sleeve. But the lab
remains focused on a central question: "How could this idea improve people’s lives?
Defining three areas of focus
The lab leadership wrangles all of this potential chaos by focusing the team on three topic areas.
The first area is "Shaping Future Experiences," which is all about exploring next-generation
interfaces and interactions with technology. For example, people are using so-called "chat bots"
in a variety of ways today. Slack is popular partly because anyone with a phone can chat with
a Slack bot and order food from Taco Bell, for example.

But the members of the Immersive Experiences Lab wanted to look beyond ordering tacos and
consider what it means to shift from "device" to "contact." In the print world, that shift could
help people have timely, useful interactions with their printers. The Lab recently studied how
people might interact with their printers using text messages as a more conversational way to
connect. As Mithra points out, "We knew we were onto something when HP released the HP
Print Bot while we were in the middle of our own study .

The connection between labs and business units is extremely important, which is why the Lab
presented their research on this topic to the Pilots and Incubations team within the HP Print

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business unit. A member of that team produced the HP Print Bot, which is built on top of
Facebook Messenger. As their work in this area proceeds, the Immersive Experiences Lab
continues to explore ways to collaborate on important future research topics.

The second area of focus within the lab is "Authentic User Experiences." Projects in this area
explore how technology can help people feel more resilient in their lives. We all crave a sense
of purpose, connection with other people who matter most to us, and feelings of control over
what happens in our lives. Explorations in this area of focus have emphasized minimal
interactions that drive maximum emotional impact and value for people in the real world. Early
results are extremely promising, and point to future experiences that might involve new ways
to use printers and supplies that drive stronger emotional connections among friends and family
members.

The final area of focus is "Advancing Blended Reality Experiences," which includes research
into augmented and virtual reality (VR). As HP begins offering untethered experiences with
VR content, the Immersive Experiences Lab has looked at ways to extend the value of products
like the Omen X VR PC Pack. Original studies continue to generate valuable insights that the
lab can bring back to business stakeholders, who recognize the significant benefits that can be
drawn from these insights .

All of these threads come together because the lab members have a knack for spotting and
hiring top talent and eager collaborators. With a team of diverse, talented people as well as top-
flight interns from around the world, the lab is working hard to drive real results that matter to
the rest of HP.

Inventing the future of experience

So what’s next for the Immersive Experiences Lab? Without revealing too much right now, it
is safe to say the future is a fascinating playground for radical explorations. Future editions of
this journal will showcase exciting projects and innovations from the Immersive Experiences
Lab as its members tread that "wacky edge" between what is technically possible and what is
actually helpful to real people .

As we look back at 50 years of HP Labs, it is important to emphasize the continued relevance

and value of HP’s investment in HP Labs. Not long ago, Labs inventions such as LED and the
pocket-sized calculator seemed like pure science fiction. HP clearly depends on Labs to help
invent the future, which means the members of HP Labs continue to share research results and
insights with business owners and stakeholders. HP needs to address the markets of today as
well as the markets of the future. The internal partnerships between HP Labs and business
owners are crucial to the success of HP, and to the continued relevance of HP Labs as a potent
driver of applied innovation.
Bringing sustainability full circle
On August 8, 2016, viewers around the world watched as swimmer Ryan Murphy of the U.S.,
weightlifter Sukanya Srisurat of Thailand, and marksman Niccolo Campriani of Italy set
Olympic records during the Games in Rio. While millions saw the competitions, most didn’t

31
notice another, more significant record that was set that day. According to the Global Footprint
Network, August 8 represented this year’s Earth Overshoot Day—the day on the calendar when
humankind has used all the renewable natural resources that the planet can replenish in a whole
year..

The Global Footprint Network has calculated that today it would take the natural resources of
1.6 Earths to sustain all the demands of humankind, and that carbon emissions account for 60
percent of humanity’s demands on nature. And the problem is expected to increase, as the UN
estimates the world’s population to surge from 7.3 billion to 11.2 billion by 2100. These
statistics highlight why governments and companies like HP are committed to taking action to
lower greenhouse gas emissions in support of the UN’s climate agreement signed in Paris in
December 2015.
HP has long recognized the need to analyze the impact that our company, and the products and
solutions we build, have on the planet and work to reduce that impact. All while creating
solutions that make the world more sustainable. Our sustainability strategy integrates the
environment, society, and integrity into what we do and deliver every day.
Conducting business and engineering solutions to the highest ethical principles, such as
adhering to strict, industry-leading standards that protect workers throughout our supply chain.
Carefully choosing the materials we use in our products as well as those we don't.
Developing solutions that perform efficiently and effectively throughout their entire lifecycle.
Creating solutions that empower people around the world to do amazing things that make life
better for everyone, everywhere.

This work is core to HP’s business strategy and contributes directly to our customers’ success.
As HP President and CEO Dion Weisler has stated, "We believe sustainability is a powerful
force for growth and innovation, in the world and at HP. It guides how we do business and
drives the way our products are designed, made, used, and regenerated. And it is a focal point
as we reinvent our business models and operations toward a materials and energy-efficient
circular economy."

And people have taken notice. Most recently, HP ranked number 17 on Gartner’s 2016 Supply
Chain Top 25 list, and HP gained a perfect 10 for our corporate social responsibility efforts.
Designing for the environment
HP’s focus on sustainable design practices is not new. In fact, our Design for the Environment
program, founded in 1992, has defined how we develop products that use less energy, require
less resources to make and use, and are more easily reused and recycled .

What has changed are the demographics, buying habits, and sustainability attitudes of the
people who purchase products for themselves and the businesses and governments they work
for. For example, the number of technology consumers in the world is quickly accelerating,
with approximately 3 billion new consumers expected by 2030. A younger generation of buyers
recognize the environmental, health, and social implications of "throw away" societies that
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view products as disposable. And people worldwide are embracing the sharing economy
business model represented by companies like Uber and Lyft .

To address these shifts, companies such as HP must change the very nature of how they design,
manufacture, service, recycle, and reuse products. HP is building on its legacy of sustainable
design by moving from the traditional linear manufacturing model of “take, make, dispose” to
the more sustainable “make, use, return” model of a circular economy. This strategy places
customers at the center of everything we do and focuses our personnel on finding ways to keep
products and materials in use for as long as possible, at the highest state of value.

Innovating using our core capabilities

For many people, recycling is the simplest circular economy concept to understand. The notion
that everyday products, such as soda bottles, can be collected, recycled, and turned into new
bottles is pretty straightforward. But recycling products, such as PCs, printers, or cartridges, is
more complex .

HP has been a recycling leader for decades, developing innovations that enable us to reduce
our products' environmental impact and meet our customers’ demands to reduce waste. For
example, 25 years ago the company launched the HP Planet Partners return and recycling
program. Through this program, we have collected more than 3.3 billion pounds of hardware
and supplies—the equivalent weight of more than 150 Eiffel Towers.

HP Planet Partners facilitates another ground-breaking innovation—our closed loop recycle

program that allows us to use millions of pounds of plastic to create original ink and toner
cartridges. Through this program, we have manufactured more than 3 billion ink cartridges
using more than 177 million pounds of recycled content material—including returned
cartridges, more than 3.3 billion plastic bottles, and 50 million apparel hangers. Today we are
helping divert on average more than 1 million plastic bottles per day from landfills.

But the circular economy is about more than just recycling. For HP it means extending the life
of our products by creating modular designs that are easy to maintain. A prime example of this
design philosophy is the HP Elite x2 1012 G1 tablet, which comes with online repair
documentation and readily-available parts. The tablet is so easy to service, that ifixit.org gave
the system its highest repairability score, 10 out of 10.
Meeting growing demands
That same innovative spirit can be seen in our service-based solutions, which are helping
customers save money and lower their environmental impact. Solutions such as Managed Print
Services (MPS) and Device-as-a-Service provide customers with access to the latest
technologies, allowing them to scale up or down as their business grows or shrinks and ensuring
that resources are not wasted through equipment reuse, refurbishment, or recycling. For
example, MPS customers can see up to a 40 percent reduction in printing-related energy usage
and paper waste reductions of 20 percent or more.

Similarly HP Instant Ink, a consumer-based subscription service, reduces costs by up to 50

33
percent, while ensuring that customers never run out of ink at the wrong time. Through this
service model, ink subscription printers use up to 67 percent less materials per printed page
than conventional business models.
And as we adapt our business models, we keep the environment in mind. For example, while
we continue to reinvent printing, we also recognize the increased importance to source paper
responsibly. This is one of the reasons that in June 2016, we set a goal to meet our objective of
zero deforestation, in which all HP brand paper and paper-based product packaging1 will be
derived from certified and recycled sources by 2020.
Reinventing the future of computing today
And HP will continue to innovate with disruptive technologies such as 3D printing that will
transform how whole industries work. For example, using 3D printers to manufacture spare
parts or fully assembled products, companies will be able to perfectly match supply with
demand. This will reduce waste and the need for physical inventories of thousands of parts and
products that are stored for later use—or worse never used at all.

HP believes that by reinventing how they make, use, and regenerate technology—businesses,
communities, and individuals can thrive. HP’s approach to the circular economy—one in which
we build on our industry leadership in environmental design, materials innovation, energy
efficiency, and product reuse and recycling is one way to help both HP and customers meet
their business and environmental objectives
HP Risk Management
We understand the realities of reporting in fragile environments and work closely with clients
to reduce risks while enabling operations to thrive.
We provide on-hand support to some of the world’s most distinguished news organisations
and journalist associations.

CPJ is proud to work with HP Risk Management through our Emergency Response Team,
which provides support and assistance to journalists at risk. We also rely on HP to develop and
help manage our own internal security. HP is a knowledgeable, dependable, and responsive.
We greatly value our partnership'.
Joel Simon. Executive Director. Committee to Protect Journalists
'I have worked with HP Risk Management in various capacities and have known the team over
the last 15 years. The advice, guidance and support I have received has been invaluable in a
number of very complicated situations. I would not hesitate to recommend the team'.
Emma Hill. Head of Production. Vice MENA. Vice News
'We have worked with HP Risk Management for over 3 years and have found their experience
and knowledge across hostile environments invaluable. Their support and advice is always
practical, knowledgeable and incredibly well received by our team'.
Nick Copcutt. Former Director of Health, Safety and Security. News UK

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"HP Risk Management are not only professionals, they’re visionaries who have a deep
experience and knowledge of all of the world’s riskiest places and a network of journalistic and
security sources unsurpassed. We rely on them every day.”
Members of HP's procurement community know that uncertainty in product demand, compo
nent cost, and component availability results in sig nificant procurement risks. Other
manufacturers, such as Ford, Cisco, and Dell, know these risks all too well. In December 2001,
Ford posted a $1 billion loss on precious-metals inventory and forward-contract agreements.
In April 2001, Cisco took a $2.5 billion inventory write-down due to weakening demand for
networking products. In October 1999, Dell's announcement about the revenue impact of
higher than-expected memory prices resulted in a seven per cent decline in its stock price in
one day. Hi-tech components exhibit even more volatility. In Ford's case, palladium prices
doubled during 2000, and then decreased by over 50 percent in 2001. By comparison, the price
of the DRAM memory that HP uses dropped by over 90 percent in 2001, and then more than
tripled in early 2002 (Figure 1). Coupled with this price volatility, there is sig nificant
uncertainty about the availability of hi-tech components including memory chips and other
semi conductor products. In periods of high demand, hi-tech suppliers place original equipment
manufac turers (OEMs) such as HP under allocation whereby they supply only a fraction of
the OEM's total demand. Availability uncertainty can also result from supply and delivery
disruptions, such as the earth quake in Taiwan in late 1999, or supplier quality issues. In
addition to component cost and availabil ity uncertainty, manufacturers face substantial prod
uct-demand uncertainty.
The dramatic drop in the demand for telecom and networking equipment in 2001-2002, after
several years of breathtaking growth, is an example. Demand uncertainty has caused cycles of
product and component shortages followed by inventory buildups and write-downs, e.g.,
Cisco's $2.5 billion loss. In mid 2000, HP signed a long-term, binding con tract with a major
supplier to actively manage the future cost and availability uncertainty of flash mem ory. There
were significant incremental risks to HP in entering into this forward contract. If flash mem
ory demand weakened, then committing to buy a fixed quantity would result in significant
inventory buildup and write-offs. However, if flash memory prices dropped, then HP would
pay more than its competitors because of its fixed-price commitment. This long-term, binding
contract for flash memory set the course for the active management of procure ment
uncertainties and risks at HP. To help verify that such incremental risks due to this forward
contract were acceptable and, more importantly, manageable in the future, we developed a quan
titative framework?Procurement Risk Management (PRM)?to show in detail the long-term
demand, cost, and availability uncertainties for flash memory, and HP's quantity and price
commitment as specified in the contract. By 2006, HP had saved an estimated $50 million
using the PRM approach, as prices of mem ory chips increased beyond the fixed and/or capped
price in the long-term contract.
Challenges: Developing and Implementing a Risk-Management Approach HP had to overcome
several technical, business pro cess, and cultural challenges to develop and imple ment a risk-
maTechnical Challenges in Managing Procurement Uncertainties Current SCM practices
emphasize the management of demand and availability uncertainties through inven tory-
buffering strategies (Graves 1988), with little, if nagement system for supply chain
management (SCM).

