HP Printers
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Transcript of HP Printers
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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 !