Pricing strategies and price politics in the key account enterprise business

Content

1.0 Executive Summary

2.0 Introduction
2.1 Foreword
2.2 Goals
2.3 HP Project Plan
2.4 Structure

3.0 HP a global acting IT company
3.1 The HP story
3.2 HP Financial facts
3.3 HP product and business portfolio
3.4 HP organizational structure
3.5 The HP competition
3.5.1 Dell Corporation
3.5.2 Fujitsu / Siemens
3.5.3 Toshiba
3.5.4 IBM
3.5.5 Pre-merger Compaq
3.6 PC Market competition overview EMEA

4.0 Pricing Theories
4.1 Preconditions of the pricing theory
4.2 Markets
4.3 Price and the theory of supply and demand
4.4 Pricing objectives and the break even point
4.5 Pricing methods
4.6 Customer decision process

5.0 Pricing methods HP PSG EMEA Sales Dev
5.1 Costs
5.2 List prices
5.3 Marketing guidelines
5.4 Channel
5.5 TV / MA9 / M72 pricing and MWD
5.6 War Room
5.7 Pricing strategies
5.8 Direct or Indirect Sales channel ?

6.0 Theoretical and HP Pricing in comparison
6.1 Pricing as a competition advantage?
6.2 Theoretical pricing methods
6.3 HP PSG EMEA Sales Dev pricing
6.4 Comparison

7.0 Strategic pricing recommendations and scenarios
7.1 Pricing environment
7.2 Pricing scenarios
7.3 Pricing recommendations

8.0 Deal Escalation Process and redesign of request forms
8.1 Large deal pricing request and escalation forms
8.2 Recommended Big Deal Request Form (BDRF)
8.3 The GPAR Form
8.4 The War Room Request Form

9.0 Conclusion

10.0 Sources
10.1 List of abbreviations
10.2 List of charts
10.3 List of illustrations
10.4 Interviews
10.5 Bibliography
10.5.1 English
10.5.2 French
10.5.3 German
10.6 Internet links
10.7 HP Intranet
10.8 HP Grenoble Internal Servers
10.9 Other Sources

11.0 Appendix
11.1 Picture gallery
11.2 Documents
11.2.1 HP Financial data in detail
11.2.2 Big Deal Request Form (original version)
11.2.3 Global Pricing Approval Request (original version)
11.2.4 War Room Request Form (original version)
11.3 Report of the interviews and prepared questions

Affidavit

Index

1.0 Executive Summary

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mong the critical factors in the go-to-market strategy for key customers, pricing has a significant importance for the financial results of a company and a direct impact on profit.

This thesis “Pricing strategies and price politics in the key account enterprise business” compares theoretical pricing strategies identified in leading scientific literature with the pricing methods used in the HP Europe Sales Development environment. With the knowledge gained of this analysis, case studies with typical deal scenarios are documented and pricing strategies as an example recommended. A further result of this research is the recommended redesign of the deal escalation request forms (Big Deal Request Form, Global Pricing Approval Request and War Room Request Form) for key customers used in Sales Development.

For collecting the necessary information an extensive research in English, French and German literature, in the HP Intranet and documented interviews as well as continuous discussions with managers and the German Sales Team were done.

All theoretical pricing methods found in literature already exist in the HP Sales Development business environment or exist as a slightly modified method except the fixed pricing (4.5). The case studies and deal scenarios with pricing recommendation are an input to the Sales Development Team for future pricing. The deal escalation request forms are redesigned for the purpose of efficiency, information sharing, and risk management. It can be used for all European countries for regional, global and special escalated HP pricing requests from the country based Sales force to the Sales Development.

2.0 Introduction

2.1 Foreword

“No one should think that the area of pricing , particularly of newer forms of information products and services, is stable or that there are any simple guidelines. Product pricing is fluid, changing and rather uncertain as technology is changing the relative economics of traditional forms versus the new products and technologies.” ^[1]

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ales is the part of a company with the most direct contact with customers and the market. Both give the company comment in terms of revenue and market share. It is the long arm of the Marketing, Finance and Product Development Division. The different tasks of the Sales Department are measurable in customer satisfaction and the profit of the company. For selling the products is one very relevant. This factor can still push developed high-end products, a brilliant quality and customer satisfaction down or up. Usually this factor is the key to the customer decision process and let deals win or loose; it is the price.

In many industries the Internet causes a high market transparency and competition worldwide. Because logistics are well developed, communication is possible everywhere, global players produce and develop 24h and 7 days per week the new technologies and globalisation are already visible and accessible for everyone. The global village ^[2] is reality and influences the professional life as well as the life of the growing generation.