35
any, focus on managing component-cost uncertainties. Financial-engineering practices, such
as those used on Wall Street for stocks, bonds, and currency, enable the management of cost
uncertainty; however, they do not manage demand and availability uncertain ties (Hull 1993).
Furthermore, such cost-uncertainty management techniques require the availability of risk-
management instruments, such as call-and-put options, instruments that are not available
directly for hi-tech components.
For these components, such as memory and flat-panel displays, demand, cost, and availability
uncertainties are equally important, and require that those uncertainties be managed together.
Thus, neither existing SCM nor existing financial-engineering practices can be applied directly
to the management of procurement risks of hi-tech components. When HP initiated the PRM
program in 2000, few academic papers addressed the joint manage ment of multiperiod and
correlated demand, cost, and availability uncertainties using a portfolio of con tracts.
Academic literature most closely related to our approach appeared after we developed our
process. Martinez-de-Albeniz and Simchi-Levi (2003) devel oped a multiperiod framework for
supply contracts with embedded quantity options under demand uncertainty; Schummer and
Vohra (2003) considered the problem of a buyer procuring quantity options from multiple
suppliers under demand uncertainty; and Fu et al. (2006) examined a single-period, opti mal
portfolio of contracts problem when both the demand and cost are uncertain. Fu et al. also pre
sented an excellent review of the existing literature that addresses the management of demand
and cost uncertainty in the supply chain.
The PRM framework that HP developed enables the simultaneous measurement and
management of multiperiod and correlated demand, cost, and avail ability uncertainties.
Existing SCM and enterprise re source planning (ERP) software does not support risk
management beyond traditional inventory-buffering strategies. Therefore, to support PRM, HP
developed from scratch proprietary software tools that use OR models. Business Process
Challenges In most manufacturing companies, current SCM busi ness processes and metrics
do not support risk management. Current SCM metrics are backward looking. For example,
such metrics report actual ma terial, inventory, and shortage costs obtained over past time
periods. To enable risk management, we developed metrics that show expected values and
standard deviations of future material, inventory, and shortage costs for a set of alternatives.
The PRM framework uses demand, cost, and availability sce narios as critical inputs in the
calculation of such expected values and standard deviations of future costs. Different pieces of
the information necessary to manage supply chain risks typically reside in differ ent
organizational functions, with few mechanisms available to connect and aggregate this
information. For example, the information necessary to quantify demand uncertainty is part of
the planning function, the market cost and available uncertainty part of the procurement
function, and the inventory costs and margins part of the finance function. Our PRM busi ness
process links these functions and aggregates all information needed for risk management, thus
insti tutionalizing risk management in the supply chain.
Cultural Challenges Cultural challenges related to workforce skill sets fur ther exacerbate the
business process challenges. Most SCM professionals are not used to working with or
quantifying the uncertainty in demand, cost, and availability of components. For example,
while most professionals realize that demand forecasts include an element of uncertainty, few
are able to quantify that uncertainty. To address this challenge, we developed a supporting

36
infrastructure that includes a training curriculum and process consulting to help SCM pro
fessionals to understand and implement PRM. Meet ing this challenge also required that we
develop the PRM software with the analytics embedded behind an easy-to-use user interface.
he PRM Framework To measure and manage procurement-related supply chain risks, HP has
developed the following: (1) A framework to quantify the impact of product demand,
component cost, and availability uncertainty on revenue, costs, and profits;
A suite of software tools, the HP Risk Suite, to support the risk-management process; this com
prises HPHorizon demand-scenario software, HPRisk component-cost-forecasting software,
and HPRisk contract-valuation software; (3) A rigorous PRM business process to proactively
manage procurement uncertainties and risks; and (4) A training curriculum and consulting
infras tructure to help HP professionals implement PRM. Measuring Uncertainty Using the
Scenario Approach HP's PRM approach involves (1) measuring uncer tainties associated with
buying components, and (2) managing these risks using structured contracts. The first step in
this process is estimating uncer tainties. Current forecasting approaches at most com panies
emphasize "point" forecasts (i.e., one number per time period). In contrast, the PRM process
uses multiple forecast scenarios to capture the uncertainty of component demand, cost, and
availability over time. Typically, each of these uncertainties is rep resented by high, base, and
low scenarios. As Fig ure 2 shows, these are, respectively, the 90th, 50th, and 10th percentiles
of a discrete-variable distribu tion at a particular time period. In addition, sepa rate correlation
coefficients are used to capture the relationship between demand and cost uncertainty, and
between cost and availability uncertainty. These scenarios are multiperiod. After modeling
these pro curement uncertainties in this manner, the current procurement strategy can be
analyzed to measure the procurement risks involved.
PHorizon Software to Quantify Demand Uncertainty Current demand-planning software
systems capture and aggregate "point" forecasts for products and components. The analytics
embedded in the HPHori zon software perform a regression analysis of his torical forecasts and
shipments to quantify forecast bias and uncertainty. The software then combines this
information with current demand trends to represent the uncertainty in the demand forecast as
high, base, and low scenarios. This software also determines and corrects biases in the point
forecasts. HP's planning team uses the HPHorizon software regularly to assess the uncertainty
HPRisk Software to Quantify
Component-Cost Uncertainty Hi-tech components, such as memory and LCD pan els, exhibit
significant cost uncertainty that, if left unmanaged, could significantly impact a company's
profitability. Measuring the uncertainty in the future cost of such components is the critical
first step. The cost uncertainty of hi-tech components, which com monly demonstrate strong
price momentum, makes previous price movements very signicant factors in predicting future
prices. In addition, hi-tech compo nent prices typically demonstrate a long-term decline in costs
due to technological and process-related improvements. The HPRisk cost-forecast software
performs a regression analysis of historical costs for a particular component to determine the
parameters of a non-Markovian price process using the scenario history to model the unique
cost dynamics of each hi-tech component. These analytics have been indi vidually adapted to
components such as memory chips (flash memory), LCD panels, and plastics, and are
embedded into easy-to-use software to forecast cost uncertainty using high, base, and low

37
scenarios. The same analytics can be adapted to forecast cost uncertainty of other manufactured
commodities such as chemicals or steel.
Managing Risks Using Structured Contracts with Suppliers Once the demand, cost, and
availability uncertainties are quantified using scenarios, the risks associated with these
uncertainties are managed by setting up portfolios of structured contracts that HP executes
directly with suppliers. These are binding commit ments, incorporating a complex combination
of quan tity and pricing terms. Quantity terms include fixed and flexible quantities, and
percentage of total avail able market (TAM); pricing terms include discount off-of-market
price, fixed price, price caps, and price floors. Applying the Structured-Contract Approach to
Manage Risk To illustrate the use of the structured contract to man age risk, consider the
schematic in Figure 3. We represent the demand uncertainty using low, base, and high
scenarios. Given that the low scenario is the 10th percentile of the demand distribution, the
likelihood that the actual demand will be greater than this number for a given period is very
high?in fact, an estimated 90 percent. For such "nearly certain" segments of demand, HP would
commit to buying today, at time = 0, a fixed quantity from one or more suppliers for a longer
period of time.
The probabil ity that demand will be at least large enough to fall in the range above the low
scenario to approximately the base scenario is lower; therefore, for this range, HP executes a
flexible-quantity commitment wherein a supplier commits today to supplying any quantity that
HP chooses to buy within that range and at HP's option. For the segments of demand above the
base scenario, where the probability that demand will be at least that large is lowest, HP does
not make any com mitment today to buy and the suppliers do not com mit to supply any quantity
in this range by contract. Instead, HP will use existing suppliers or the spot market to meet such
high demand if and when that demand exists in a future time period even though the spot market
price will be higher than the con tracted one. In this simple illustration, the portfolio of contracts
is composed of fixed-quantity and flexible quantity contracts, with a portion of uncommitted
demand.
To address specific business objectives, such as cost savings or cost predictability, these
quantity terms are paired up with specific pricing terms. For example, if the business objective
is cost savings, then the fixed quantity and/or flexible-quantity terms are combined with a
discount-off-of-market-price pricing term. If the business objective is cost predictability, then
the fixed- and/or flexible-quantity terms are combined with either a fixed-price or price-cap
pricing term. Price-cap contracts establish upper limits; therefore, if the market price is higher
than the price cap, HP pays the price cap, and if the market price is lower than the price cap,
HP pays the lower market price.
Effectively, the portfolio of structured contracts is composed of contracts that combine
quantity and pricing terms to maximize business objectives?re sulting in "tailored" structured
contracts?and to manage risks due to demand, cost, and availability uncertainty.
Compare this portfolio-of-contracts approach to the common practice of manufacturing
companies of not committing any volume to suppliers, providing only nonbinding forecasts of
demand to help suppliers plan their production. In an attempt to ensure sup ply, and with
nothing to lose, manufacturers have an incentive to inflate the nonbinding forecasts. As a result,
suppliers have little faith in a manufacturer's ability to order based on the forecast; therefore,
they plan to produce fewer components than the manufac turer's forecast to reduce their risk of

38
excess inven tory or capacity. Because of this lack of commitment upfront on pricing or supply
terms, the procurement uncertainties are exacerbated over time, especially in a volatile industry
such as electronics. The fundamental value of the PRM approach is the structured sharing of
risks between HP and the sup plier. This is driven by the ability of one party to better manage
certain risks and to be rewarded fairly for it. For example, HP can better accept risks due to
uncertain demand for its products than one of its suppliers can. By entering into a quantity
commit ment with a supplier, HP bears this demand risk and, in turn, the supplier rewards HP
with better pricing terms. In cases where a supplier explicitly manages quantity and especially
pricing risks, HP rewards the supplier with better quantity and/or pricing com mitments. This
contrasts with traditional industry practices where buyers do not make quantity commit ments;
therefore, they impose all demand risk (and associated costs) on the supplier. For buyers and
commodity managers, segmenting demand increases opportunities for creative contract ing
with suppliers. Suppliers are often willing to provide a discount for fixed-quantity
commitments because it allows them to manage their production, capacity investments, and
their own supply agree ments more efficiently.
They can schedule committed volumes during nonpeak times, and inventory carries no
obsolescence risk. On high-volume deals, suppli ers can modify fabrication lines to
significantly reduce costs. HPRisk Contract-Valuation Analysis Because the PRM approach is
based on forward-con tract commitments to price and quantity terms, it is critical that these
contracts be appropriately analyzed to increase benefits and decrease the risk that the contracts
will incur costs (for given levels of avail ability) in excess of short-term sourcing alternatives.
Complicating this analysis are situations where for a given commodity there are several
overlapping con tracts, each with different quantity, pricing, and cash flow structures. The
value of a contract may depend greatly on the other contracts that are in place. Given such a
portfolio of structured contracts, the optimal quantity to be bought from the different contracts
at any period in time will depend not only on the cur rent demand, price, and availability, but
also on the specific structure and terms of the other contracts.
The HPRisk contract-valuation analytics (Figure 4) use an optimization engine to determine
the optimal purchase in each period and scenario combination; therefore, they ensure that a
correct value is placed on the flexibility from the contract portfolio. In our case, the decision
variables are simply the quantities to buy from each contract or from short-term sourc ing.
The objective function adds material, shortage, and inventory costs, so that the OEM
automatically finds a contract mix to optimize trade-offs among these costs to find a minimum
expected total cost across scenarios. Constraints are included to represent minimum and
maximum contract purchase quanti ties and the maximum availability through short-term
sourcing. These max/min quantities are contract spe cific and determined through supplier
negotiation. The optimization engine is run in each period and scenario combination, and
reports are returned for the optimal purchase quantities and cost metrics in each case. Then,
engine can be described schematically as: Decision variables: The quantities to buy from each
structured contract and/or from short-term sourcing in each period and scenario combination.
Objective function: Minimize expected total cost, with the total cost in each period and scenario
combi nation represented by the sum of the material, short age, and inventory costs in that
period and scenario combination Constraints: (1) Minimum and maximum contract purchase
quantities and the maximum availability through short-term sourcing in each period and sce
nario combination, and (2) nonnegative quantities purchased for each structured contract.

