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MASTER OF MANAGEMENT GADJAH MADA UNIVERSITY November 2006
California. (4) achieve results through teamwork. Revenue overview by region (% of total) as reported in the 2005 Annual Report: Case 3 2 . and (7) conduct business with uncompromising integrity. HP's core values have shaped the company's history and will continue to define their future aspirations.000 employees. (5) act with speed and agility. market leadership. employee commitment. growth. (2) trust and respect for individuals. and global citizenship. United States. (6) deliver meaningful innovation.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. Their core values are (1) passionate about customers. leadership capability. HP s corporate objectives were adopted in 1957. The corporate objectives include customer loyalty. NASDAQ and the Pacific Exchange with the ticker symbol HPQ. These objectives have remained essentially unchanged for nearly 50 years. HP is listed on the New York Stock Exchange. (3) perform at a high level of achievement and contribution. It has approximately 150. and the inclusion of global citizenship was an innovation at the time. Together with the core values. Its headquarters is in Palo Alto. HP s corporate objectives were written to serve as a day-to-day guide for management decisions.
However. computing.Revenue and earnings (loss) from operations by segment are stated below (in Million $U. One of HP s first product is audio oscillator. HP s net revenue was $6. With the continuous release of computers. and communication. lower demand.S. By 1962. defining corporate objectives and developing a path of globalization.): HP HISTORY Bill Hewlett and Dave Packard founded HP in 1939 in a Palo Alto garage.000 employees. Case 3 3 . the president and CEO. In 1985. In the 1940s. HP became known as one of the few organizations that was able to marry measurement. During the 1950s. and the strength of the dollar as compared to other currencies. The 1980s were critical to HP s success. the HP 35. Lew Platt. as it became a major force in the computer industry and printer market. peripherals. Net revenue for HP was then $42. and related products in the 1990s.900. HP also began signing with sales representatives to market products throughout the United States. HP was ranked number 460 in the Fortune 500. the company mastered the internal effects of growth.5 billion and the company had 85.9 billion and employees totaled 121. HP produced electronic instruments. This success translated into HP s number 16 ranking on the Fortune 500 list by 1997. 1997 was the first time since 1992 that revenues increased by less than 20%. Both the ThinkJet and the LaserJet printers were introduced in 1984. Innovation continued in the 1970s with the release of the first scientific handled calculator. blamed HP s inability to control operating expenses.
In 1998. ending the year as the number four PC manufacturer worldwide. HP grouped its products into five general categories: Computer Products. Though HP was well known for its technological innovation and product quality. HP had shown its ability to respond to demanding needs when it introduced its first computer in 1966. which was based on the thermal inkjet technology the company had developed in its own labs in the 1970s. HP released its ThinkJet. The naming of the product. Test and Measurement Products & Service. Service & Support. HP management was credited with making two vital decisions that led to the success of the LaserJet series. marketing was the key to HP s success. HP was the fastest-growing PC company in the world by 1997. Dell. In 1997 and 1998. In 1991 HP unveiled the 11-ounce 95XL palmtop PC. and HP Pavilion PC in 1995. 1. Medical Electronic Equipment & Service. in 1984. Compaq. Just as it had been a significant player in the PC market. Laser printers were also released in 1984 and changed the industry dramatically. plus peripherals and services. and HP had combined market share of 38% of the PC market. but had also grown with them as their needs became more demanding and involved. The company had always considered the needs of its customers and partners. Instead. IBM. and Qume led the way with their dot-matrix and daisy-wheel printers. Companies were slow to acquire this color technology.9 billion in 1997. HP was also a leader in the printer supply business. This was despite the fact that HP was not associated with printers as of the early 1980s. Computer Products. 2. The move to sell via the reseller channel. and vendors had difficulty finding the appropriate price points. The top four companies. which contributed $5 billion to its total sales of $42. HP led the printer industry. Diablo. it had not only met their requirement. however. Then. and Chemical Analysis & Service. HP released the first network printer in 1991. Electronic Component. Epson. Service & Support In 1997. this segment of operations made up 83% of HP s total revenue and included computers ranging from palmtops to supercomputers. demand for HP products was soaring and the company had leading market shares in both the InkJet and LaserJet segments. HP introduced its first personal computer (PC) in 1980 and later released a family of computer system in 1986. the three-pound OmniBook 300 in 1993. and then introduced the first desktop color laser in 1994. Expansion into business computing occurred in the 1970s. Case 3 4 . HP knew that the success of its customers and partners was directly correlated with its own.