IT and high-tech markets are visible and transparent. Costumers can compare pricing from all over the world and order a product from another continent if it is cheaper and has the same value as another product made 10km away from home. The paradigm of a market with geographical frontiers and the uninformed costumer has disappeared. Prices are internationally visible and companies compete in a global environment.

In the IT industry the competition has become harder and harder. For most customers the performance and the pricing of a product seem to be the only decision influencing fact.^[3] Since Michael Dell started his business with the direct business model the question for all other competitors is not only if we have the best products for the best price. The question is also do we have the right business model.

Pricing in the IT industry is very complex because the supply chain is spread all over the world. Fluctuating currency rates or sudden cost increases caused by a shortage on the global memory stocks, for example, can have a large impact on the prices and the market.

This interesting and challenging environment creates a business surrounded with a large variety of complex factors. Furthermore it is not easy to have an overview of all factors that have an impact on the success in the business.

Because I wanted to understand more of the IT business and the pricing of the Big Deal^[4] business I choose to write my dissertation for Hewlett-Packard in the HP PSG Sales Development Team Grenoble, France. (Please look for a complete list of used abbreviations in chapter 10.1)

This placement was a great opportunity to learn more about sales for big customers and to understand the strategic business methods behind it. Being the interface between the European Marketing on one hand and the country-based sales force has the advantage of being always informed about the ongoing business and the negotiation between the different parties.

2.2 Goals

After a short introduction in HP’s company structure and business environment a general overview about the existing kinds of pricing strategies and politics in the scientifically literature shall be given. Comparison of already existing pricing methods in HP with theoretical pricing methods to find aspects that might improve the work of the Sales Development Department and to show the variety of the different pricing techniques.

To present with reference to this research a certain number of deal scenarios with pricing recommendations as a help and support for the Sales Development’s current work. As well as a suggestion of how to improve the deal escalation request forms (such as the Big Deal Request Form, the Global Price Approval Request and War Room Request Form) for more efficiency and highlighting the key information.

2.3 HP Project Plan

Project Description

“Pricing strategies and price politics in the key account enterprise business”,

- An analysis in reference of the company HP in consideration to the merge with Compaq -
Main contents:
- Research of the different theoretical pricing models in the relevant literature
- Research off the different pricing methods which exist in HP’s daily big deal pricing process
- Research off the different pricing methods which are used in HP PSG EMEA for large customers
Project Goal:
- Understanding how to find the price for a customer and the different pricing strategies which can be chosen
- Redesign of deal escalation request forms for the HP PSG Sales Development Department in Grenoble
- Pricing scenarios with action recommendation for different pricing situations

Issue statement

Key questions:

- How to find the price for a certain deal and customer?

a) What information do I need?
b) What measurements do I have?
c) What tools can I use?
d) How do I know that the price was the right one?

- What kind of pricing techniques exist?

a) What can be found in the economic literature?
b) What kind of pricing techniques are already in use at HP?

Is the price most important?

Scope:

Is

- Flat discount
- Shopping basket
- FWD Cost Plus
- Must win deals
- War room

Is not

- Reworked deal escalation forms after the merger for the War room, global and normal M72 deals

Deliverables:

- Comparison between theoretical pricing methods researched in literature and the already existing pricing strategies in the HP EMEA PSG Sales environment
- Extended deal escalation request form for all European countries
- Case studies with pricing recommendation

Assumptions:

- Because pricing is one of the critical success factors in the go-to-market strategy of HP it is necessary to choose a pricing strategy individually for a certain deal. The pricing scenarios can help to find an adequate strategy and the redesigned deal escalation forms improve the daily work and are more efficient

Risks and Constraints:

- Caused by the merge the pricing process changes dramatically
- If the tool is not easy and efficient enough only a few people will use it

Resources:

a) Information and research taken out of literature / interviews with HP employees or sources by IT syndicates
b) Online libraries
c) Library Université Stendhal
d) Library HP
e) University of applied sciences Kiel
f) Library Weltwirtschaftsinstitut Kiel?

Interviews with the responsible people of:

1. CPL for PSG (Audrey Donegan)
2. Costs for PSG (Alexis Hendrickx )
3. Forecast of costs and benchmarking (Georg Bernskötter)
4. Sales Dev (Charl Snyman)
5. Various interviews with German Sales Reps and members of the Sales Dev Team

The Team (Who):

Tutors:

on University site: Prof. Dr. Dipl-Ing. Bernd Vesper

Prof. Dr. Mohammed Es-Souni

on HP site: DRS Gerwald Van-der-Gijp RC

Dipl.-Bw Horst Karlsberg

Project Supervisor: Charl Snyman

Author: Christian Lang, Matr. Nr. 900362

The project Plan (When and How):

- Start of writing: 01/08/02 ü
- Finish of written part: 02/12/02 ü
- Presentation of thesis to HP: 04/12/02 ü

2.4 Structure

Pricing is a complex topic that depends on a tremendous number of different factors. Similarly to how pricing can be different for every business and market, it can also be different for each company as well. For this reason it is very difficult to uniform pricing strategies in general and give an advice for everybody. To keep the complexity down and to add as much value as possible to the PSG Sales Development Team the I always kept in mind what could be relevant for the department, helps most to understand the pricing factors, gives some basic knowledge about this topic and includes also a practical part as an outcome.