39
The contract-valuation analytics have been incor porated into easy-to-use software?
HPRisk Contract Valuation. This software automates calculations ac ross a full range of price,
demand, and availability scenarios that are required in measuring procurement risks; it also
supports "what-if" analysis to explore alternative contract terms and comparisons between
alternative contract portfolios to aid in the negotition . he PRM Business Process Risk
management by its very nature is a cross-func tional process. We have developed a cross-
functional PRM business process that links and defines the roles and responsibilities of
procurement, planning, supply chain operations, finance, and marketing. HP's risk management
process is simple in structure but rigor ous in execution (Figure 5). Strategy and governance
for a particular com modity typically include approving procurement objectives, establishing
metrics, and reviewing the performance of any existing portfolio of contracts. HP manages
strategy and governance for product specific commodities at the business-unit level; it manages
commodities that are common across prod ucts more centrally. The deal-origination process
guides the design of portfolios of structured contracts to meet procurement objectives and to
manage cur rent product and component market uncertainties. For company-wide contracts,
commodity managers spec ify contract terms that satisfy specific product or divi sional
objectives, and a team of commodity managers integrates these specifications into a single
contract to leverage purchasing power. HP uses the HPRisk suite of software tools to eval uate
the performance of the proposed portfolios of structured contracts during the contract-
evaluation phase to determine their future performance against set objectives under various
conditions of demand, price, and supply uncertainty. We pay specific atten tion to situations
under which a contract would perform worse than buying on the spot or short term market
without binding terms and conditions.
The contract origination and evaluation phases are iterative, with the latest analysis guiding the
redesign of the proposed contracts being negotiated with sup pliers; the iteration stops when
the analysis deter mines that the proposed portfolios of structured contracts meet the set
objectives. Once the proposed contracts are approved, these contracts are negotiated and
executed using traditional face-to-face methods or over the Internet using reverse auctions. The
contract monitoring process guides (1) the backward-looking measurement of HP's and suppli
ers' performances against commitments made in the structured contracts, (2) the determination
of the past performance of a structured contract (or combina tion of contracts) when compared
to previously estab lished metrics, and (3) the future performance of an existing portfolio of
contracts under changed forecast scenarios for demand, price, and availability. HP has
instituted a rigorous process to estimate demand, price, and availability uncertainty for fore
cast-scenario generation.
The forecasting process forms the cornerstone of HP's risk-management pro cess because
credible forecast scenarios drive contract valuation and monitoring processes. The forecasting
process involves estimating uncertainty by analyzing historical demand, price, and availability
data using the software tools we described earlier, and modify ing these estimations of
uncertainty using input from market analysts on price and availability uncertainty and HP
component-demand uncertainty. Analyzing the impact of new forecast scenarios at the start of
each new time period on an existing portfolio of con tracts identifies any unmanaged risks;
these risks are then addressed at the deal origination phase, thus restarting the cycle all over
again.

40
Each business unit's vice president for supply chain management leads the PRM business
process and sets the procurement objectives as a part of the strat egy and governance activities
described earlier. At the pan-HP level, HP's Supply Chain Board spon sors the PRM program.
This board comprises senior vice presidents of HP's three global business units? Printers, PCs,
and Servers?who set and monitor PRM implementation objectives for the various com modities
and business units.
PRM Implementation Benefits Portability of the PRM Approach Over the past six years, HP
has been successful in developing and deploying an OR-based procurement risk-management
framework, business process, and software, and in implementing the risk-management
approach across HP's business units for the procure ment of key strategic commodities.
HP has applied PRM for a range of procurement situations rang ing from direct procurement
of components to indi rect and services procurement. In direct procurement, HP has applied
PRM to standard components, such as memory, hard disk drives, and plastics, to custom
components, such as microprocessors, application specific integrated circuits (ASICs), and
custom assem blies. In indirect and services procurement, HP has applied PRM to energy, spare
parts, and advertising procurement. In general, we designed the PRM approach to address
questions such as: "How much should we buy?," "When and for what time frame?," and "At
what price?," in the face of uncertainty in the business environment. Because these questions
are common across all industries, the PRM approach, analytics, software, and processes are
portable to all manu facturing industries. The wide range of applications of PRM across HP's
different commodity categories illustrates the power, generality, and portability of the PRM
approach. HP has received requests from sev eral companies to share this methodology. Some
have even requested consulting services on this subject, and HP intends to start a consulting
service focused on commercializing our PRM approach and tools.
Benefits We describe the benefits of implementing PRM below: (1) Material-cost savings: HP
obtained $128 million in material-cost savings in FY'06, and over $325 million in material cost
savings (and $425 million in total costs savings from all catergories) cumu latively over the
past six years using the PRM approach. PRM quantity commitments lowered sup pliers'
demand risks, while also enabling suppliers to cut costs through more efficient planning and
production processes. The suppliers share some of this value with HP through discounts on
material costs, through discount-off-of-market-price pricing terms.
Through such PRM quantity commitments, HP obtained material-cost discounts of up to five
percent for standard components, when compared to market prices, and an even higher discount
for custom com ponents, and indirect and services procurement. (2) Assurance of supply:
Managing component de mand and availability uncertainties is a key PRM objective at HP.
PRM contracts have improved sup ply availability for several commodities?even under
industry-wide shortage conditions. For example, despite an industry-wide memory shortage
approxi mately one year ago, the PRM contracts that HP busi ness units had executed ensured
that they obtained 100 percent of their demand from the suppliers. We estimate that HP
obtained more than $50 million in additional margin through PRM contracts that ensured
component availability in market-shortage conditions over the past six years. (3) Cost
predictability: PRM contracts with specific pricing terms enable HP to manage cost uncertainty
proactively. HP now procures over 25 percent of its memory chips using PRM contracts; this
enables HP to obtain the cost predictability required to pro tect margin on contracted sales to

41
large customers. We estimate that HP achieved cost savings of more than $50 million when
market prices for memory moved higher than the fixed prices and price caps specified in the
PRM contracts over the last six years. (4) Inventory reduction: The requirement for HP to hold
inventory is reduced as suppliers commit to providing defined upside flexibility through
flexible quantity contracts. In one instance, HP used to carry three months worth of inventory
of a custom emiconductor component to mitigate an expected shortage; using PRM, it was able
to replace this "strategic" inventory with a flexible-quantity contract executed with that
component's supplier. In addi tion, the precise measurement of demand uncertainty using PRM
software enables HP to optimize inven tory levels internally and externally at supplier sites.
Thus, implementing the PRM approach has reduced inventory-driven costs for commodities
by several percentage points. (5) Supplier benefits: Given the risk-sharing aspects of PRM, the
suppliers have also benefited substan tially. The quantity commitments that HP makes to
suppliers, as opposed to just exchanging nonbinding forecasts, have lowered suppliers' risks
(Shah 2002); suppliers of several strategic commodities have locked up significant portions of
their capacity through PRM contracts with HP. (6) Reduction in the "bullwhip effect"'.
Some suppli ers are making commitments to their suppliers (who are HP's second-tier
suppliers) that are tied to HP's quantity commitments to them. This results in quan tity
commitments that cascade deeper into the supply chain, resulting in a significant drop in order
volatil ity through the supply chain; thus, this results in a reduction in the "bullwhip effect."
We have observed reductions in order volatility of up to 50 percent across two tiers of the
supply chain after implemen tation of the PRM approach. The first tier is between HP and our
supplier; the second tier is between our supplier and their supplier. Therefore, the PRM
approach has the effect of smoothing supply chain volatility. (7) New business process and
PRM function: As we described above, we have developed a cross-func tional business process
that makes risk management a regularly scheduled activity that ensures that risks are
continually identified and managed. This business process also ensures that the benefits from
implement ing PRM are ongoing. Some HP business units have instituted a "PRM Manager"
position, a new business position much like manager of procurement, plan ning, or finance. (8)
HP workforce development: Because the PRM ap proach is still new at HP, we have developed
support ing infrastructure that includes a training curriculum
Summary of Key Innovations The OR-based PRM approach represents a paradigm shift in how
HP manages its supply chain. Its success ful implementation required several innovations in
analytics, software, and business processes. We sum marize some of the key innovations below.
(1) Development of a scenario-based approach to quantify the uncertainty pertaining to
multiperiod and correlated demand, cost, and availability uncertainties to measure risk in the
supply chain. The methodol ogy incorporates the analytics to quantify demand and cost
uncertainties in easy-to-use software packages? HPHorizon demand-scenario software and
HPRisk component-cost forecasting software.
Supply chain professionals require minimal training to use these packages. (2) Development
of a risk-sharing portfolio-of structured-contracts approach to manage the mul tiperiod risks
associated with demand, cost, and availability as a portfolio. This represents a new paradigm
for writing contracts in the supply chain. (3) Development of analytics to determine the port
folios of structured contracts that best meet a defined set of business objectives. We
incorporated those inno vations in the HPRisk suite of PRM software; this has resulted in five

42
patent applications thus far. (4) Development of cross-functional business pro cesses involving
planning, procurement, and finance to institutionalize the management of supply chain risks.
(5) Most importantly, the above innovations have the appropriate level of sophistication and
ease of use to enable HP to be one of the first manufacturing companies to widely implement
a modeling-based risk-management approach to proactively manage the multiperiod and
correlated demand, cost, and avail ability uncertainties in its supply chain. All parties in the
supply chain benefit from reduc tions in volatility; in particular, suppliers pass some of the
benefits as cost savings to HP. This paradigm shift that the PRM approach has enabled now
provides a recurring savings stream of approximately several percentage points to HP. Thus,
PRM is transform ing HP's internal planning, procurement, and supply chain processes, and its
relationships with its suppli ers through a win-win risk-sharing partnership. Acknowledgments
We thank our Edelman Award coaches?Randy Robin son (INFORMS) and Bruce Buckiet and
Layek Abdel-Malek
Management Approach
Early in the company’s history, the two founders endorsed formal management procedures,
and Hewlett-Packard was one of the first corporations to use the “management by objective”
approach. They also created an informal workplace, encouraging the use of first names
among employees, even for themselves. Packard and Hewlett were also known for
“management by walking around,” visiting as many departments as possible without
appointments or scheduled meetings and talking with line workers as often as with managers
in order to understand how the company was operating. Hewlett-Packard became one of the
first businesses in the United States to endorse the idea that employees, customers, and
the community have as valid an interest in company performance as do shareholders. As a
result, it consistently ranked among the best places to work for women and minorities. It also
became one of the leading contributors to charitable organizations, donating as much as 4.4
percent of its pretax profits.
Hewlett-Packard takeover

The charges, which are expected to go to trial, carry a maximum penalty of 20 years in prison
and include 14 counts of conspiracy and fraud. The Department of Justice is seeking to
confiscate $815m from Lynch, which it says was obtained through the alleged fraud.

Lynch, a British entrepreneur, co-founded Autonomy and served as its chief executive. In
2011, the company was bought by HP for $11bn in a move meant to form the central part of
the US group’s move into software.

However, the deal turned sour a year later when HP wrote off $8.8bn in relation to the
acquisition, three-quarters of the British company’s value, accusing Lynch and his colleagues
of financial mismanagement.

Lynch has always denied any wrongdoing. He and Stephen Chamberlain, a

former Autonomyfinance officer also named in the indictment, declined to comment.

Lawyers for Lynch said he had done nothing wrong, and that he would “vigorously defend
the charges against him”.

43
In a statement, Lynch’s US-based lawyers, Chris Morvillo of Clifford Chance and Reid
Weingarten of Steptoe & Johnson, described the case as “a travesty of justice” and said it
“has no place in a US court”.

The lawyers argue that the allegations made by the Department of Justice relate to the
difference between British and American accounting standards, and therefore are not relevant
to a US criminal court.

HP has tried to sue Lynch for $5bn in British civil courts. Lynch countersued HP in 2015 for
$150m, saying at the time that “HP was simply incompetent in its operation of Autonomy,
and the acquisition was doomed from the very beginning”. Those cases have been delayed by
the criminal investigation in the US.

Lynch’s lawyers said: “HP has a long history of failed acquisitions. Autonomy was merely
the latest successful company it destroyed. HP has sought to blame Autonomy for its own
crippling errors, and has falsely accused Mike Lynch to cover its own tracks. Mike Lynch
will not be a scapegoat for their failures.”

The UK’s Serious Fraud Office closed an investigation into HP’s acquisition of Autonomy in
January 2015, saying it had insufficient evidence for a realistic prosecution. However, it
ceded some aspects of the investigation to the US.

The US indictment alleges that Lynch, Chamberlain and other executives including Sushovan
Hussain, the former chief financial officer, “engaged in a fraudulent scheme to deceive
purchasers and sellers of Autonomy securities”. The executives did this to “enrich themselves
and others through bonuses, salaries, and options”, the indictment alleges.

Autonomy executives asked counterparties to backdate transactions so revenues could be

recorded in different quarters, as well as making “false and misleading statements” on the
company’s performance ahead of the completion of the purchase by HP, the indictment
alleges.

Hussain was convicted on separate charges by a US jury of wire fraud in August in relation to
HP’s purchase of Autonomy and faces up to 20 years in prison. He is appealing and has been
ordered to wear a GPS ankle tag and hand over $5m as part of his bail conditions.

Lynch, a mathematician educated at Christ’s College, Cambridge, founded Autonomy in

1996. The company specialised in using complex pattern recognition techniques to help
organisations search and sort through unstructured information such as emails and phone
records.

Lynch is now a partner at Invoke Capital, an investor in European tech companies including
Darktrace, a British cybersecurity firm, and Luminance Technologies, a legal tech company.

A British citizen who was made a member of the Order of the British Empire in 2006, Lynch
lives in England. Following the announcement of the charges yesterday Lynch resigned as a
member of the government’s Council for Science and Technology and from the advisory
board of the Royal Society, although he remains a fellow

As 2019 begins…

44
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honest reporting is critical

HP a name popularly known for their PC’s and printers, but when it comes to the company as
a whole they have used demographic and geographic segmentationvariables to address
the needs of the retail and corporate customers.

Targeting is one of the important pillars of the marketing strategy. HP uses differentiating
targeting strategy to provide customised products & services to the enterprises.

HP uses a mix of value/ product and pricing based positioning strategies to compete in the
market.

Marketing mix – Here is the Marketing mix of HP.

SWOT analysis – Here is the SWOT analysis of HP.

Competitive advantage in the Marketing strategy of HP –

The diversified product portfolio for both enterprise and retail customers which consists of
personal computers, other related products and printers.

