Group Assignment

Marketing Management

Prepared by:

Group III

MASTER OF MANAGEMENT GADJAH MADA UNIVERSITY November 2006

HP CONSUMER PRODUCTS BUSINESS ORGANIZATION: DISTRIBUTING PRINTERS VIA THE INTERNET

CASE SUMMARY

HP PROFILE

HP is a technology company that operates in more than 170 countries around the world. Its headquarters is in Palo Alto, California, United States. It has approximately 150,000 employees. HP is listed on the New York Stock Exchange, NASDAQ and the Pacific Exchange with the ticker symbol HPQ. HP's core values have shaped the company's history and will continue to define their future aspirations. Their core values are (1) passionate about customers; (2) trust and respect for individuals; (3) perform at a high level of achievement and contribution; (4) achieve results through teamwork; (5) act with speed and agility; (6) deliver meaningful innovation; and (7) conduct business with uncompromising integrity. HP s corporate objectives were adopted in 1957, and the inclusion of global citizenship was an innovation at the time. Together with the core values, HP s corporate objectives were written to serve as a day-to-day guide for management decisions. These objectives have remained essentially unchanged for nearly 50 years. The corporate objectives include customer loyalty, market leadership, growth, employee commitment, leadership capability, and global citizenship. Revenue overview by region (% of total) as reported in the 2005 Annual Report:

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Revenue and earnings (loss) from operations by segment are stated below (in Million $U.S.):

HP HISTORY

Bill Hewlett and Dave Packard founded HP in 1939 in a Palo Alto garage. One of HP s first product is audio oscillator. In the 1940s, HP produced electronic instruments. HP also began signing with sales representatives to market products throughout the United States. During the 1950s, the company mastered the internal effects of growth, defining corporate objectives and developing a path of globalization. By 1962, HP was ranked number 460 in the Fortune 500. Innovation continued in the 1970s with the release of the first scientific handled calculator, the HP 35. The 1980s were critical to HP s success, as it became a major force in the computer industry and printer market. Both the ThinkJet and the LaserJet printers were introduced in 1984. In 1985, HP s net revenue was $6.5 billion and the company had 85,000 employees. With the continuous release of computers, peripherals, and related products in the 1990s, HP became known as one of the few organizations that was able to marry measurement, computing, and communication. This success translated into HP s number 16 ranking on the Fortune 500 list by 1997. Net revenue for HP was then $42.9 billion and employees totaled 121,900. However, 1997 was the first time since 1992 that revenues increased by less than 20%. Lew Platt, the president and CEO, blamed HP s inability to control operating expenses, lower demand, and the strength of the dollar as compared to other currencies.
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In 1998, HP grouped its products into five general categories: Computer Products, Service & Support; Test and Measurement Products & Service; Medical Electronic Equipment & Service; Electronic Component; and Chemical Analysis & Service.

Computer Products, Service & Support In 1997, this segment of operations made up 83% of HP s total revenue and included computers ranging from palmtops to supercomputers, plus peripherals and services. Though HP was well known for its technological innovation and product quality, marketing was the key to HP s success. The company had always considered the needs of its customers and partners; it had not only met their requirement, but had also grown with them as their needs became more demanding and involved. HP knew that the success of its customers and partners was directly correlated with its own. HP had shown its ability to respond to demanding needs when it introduced its first computer in 1966. Expansion into business computing occurred in the 1970s. HP introduced its first personal computer (PC) in 1980 and later released a family of computer system in 1986. In 1991 HP unveiled the 11-ounce 95XL palmtop PC, the three-pound OmniBook 300 in 1993, and HP Pavilion PC in 1995. HP was the fastest-growing PC company in the world by 1997, ending the year as the number four PC manufacturer worldwide. The top four companies, Compaq, IBM, Dell, and HP had combined market share of 38% of the PC market. Just as it had been a significant player in the PC market, HP led the printer industry. This was despite the fact that HP was not associated with printers as of the early 1980s. Instead, Epson, Diablo, and Qume led the way with their dot-matrix and daisy-wheel printers. Then, in 1984, HP released its ThinkJet, which was based on the thermal inkjet technology the company had developed in its own labs in the 1970s. Laser printers were also released in 1984 and changed the industry dramatically. HP released the first network printer in 1991, and then introduced the first desktop color laser in 1994. Companies were slow to acquire this color technology, however, and vendors had difficulty finding the appropriate price points. In 1997 and 1998, demand for HP products was soaring and the company had leading market shares in both the InkJet and LaserJet segments. HP was also a leader in the printer supply business, which contributed $5 billion to its total sales of $42.9 billion in 1997. HP management was credited with making two vital decisions that led to the success of the LaserJet series. 1. The move to sell via the reseller channel. 2. The naming of the product.

