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DISTRIBUTION STRATEGY OF HEWLETT - PACKARD
DISTRIBUTION STRATEGY OF HEWLETT - PACKARD - March 10th, 2011
Hewlett-Packard Company (NYSE: HPQ), commonly referred to as HP, is an American multinational information technology corporation headquartered in Palo Alto, California, USA. The company was founded in a one-car garage in Palo Alto by Bill Hewlett and Dave Packard, and is now one of the world's largest information technology companies, operating in nearly every country. HP specializes in developing and manufacturing computing, data storage, and networking hardware, designing software and delivering services. Major product lines include personal computing devices, enterprise servers, related storage devices, as well as a diverse range of printers and other imaging products. HP markets its products to households, small- to medium-sized businesses and enterprises directly as well as via online distribution, consumer-electronics and office-supply retailers, software partners and major technology vendors.
HP's posted net revenue in 2009 was $115 billion, with approximately $40 billion coming from services. In 2006, the intense competition between HP and IBM tipped in HP's favor, with HP posting revenue of US$91.7 billion, compared to $91.4 billion for IBM; the gap between the companies widened to $21 billion in 2009. In 2007, HP's revenue was $104 billion, making HP the first IT company in history to report revenues exceeding $100 billion. In 2008 HP retained its global leadership position in inkjet, laser, large format and multi-function printers market, and its leadership position in the hardware industry. Also HP became #2 globally in IT services as reported by IDC & Gartner.
Major company changes include a spin-off of part of its business as Agilent Technologies in 1999, its merger with Compaq in 2002, and the acquisition of EDS in 2008, which led to combined revenues of $118.4 billion in 2008 and a Fortune 500 ranking of 9 in 2009. In November 2009, HP announced the acquisition of 3Com; with the deal closing on April 12, 2010. On April 28, 2010, HP announced the buyout of Palm for $1.2 billion. On September 2, 2010 won its bidding war for 3PAR with a $33 a share offer ($2.07 billion) which Dell declined to match.
On August 6, 2010 CEO Mark Hurd resigned. Cathie Lesjak assumed the role of interim CEO, and on September 30, 2010, Léo Apotheker became HP's new permanent CEO and Ray Lane, Managing Partner at Kleiner Perkins Caufield & Byers, was elected to the position of non-executive Chairman. Both appointments were effective November 1, 2010
Distribution channels have become the least glamorous strategy in the B2B marketing portfolio. Who writes about building channels, nurturing partners and channel performance?
I feel grizzled just tackling this subject. Social media, search marketing and new media are the topics with heat even in the B2B crowd (a small group compared to consumer marketers, I might add). Frankly, there’s been nothing new or exciting to say about distribution strategy for many years.
Many marketers in established companies don’t give much thought to distribution strategy. Maybe it’s because they think of distribution as the movement of a physical product from one place to another.
Or maybe it’s because distribution is a strategy that’s only discussed in the executive suite, and marketers often don’t have a seat at that table. Maybe it’s just because it’s rare to find new case studies and stories about innovative channel design and management.
A key marketing strategy
But distribution strategy (one of the “4 Ps”, BTW) is perhaps the most important weapon in your arsenal. Great distribution strategy and execution can dramatically boost your top line. A poorly-performing channel can do the opposite.
For many B2B service firms (including SaaS companies like us who don’t physically distribute a product), “channels” are somewhat intangible and take creativity to apply. For example, you can create a private-label version of your service and offer it to large partners to offer to their customers. Or you can create a packaged offering where you join forces with other companies to offer a larger suite of services.
We’ll write more about creating channels for service companies in our next post. Today I’m focusing on improving an existing channel using H-P’s PC division as an example.
H-P versus Dell
While H-P used to own the #1 spot in the PC market, Dell took over the top spot in 2003. Dell’s direct distribution model became the envy of all PC manufacturers and made them a darling on Wall Street (and a case study for all MBA students). Christopher Lawton’s post for the Wall Street Journal provides great detail about H-P’s fall and strategy to regain the top spot.
It started in 2005 when H-P CEO Mark Hurd hired Todd Bradley to run its PC business. Bradley quickly found out that H-P was concentrating resources where Dell was strong: in direct sales over the internet and phone.
More importantly, in focusing in head-to-head competition with Dell, H-P was neglecting its retail stores. Bradley found a slew of problems:
Late and incomplete deliveries
Strained partner relations
No marketing focus (the printer division handled PC marketing)
H-P’s research also showed that 58% of PC buyers had no preference whether they bought a PC in a store or online.