45
Data analytics, software development, network and IT related infrastructure developed for the
enterprises is helping the company to generate revenue by offering the bouquet of products and
services under one roof.

Strategic mergers and acquisitions like those with Compaq Computer

Corporation, Indigo N.V., Snapfish, synstar, Pixaco, lefthand networks and much more are
helping HP in using the advanced technologies and resources these companies bring in with
them.

BCG Matrix in the Marketing strategy of HP –

HP’s Personal computer and Imaging & printing related other products are businesses which
are stars in the BCG matrix.

The enterprise solution offered by the company such as network infrastructure, software
services, data analytics and IT support system is also starred in the BCG matrix due to having
such a broad product portfolio.

istribution strategy in the Marketing strategy of HP –

HP is using multiple distribution channels to make its products and services available to its
customers.

Retail outlets, authorised showrooms & service centres, direct sales channel, OEM’s (Original
equipment manufacturer) and resellers are helping the company to make its products and
services to reach to the end customer.

Brand equity in the Marketing strategy of HP –

With such a high brand visibility and high top of mind awareness (TOMA), HP leads the
market. The world’s largest PC maker works with GMR Marketing Co. to increase its visibility
through sponsoring different activities and events happening worldwide

Competitive analysis in the Marketing strategy of HP –

HP competes with other large corporations in the same business segments at different levels
such as technology, product portfolio depth, IT and network infrastructure, availability of the
resources, branding, distribution channels and retaining the pool of talents that HP have.

To stay competitive HP continuously adjust the prices of their products and services.

Many corporations with a long history such as IBM, Samsung and many others compete with
HP at different products/ services segments.

46
Market analysis in the Marketing strategy of HP –

The market is overcrowded with a vast number of companies small and big like MNC’s which
are eating up each other’s market share and making it difficult for the companies to sustain in
the market which have products and services with short life cycles. The market for each
segment of a business of HP is vast and sometimes HP has to compete with their own OEM
partners in different business segments.

Customer analysis in the Marketing strategy of HP –

HP have product portfolio focusing on satisfying the needs of the individual customers and
enterprises. It caters to the enterprises ranging from the small & medium enterprises to private
companies to government institutions.

Here's How Hewlett Packard is Using B2C Techniques to Build a Classic B2B Strategy

B2B and B2C marketing strategies are often quite different. However, Hewlett Packard (HP)
is bucking the trend with an innovative B2B multichannel marketing strategy.

After graduating with electrical engineering degrees from Stamford University in 1935,
William Hewlett and David Packard started HP in a garage in Palo Alto. Rumor has it the
partners tossed a coin to decide in which order their names would form the company
moniker.

The company found its first success when the partners invented the HP200A precision audio
oscillator. The use of a small incandescent light bulb as a temperature dependent resistor in a
critical portion of the circuit not only created a superior audio experience for the listener, but
also allowed HP to undercut its lower quality competitors by over $100 per unit.

Today, HP is credited with giving birth to the Silicon Valley boom, and is one of the world's
leading manufacturers and suppliers of B2B computer equipment in the world. The company
has revenue exceeding $48,238 million, placing it at #61 on the Fortune 500.

To stay ahead in an increasingly competitive marketplace, HP has needed to constantly

innovate the way it promotes itself to its B2B clients. And it does so with an innovative
multichannel marketing strategy which takes more than a few ques from B2C companies.

Influencer Marketing

The use of influencers to market B2B products is not a strategy which is often used, but it's
exactly what HP decided to do as part of its multichannel marketing strategy.

47
HP created a series of videos called 'Meet the Intern.' In the series, ESPN sportscaster
Charissa Thompson played the role of an intern at various companies and was given various
tasks to complete - such as running an open house for a realtor business. Thompson comes up
with some kooky ideas, which she can then facilitate by using HP products.

A press release from Collectively, which worked with HP on the project said, "Influencer
marketing isn't just for lifestyle and consumer brands. With the right approach, businesses
and technology companies can leverage the power of social influence to support B2B
initiatives. Our work for HP's OfficeJet Pro video "Meet the Intern" leverages the stories of
small business owners and influencer ambassadors in an ongoing comedic branded video
series shared across the web."

By finding an influencer who aligns with its target demographic, in this case small business
owners, and creating fun and informative online videos, HP not only saves a significant
amount of money when compared to expensive TV spots, but also creates a different way of
connecting with potential B2B clients.

Twitter Competitions

It would have once been unheard of for a B2B company to use a Twitter competition to
attract attention, but that's exactly what HP did at the Black Hat security convention in Las
Vegas, Nevada.

The conference is one of the largest of its kind in the world, and attracts around 11,000
visitors each year. HP knew it would have to come up with something unique to stand out
from the maelstrom of companies all vying for the attention of the conference's discerning
clientele. "We had to do something that stood out in this clutter, and the only way to really do
that was to do something that had an impact with people," said Shuchi Sarkar, VP of HP
Americas Print Marketing.

Upon entering the conference, guests were invited to use the hashtag #SecureMyUpgrade and
send HP requests to augment their experience. 36 winners were awarded experiences such as
a Pokemon Go limo ride, skydiving, spa treatments, and swimming with sharks. Over five
days, the exercise earned HP 9,500 engagements on Facebook and Twitter, 608 contest
entries, and nearly 1,500 #SecureMyUpgrade mentions, showing that B2B customers enjoy a
good competition just as much as everyday consumers do.

48
Final Thoughts

By not being afraid to buck trends, and instead see which multichannel marketing strategies
can be taken from B2C businesses and adapted for the B2B market, HP has seen successes
across all its touch points. In marketing, it never pays to be too stuck in one's ways, and by
thinking outside of the box and looking for inspiration in unlikely places you, like HP, can
find unexpected success.
It seems only appropriate that the final word goes to Bill Hewlett and Dave Packard.
"The greatest success goes to the person who is not afraid to fail in front of even the largest
audience."
Powerful Brand
Widescreen in scope. Microscopic in detail
Spanning two and a half years of our work together, HP’s brand reinvention was widescreen
in scope and microscopic in detail. We worked simultaneously on articulating a unified vision
for HP’s future, while also focusing on what could be immediately improved and actioned.
Absolutely everything was reconsidered — from the user interface motifs and the retail
experience to consistent industrial design principles. Throughout the process, we took into
account the wishes and advice of the inhouse design leads and worked closely with HP’s
many external agencies.

Week after week, our small team proved that Moving Brands’ drive, vision and focus were
equal to a monumental task. At the time, HP was manufacturing 100 million devices per year
and had in excess of 47,000 different models on its books. Redesigning its brand meant
redesigning the way HP did business.

Reconnecting with founding beliefs

If the company had, to a certain extent, lost its way, we felt we could find direction in The HP
Way - Bill and Dave’s original philosophy for the business, with its belief that when you get
to know people through ‘managing by walking around’, they get a sense of the company’s
destiny and do great things.

At co-creation workshops that engaged every stakeholder – from marketing leads to the CEO
– in the redesign of the business, we unearthed what lies at the root of the company: the
conviction that technology must improve human life, so HP must continually aspire to do
better.

HP stands for Human Progress

This enduring truth – that HP stands for something much greater than its devices and
services, something as profound as its positive impact on people’s lives – is articulated,
simply and memorably, as Human Progress.

This was the fully-fledged vision we created for HP’s future. Massively ambitious, it was a
claim that the world's largest technology company could legitimately make to transform into

49
the world’s most powerful brand.

To make the vision real and tangible, we used film, photography and an installation in the
Palo Alto HQ so everyone could get a sense of how HP would ‘lean into the future’.

Heritage and progression

The defining signature of the Living Identity we designed is the forward slant found in
Hewlett and Packard’s 1941 original company logo. Rooted in its heritage, this 13º angle
simultaneously represents HP’s forward momentum towards the future. It also refers to the
world of computing by recalling the forward slash used in programming. We embedded the
13° in the brand identity, driving the design of graphics, products and UI.
A vision that found its time
The four 13° diagonals that form an abstract version of the HP insignia, was an unambiguous
signal of a company on a mission of renewal. In 2011, when the mark was created, the
business felt unable to embrace this forward-facing posture. It was a company in the midst of
great upheaval, and the fundamental change proposed by a brand overhaul was deemed too
dramatic to put into action.

The future-proof nature of the symbol was vindicated when, in 2017, HP’s new CEO Dion
Weisler gave the go ahead and it emerged as powerful as ever, on selected premium HP
products. Those four ultra-refined, forward leaning lines caused an immediate stir in the
design world and beyond. What they represent – HP’s vision of Human Progress – remains
true to the spirit of the business we helped discover back in 2008.

ech giant HP, Inc. took home the award for Brand of the Year at last night’s Digiday Awards
gala, which was held at The Lighthouse at Chelsea Piers in New York.
This year, the Palo Alto-based juggernaut sought to evaluate and alter the ways in which it
reaches its customers in an effort to evolve beyond transactional relationships and continue to
create emotional connections with stakeholders. This focus on reinvention through
heightened experiences has resulted in valuation gains as well as all-time-high brand
consideration and preference.

Internally, the household name has become increasingly aware of the role that brands play in
culture and society, and has taken steps to ensure the inclusion of women and minorities in
their workforce even going as far as conducting focus groups to discuss the process behind
forming an inclusive workplace and give employees the ability to address hurdles that would
need to be overcome in order to attract and retain a wider range of talent.

so taking top honors in the program, which recognizes the companies, campaigns and
creative modernizing media and marketing, is Work&Co. The digital product agency, which
shipped 56 products in the last year, has worked for clients like Facebook and Google. The
250-person Brooklyn-based shop has continued to stand their ground on issues like climate
change and immigration rights they were able to join Potential Energy group and donate to
DACA relief in 2018.
Best Creative went to MullenLowe for their work with JetBlue on “Office Souvenirs,” which
was a collection of items including an “HR-scented” candle and a paper jams

50
commemorative plate that sought to remind adults that vacation days — 662 million of which
were not taken last year — are to be cherished. The collection, which was sold online and at a
pop-up in lower Manhattan, resulted in increased web traffic and bookings for JetBlue during
its rollout. When asked what the team was most proud of this campaign for, Matt Deurr,
account director at MullenLowe said “We got a lot of organic earned media pickup in places
that wouldn’t traditionally talk about a campaign that we’re doing.” On what’s next for the
team, Deurr says “we’re constantly looking for ways to remain in the cultural conversation.”

We live in an era characterized by jarring market volatility, single-digit profit

margins, vaporizing trust, and unstable resource allocation. In a commercial environment
laden with these challenges, negotiation skills are a key skill set to getting the economy back
on track.
Negotiation skills are the life-blood of business. From the decisions made by
executives at the top, to middle-management project leadership, to front-line employees
meeting customer needs, right down to cafeteria workers buying vegetables off the farm
truck; everyone uses negotiation skills on a daily basis. People who are aware they are
negotiating and that they can get more of what they want by understanding the process are
able to have a greater impact in the economy than those who are unfocused and directionless.
With this in mind, here are three powerful negotiation techniques, which business
leaders can utilize to contribute positively to breaking through the recessionary malaise.
Break Down the Barriers
Today’s business leaders should view their counterpart as a potential partner –
someone to cooperate with in order to achieve mutual gains. A negotiator operates from a
much stronger power position when he or she freely shares information, demonstrates trust in
the bargaining process, and broadens the scope of the discussion by exploring alternative
approaches.
In the last year, we witnessed high-profile negotiations over the budget that allows
the country to operate, the debt ceiling, and the NBA and NFL seasons. Over and over again,
we saw progress stifled until both sides broke down the barriers and opened up the
communication. How much time and money will be lost before people realize that they will
get more value out of the transaction if they shift to a position of openness, honesty and
transparency?
The new paradigm for getting business done with the loyal opposition is to take a
chance and boldly reveal some of the cards in your hand in order to create a positive
negotiation climate built on cooperation and trust. Openness begets more openness and
provides the gateway to the added value that is otherwise hidden in the transaction.
In the case of the NFL lockout, billions of dollars were at stake. With the clock
ticking on the start of the season, and no solution in sight, NFL Commissioner Roger Goodell
initiated talks that would include principals only—just players and owners face-to-face at the
table with no attorneys present. This removed a major obstacle and allowed the issues to get
identified and resolved.