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THE PRINTER INDUSTRY

In 1997, revenues of printer manufacturers were $8 billion for the US and $22 billion worldwide. As home PCs became more prevalent in the 1990s, printer demand rose dramatically. By 1998, InkJet models accounted for 70% of all units sold. The printer supply business obviously benefited from this surge in printer sales. It was very profitable and the strategy was analogous to the razor blade scenario and then charge premium prices for the blades. sell the razor cheap

InkJet Printers Most people opted for InkJet printers due to their versatility and low cost. In spring 1998, HP had a 55% market share in this segment. HP s InkJet sales were expected to improve further with the release of the 2000C in June 1998, which incorporated its new Modular Ink Delivery System (MIDS). Canon s market share was 19% and declining, while Epson s share had increased to 18% due to its aggressive marketing and affordable products, at the same time as Lexmark s market share had nearly doubled to 6%.

LaserJet Printers LaserJet printers could handle high volumes of text documents, had superior quality and speed, and could be used on a network. By 1998 black-and-white laser technology was mature and recent advances had focused on performance and price. Color laser technology was a different story. In spring 1998, HP led this segment with an impressive 85% market share, primarily due to the overwhelming adoption of the LaserJet 4000 family. Lexmark was the closest second holding an 8% market share.

Multifunction Printers (MFP) MFPs, machines that could print, fax, copy, and scan, were introduced in 1993 but did no catch until 1997. Some units could perform color scanning and copying, and could shrink and enlarge originals. To do all the same tasks with independent machines would cost about twice as much and take up more office space. They were also easier to install. However, they were slower and unsuitable for high-volume printing. Furthermore, they were not designed to connect to networks, and it is risky to rely on only one device because if one function failed, the whole system went down.

The pace of technology and life cycle of products varied between InkJet and LaserJet printers. For InkJet, the core technology was the printer cartridge, which affected speed and
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quality. The life cycle of an InkJet printer was between one and two years and the difference depended on whether the InkJet was targeted to personal or business use. For laser printers, key technologies were printer cartridges, toners, photoreceptors, paper handling, optics, and scanner. The life cycle for a laser printer, which targeted business user, was two-to-three years.

CONSUMER BUYING PATTERNS

The At-Home Market The home market could be divided into characteristics of first-time buyers were as follows: y They shopped for about one month, focusing on quality, speed, after-sales service and support, availability, brand, and price. y They usually went through the normal phases of awareness, consideration, and purchase behaviors. During the first two phases they visited web sites and physical stores, talked to friends, and read consumer reports. Once in the stores, shoppers could be influenced by instore demonstrations of other printer brands. Manufacturer guarantees were an important buying factor. y They also tended to purchase a PC, monitor, and printer as a bundle. Because the PC was the most expensive of these items, it was the focus of the buying decision. Meanwhile, repeat buyers, which were the larger of the two segments, had some characteristics, as follows: y y They tended to buy a printer as a single purchase. They came in two flavors. When they were simply upgrading their existing technology or buying additional units similar to the original, they had shorter shopping periods and were more likely to buy sight-unseen . Mail order was a popular channel for these buyers. When they were introducing a new printer category, repeat buyers became like first time buyers, but were more informed. first-time and repeat buyers. Some

The Home Office Market Individuals with home offices became important to the printer market in the 1990s. The all-in-one peripherals, or MFP, were the most popular product for them. Buying patterns for this segment were even more deliberate than in the at-home category because these people tended to know exactly what they needed and had specific price in mind.