Let the plum tree wither for the peach
So instead of fighting a losing battle online, Bradley shifted H-P’s focus to a battle it could win: in the retail distribution channel.
Bradley immediately began repairing relations with retailers, freshened designs to appeal to retail buyers, formed the PC’s own marketing group, upped his retail outlet marketing budget, and designed new campaigns targeted to the retail buyers.
Some of his campaigns such as “The Computer is Personal Again” with rapper Jay-Z and fashion designer Vera Wang alarmed H-P employees, who felt Bradley was too focused on consumer PCs, ignoring corporate business.
He shrugged off the criticism. “I wasn’t holding an election.”
The results? H-P’s retail outlet strategy vaulted it back to the undisputed world lead in personal computer sales.
When you’re losing marketing share, shifting the battle to one you can win might work for you. (It’s one of the 36 Stratagems of ancient China: Let the plum tree wither in place of the peach.)
Six ways to improve your channel’s performance
If you need to improve your channel performance like H-P, here are six things you can do to improve your top line.
1. Make it a priority. Devote resources to channel management – preferably at least one dedicated manager whose sole responsibility is to manage those relationships and build the marketing programs to drive revenue through the channel.
2. Develop measurements and track performance. Know who your best sales performers are at each point in the channel. By tracking orders, volume and total revenue at each point, you can identify and improve underperforming partners and keep your top performers happy.
3. Communicate! Build relationships at each step of your channel. If you’re not talking with your partners, how can you identify problems and solve them? And how will you know whether your programs are working and how to make them better?
4. Drive revenue through the channel. Take ownership of the marketing campaigns that will drive revenue at all levels through the channel. Your partners have to focus on building their own customer base, not marketing just your product (remember that you’re not the only solution they offer).
5. Avoid pricing conflicts. Establish a pricing strategy and stick to it. If channel conflict arises because of price, attempt to resolve it ASAP.
6. Address conflicts swiftly. Since distrust and channel conflict is common, it’s important to address problems quickly to find a solution.
After writing this, it’s even clearer to me why there’s no buzz about channels. Building and managing traditional channels isn’t glamorous and requires a lot of elbow grease. But even though channels have little sizzle in the marketing mix, they’re a big piece of the steak.
1) HP is a VERY BIG supplier to channel and 2) The company that Mark Hurd formerly led, NCR, utilized the channel to a far less extent than HP. So the natural concern is Hurd may steer HP toward a greater percentage of direct business in their distribution model.
It was interesting, especially at first, to watch various editorials attempt to "read the Mark Hurd tea leaves." This started IMMEDIATELY AFTER his very first press conference, which ANNOUNCED his appointment as the new HP CEO. The better part of one issue of a prominent channel magazine seemed dedicated to trying to decipher the impact on the channel by interpreting his earliest words. Hurd basically said, "I don't know yet". His appointment had just been announced within the last hour, so that seemed to be a pretty reasonable statement! While certainly not universal, many a columnist and channel spokesperson interpreted this simple, honest statement to be a putdown of the channel's role at HP, with dire consequences certain to follow if this held true. These wags even went on to warn him of how the channel will turn on HP. They pretty much threatened that he had better live up to recent HP channel executives promises to make the channel even more prominent in HP's distribution model. It's pretty ironic considering many HP executives will tell you that most of their business already flows through channels, sometime hampering their ability to gather good marketing data. To quote a high profile (and somewhat silly) primetime TV reporter, "I say give me a break!"
The whole thing was really jumping the gun, and frankly quite silly. As Hurd has had a bit of time to study the massive company he is taking over, these same channel players seem to be pleased with his follow-on statements, and the direction they believe he will lead HP with respect to the channel. I got quite a chuckle over a period of weeks reading the various stories. As I stated above, it's ironic to me, since HP already pushes the great bulk of its $80B business through the channel. While doing this, their business is certainly not optimized, and the key competitor breathing down the company's throat is Dell. Dell's direct distribution model is clicking on all cylinders, moving down the line like a Japanese bullet train while attempting to blow HP out of the water. And if HP doesn't make some fundamental improvements to its business model, it just might happen. You would think it might be wise to examine whether utilizing direct distribution more heavily might be good for HP to study.
Of course, my channel colleagues reading this will want to burn me at the stake for espousing such blasphemy! Go direct—how dare you say such a thing! That is the nature of channel conflict—all parties want the business for THEMSELVES. Much smoke is always blown by the various interested parties about what is right and fair, and commitments that were made and so on, but let's face it—it's basically self interest. They just want the business for themselves.