51
 When parties begin to work cooperatively, new solutions become evident and
alternative ways of solving problems reveal themselves that enable both sides to leave the
negotiation table with more than they expected.
The focus needs to be on accessing the added value that is buried in the deal so that
both parties to the negotiation can benefit from the “bigger pie.” In an independent research
project, my firm, MarketWatch Centre for Negotiation, found that parties typically leave up
to 42 percent of the value of a transaction untapped because they fail to examine all the
possibilities. If this unexploited value is aggregated across the thousands of commercial
transactions that are conducted every day, it amounts to billions of dollars that could be
infused into the global economy.
Frequently, companies follow routines without questioning whether changing the
conditions could create added value. Negotiating terms of payment is a perfect example.
Most business suppliers are willing to extend the length of their terms of payment, but they
never fully explore other alternatives relating to how the supplier gets paid. Any attempt to go
down another path is quickly shut down when the culture of the negotiation is zero-sum and
win-lose. Here’s a typical conversation:
Supplier: Would you be willing to consider an advance against the purchase price?
Buyer: No, that’s out of the question.
This is a knee-jerk reaction. Before gathering any other information the buyer has
slammed the door shut. The approach needs to be towards more exchange of information,
more openness to explore creative solutions, and more give and take in the interpersonal
dynamic.
The buyer should proactively search for added value by asking questions such as
how big an advance the supplier is looking for, why does she want to be paid upfront, and
what is she willing to give in return. The supplier should ask questions about the buyer’s
resistance to paying the advance and what the cost of doing so would be. It is only with this
additional information that both parties can create a win-win deal.
In this example, let's say the supplier finds out that it would cost the buyer $10,000
for a $100,000 advance. With this information, the supplier can now make offers of
comparable value in exchange for the advance such as early delivery of the shipment, half off
the installation of the equipment, or free service for a year. Since both parties have different
expectations and mindsets over which aspects of the deal have the most value, it creates the
potential for a “bigger pie” which can then be shared between the parties.
Leaders who abandon the combative negotiation tactics and focus on creating a
climate of openness and transparency will find that they leave the table with a better result
and a greater sense of satisfaction with the process. Generally, they also come away with a
stronger relationship with their counterpart which will pay dividends later.
It has been proven over and over that the most successful negotiation results are
achieved by building partnerships based on optimal levels of trust, cooperation, and shared
information. I call these SMARTnerships™. With this approach the parties work together in
such a way that the whole is greater than the sum of the parts and both parties retain their
autonomy and the discretion to pursue their individual self-interest. By creating
52
SMARTnerships, companies can come out of the recession with greater resilience and long-
standing working relationships.
Take a look at Apple’s textbook partner McGraw Hill. These two parties could have
viewed each other as competitors; with digital publishing the clear wave of the future the
entire publishing industry has been turned on its head. However, McGraw Hill has been a
long-term partner of Apple and with its newest app – iBooks 2 for the iPad – it doesn’t look
like this partnership will dwindle anytime soon.
The iBooks 2 app allows complete textbooks to be downloaded on the iPad. These
innovative books feature interactive video, games, music and many features that enhance the
learning experience at a better price point for the student. So far there are only seven
textbooks available on the iPad app five of which are from McGraw Hill. There were over
350,000 downloads of these books in just the first three days they were available. By
partnering together, these two companies were able to create new opportunities and unlock
the hidden potential in collaboration.
Approaching nearly a decade of stagnant economic conditions, it has become clear
that there will be no quick fix through bailouts or spending incentives. There needs to be a
cultural shift towards openness and transparency in the way business is done.
By breaking down barriers, finding and sharing added value, and focusing on
creating partnerships, there is the opportunity to infuse the economy with billions of dollars—
funds that are currently hidden beneath recession-minded thinking and stifled
communication. The added value is there for the taking! Leaders just need to use these
powerful negotiation techniques and seize the opportunity to help reinvigorate the
economy. We are moving from the orthodox economic system to the behavioral economic
system. Adam Smith was wrong!
Heterogeneity of exposure to industrial risk
Despite our improved understanding of the causes of industrial risk, there is also an
understanding that it is impossible to completely eliminate it: no matter how many
precautions are taken, and how many protective barriers are put in place, an accident is
always possible. Furthermore, in most cases it is impossible to stop production in order to
stop risk. Thus, there are two important cases to consider when people are exposed to
hazardous conditions. On the one hand, some individuals have a direct link with the at-risk
industry. They may be associated with production, or have an economic interest in it (e.g.
workers at an at-risk plant). In fact, economics research has focused on compensatory wage
differentials, both from the theoretical and empirical point of view. Given two workers with
equal abilities (skills, experience etc.), the one involved in the at-risk activity receives a
higher salary to compensate for the risk they face. In other words, risk can have certain
(economic) advantages, which can be taken into account in contract negotiations. The
potential negative event they are exposed to represents both a potential cost (or loss), and a
potential profit in salary negotiations. Another example is a consumer of liquid petroleum or
propane gas who wants to install a gas tank and who knows that it can leak or explode. In this
case there is a trade-off between the advantages of the product and its risks. On the other
hand, there are adverse events that affect populations who are not directly involved in

53
production or consumption of the product. In economics, these spill over effects on society
are called negative externalitie
Negative externalities Negative externalities are situations that affect a third party
who did not participate in the decision that created the externality2 . Therefore, a key
question that naturally emerges is how society distributes risk between individuals (e.g.
residents living close to a plant that produces hazardous materials). The answer to this
question requires investigation of prevention measures and the compensation offered to
individuals that incur risk. However, it is unlikely that these third parties will have decision-
making powers regarding safety measures; these remain in the domain of the company and
the legislator. Typically, many actors are involved: the industry (which causes the risk, thus
the potential negative externality), other stakeholders (the plant’s workforce), the population
(that may be affected by externalities), and authorities (e.g. state/government administrations
that can legislate and enforce laws).
These actors operate at different levels and have different interests. In particular,
they have different ideas about acceptable levels of investment and risk – residents demand a
low accident probability, while the company has high prevention costs and would prefer to
limit its investment in risk reduction.
The importance of negotiation As risk cannot be simply avoided, negotiation
becomes crucial. It provides a mechanism for discussion, conflict resolution, and agreement
on topics such as loss compensation, liability, protection levels, prevention measures,
Striking a bargain in the domain of technological risks An example is the best way
to introduce the idea of technological risk bargaining
A pipeline in my field Company C wants to route a natural gas pipeline across land
owned by landowner L. C asks L for a lease that grants right-of-way across the affected area.
In the simple case, the pipeline transports a perfectly safe material, and the landowner agrees
to the lease in return for a payment. Here, all there is to negotiate is the price at which the
deal is concluded. The bargaining process might go as follows: Company C makes an initial
offer, which the landowner can accept or reject, or make a counteroffer.

If a price is agreed, the process ends: the landowner receives a fee for leasing the
land, and the company obtains the right to use the land. However, if there is no compromise,
the landowner receives no rent, and the company is unable to route the pipeline as planned. In
fact, things are not that simple. While the usual bargaining process3 involves two parties who
are in a situation where an exchange could take place, here there is another factor to take into
account: the level of risk. Gas is an inflammable material and an accident might damage L’s
property or create a health hazard (e.g. a gas leak or explosion that injures or kills the
landowner). Reaching an agreement is always a complex business (as we will see more in
detail in the next chapter). If we add in a potentially risky activity, the level of complexity
increases for three reasons: 1. risk perception differs between individuals; 2. parties don’t
have access to the same information. One party knows more about the potential damage the
activity can cause; and 3. even the best-informed party may not know everything necessary to
understand the real level of uncertainty regarding the occurrence and consequences of the
risky event

54
 Negotiations in safety management Besides negotiations with external actors, any at-
risk industry must engage in negotiations with internal stakeholders. A better understanding
of bargaining processes may help to improve decision making regarding safety management
in these industries [Reniers and Pavlova 2013; Reniers 2010].
Negotiation as a “game” Bargaining can be explored in terms of game theory, which
has been at the forefront of a revolution in economics that began in the 1970s [Turocy and
von Stengel 2001; Fudenberg and Tirole 1991].
Game theory Game theory is the formal study of decision making, where several
agents (players) make choices that potentially affect the interests of the other agents (players).
Game theory is the formal analysis of conflict and cooperation. Its concepts apply
whenever the actions of several agents are interdependent. This is very much the case for
bargaining in the domains of industrial risk and safety management. Agents may be
individuals, groups, firms, or any combination of these. Game theory concepts provide a
language to formulate, structure, analyse, and understand strategic scenarios [Turocy and von
Stengel 2001]. This document uses the vocabulary of game theory, notably in the examples
that are given. Bargaining agents (players) are designated as “parties” in reference to
contractual language.
Two basic postulates: rationality and complete information In order to understand
bargaining theories, we first need to introduce some of the basic concepts of expected utility
theory4 . In line with traditional economic theory, we assume that individuals are rational and
selfish; for the sake of simplicity (and unless otherwise stated), we will also assume that
information is complete and perfect.
Rational and selfish individuals: utility and preferences First, bargaining can be seen
as a way to achieve “satisfaction”. Economists assume that whenever an individual consumes
a good or a service, they receive satisfaction. This is represented by the concept of utility. As
the aim of bargaining is to be better off after an agreement than before, the outcome of a
bargain can be seen through the prism of utility theory (for further reading, see appendix B).
Second, individuals have preferences concerning the consumption of goods or services,
which can be ranked depending on the level of satisfaction they provide. Ranked preferences
are represented by utility functions, which measure the level of satisfaction (sometimes called
happiness) provided by the consumption of a good (see Appendix B).
A utility function does not explain why someone has a particular preference; instead
it describes preferences in mathematical terms. In very brief and simple terms, the rationality
of economic agents is described by their preferences. Key issue Fruit and axioms Take an
apple and a pear. If you like fruit, eating an apple gives a particular level of satisfaction. The
same for the pear. We assume that it is rational to rank preferences in terms of “I prefer
apples to pears”, or “I prefer pears to apples”, or “I have no preferences between apples and
pears”. This is one of the axioms that form the basis for expected utility theory. It is called
completeness because it assumes that any comparison of two alternatives has one of the three
possible solutions. Therefore, objects can always be ranked in terms of preferences. The other
three axioms are transitivity, independence and continuity. Transitivity assumes that rational
agents are consistent in their choices: if they prefer bananas to apples and apples to pears,
then they must prefer bananas to pears.

55
 The independence axiom concerns variations on a given set. For example, if rational
agents prefer apples to pears, adding a banana maintains the ranking of preferences. In other
words, an apple plus a banana is always preferred to a pear plus a banana. Finally, we have
the continuity axiom. Once again, apples are preferred to pears and bananas to apples.
The continuity axiom states that there is a banana–pear combination that gives the
same utility as an apple (e.g. a quarter of a banana and three-quarters of a pear). We then
assume that agents are totally selfish: their preferences only take into account their own
personal benefits without accounting for the preferences of others. This assumption applies to
most of the analyses that follow (although Section A.3 of appendix A describes some
experiments that take into account the fact that humans can care about others’ utility). Many
other factors influence choices. These require some simplifications and assumptions
regarding human behaviour and, as shown in next section, information.
Complete and perfect information Information is very important in a bargaining
situation. Economics distinguishes two cases: symmetric information: both parties have the
same level of information; asymmetric information: at least one of the parties knows
something relevant that the other party does not know [Muthoo 2000]. In order to illustrate
this, let us return to the pipeline example.
A pipeline in my field Company C wants to route a natural gas pipeline across land
owned by landowner L. C asks for a lease that grants right-of-way across the affected area.
The proposed gas transport unit is not totally safe, and C knows it. Specifically, they know
more than the landowner about the risks (explosion, health consequences if there is a leak,
etc.) and the safety measures they will adopt. Therefore, the level of information at the
disposal of the parties is asymmetric. Although in real life, levels of information are usually
asymmetric, here we will assume there is symmetric and complete information
. Complete information means that all parties know everything about the negotiation
(i.e. all of the moves available to them, strategies and payoffs, as well as those available to
the other parties). Perfect information occurs in a dynamic negotiation where one party,
which usually has complete information, also knows all of the previous moves and strategies
of the other parties and remembers all of their own moves. Key issue Basic framework For
the sake of simplicity, in the following chapters (and unless otherwise stated: see section 2.7
and appendix A.3), we discuss cases where rational and selfish agents have complete and
perfect information. Similarly, to keep the framework simple, we only consider two parties,
although in real life bargaining can of course involve more.
Many economic and social interactions consist of a process that involves two or
more parties and aims to ’’ determine choices. Here, we focus on those situations in which,
on the one hand, the parties have a common interest in making an exchange, but where, on
the other hand, a conflict emerges concerning how this exchange takes place. Key issue The
bargaining process The bargaining process represents all interactions related to a proposed
exchange between parties. If the trade takes place, there is a mutual benefit for everyone
involved
On the other hand, if the negotiation fails, there is a loss for society, in the sense
that all parties miss out on potential gains. This chapter introduces the theoretical models of
the bargaining process developed by economists, and describes their predictions. We first

