{

Please click me for Case details

Please click me for Q &A

The Dilemma Pradeep Jotwani, VP and GM of Consumer Products Business

Organization of HP is contemplating on ecommerce channel for selling

new printers

Motives

HP was already selling refurbished printers online

Competitors were successful through direct selling

Concerns:

Currently new printers are sold only through retailer channels. Will it

Impact on retailer relationship?

What-if entry through eCommerce (or Direct selling) fails?

Market externalities – Should we or Should we not?

The HP Timeline

1939 •Founded by Bill Hewlett and Dave Packard in 1939 at Palo Alto Garage •Oscillators for sound systems

1940 •WW II •Demand for HP’s Electronic instruments

1962 •Ranked 460 in Fortune 500 •Medical electronics and analytical instrumentation business

1970 •First scientific Handheld calculator •End of slide rule

1984 •ThinkJet and Laser printers introduced •HP becomes a major force in computer industry and printer market

1996-97

•One of the few organizations that was able to marry “measurement, computing and communication” •Ranked 17th in Fortune 500 list | Net revenue : $42.9 billion | 121,900 employees

PC & Printer Markets PC Market

83% of revenue from Computers and allied products

Marketing was considered key to its success

Fastest growing PC company in 1997

Compaq + IBM + Dell + HP = 38% of PC Market

Compaq was Market leader with a 13.5% market share

Printer Market

Epson, Diablo and Qume – First set of players

HP changed the market in 1984 with its inkjet and laser printers

1994 saw HP introducing first color laser printer

Printer Industry The Printer Portfolio

Inkjet

Laser

Multifunction (MFP) with PRINT + COPY + FAX

Twice as costly

Occupies more office space

Considered risky since if one function failed whole system failed

Focus on improving speed and reducing cost of ownership

As many as 52 Laser and 84 InkJet SKUs were distributed through

reseller channel

Consumer Market The At-Home Market

“First-time”

– Buys as a PC + Monitor + Printer bundle

“Repeat”

– Buys printer as a single purchase

– Largest of the two groups

The Buying process

Awareness Consideration Purchase

Simple upgrades were quick

Mail order was a popular channel

Accounted for 8% of all printer sales

Consumer Market The Home Office Market

MFP s were the popular choice

Considered 3-in-1 (Print/Fax/Copy)

Perceived to be minimizing costs and saving space

Buyers of this segment were well informed of the products

Distribution Channels Computer Product stores

Retail stores like CompUSA

Broad and deep assortment of computer related products

Category Specialists

Consumer Electronics Superstores

Computer products were just part of many consumer electronics

products sold

Salespeople persuade customers for a commission

Office Product Superstores

Targets SOHO (Small and home offices)

Again computers were just part of the product mix sold

Distribution Channels Corporate account dealers

No physical stores

Corporate account sales force generated ~50% of revenues

Mail order companies

Catalogue advertising and Internet

Delivery by mail

Mass merchants

Stocked limited selection of computers and related products

Departmental stores

Very limited SKUs and typically low volumes

Retail space Retail Account management

HP Account teams

Each had assigned retailers and multiple support functions

Logistics and Inventory management

Promotional activities by HP teams up to 1.5% of sales

Small retail chains were focused only by distributors

HP only authorizes small retail chains

Printer business

5% - 10% of sales with 8% - 14% margins

HP products provided lesser margins than competitor products

Retail space Printer Supply business

Considered profitable

Margins between 13% - 19%

Major revenue provider for Office super stores

Challenge was to maintain multiple SKU’s

Laser and InkJet cartridges particularly were repeat items

~ $420 of supplies per printer before replacement

Total US Cartridge markets was $7 billion

Right Product at Right place at Right time

Internet solved the puzzle

Ideal platform for offering wide selection of products

eCommerce market eChannels as of 1998 were of two types

Traditional resellers leveraging their brand online

New Virtual stores existing only on the internet

Value America (VA) that sold only branded products

Cooperative advertising for brands

No inventory Only order processing

Why Internet adoption was growing?

Growing dissatisfaction with conventional channels

Increasing acceptance of mail order channels

Amazon.com growing at 100% year on year during 1996-97

eTailers Valuation

Growth prospects

Number of new customers

Pure Play internet model

Major expense during brand awareness building stages

Revenues expected to decrease when economies of scale sets in

The Dell story

Direct order selling model

Standard of efficiency

JIT leading to very efficient inventory handling

$3 million sales per day in 1998

Online Retail Sales Market size and growth

$600 million in 1996 | $2 billion in 1997

Projections

$21 - $56 billion by year 2000 | $115 billion by year 2005

Changing lifestyles leading to promising online sales

Challenges

While large retailers resent the impact of online competitors small

retailers had a clear dent in sales

Removal of “Middlemen” could disrupt distribution channels

Uncertain and large investments associated

Higher product returns and customer incurred shipping charges

HP’s View Unsatisfactory retailer performance

High sales personnel turnover

Low product knowledge

Assessment of own refurbished eTailing results

Continuous stream of information on

Supply chain

Advertising response

Customer behavior

Considered more controllable form on retail channel

Strategic options Wait and See

Wait for competitors to migrate to eTailing

Participate through Online retailers

Associate with conventional retailers that moved online

But, it is perceived by HP that these players were on slow mode

Dell and Gateway taking the market through Direct selling

Expand the offerings online

Helps interact directly with customers and build relationship

First mover risk offset by success of eTailers like Amazon

Involves new investments on website creation, marketing and

advertisement etc.,

Q1 What kind of on-line presence do you think HP should have ? Why ?