So what's a company to do? Just sell direct, or just sell through VARs, or just sell through retail? Unless you have strict exclusive territories throughout your distributions system, problems will still arise. You'll always have some kind of conflict (two direct reps or two resellers fighting over who should have an account), but at least you would eliminate cross-channel conflict, which can be particularly complex and nasty.
Well, limiting yourself to a single channel focus certainly may make your life less complicated, and less rife with conflict. But unfortunately, in most cases, you'll be leaving a lot of money on the table. If you rule out natural channels that can sell your product, you won't be maximizing your return on your heavy investments in IP, which should be one of the fundamental concerns of any business.
HAVE YOUR CAKE AND EAT IT TOO
So I say, sell through every channel that makes sense. If done poorly, it can, and almost certainly will, be very messy. You'll be sorry you did it, and probably become a convert to a single channel, or at least less complex, distribution model. But it doesn't have to be so. Yes, you CAN have your cake and eat it, too.
There are many potential channels for your products: direct, OEM, one-step through VARs, 2-step through distributors/VARs, retailers, independent sales reps, strategic partner referrals, and more. In extreme cases, ALL of these potential channels may be appropriate ways to deliver your product to the market. The question I am often asked by clients is "How do you make it all work without it blowing up in your face?" The way you can do this is to live by two very simple rules:
1) DON'T EVER SCREW A REAL BUSINESS PARTNER
It actually sounds pretty simple and easy. Yet humans can be greedy creatures, and just a little greed in partnering can quickly ruin reputations for a long time. There's the greedy VAR who thinks he deserves a piece of every deal with any customer within a 100 mile radius of his office—a customer he might have only sent a piece of mail, or cold-called a year before. But more seriously, it only takes one weak-willed sales manager at a manufacturer or software developer, trying to make quota or maximize his income, to cause real havoc. If he attempts to cut a channel partner out of a deal that they drove, or had legitimate influence on—this is a mortal sin. Your channel partners will be outraged, and they will spread the word and not soon forget. Your reputation has been tainted, and that crucial trust that is necessary to make any business relationship work is now gone. Everything becomes harder. Partners aren't willing to share information about what's going on in accounts—maybe even withholding names on potential new deals. A struggle for account control, rather than teamwork, becomes the rule of the day. So if it is a REAL partner, one who is trying to drive business to your mutual benefit, do whatever it takes to make it right. Give up short-term profitability to maintain a long-term profitable relationship. Don't ever, ever screw a partner in the name of short-term gain. It can ruin your channel business long term.
2) DO ALLOW BUYERS TO PURCHASE THE PRODUCT FROM WHOM THEY WANT TO BUY IT
If you are honest and fair with people, potential channel conflict shouldn't unnecessarily stop you from maximizing revenue by using multiple methods of delivering your product to the market. There is a range of customer profiles in the market. Some want to buy everything through their trusted VAR/Integrator, who helps give them a third party evaluation of the product's virtues. Others want to deal directly only with the manufacturer or developer of the specific product they are purchasing. A third category of buyers likes to buy as much as possible through their favorite large manufacturer—this is a great reason to OEM your product to the IBMs of the world. In each of these situations, the channel that is best positioned, via relationship or type of support, should and usually will get the deal. In each situation, if your product isn't available in that channel, my may not get the deal. The last category of buyer, however, is different. This is the bargain basement buyer, the one who couldn't care less who he buys from, as long as he gets the lowest price. These are the people that can wreak havoc on a multi-channel distribution system, if you aren't careful.
BEWARE THE BARGAIN BASEMENT BUYER
It's this price conscious buyer that will often bring cross-channel conflict to the forefront. Since they are seeking the lowest price, they end up shopping the purchase across many potential sources for the product, creating great price competition among your channel partners. This is where conflict is often born. There are many tactical mechanisms to limit these situations (such as deal registration), which I won't delve into. The main thing to have thought out is where these customers should end up buying. There are two basic approaches:
1) Tell your value-added channels that this price conscious buyer, who isn't looking for any added value, isn't going to buy from them. You might decide that this buyer is going to find the lowest price at retail, or maybe direct if they buy in volume. In this case, it's important to set those expectations up front when you recruit channel partners. Let potential partners know where they fit, and where they don't. They can walk away if they don't like it; otherwise they've been warned. This is being fair and honest. Before potential partners invest in selling your products, they should have the real picture of what they're getting into.