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CHANNELS OF DISTRIBUTION

HP had 7 (seven) types of printer channel distribution to customers including: 1. Computer Product Superstore y y One type of retailer. The store carried a broad and deep assortment of PCs, peripherals and computerrelated products. y y y Generally knowledgeable store employees to respond to customers questions. Specialist store focusing on PCs. Example: CompUSA.

2. Consumer Electronic Superstore y y y One type of retailer. Many types of electronic goods offered. Salesperson worked on commission basis, tend to encourage customers to buy more expensive product. y Example: Circuit City.

3. Office Product Superstore y y y One type of retailer. Many types of office product offered. Both small offices and home offices were the primary target markets of these offices.

4. Corporate Account Dealers y y y No physical stores. Generated their 50% of revenue by corporate account sales force. Example: Inacom

5. Indirect mail-order companies y y y Using catalogue advertising and/or internet. Delivery of goods to customer was almost by mail or courier services company. Example: Micro Warehouse.

6. Mass merchants y y y At home market. Stock limitation of computers and computers related product. Example: Wal-Mart.

7. Department Stores y y y
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At home market. Stock limitation of computers and computers-related product. Example: Sears. 7

The first three listed above accounted for bulk of sales.

RETAIL ACCOUNT MANAGEMENT

HP had a solid reputation with its primary retail accounts and was reinforced by all of the services that HP provided. Large retail accounts represented 90% of HP s printer sales. To manage the retail accounts, HP used an account team to do business directly with each account. These teams worked with their assigned retailers on many fronts. Some assistances including: y Coordinating co-marketing efforts which included cooperative advertising and in-store displays. HP implemented Manufacturer s Advertised Price (MAP) policies in the cooperative advertising contracts. These clauses stipulated that manufacturer would not reimburse the reseller for cooperative ads that involved a price below a specified level. As a result, there was little variation in advertised retail prices across channels. y y Providing merchandise development funds. Establishing category management, which aided the retailer in understanding trends, and detailing. Detailers tended to work for a third party but they were paid and scheduled by HP. Detailers performed functions such as making sure that the appropriate type of paper was being used in the printers displayed on the shop floor and the signage was adequate. y Managing logistics and inventory. The services provided such as assisted retailers to maintain their level of inventory, decided time to order, etc. y Providing price protection. HP provided price protection for inventory that became obsolete on the retail shelf. HP retailers were responsible for a number of value added functions such as: breaking bulk orders and shipping merchandise to individual retail stores, sales assistance, advertising, after sales customer service and support, credit/collections from consumer and returns processing. The retailers also enabled shopper to see the physical products, get a sense for their speed and judge the quality of their input. HP also did business with smaller retail chains. HP, however, used distributors to reach such customer rather than going direct. These distributors could sell only to HP authorized retailers.

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RETAIL PRICES & PROFITABILITY

Average retail prices for printers had declined steadily. It caused the declining of the profit margins both for retails and printer manufacturers. This was a result of all the services the retailer provided, cost of six weeks of inventory in the retail channel and the payment terms to the manufacturer set at 30 days. Since the popular HP products were advertised frequently by retailers, net margins on HP products were even less than those on competing products. 1998 data are as shown below: Type of Product Printers InkJet printer LaserJet printer Printers Supplies InkJet Cartridge LaserJet Cartridge US$ 22 US$ 30 11% - 19% 11% - 19% US$ 299 (Avg) US$ 999 (Avg) 1% - 9% 1% - 9% 5% - 10% 5% - 10% Retail Price Net Margin % of retailers sales volume

US$ 60 (Avg)

RETAIL DISRUPTION AND THE INTERNET

The goals of retailing were always to get the right product in the right place at the right price and at the right time. The internet created the ideal platform for retailers to excel in offering a wide selection of products, 24 hours a day, at low prices and significant time savings. In general, the internet was proving to be unstoppable force and was changing the way everyone worked and played.

eChannels for Computer Products Two basic types of eChannel existed in year 1998. They are as follows: a. Traditional Resellers Traditional resellers such as: Wal-Mart, Office Depot, CompUSA, etc which were using their brand leverage from their brick and mortar base and applying it to the web. These companies had existing infrastructure costs and needed to balance strategies between instore and on-line goals. b. New Virtual Stores New Virtual Stores existed only on the Internet. It offered a large selection of technology, office, and consumer merchandise. They sold only leading branded products at a discount.
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They keep no inventory and would send product orders directly to distributors or manufacturers. The examples of this kind of store are Value America (VA) and Costco.

