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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 WW II Demand for HPs Electronic instruments

1940

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

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

Focus on improving speed and reducing cost of ownership

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

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)

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 SKUs 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

HPs 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

+ + +

HP was not satisfied with retailers 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

Q1 Contd.
Global Internet Sales projection
140000 120000 Sales in million $ 100000 80000 60000 40000 20000

0
1996 1997 Year 2000 2005

Internet sales growth

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 eTailing growth in general

281% 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

Other market externalities

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 HPs competitor products

So naturally, push for HPs 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

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 Price of Laser cartridge Revenue per printer per year Total supplies per printer Price of a Inkjet printer

$30 $60 $60 $420 $299

Price of a Laser printer Total cost of ownership of Inkjet

$999 $719
$1419

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

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

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 !