2) Conversely, you can strive for street price equity between channels. This gets tougher to do the more channel types you have, and also the larger your channel is in general. But it can be done. The main thing here is to avoid giving incremental channels discounts based upon volume. If you do, incentives are created for a channel player to discount to achieve volume—thereby lowering their costs, so they can win more business via aggressive discounting. This leads to a continuous downward spiral in your street price, and to unhappiness and channel conflict to such a degree that will drive you to drink, or at least a career change. It will get ugly. But if you limit your channels to those that truly are strategic for your product, and which add real value, it can be managed. The key is to set discount schedules based upon value-add and associated costs, rather than revenue or unit volume.
In terms of fixed pricing, HP utilizes the promotional and bundling pricing strategies. Used as an incentive for consumers to buy more than one product, promotional pricing is used by many computer companies. HP is currently offering several discounted, free, and bundled products and services to appeal to consumers by using both the bundling and promotional price strategies. One example of HP utilizing these strategies is the New HP Pavilion dvgz laptop. Priced at $599.99, if you buy this laptop you receive other services as well as several discounts which include: a free memory upgrade to 3GB memory as well as a 320GB hard drive, $100 rebate, free color customization (stated as a $25 value), $30 off Microsoft Office Small Businesses 2007, $50 off on Blu-ray drive, and free shipping. The second product HP offers is the HP Pavilion dv4t series, also priced at $599.99. If you buy this PC you will also can obtain several discounts and services for free, valued at $436, which includes: $150 instant rebate, free double memory upgrade from 1GB to 3GB (stated at $100 value), free double hard drive upgrade from 160 GB to 320 GB (stated as a $90 value), 50% off High-Definition LED display (stated as a $30 value), $30 off Microsoft Office Small Businesses 2007, and free shipping. Lastly, another product that can be categorized into both the bundling and promotional pricing strategies is the HP Touchsmart tx2z Series. Priced at $899.99, HP offers a $419 discount which includes: $200 instant savings, free double memory upgrade from 2GB to 4GB (stated as a $100 value), free double hard drive upgrade from 160BG to 320GB (which is stated as a $90 value), $30 off Microsoft Office Small Businesses 2007, and $40 off on 320GB Pocket Media Drive.
All of these products and services that cater to the promotional and bundling pricing strategies appear on HP’s homepage in flash reels, have customer reviews and ratings, and if you buy these products within a certain amount of time, you receive 90 days with no payments. Furthermore, right above the flash reels of these HP products is a promotional pricing strategy that offers free shipping for an order of ink, toner, and paper delivered the next business day and all qualifying offers over $49.99.
HP also uses the segmenting pricing strategy to offer its customers a variety of options to pay for its services or technology. According to Business Wire, One of the options HP is giving its consumers is pay-per-use utility pricing which charges consumers for actual usage on a monthly basis. This technology works by measuring the percentage of utilization on each Central Processing Unit. The advantage for HP customers is that they will only pay for processing they are utilizing. They also have the option to use additional processors, therefore processing is not limited.
HP was recently named one of the top 25 companies who do more to satisfy consumers according to BusinessWeek’s third annual Customer Service Champs Survey. Furthermore, HP’s net revenue has continued to increase in the last 4 years (from $79,905 million in 2004 to $118,364 million in 2008). Its year-over-year net revenue percentage increase was 13% in the fiscal year ending in 2008. In terms of assessing the effectiveness of HP’s pricing strategies, I would say that HP is highly successful because it has strong financials and consumers seem to respond positively to its pricing strategies. Strong brand image and marketing initiatives have helped to improve HP sales. In fact, by placing its pricing strategies along with the products and services it wants to sell in the center of the HP homepage, it is using marketing tactics and web design to draw the task-oriented consumers to these special offers. Moreover, HP makes the customer reviews and ratings easily accessible to other consumers when navigating through the web site. This shows the consumer that HP is a trustworthy company which truly cares about customer satisfaction and experience with its products.
Besides adjusting its product line and pricing strategy to confront intensifying competition in the ICT market, HP has also been making extensive changes to its distribution strategy in an effort to reduce distribution costs and boost earnings. This report will examine HP's distribution strategy and analyze the opportunities and challenges facing HP, with the aim of clarifying HP's overall performance in the global PC market
Last edited by abhishreshthaa; March 10th, 2011 at 05:36 PM..
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