56
identify the factors that must be in place at the start of a bargaining process, which can
determine the outcome of the negotiation. We then use them in increasingly complex
examples. Finally, we briefly illustrate the bargaining process through so-called “simple
bargaining games”.
The elements of bargaining Understanding the factors that determine the outcome of
an interaction involving two parties is important for two main reasons: it helps to disentangle
the multiplicity of effects that might emerge in a complex negotiation process; and
understanding the influence of a single variable can provide ideas for new tools or procedures
that improve the distribution of gains from trade. It is not easy to model a bargaining situation
that involves firms and their stakeholders (society, residents, elected representatives, workers,
etc.) in the context of industrial risk, as the factors that contribute to an agreement can be
both complex, and include caveats that cannot be fully taken into account. Nevertheless, the
motivation to reach an agreement can be investigated. With this in mind, the following
sections give a flavour of the most common situations and elements that emerge in
bargaining. Specifically we introduce the following factors that provide the framework: the
parties’ objectives; the complexity of the bargaining object; and; the available information
The parties’ objectives: between conflict and cooperation In the basic framework,
two parties are interested in coming to an agreement on a specific subject (e.g. an exchange,
compensation for negative externalities). Why do the two parties want to strike a bargain?
What makes it so complicated to reach a decision? In this section we look at some answers to
these questions. Conflicting interests We begin with the example of a simple trade: the
exchange of an object between a buyer and a seller where a price has to be agreed. The two
parties have a common interest in trading the object. Both will gain if they reach agreement
on how to proceed, i.e. the price of the object. Mutual benefit means that they both end up
better off than they were before the bargain was struck. In this case, the buyer pays a price
that is lower than (or equal to) the value they place on the object. Note that the buyer is
satisfied, because they pay less than the value they place on the object (they would not have
bought it otherwise).
The seller is better off when the exchange is made at a price that is higher than (or at
least equal to) their valuation of the object3 . The respective value the buyer and the seller
give to the object are their reservation points, namely their valuation of the object
independent of whether a trade is made or not4 . Clearly there is a potential gain for both
parties, and this is why they bargain. Nevertheless, a natural antagonism emerges: the buyer
prefers lower prices, while the seller prefers higher prices. This forms the basis for a possible
disagreement: a conflict may arise. In other words, the two parties have conflicting interests
on the exact price. The space of action The space of action is all of the prices where
agreement can be reached or not; it represents the set of all possible outcomes of the
decisions taken. We assume that both parties can divide their space of action in two parts,
separated by their reservation point: One side includes all of the situations where agents do
not reach an agreement i.e. they both walk away from the bargaining game. This occurs
when, for example the reservation point of the seller is higher than that of the buyer (i.e. the
seller wants more money than the buyer is prepared to pay).
These are called disagreement points. In this case, the “payoff” they receive is called
the disagreement outcome. For example one disagreement outcome can be the seller’s

57
reservation point and zero for the buyer (i.e. the situation as it was pre-bargain)5 . On the
other side lies a set of possible situations where both parties are better off if they agree. This
part of the space of action is preferable for both parties as it is here that they judge there is
something to bargain over. It is important to note that there is a range of possible situations
that the parties can agree on: this is the zone of possible agreement (ZOPA) or the bargaining
zone. In this case, although both parties gain from the agreement, a higher gain for one party
implies a lower gain for the other. Again, conflict can arise when there is a lack of mutually
beneficial cooperative behaviour
Memo: some basic terms Figure 1.1 shows that the reservation point of each party is
the point beyond which they won’t accept a deal. The bargaining zone is the area located
between their respective reservation points. Suppose now that the seller and the buyer have
an ideal price, the target price, at which they wish to, respectively, sell and buy. Imagine this
target price is 90$ for the seller and 60$ for the buyer. If the lowest price the seller will accept
is higher than the highest price the buyer is prepared to pay, then there can be no agreement
(see the following example). Example The impossible deal The seller absolutely wants to sell
at their target point, here 90$. In this case, their target price is the same as their reservation
price. This, in turn is higher than the buyer’s reservation point, here, 85$. The parties will
never agree. However, if this is not the case, the trade can take place because there is a range
of prices where both parties make gains: this is the bargaining zone (see figure 1.1). The
correct evaluation of the space of action has an important role, as an erroneous evaluation can
translate into an incorrect trade. Imagine that the two parties believe that they have a common
interest in trading (i.e. they think that the seller’s reservation point < buyer’s reservation
point, as described in figure 1.1), but in reality, the seller’s reservation point > buyer’s
reservation point (the seller wants more than the buyer will pay). In this case there can be no
agreement and both parties will simply lose time and energy in a bargaining process that will
never reach a positive conclusion.
If the reservation point of the seller is higher than the reservation point of the buyer,
the bargaining zone is negative and the parties won’t be able to conclude a deal. So far we
have focused on the motives for bargaining. However, most bargaining situations are less
simple, due to, amongst other factors, the complexity of the bargaining object, the level of
information…
The complexity of the bargaining object The first question concerns the nature of the
object about which the parties want to reach an agreement. Example The oriental rug The
object can be simple: a tourist and a merchant negotiating over the price of an oriental rug. In
this case, the object is simple, in the sense that the bargaining process only concerns the price
of the goods. It is nevertheless interesting to examine how the parties reach agreement on the
exact price paid by the tourist to the merchant. However, in most contexts the parties have to
agree on more complex situations and/ or multiple goods. In these cases the number of
variables to be taken into account makes it more difficult to reach an agreement.
Typical examples are strike negotiations, where the bargaining process deals with an
increasing number of variables that are themselves complex objects. The choice of which
elements are addressed can modify the way the discussion takes place and direct or redirect
the issues. The individual characteristics of multiple objects can conflict or have different
value for the parties, parties can agree on one particular issue, but disagree over others .... It

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should be noted that when the parties agree on one aspect of the negotiation, the conflict
concerning that particular issue automatically disappears. This part of the problem is, in some
way “erased” as it will not be a determining factor in the agreement. The focus remains on
points of disagreement and relative differences that determine the outcome.

The available information Even the simplest bargaining situation has an

informational context. Example The oriental rug The object can be simple: a tourist and a
merchant negotiating over the price of an oriental rug. The seller knows how much the rug
cost them and their own selling price. The tourist knows their own buying price. Usually,
neither party knows the other’s price. As stated in the introduction, here we assume that both
parties have the same level of information and perfect knowledge of each other’s strategies.
Information is complete, perfect and symmetric. Of course, in real bargaining situations,
information is mostly asymmetric. This has a significant impact on the bargaining powers of
parties and therefore bargaining outcomes.
We will give a flavour of these impacts in chapter 2. 1.2 The bargaining process So
far we have considered the basic elements of bargaining. Next, we introduce bargaining
strategies. As Abhinay Muthoo highlights: ‘‘ Bargaining is any process through which the
players on their own6 try to reach an agreement.
Bargaining is a strategic game, which means that the outcomes of one player (party)
are not only affected by their ’’ own actions and choices, but also by those of other players.
Many economic situations can be seen as strategic games; as an example, company profits
not only depend on choices regarding price (among other parameters), but are also shaped by
the prices of their competitors
Introduction to bargaining strategies We begin with the following introductory
example. Example Dell vs Compaq7 Imagine Dell and Compaq are the only companies
producing computers. Whether their computers are compatible (or not) depends on their
decision to choose the same operating system (or not). Suppose they can choose between
Linux and Windows. Clearly, in addition to being beneficial for users, compatibility would
also be beneficial for both firms as Dell could sell its peripheral devices to Compaq’s users
and vice versa.
Nevertheless, for historical reasons, both companies would rather see the other make
the effort to adapt. Imagine Dell prefers Windows, and Compaq prefers Linux. If both
companies choose Windows, Dell makes a profit of 600M$ and Compaq 200M$. If both
choose Linux, Compaq will make 600M$ and Dell 200M$. If they choose different operating
systems, leading to incompatible devices, each company makes only 100M$.
Suppose also that the two companies announce their decisions simultaneously, and
do not know each other’s choices. If both companies choose Windows, this is interpreted as a
victory for Dell as its operating system becomes the market standard. Similarly, if both
choose Linux, Compaq is considered the “winner”. However, regardless of the nature of the
choice, it is most important to make the same choice as compatibility has greater benefits for
both companies. In 1950, John Nash showed that games have an equilibrium point where all
players choose their actions with respect to their opponent’s choices [Nash 1950]. Definition
Nash equilibrium A Nash equilibrium, also called strategic equilibrium, is a list of strategies,

59
one for each player, which has the property that no player can unilaterally change his strategy
and get a better payoff [Turocy and von Stengel 2001]. The Nash Equilibrium is reached
when each player’s strategy is an optimal response based on the anticipated rational strategy
of the other players in the game. In the example given above, the strategies associated with a
gain of 200M$ for one firm and 600M$ for the other are equilibrium strategies in the
bargaining game. Why? Because if Dell thinks that Compaq will always choose Linux, then
they will choose Linux too; this strategy would be the best response to the choice Dell
expects from Compaq. This creates equilibrium because neither company has an incentive to
change its strategy, given the strategy of the other.
It should be noted that both parties benefit from abandoning their extreme position if
the other party agrees, because they both gain at least 5. Regardless of the strategy, it is most
important that the two parties make the same choice (despite the fact that one party will
receive a higher payoff than the other) because if they do not, there will be no deal and their
payoff will be zero (both lose). These two outcomes are Nash equilibria, because both parties
are better off maintaining their position if the other does so too.
The equilibrium concept requires that both parties anticipate the choices of the other
and respond as expected. In equilibrium, there is no desire to change strategy as it is already
the best response to the other’s move and vice versa. In the house sale example, if the buyer
thinks that the seller would make a “high price” move, they must decide to buy at the high
price, otherwise there is no deal. As for the seller, if they think that the buyer would make a
“high price” move, they are also better off making the same move. Since this works in both
cases, neither would change strategy. This is exactly the concept of Nash equilibrium. For the
same reason, the low price outcome is also equilibrium, because this is preferable for both
parties to the no-deal outcome. However, it is not easy to identify which of these two
equilibria will be chosen. Based on the assumptions of rationality and complete information,
we can now discuss in more detail the implications of these hypotheses, and better understand
the definition of equilibrium. Assuming that they are rational, and hold all of the necessary
information about available strategies, players can anticipate their behaviour, their responses
to all possible combinations of other’s moves. Moreover, the rational player with perfect and
complete information is also able to predict what other players will do (knowing their
strategies, information sets and that their behaviour is rational). This helps to clarify the
equilibrium concept: as all players are able to anticipate all other player’s moves, in
equilibrium they know that everyone chooses the best action available and no-one will
change strategy. Next, we describe in more detail the bargaining process using more
examples and some economics terminology
The share of the cake In the previous example, seller’s and buyer’s strategies reflect
extreme positions. However, usually (as in the second-hand bike example described in
section 1.1.1) there is a range of possible agreements. As both agents prefer to cooperate, the
focus is on how, and how to divide the gains. In economics, the overall gain that emerges
from the interaction of the two parties is called the bargaining surplus. It is the additional
value that emerges from bargaining. Definition Memo: more basic terms Figure 1.2 shows
that the size of the bargaining zone represents the overall bargaining surplus. The bargaining
surplus is negative when there is no overlap in gains. In the opposite situation, in the case of a
positive surplus, each party receives a part of the total surplus. Bargaining power is the ability

60
of a person, group, or organization to exert influence over another party in a negotiation in
order to achieve a deal which is favourable to themselves
Simple static bargaining: the Nash bargaining game One way to model the division
of the surplus is given by the so-called “Nash bargaining game” [Nash 1950]. The game is
simple: two agents negotiate over the distribution of a fixed surplus. They simultaneously
claim a percentage of the share. If the sum of their two demands is equal to, or lower than the
net gain from trade, the agreement is settled. If the sum is bigger than the cake, there is no
trade. If they fail to reach an agreement, there is no surplus to share. If they reach a deal, the
gain is shared according to the Nash Bargaining Solution (NBS)8 . Given certain conditions,
Nash finds that there is always a unique equilibrium that represents the agreement, and which
depends on bargaining power. If two parties have the same bargaining power and the same
characteristics, the surplus is split equally. In this case, the equilibrium is efficient (an
agreement is reached), and symmetric (it leads to same outcome for both parties). Although
the NBS has properties that make it interesting in the bargaining analysis, it only applies to
the static Nash bargaining game. In the following section we introduce the notion of dynamic
bargaining.
Dynamic bargaining: the Rubinstein bargaining model So far we have assumed that
the game is played simultaneously; namely, strategic decisions are announced at the same
time. However, in the real world, offers and counteroffers follow one another in sequence,
and parties are able to accept or reject proposals. In economics, the Rubinstein model is
usually used to represent real-life situations [Rubinstein 1982]. In this sequential, repeated
game, parties make a series of offers and counteroffers (see 1.4) and it is a closer reflection of
actual bargaining procedures than Nash’s static, one-period game.
Always based on the hypotheses of perfect information and rationality described in
the introduction, in that model we assume that each player knows the possible strategies of
their opponent and plays in order to get the best out of the agreement. The game’s dynamics
are described schematically in figure 1.4. Player A starts, and makes an offer. If player B
accepts the offer, the game ends; alternatively B refuses the offer, and proposes a
counteroffer. A decides whether to accept the counteroffer (and end the game) or to reject it
(and make a new offer). The game continues until an agreement is reached. As the game is
dynamic, the solution to the Rubinstein model is a refinement of the Nash equilibrium, the
subgame perfect (Nash) equilibrium or SPE. A subgame is a part of the dynamic game. The
SPE concept requires that players’ strategies reach equilibrium in every subgame. To
determine an SPE, we use the technique called backward induction: first, the optimal choice
of the player who makes the last move in the game is identified; second, the optimal action in
the next-to-last stage (given the optimal action in the last stage) is identified; and then we
work backwards to the preceding stage, and so on until the first stage of the game is reached.
Despite the difference in the settings for the Nash and the Rubinstein bargaining games, there
are similarities between the two models. In both cases, economists are interested in finding a
solution to the bargaining situation. In other words, they want to determine the distribution of
the outcome emerging from the bargaining process, and how and when the solution is
reached. However, given the complexity of the process, they must make assumptions and
focus on the most important factors and variables. When a solution is found in the simple
context, a new element is added or, if a hypothesis is found to be too strict, it can be relaxed
to increase its complexity