Some of the facts supporting option 3 “Expanding the offers online”

+ As per the case, HP clearly intends to explore the benefits of direct

selling

+ The online refurbished selling activity suggests that customers are

inclined toward internet purchases

+ HP was not satisfied with retailer’s selling performance

+ Retailers clearly are aware of poorer margins compared to

competitors

+ Printer supply business is profitable both to HP and retailers. But

customers find it difficult to find the right cartridge among the many

SKUs

0

20000

40000

60000

80000

100000

120000

140000

1996 1997 2000 2005

Sale

s in

mil

lion

$

Year

Global Internet Sales projection

Internet sales growth

Q1 Contd.

Q1 Contd. + Cost savings include of ~6.5% increase in margins

+ Resellers find selling of printers less profitable

+ Amazon has proven internet selling with 100% growth in a year

+ Dell is another success story with $3 million in sales

+ Proven mail order pickups on printer sales

+ Break even in 5 years possible through online sales. It must be even

quicker with internet user base and online purchaser population to

grow rapidly

eTailing growth in computer products 281%

eTailing growth in general 277%

Q1 Contd. + Benefits of Internet reach are humongous

+ HP may not be interested in refurbished printer ecommerce business

+ It is possible to take orders online and allow a nearby shop pickup.

This will help customer as well as retailer.

+ Retailers have also realized the power of internet and have started

adopting internet selling.

Some of the negatives include

− Perceived resentment from retailers and distribution channel

disruption

− Other market externalities

Recommendation:

Benefits overpower the perceived threats in the near and far

Q2 What risks do you see in your strategy? How would you manage them ?

Some of the clear cut risk in “Expanding the offers online” are:

Initial investment is high

90% sales is currently from retailers. So it is advisable to go online

considering retailers.

Involve retailers in the buying process. May be shop pickups

should help

Convince retailers to use HP website to order and receive a

commission

Consider utilizing delivery options with retailers initially

Order management through a new sales channel needs to be spot

on. It is advisable to take help of consultants to set this up.

Q2 Contd. The creation of whole ecommerce solution will involve linking up

of

Demand and Production

Inventory management

Shipping and handling

So a thorough study of the whole new sales channel characteristics

will ensure minimal gaps.

Q3 Should printers and printing supplies be treated differently ?

Again with 90% of the sales through conventional retail channels it is

advisable to migrate online on a phased approach

The case says that for retailers, printers are 5% - 10% of sales with 8% -

14% margins.

Margins are also poorer compared to HP’s competitor products

So naturally, push for HP’s product from retailers (and its sales

reps on the shop floor) is expected to be less

For HP, this means extra time and reduced margins due to

additional promotional exercises

It is recommended to start selling printing supplies first and then

follow it with printers when the time is ripe.

Q3 Contd. Why? Printing supplies are

frequently purchased and are repeat purchases and does not

requires physical examination before purchase

They are less priced though the margins are high. So magnitude of

profits per sale is less compared to sale of a printer with a lesser

margin

It is found that customers find it tough to find the right supplies

for their printer on the shop floor

Internet solves this puzzle by throwing all the relationships.

Also convincing retailers on the sale of supplies online with these

reasoning is possible owing to practical difficulties in stocking all

combinations of SKUs on the shop floor

Price of Inkjet cartridge $30

Price of Laser cartridge $60

Revenue per printer per year $60

Total supplies per printer $420

Price of a Inkjet printer $299

Price of a Laser printer $999

Total cost of ownership of Inkjet $719

Total cost of ownership of Laswer $1419

Earnings from selling a cartridge is ~ $5 to $10

Earning from selling a printer is ~ $30 to $90

Q4 What would the people at Best Buy think of your plan ? Would it be any

different at CompUSA or the same ? What reactions might they have to

news of your plans ?

While BestBuy as a Consumer Electronic superstore will not find it

denting its sales (since printer supplies do provide a very less sales

volume), CompUSA will find it impacting. Reasons include:

CompUSA focuses on selling peripherals and is a category

specialist

CompUSA has trained sales people on the shop floor to explain

and support customers with supplies

Q4 Contd. CompUSA might resort to placement of HP products at the end of the

queue and provide importance to products of other players like IBM

and Compaq.

A competing view is that HP is one of the 3 major brands sold by

CompUSA in that segment.

There could be two different possible repercussions.

Reducing order placement

Adopting Internet selling proposal from HP and integrate order

management with HP

Thank you !