They were also easier to install. had superior quality and speed. By 1998. HP had a 55% market share in this segment. sell the razor cheap InkJet Printers Most people opted for InkJet printers due to their versatility and low cost. The printer supply business obviously benefited from this surge in printer sales. By 1998 black-and-white laser technology was mature and recent advances had focused on performance and price. they were not designed to connect to networks. In spring 1998. However. HP led this segment with an impressive 85% market share. The pace of technology and life cycle of products varied between InkJet and LaserJet printers. Canon s market share was 19% and declining. and could shrink and enlarge originals. which affected speed and Case 3 5 . In spring 1998. As home PCs became more prevalent in the 1990s.THE PRINTER INDUSTRY In 1997. Lexmark was the closest second holding an 8% market share. For InkJet. and scan. Some units could perform color scanning and copying. Multifunction Printers (MFP) MFPs. while Epson s share had increased to 18% due to its aggressive marketing and affordable products. printer demand rose dramatically. which incorporated its new Modular Ink Delivery System (MIDS). primarily due to the overwhelming adoption of the LaserJet 4000 family. the core technology was the printer cartridge. the whole system went down. revenues of printer manufacturers were $8 billion for the US and $22 billion worldwide. InkJet models accounted for 70% of all units sold. HP s InkJet sales were expected to improve further with the release of the 2000C in June 1998. they were slower and unsuitable for high-volume printing. Furthermore. at the same time as Lexmark s market share had nearly doubled to 6%. were introduced in 1993 but did no catch until 1997. copy. It was very profitable and the strategy was analogous to the razor blade scenario and then charge premium prices for the blades. machines that could print. fax. To do all the same tasks with independent machines would cost about twice as much and take up more office space. LaserJet Printers LaserJet printers could handle high volumes of text documents. Color laser technology was a different story. and it is risky to rely on only one device because if one function failed. and could be used on a network.
and price. focusing on quality. The life cycle for a laser printer. paper handling. and read consumer reports. key technologies were printer cartridges. For laser printers. which targeted business user. Some The Home Office Market Individuals with home offices became important to the printer market in the 1990s. and scanner. were the most popular product for them. and printer as a bundle. speed. consideration. 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. which were the larger of the two segments. Case 3 6 . y They also tended to purchase a PC. photoreceptors. Because the PC was the most expensive of these items. it was the focus of the buying decision. 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. after-sales service and support. first-time and repeat buyers. and purchase behaviors. talked to friends. had some characteristics. brand. toners. availability. During the first two phases they visited web sites and physical stores. Once in the stores. shoppers could be influenced by instore demonstrations of other printer brands. Meanwhile. monitor. They came in two flavors. but were more informed. repeat buyers. When they were introducing a new printer category. Manufacturer guarantees were an important buying factor. Mail order was a popular channel for these buyers. or MFP. was two-to-three years. as follows: y y They tended to buy a printer as a single purchase. optics. repeat buyers became like first time buyers.quality. y They usually went through the normal phases of awareness. The all-in-one peripherals. they had shorter shopping periods and were more likely to buy sight-unseen . 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. When they were simply upgrading their existing technology or buying additional units similar to the original.
y Example: Circuit City. Generated their 50% of revenue by corporate account sales force.CHANNELS OF DISTRIBUTION HP had 7 (seven) types of printer channel distribution to customers including: 1. Mass merchants y y y At home market. 3. Salesperson worked on commission basis. 2. Example: Micro Warehouse. peripherals and computerrelated products. Example: CompUSA. Example: Inacom 5. Example: Sears. tend to encourage customers to buy more expensive product. Delivery of goods to customer was almost by mail or courier services company. Department Stores y y y Case 3 At home market. Example: Wal-Mart. 6. Both small offices and home offices were the primary target markets of these offices. Computer Product Superstore y y One type of retailer. The store carried a broad and deep assortment of PCs. 7 . 7. Many types of electronic goods offered. Office Product Superstore y y y One type of retailer. Many types of office product offered. Specialist store focusing on PCs. Corporate Account Dealers y y y No physical stores. Stock limitation of computers and computers related product. 4. Stock limitation of computers and computers-related product. Consumer Electronic Superstore y y y One type of retailer. Indirect mail-order companies y y y Using catalogue advertising and/or internet. y y y Generally knowledgeable store employees to respond to customers questions.
As a result. used distributors to reach such customer rather than going direct. after sales customer service and support. HP used an account team to do business directly with each account. To manage the retail accounts. These distributors could sell only to HP authorized retailers. Case 3 8 . HP provided price protection for inventory that became obsolete on the retail shelf. The retailers also enabled shopper to see the physical products. HP. y Providing price protection. decided time to order. The services provided such as assisted retailers to maintain their level of inventory. 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. y Managing logistics and inventory. get a sense for their speed and judge the quality of their input. These teams worked with their assigned retailers on many fronts. Detailers tended to work for a third party but they were paid and scheduled by HP. HP also did business with smaller retail chains. Establishing category management. RETAIL ACCOUNT MANAGEMENT HP had a solid reputation with its primary retail accounts and was reinforced by all of the services that HP provided. 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. credit/collections from consumer and returns processing.The first three listed above accounted for bulk of sales. which aided the retailer in understanding trends. there was little variation in advertised retail prices across channels. y y Providing merchandise development funds. etc. HP retailers were responsible for a number of value added functions such as: breaking bulk orders and shipping merchandise to individual retail stores. advertising. and detailing. Large retail accounts represented 90% of HP s printer sales. Some assistances including: y Coordinating co-marketing efforts which included cooperative advertising and in-store displays. however. sales assistance.