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 Minimum required to engage in bargaining As discussed in section 1.1.1, the
reservation point is the starting point for the bargaining process. Parties will bargain only if
they think they will benefit. They will only bargain if they expect that the outcome of the
negotiation will exceed their reservation point. If there is no perceived advantage,
negotiations will not even start.
A pipeline in my field To illustrate the idea of the reservation point, let us return to
the example of company C that wants to construct a pipeline on the property of landowner L.
If C does not make a proposal to L, the latter will continue to use the land as in the past (e.g.
to grow wheat). As growing wheat is a low-profit activity, L’s reservation point is very low.
However, C has to offer at least the profit that L receives from his agricultural work,
otherwise L has no incentive to conclude the contract. The higher L’s profit, the more money
C needs to offer in order to reach an agreement. The reservation point only makes sense in
the context of simple, static bargaining. In the dynamic case (the Rubinstein bargaining
model), consisting of a sequence of offers and counteroffers, there is a similar concept, called
the impasse point
The impasse point The impasse point represents the “payoff pair obtainable through
perpetual disagreement–that is, the payoff obtained by the players if each player always
rejects any offer made to her [Muthoo 1999, p52]9 .” However the two points are very
similar. Multhoo shows that in general, when players have similar characteristics, the
reservation point (in Nash bargaining terms), and the impasse point (in Rubinstein bargaining
terms) have the same value.
This second chapter uses examples to give an overview of some of the important
factors that influence the bargaining process and its outcomes. Most of these factors act on
the bargaining powers of the parties; knowing and using them can be part of bargaining
strategies.
The process of reaching an agreement can take time and might consist of many
stages, usually characterized by offers and counteroffers, as in the Rubinstein model. A
particular case is frictionless bargaining. This happens when time has no cost for the parties
involved. This leads to an indeterminate outcome as parties can make offers and
counteroffers to try to reach a better deal, without ever concluding an agreement. In this case,
if it does not matter when the negotiators agree, then it will not matter whether they agree at
all [Muthoo 2000]. However, in most real-life situations, time is precious and plays an
important role in negotiations for various reasons. On the one hand, the actions taken by the
two parties can be protracted, creating costly delays. On the other hand, the time that elapses
between the formulation of the proposal and its acceptance or refusal may be lengthy
Economists pay particular attention to opportunity cost. This is the cost of the time
spent bargaining, rather than doing the most enjoyable alternative activity. In other words, it
is the price of the next best alternative to negotiating. Although opportunity cost is of crucial
importance in economics, it is not an intuitive concept. It describes the gain you might make
from the best alternative option to your choice.
Example Freelance worker To better understand the concept, we take the example
of the opportunity cost of one hour of leisure time for a freelance worker. In this hour, they
could have worked; if their hourly salary is 25$, then the opportunity cost of their leisure

62
hour is exactly 25$. In other words, it is the profit that is lost by not using the time to do
something else, in this case working. Why is it important to know the opportunity cost of
time? Take the example of two parties who are negotiating over how to divide a cake (which
has very low value). One is a lawyer and the other is an unskilled worker. The difference in
their respective salaries means that the opportunity cost of the lawyer’s time is much higher
than that of the unskilled worker. Therefore the bargaining power of the lawyer is lower
because they are eager to conclude the deal as quickly as possible. Thus, high opportunity
costs reduce bargaining power as it is costly to spend time bargaining rather than concluding
the negotiation quickly and going back to work
Impatience On the other hand, if the cake is very valuable, it is worthwhile for the
lawyer to wait longer in order to get a larger share. If the value of the cake is so high that it
exceeds the opportunity cost of going to work, bargaining might last for days. In this case, it
is no longer opportunity cost that matters, but relative wealth. Suppose the lawyer is
relatively rich and the unskilled worker is relatively poor. In this case, the lawyer can afford
not to work. The worker, however, cannot do this and will prefer to conclude an agreement as
soon as possible. Key issue Impatience These types of situations determine the level of
impatience of parties: a typical result in bargaining theory is that the higher the level of
impatience, the lower the bargaining power of a party.
A need to reach agreement as soon as possible reduces the gains –the part of
surplus– a party can expect to get. We can apply the concept of bargaining power to the
pipeline example. In this case, the company is eager to reach an agreement: the sooner they
construct the pipeline and transport gas, the sooner they make profits. The longer the
bargaining process, the greater the cost of the lost opportunity. However, as we have seen in
the previous example, we also need to consider relative wealth. While the firm may be
impatient to conclude the deal, the landowner might also be in a disadvantageous position if,
for example, he has financial problems that reduce his bargaining power. To conclude, not
only is the time spent bargaining important, but also the degree of impatience
Discount rate and discount factor The degree of impatience depends on economic
factors and is represented by a party’s discount rate. This measures the loss of value over
time as the bargaining process evolves. The discount rate is related to the discount factor (the
lower the discount rate, the higher the discount factor), which is a measure of future gains.

It is possible that negotiations break down due to uncontrollable factors.

Exogenous factors can prevent the two parties from reaching an agreement. For example, a
third party could stop or block the bargaining process, or an unexpected event might occur
that means that there is no more need to reach an agreement. Example A pipeline in my field
If the government rejects the company’s application for a permit to construct the pipeline, the
bargaining process between them and the landowner automatically terminates because there
is no more reason for the company to ask for the land. There is a risk of breakdown in any
bargaining process, and it can weigh differently on the bargaining power of the parties. ‘‘ A
key principle is that a player’s bargaining power is higher the higher is her profit (or payoff)
following the occurrence of the exogenous and uncontrollable factor that triggers a
breakdown in the negotiations; and, similarly, a player’s bargaining power is lower the higher
is the other negotiator’s payoff in that eventuality [Muthoo 2000]. The payoff each party

63
receives in the case of a breakdown in negotiations is termed the breakdown payoff. ’’ In the
context of hazardous industrial activities, the risk of the breakdown of negotiations can be
significantly affected by the probability that an accident occurs. For example, in protracted
negotiations over investment in safety to protect residents, the probability of an accident
increases as time spent is in bargaining. Such an event will terminate any bargaining process
with large losses for the parties. In this case, the risk of a breakdown in negotiations depends
on an external factor that is not directly linked to the actions taken by the parties.
Breakdowns can be random, and are therefore risky. Whenever there is risk, the parties’
choices are affected by their preferences concerning uncertain events.
In real life, most situations are unforeseeable and we need to predict future events in
order to take decisions. A common problem is uncertainty related to the occurrence of a
particular event. Before going any further, we need to link this uncertainty to how economists
define risk. We will therefore first give the definition of risk, and risk attitudes we used2 , and
then describe how the attitude of parties that face risk influences their bargaining power
Although in general, risk is perceived as negative because it is linked to potential
accidents, loss, damage, missed opportunities, or a lack of gains, in economics it can also be
associated with benefits (such as research-driven innovation). From an economic point of
view, risk has more to do with uncertainty than negative effects. Definition Risk In
economics, the notion of risk concerns an event that is uncertain, i.e. that occurs with known
or estimable probability3 , while an event that occurs with a probability of one or zero is said
to be “safe” (or certain)
It is usually assumed that there is an expectation concerning uncertain events. For
example, although the future salary of a worker might be unknown, it is expected to be in a
certain range with a certain probability, or around a mean equal to certain amount: it has an
expected value (EV). Definition Expected value The expected value (EV) of a random
variable is the weighted average of all possible values that the variable can take. EV is a
hypothetical measure: it does not reflect a real situation, instead it is the weighted mean of all
possible real situations.
For example, the expected value can be calculated when the probability distribution
of a continuous variable is known. To continue with the salary example, a worker believes
their future salary will be between 20 000$ and 30 000$ and they expect the probability
distribution to be uniform. Then, the expected value of the salary will be 25 000$
People differ in their perception of uncertain events i.e. their perception of risk, and
can be more or less reluctant to engage in a risky activity. Expected value is a crucial element
to understand attitude to risk. The following example illustrates the idea. Key issue Attitude
to risk: a lottery A lottery consists of events that occur with a probability. If I buy one or
more tickets, each has a probability of winning a prize. Imagine a lottery L where I have a
50% probability of winning 100$, or 0$ otherwise. Risk attitude is measured by the price that
an individual will pay for L. A risk neutral person will buy a ticket at the same price as the
expected gain, namely 50$: this person is “neutral” because they expect to receive the same
amount of money they paid. For a risk neutral person, the uncertain event and the certain
amount of money have the same weight. A risk averse person perceives uncertainty as
negative: they prefer a certain outcome to a risky situation. Thus, they will always pay less
than 50$.

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 Risk averse people are characterized by a reluctance to engage in risky events.
Finally, someone who is willing to pay more than the expected outcome is a risk lover: they
perceive risk as a positive additional characteristic of the lottery. Bargaining theory
underlines how the level of risk aversion affects the bargaining power of parties. Once more,
we assume that there is perfect information – namely, that agents know each other’s
preferences, and therefore their risk attitude. We can consider a simple case (the Nash
model), where the split-the-difference rule is applied and where the two parties have the same
reservation price and the same discount factor, but different attitudes to risk. In this case, the
less risk-averse agent will receive a bigger share. Moreover, it is very possible that the fear of
not concluding the agreement reduces the bargaining power of the party. Similar arguments
apply in the Rubinstein model. A possible breakdown in negotiations can have a large impact
on the outcome depending on the parties’ risk attitude. Key issue To summarize The
bargaining power of parties depends on their relative degree of impatience (see section 2.1.2)
and their relative level of risk aversion. Less risk-averse parties have greater bargaining
power and will receive a bigger share of the bargaining surplus.
In this section we explore some tactics that can be put to use by the parties. The first
one is to actively search for an outside option to increase their bargaining power. The second
is termed “burning money” and consists in strategically destroying part of the potential gains
or personal assets to threaten the other party. Finally, a party can commit to an action that
increases their share.
Searching for an outside option
The previous sections have shown how another alternative can influence the
outcome of bargaining. It can be advantageous to be able to threaten the other party with
leaving the negotiation table. It is therefore interesting to observe what happens if one of the
parties actively searches for an outside option during the bargaining process. Search theory5
assumes that a suitable alternative cannot be found instantaneously: there is a search and
many alternatives are compared until a suitable one is found. The optimal search strategy can
consist, for example, in setting a value and comparing it with alternatives that are found over
time. Less valuable alternatives are ignored, and the search continues until one is found that
is equal to or greater in value than the one that is required. The search for an outside option is
very important in bargaining theory because it increases bargaining power. However, the
search may not be consistent with the bargaining process if, for example, the searcher has to
leave the bargaining table (e.g. the tourist cannot check prices in other shops while at the
same time negotiating with the merchant). Example The oriental rug Suppose the tourist opts
out, cannot find a better alternative and returns to the first shop. In the eyes of the merchant,
the tourist’s bargaining power and credibility have fallen and the seller may raise their price.
Moreover, as time is costly, time spent searching for a better deal is costly. This is
inefficient, as a loss is dissipated in the exploration of alternatives. Intuitively, the share of
the cake is related to the value of the anticipated outside option, which in turn has to be
compared with the risk of breakdown. Consequently, opting out is usually the last option.
Nevertheless, there are situations in which the search can be carried out during the bargaining
process. In the oriental rug example, the tourist’s partner can search for alternatives and
report the results by mobile phone. This shows that finding an outside option in real time is a
strategy that can considerably increase bargaining power. In the pipeline example, the

65
landowner could increase their bargaining power by searching for an alternative use for the
field (e.g. renting the land to someone else for another purpose). On the other hand, the
company could threaten to change the pipeline route if it can find other landowners who will
accept a lower price. However, the threat must be credible: changing the route might be too
costly, and using the land for agriculture may yield a lower rent.
The idea underlying burning money is to take action that can be harmful to both
parties. The principle motive of this strategy is to eliminate a potential move by either the
money burner or the other party, and increase the probability of a more favourable outcome.
A burning money strategy can be used to increase the time interval between an offer and a
counteroffer. As parties are usually impatient (because of the cost of time), protracted
bargaining is harmful for both. A simple example is striking during wage negotiations:
workers can stop negotiations for few days to demonstrate their bargaining power. However,
claiming that the strike will last several months is less credible. This shows that the stoppage
should not be too long, but when it is credible, the strategy can have a significant impact on
the outcome. Timing is important. We illustrate this point with the following example
In this example, the burning money technique used by the workers decreases the
employer’s discount factor as it increases the time (number of periods) during which the
employer cannot take action. On the other hand, if workers go on strike immediately after
they have rejected an offer, they decrease their own bargaining power by increasing the time
available to prepare a new (potentially acceptable) counteroffer. In general, the effect of
applying the burning money strategy after an offer has been rejected is to increase the
personal cost of rejection. Finally, another burning money tactic is to destroy part of the cake
immediately after the other party rejects an offer. Shrinking the gains from trade has the same
impact as the previous delaying tactic, but it does not affect the time span
Another common tactic is to strategically commit to an action that creates an
(advantageous) bargaining position. Prior to, or during the negotiation, one party indicates to
the other that, as a result of its previous commitments, its hands are tied. Here, the idea is to
stick to commitments no matter what. This extract illustrates the idea:
If the cost of reneging on the commitment is low or zero, this is not a credible threat
and the other party can ’’ offer an amount that is lower than the one that was on the table
when the commitment was made. However, if the costs of backing out of the commitment are
high, bargaining power is high. This can lead to aggressive bargaining. One problem is that if
both parties will incur high costs in backing out of their commitments, their bargaining
positions become incompatible. In this case, agreement might never be reached, with a loss of
efficiency for both agents. It has been shown that incompatible bargaining positions and
irrevocable commitments always end in perpetual disagreement