This thesis is structured in a way to get step by step to the main goal of being able to rework the deal escalation forms and to give recommendations for certain pricing situations to the department. At the same time the structure also allows to give the University of Applied Sciences in Kiel, Germany the opportunity to understand from an external point of view how the business environment that I worked in looks like and under which circumstances this project was created.

To give a short impression about Hewlett-Packard as a company the first main chapter No 3 starts with the history of the company, shows some financial key figures to get an impression of the size of the company and gives information about the organisational structure.

Chapter No 4 is a theoretical part, which was done with literature studies. It explains the pricing basics starting with a critical view on pricing models, markets, the theory of supply and demand, costs, the Break Even Point and theoretical pricing methods as a preparation for the following chapters. After having a look in the HP world this chapter shall broaden the horizon of pricing also on having a short look on competitors like Dell, Fujitsu-Siemens, Toshiba. After a short introduction on company history the IT market situation in EMEA is shown.

Chapter No 5 is done in the background of my current work in the Sales Development Department office. It gives an overview over the different pricing methods and strategies used in HP PSG EMEA. Starting with basics like costs and list prices it continues with the special pricing accounts and their profitability delegations.

The sixth chapter is a comparison of the theoretical background given in chapter 4, HP’s existing pricing methods described in chapter 5.

As a result of all chapters before, in chapter No 7 certain typical pricing scenarios are described and a fitting pricing strategy for this deal is recommended as an example. Eight Cases give an overview about typical deals depend on the customers IT and procurement strategy as help for the Sales Development Team and as a practical application of the theoretical research.

In the last chapter the deal escalation request forms for the Big deals (Big Deal Request Form, BDRF), for global deals (Global Pricing Approval Request, GPAR) and the War room, which are used as a standardized formulary for the sales staff is reworked and redesigned. Also for this work the research done in previous chapters is the basis.

This thesis has 143 Pages and includes a CD with the digital version as a Word 2000 and Acrobat *.pdf document, most of the internal HP information used in the thesis, recorded interviews and multi medial information about the company. The information given in this document is illustrated with 16 charts and 35 images. The literature used is three lingual (English, French and German).

Where it made sense I used hyperlinks (content, list of charts and abbreviations) in the document which can easily and comfortable been used by opening the digital version in Microsoft Word 2000. Also the listed bibliography is transformed in hyperlinks and by clicking on the name of the book and author the reader can switch directly to the page where I used this resource. As a help to understand the idea of the structure in image 1 the content of this document is visualized.

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Image 1: Structure of the dissertation

- Chapter 2: Introduction / structure and goals of the dissertation
- Chapter 3: HP story and company background, competition and IT market
- Chapter 4: Research on theoretical pricing methods in relevant literature
- Chapter 5: Pricing methods used in HP PSG EMEA
- Chapter 6: Comparison
- Chapter 7: Pricing scenarios and recommendations
- Chapter 8: Redesign of the deal escalation forms
- Chapter 9: Conclusion

(2.0) (3.0) (4.0) (5.0) (6.0) (7.0) (8.0) (9.0)

3.0 HP a global acting IT company

3.1 The HP story

What is the HP way ?

“I feel that in general terms it is the policies and actions that flow from the belief that men and woman want to do a good job, a creative job, and that if they are provided the proper environment they will do so” ^[5]

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s the most business stories the HP story starts with people who meet at random and had a great idea. When Bill Hewlett and Dave Packard meet in 1934 during a camping and fishing trip the idea of the later company Hewlett-Packard was born. Starting in a little garage in Palo Alto the two friends made business on their knowledge about electronics and their innovative ideas. As most start-up companies in modern ages HP had it largest challenges in handling the extremely fast growth.

The HP story begins with the first HP product, the 200A Audio oscillator^[6] that was produced in the garage rent by Bill Hewlett. HP’s early times are followed by a large variety of innovative and successful product ideas in the following years. The secret of HP’s success is the management’s focus on personal involvement, good listening skills and the strong belief in that everyone in an organization wants to do a good job if the employee has the freedom to do so^[7] The early start up days of HP resulted to a very open and flexible style of management. Every step had to done without knowledge of the past. Dave Packard’s famous management style that is called “management by walking around” was the first step to the later called management by objective.