The internet created the ideal platform for retailers to excel in offering a wide selection of products. Traditional Resellers Traditional resellers such as: Wal-Mart. 24 hours a day. cost of six weeks of inventory in the retail channel and the payment terms to the manufacturer set at 30 days. These companies had existing infrastructure costs and needed to balance strategies between instore and on-line goals. at low prices and significant time savings. b. They are as follows: a.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. and consumer merchandise. office. CompUSA. It offered a large selection of technology. This was a result of all the services the retailer provided. Office Depot. Since the popular HP products were advertised frequently by retailers. Case 3 9 . It caused the declining of the profit margins both for retails and printer manufacturers. They sold only leading branded products at a discount. In general.10% 5% . 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% . eChannels for Computer Products Two basic types of eChannel existed in year 1998.19% 11% .9% 1% .9% 5% .19% US$ 299 (Avg) US$ 999 (Avg) 1% . net margins on HP products were even less than those on competing products. New Virtual Stores New Virtual Stores existed only on the Internet. etc which were using their brand leverage from their brick and mortar base and applying it to the web. the internet was proving to be unstoppable force and was changing the way everyone worked and played.RETAIL PRICES & PROFITABILITY Average retail prices for printers had declined steadily.
They keep no inventory and would send product orders directly to distributors or manufacturers. vice-president and general manager of the Consumer Products Business Organization of the Hewlett Packard. uncertain return on investment. obstacles included: the large investment for developing and maintaining a solid web site. competitors having easy access to information. Pradeep Jotwani. but they hesitated for fear of angering their channel partners. was contemplating the increasing success of eCommerce. MAIN ISSUE In spring 1998. he wondered which Case 3 10 . not their profitability. meaning that shoppers were becoming comfortable purchasing goods sight and unseen . it seemed natural to want to eliminate the middleman and sell directly to consumers online. For manufacturers. Potential threats to Internet retailing came from mass merchandisers like Wal-Mart or from manufacturers themselves. Jotwani was now considering a move to sell new printers directly to consumers via this new eChannel. and customer-incurred shipping charges. The examples of this kind of store are Value America (VA) and Costco. Even retailers posed a threat as they introduced private label products that competed directly with national brands. Internet businesses were valued according to their prospect for future growth and their number of new customers. This tended to be very high in the early brand awareness building stages. especially from sales of refurbished printers through an Internet outlet center since December 1997. Using Internet as a main tool for business transaction had no free of risks. 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. the most critical aspect of pure play Internet companies was the expense of acquiring a new customer. but was expected to decrease later as economics of scale came into reach. and superior channel muscle were expected to pose a formidable challenge to existing web retailers. In addition to possible channel disruption. state of the art of information technology and distribution systems. higher rates of product return. Wal-Mart s strong brand awareness. In addition. security and bandwidth issues. If he were to make such a move. Going direct was not only about increased gross margin.
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. HP management was also assessing the position of its Internet outlet center that sold refurbished products at reduced prices. The company also believed that the retailers could have provided better in-store support for HP products. If competitors took a direct route. HP could benefit from possible retail retaliation. This stemmed from high sales personnel turnover and low product knowledge. HP also believed there would be little channel conflict by focusing on refurbished products. if competitors became successful on the Internet. and how to communicate this strategy to the channel partners without damaging the existing distribution structure. Alternatively. The outlet store was established for two reasons: 1. If competitors were not selling directly on the Internet at this time. as well as the associated printer supplies and accessories. Wait and See HP could continue selling refurbished printers through its internet outlet center. To enable the company to sell open-box returned products. 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. HP could join the new channel at a more mature stage. HP would be taking a risk by being to use that channel. 2. HP management considered its option: 1. To use it to learn the mechanics of Internet direct selling and as a means of recognizing the increasing number of Internet shoppers. recovery of which was a significant problem prior to the establishment of the online store. Case 3 11 .products to sell online at what prices. which would maintain channel relationships and profits. nor accounted for consumer s awareness and preferences for its products.
including marketing and advertising allowances. build relationships and strengthen the HP brand. so it seemed reasonable to expand with them on the web. The problem was that these stores were moving slowly in the eCommerce arena.2. Participates through Online Retailers Some others traditional retailers such as CompUSA were selling via online stores by mid of 1997. If this course was taken.com. These companies had had low printer sales in the past. A budget would also be needed to allow for development and maintenance of the web site. 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. HP was already selling to the bricks and mortar stores. Although there was first-mover risk. there was also potential benefit as evidenced by success of Amazon. a business plan would have to outline the products and prices to be offered online. RECOMMENDATIONS ??? ****** Case 3 12 .
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