Internet Retailing The most reasons for rapid growing of the virtual business transaction using internet included consumer s growing dissatisfaction with the level of service and lack knowledgeable sales people offered by the conventional channels and the increasing acceptance of the indirect mail-order channel, meaning that shoppers were becoming comfortable purchasing goods sight and unseen . Internet businesses were valued according to their prospect for future growth and their number of new customers, not their profitability. In addition, the most critical aspect of pure play Internet companies was the expense of acquiring a new customer. This tended to be very high in the early brand awareness building stages, but was expected to decrease later as economics of scale came into reach. Using Internet as a main tool for business transaction had no free of risks. Potential threats to Internet retailing came from mass merchandisers like Wal-Mart or from manufacturers themselves. Wal-Mart s strong brand awareness, state of the art of information technology and distribution systems, and superior channel muscle were expected to pose a formidable challenge to existing web retailers. For manufacturers, it seemed natural to want to eliminate the middleman and sell directly to consumers online, but they hesitated for fear of angering their channel partners. Even retailers posed a threat as they introduced private label products that competed directly with national brands. Going direct was not only about increased gross margin. In addition to possible channel disruption, obstacles included: the large investment for developing and maintaining a solid web site; security and bandwidth issues; uncertain return on investment; competitors having easy access to information; higher rates of product return; and customer-incurred shipping charges.

MAIN ISSUE

In spring 1998, Pradeep Jotwani, vice-president and general manager of the Consumer Products Business Organization of the Hewlett Packard, was contemplating the increasing success of eCommerce, especially from sales of refurbished printers through an Internet outlet center since December 1997. Jotwani was now considering a move to sell new printers directly to consumers via this new eChannel. If he were to make such a move, he wondered which

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products to sell online at what prices, and how to communicate this strategy to the channel partners without damaging the existing distribution structure.

PROBLEM STATEMENT

Should the company move to sell new printers through a new eChannel? What strategy should be taken without damaging the existing distribution structure, and which products to sell online at what prices?

ANALYSIS OF THE SOLUTION ALTERNATIVES

HP believed that its market share neither reflected the company s comparative advantages, nor accounted for consumer s awareness and preferences for its products. The company also believed that the retailers could have provided better in-store support for HP products. This stemmed from high sales personnel turnover and low product knowledge. HP management was also assessing the position of its Internet outlet center that sold refurbished products at reduced prices, as well as the associated printer supplies and accessories. The outlet store was established for two reasons: 1. To enable the company to sell open-box returned products, recovery of which was a significant problem prior to the establishment of the online store. 2. To use it to learn the mechanics of Internet direct selling and as a means of recognizing the increasing number of Internet shoppers. HP also believed there would be little channel conflict by focusing on refurbished products.

HP management considered its option:

1. Wait and See HP could continue selling refurbished printers through its internet outlet center, which would maintain channel relationships and profits. If competitors were not selling directly on the Internet at this time, HP would be taking a risk by being to use that channel. If competitors took a direct route, HP could benefit from possible retail retaliation, Alternatively, if competitors became successful on the Internet, HP could join the new channel at a more mature stage.

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2. Participates through Online Retailers Some others traditional retailers such as CompUSA were selling via online stores by mid of 1997. HP was already selling to the bricks and mortar stores, so it seemed reasonable to expand with them on the web. The problem was that these stores were moving slowly in the eCommerce arena. These companies had had low printer sales in the past, but were beginning to see the advantage as the printer drivers could be preloaded into their machines.

3. Expand the Offerings Online Going direct would enable HP to interact with its customers, build relationships and strengthen the HP brand. Although there was first-mover risk, there was also potential benefit as evidenced by success of Amazon.com. If this course was taken, a business plan would have to outline the products and prices to be offered online. A budget would also be needed to allow for development and maintenance of the web site, including marketing and advertising allowances.

RECOMMENDATIONS

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