Behind

WORLD HEADQUARTERS for a division doing worldwide business is this small

conference room at Loveland Instruments Division. Here, on one of those rare times when all
three are not traveling, Dick Lubinski, LID International sales manager at right, and Carlos

66
Oyarzun, left, and Glenn French, respectively the sales engineers for Intercon and Europe,
discuss new aspects of their far-ranging responsibilities. Among these is the new team of LID
marketing-support representatives at Boeblingen. Headed by Wolfgang Flender, the team
provides localized sales, service and LiD prodl~ct support to El~ropean field engineers.
Lubinski's department also provides some interface on overseas production of transferred
LID products.
DIVISION REVIEWS are an important means of making the product development plans of
the divisions visible for top corporate management review and support. Up to a full day of
presentations and discussions may be required to brief the management team. Above, Dave
Packard and Ralph Lee listen as Santa Clara R&D people explain a new project. FACTORY
MAN IN THE FIELD is George Tibaldi, left, manager of the Eastern Training Center at
Rockville, Maryland, on behalf of Data Products Group. With George is Malcolm Wiseman,
Training Center hardware instructor. Last year the center was host to almost 1,000 tuition-
paying students from customer organizations wanting their people trained in the use oj HP
computers and systems. Tibaldi also functions as technical consultant to the field engineers
and regional sales manager of Data Products.
"OUR REPORTING RELATIONSHIP has certainly changed," says George Tamaki,
Instruments service manager in Eastern Sales Region, "but first and foremost we still report
to the customer." The change George refers to concerns the recent integration of the field
service people within the six product groups. George formerly was region service manager,
reporting to the region general manager. WHILE FUNCTIONING INDEPENDENTLY to
represent customer expectations for product performance, HP product safety and quality
assurance departments work on a strong team basis with other departments in solving quality
problems. Here a medical instrument is given a punishing drop test at Waltham Division
under observation by (from left) John Sherwood, reliability engineer, Paul Sullivan,
production line supervisor, and Tom James, production engineer.
Inside
Paul Guercio, manager of ESR's Instruments sales and service force, noted that on a direct
line basis he reports to the Instrument Group in Palo Alto. "My job is to make sure we have a
sales and service force in the field able to implement the marketing plans developed by the
group organization and the divisions, and to meet the needs of our customers, To provide
strong local management, the ESR Instrument team is divided into northern and southern
areas whose managers report to me. The two areas are subdivided into eight districts whose
managers report to their respective area instrument sales managers, Tom Strasser and Al
Kennedy. "If that looks like the old chain of command, with everything funneling up to me,
across to the group then back to me and down again - that's not the way it works. For the
greater part of their activity, the field engineers will be in contact with the divisional sales
engineers, and the district managers will be in touch with division sales managers - and so on.
They have a direct working relationship with factory people who can give them answers. I'm
here to provide and manage the human and material resources required to get the selling job
done. "I'm involved in targeting to the extent of defining for the group the dollars needed by
the Instruments sales force to get the job done in this region. "While reporting to the 'west
coast,' I still have a strong working relationship with Rick Weaver, the region manager. I see
his job as an extension of the office of the vice president of Marketing, that is, providing the

67
local business and corporate environment for the operation of the sales force. Our job is the
actual selling - the closing of orders, and the service that follows. "One of the most important
steps taken recently was to consolidate the service organization with sales - in other words, to
'verticalize' customer service which previously had all been pooled under the regional
structure serving all sales forces. Now the Instruments sales and service people are part of the
same team. I think this will be a major benefit to the service people themselves in terms of
their identity with the selling organization. and our customers.
"Looking at our organization from the field engineer's point of view, there are great
opportunities for full professional development. The Instrument product line covers most of
the significant areas of electronic measurement and instrumentation. As a result. the F.E. is
able to offer a broad line of effective solutions to his customer's measurement problems. He
is truly looked upon by the customer as 'Mr. Hewlett-Packard'." Dick Bryden, District Sales
Manager for Instruments in the Paramus, New Jersey Office, heads a team of seven field
engineers and two staff engineers. He noted that "field engineers by nature and training are
usually very organized people. I'd say that 80 to 90 percent of their business is done on a
direct basis with the division sales people. My role is quite straightforward; I spend much of
my time with our customers and field engineers. I must know our customers, the instrument
product line, and the capabilities and performance of my field engineers. Since the district is
the basic selling team, my job is to be the nucleus and the leader of that team."
Carlos Perez, Instruments Group field engineer in the Rockville, Maryland District Office,
describes the field engineer's role as "a complete measurement specialist. We have over 2000
different instru· ments to sell and can solve the customer's measurements problems most of
the time. We rely heavily on our regional and application engineers back at the factories for
technical and competitive information. "Flexibility is very important in this job. We need to
know what is going on in the whole.HP organization - because our customers want to hear
what HP is doing. Since the instrument field engineer probably calls on many of the
customers more frequently than the other disciplines, he is expected by the customers to have
a "feel" for HP's total activity. Our regional managers are very aware of this, and Paul
Guercio, for example, makes sure we hear what's going on in the group and corporate
organizations. Another way of finding out what's happening within the different divisions is
getting together with the other discipline field engineers informally in the office."
Felix Balmaz, Computer Systems field engineer in the Rockville, Maryland Sales Office,
points out that the "typical" HP field-factory interface does not apply in the same way for
Computer Systems people: "Because of the nature of our product support requirements, most
of our sales support and customer services are part of the field organization. This includes
presale systems engineers whose job is to provide technical review and applications support,
customer engineers who provide such support as software debugging as well as bench repair
service, and training centers for users and potential users of our equipment. "One basic reason
for this is that there's no way a Computer Systems field engineer can have the background to
handie a high percentage of customer requests, many of which are complex and specialized in
their field. Hence the need for both strong.factory and local support."
Working together
The product group's role Bill Terry, vice president and general manager of the HP
Instruments Group. "In the late sixties it became increasingly clear that HP was asking the

68
field sales engineers to perform a heroic, but almost impossible task, namely selling and
understanding the increasing breadth of the HP line of products, "As a first step in easing this
situation, certain natural distinctions were recognized in the products themselves and the
markets or customers' interests. This resulted in a process called 'segmentation' which
identified portions of the HP sales force with different product groupings. "At the same time,
the factory organizations were themselves beginning to exhibit more and more complexity.
They were reaching out into worldwide markets by such arrangements as "parallel"
production and joint venture R&D with the international divisions, and there was a steady
increase of new product lines and new customers. This resulted in a need for the corporation
to give more attention to the divisions, the key tactical unit of HP, to assure the right balances
of investment and performance, and to avoid duplication of effort. "In 1969/70, the
manufacturing divisions were brought together into product groups that paralleled their
product interests at that time. Since then, there has been growth in size and breadth of product
interest, especially in the electronic and data products groups.

Our latest evolutionary step has been to preserve this group structure and expand it once
again to six product groups. "The functions of these six product groups are similar though
there tends to be some differences in emphasis. For example. I like to think of the Instrument
divisions as sections of an orchestra, each capable of giving a strong solo performance with
their own instruments, but following the same score as far as customers, market needs and
technology are concerned. Some of the other groups have a greater need for inter-division
product interfacing, such as computers and medical with their system emphasis, hence more
overall product strategy may be decided at the group leveL "An Instrument Group staff helps
manage our responsibilities with emphasis on marketing, finance and engineering. "The
marketing function is basic. Our responsibility for the field sales force is direct; the regional
and country sales managers for Instruments are our instrument division's principal
representatives to our customers. Responsibilities for management of the instrument service
program is a new challenge for '75. "Finance at the group level is very much a matter of
performance measurement, communication and adherence to corporate policies, developed at
the corporate level, as well as direction and communication to the divisions in financial areas
where new ideas and new techniques can yield better results. Each month we use the
division's facility financial statement (Loveland, Santa Rosa, etc.) to determine how the group
as a whole is doing, as well as how the individual divisions are performing. Product line
statements (i.e. digital voltmeters, spectrum analyzers, pulse generators) are equally
important, giving us the opportunity to evaluate the relative contributions of the various
product lines and as a basis for deciding where and what level of investment and support will
be needed for the future. The monthly review is usually quite informal with a lot of it done by
phone.
Each quarter the three months to date statement forms a basis of a more formal review,
usually held in each division's facility. At this review, besides judging short term
performance, we forecast the balance of the year and determine major changes in direction
when required. But, all of them result in a great deal of useful contact between HP
management and the key management of each one of the manufacturing divisions. "At this
time of the year, for example, we are working to update our IRPs - intermediate range plans.
This is a form of planning and negotiation between the divisions and the groups. The purpose

69
is to reach agreement as to what are the important elements of our business strategy and the
investments needed to meet certain goals of the divisions for the next three to four years. The
corporation then looks at all of the IRPs and another process takes place that results in broad
targets being set for the groups that will enable the company to meet its overall performance
targets.
This is probably the single most important process we undertake on a regular basis, because it
sets objectives and priorities - both upward and downward - for all parts of the company.
"Engineering considerations are very important in arriving at some of the decisions required
by this process.
What kind of engineering investment will such-andsuch a project require? How do the
qualities of the product contribution ideas compare? Can it benefit by work done or underway
in any of the other two dozen product lines in the Instruments Group? How are the divisions
going to manage or share - the integrated-circuit facilities that are becoming more or less
standard within the larger organizations? Can other resources - other groups, HP Labs - be
applied? Those are the kinds of questions that a group engineering manager will be interested
in, "Where other key functions are concerned, such as personnel, legal and financial policy
and international conduct, it's my view that these are better handled within the appropriate
Corporate Staff depart ments. In this way, all of the groups can share these services and speak
in one uniform voice for all of HP. "Of course, a tremendous amount of direct contact and
communication and decision making goes on among the divisions that never reaches the
group level. The more decisions that can be made at the first level, the better the quality and
dedication for follow through. "There also is a lot of contact across group lines, between
similar functional departments - basically exchanges of information and ideas. It seems to
me, in fact, that just about every identifiable function has a newsletter or seminar going for
those purposes. I'm all for that - so long as it helps get things done."
International's new look... Bill Doolittle, vice president and general manager of UP's
International organization, recently outlined changes that will have a significant effect on the
reporting relationships of the international manufacturing and sales organizations. The
corporate chart on pages 16-17 reflects these changes, but some explanation in Bill's own
words may be useful: "We've restructured the international organization a number of times
and in a number of ways over the past fifteen years. Most of these were done within the
framework of the international structure itself, until a few years ago when the field sales
teams within the country organizations were 'verticalized,' becoming integral parts of the
various product groups. "Now we're in the process of completing that step by integrating the
international factory organizations within the appropriate product groups. "The effect of this
is two-fold. First, it will give the product group general managers total worldwide
responsibility for the manufacture, product development, marketing, and profit performance
of all of their group activities. Next, the remaining International organization will have a
rolethat in most respects will represent an extension of the full range of corporate staff
services. "Let's first see how this will work in Germany, our furthest developed international
organization. HP's first overseas direct sales and manufacturing facilities were established
there 15 years ago. We currently employ nearly 1,600 German people, and the manufacturing
facilities are involved in producing from five products groups - Medical, Instruments,
Analytical, Calculators and Data Products. "Our plan is to reorganize the German
manufacturing operations into five units reporting directly to the various product groups.

70
Several of them already support R&D efforts that have brought out proprietary products for
which they have worldwide responsibility. In time it is likely that some of these
manufacturing operations will attain full division status within their product group. "In
addition, a corporate German office will be established under Eberhard Knoblauch to provide
the manufacturing operations and the German sales activity with the same range of corporate
services that the U.S. divisions and sales regions receive from Palo Alto. "In the United
Kingdom, manufacturing at South Queensferry will report to the Instruments Group, with
Peter Carmichael as general manager. Dennis Taylor, meanwhile, will move to the Winnersh
headquarters where he will take on a dual role - first as managing director of HP Ltd., similar
to Eberhard's role in Germany and, on an interim basis as manager of the UK sales region.
"The situation in France is more straightforward.
The Grenoble Division is already dedicated solely to computer products, and therefore will
report directly to Paul Ely's Computer Systems Group. "The Southeast Asian facilities will
become members of the Components and Calculators groups under managers still to be
named. Tom Lauhon then will serve in the corporate role as managing director of our
Southeast Asian operations. "HP Brazil manufacturing will be similarly structured, with
general managers representing the Medical Products and Calculators groups, and with
Guenter Warmbold having overall manufacturing facility responsibility. "YHP, our
manufacturing joint venture in Japan, is organized somewhat differently than our other
worldwide manufacturing operations, and does not so readily lend itself to direct product-
group reporting. For the present, therefore, YHP will continue to report through
Intercontinental Operations. "It seems to me that all of these changes will bring about a
clearer definition of responsibility in our international operations as well as a better balance
of authority and responsibility. "I might add that in addition to its corporate representation
overseas, International will continue to be responsible for the legal performance of our
international subsidiaries, and for pioneering in new international areas of opportunity."

71