Bill and Dave were always concerned about their employees and tried as hard as possible to create a working environment that could yield maximum performance. In literature this attitude is often mentioned as the key of HP’s success.

“The achievements of a company are the result of the combined effort of all individuals. Furthermore HP confirms its attachment to the philosophy of innovators which underlies the success of this company.”

[Translated by the author]^[8]

Employee insurance plans, sport and leisure offers attract young people to work for HP and create a positive working environment. The communication used was always direct and HP flat hierarchy keeps information interaction between management and employees easy.

In 1959 HP becomes a global company with it first abroad manufacturing plant in Böblingen (Germany). The European marketing organization was established in Geneva (Switzerland) as the European headquarter. From this base, HP steadily expands its European operations outside from Palo Alto, California (USA). In the early 1960’s HP enters as one of the first companies the Asian market and starts the joint venture Yokogawa Hewlett-Packard (YHP) in Tokyo (Japan). By 1963 the overseas sales already account for 18 percent of HP’s business. In the following decades HP produces analytical electronically products and components for science and medicine. Also the calculator product line is very famous and successful. At the end of the 1970’s the company is becoming to be a leader in the launching computing industry. HP starts the 1980 as a major player in the computer industry with a full range of computers, from desktops machines to portables to minicomputers. The products are also linked with its electronic instruments and medical and analytical products, making them faster and better performance.

HP makes its entry into the printer market with the launch of inkjet printers and laser printers that connect to personal computers.

HP’s high quality, inexpensive inkjet printers spell the end of dot-matrix printers. The LaserJet printer line, which debuts in 1984, goes on to become the company’s most successful single products line ever. The quality and reliability of HP’s printers make HP a highly recognizable brand by both consumers and businesses.

In the beginning of the 21st century HP focuses on three key areas of invention: connected access devices, infrastructure solutions and applications that can be delivered over networks as web services. In the year 2000 HP moves up the Fortune 500 listing to No. 13.

The long-term strategy is being the leading provider of access devices, applications delivered as Web services and running on infrastructure solutions. Also in enterprise storage Windows, UNIX® and Linux® Servers, PCs, management software, imaging and printing devices and IT services HP wants to be the leader on the market.

On September 4th 2001 HP announced the merger with Compaq and 8 months later the largest IT Company in terms of revenue, number of employees and product portfolio was created. With a revenue of 80 Billion USD, a product range of 20.000 products one billion customers worldwide the new HP takes a leading position in the IT industry^[9]. The goals of the merger are to create the Nr.1 IT company and with a larger market share and lower costs. The approximately cost savings from 2003 on will be around 2 Billion US $.^[10]

As the main goals for the merger the following were communicated:^[11]

Goal 1: Extension of the product portfolio
Goal 2: Better ability to innovate
Goal 3: Leadership in technology
Goal 4: Leadership in all parts of the IT industry
Goal 5: Extension of the cooperation with partners
Goal 6: Improvement of the cost structure

Because the economy in 2002 started to slow down, a merge costs a lot of money, the integration process needs its time, and the two business styles of the companies need to be in line the new HP is getting in a tough time. 2002, the first results of the merge will become visible. Only after years of observation, however, will the merge prove itself a success.

"Fiscal year 2002 promises to be one of the most momentous years in the [HP] history …we pursue the same goal as the people who gathered at the Mission Inn some four decades ago - to build a stronger, more vibrant HP. A company that in these new technological times will be known for its character as well as its creativity, its people as well as its products. A company not content to rest on its legacy, but determined to build on it."^[12]

Although in the new HP a lot of things changed and will change, but the roots of its founders Bill Hewlett and Walter Packard are still there.

With the roots in the mind and the new vision in front of the management HP, created a new company. Stagnation and inflexibility are the great dangers of a company after a certain size.^[13]

“As Bill and Dave understood, the real genius of the HP way is that it's a legacy built on innovation, bold enough to embrace change and flexible enough to absorb it. The spirit of those original seven principles continues to guide us to this day.”^[14]

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Image 2: Bill Hewlett’s and Walter Packard’s Garage where they started business

Source: HP Intranet

In 1989 the state of California designated the Addison Avenue garage as a Californian Historical Landmark and “the birthplace of Silicon Valley”.^[15]

3.2 HP Financial facts

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Chart 1: HP financial figures of the fiscal years 1999 / 2000 / 2001

Source: HP Annual Report 2001 p.4 (in detail see appendix)

The data in chart 1 is taken out of the HP annual Report 2001 to give information about the size and financial volume of the company.

It can be seen that the IPG group is the largest. The fiscal year 2001 has been, like for the most companies in IT business, a year under pressure of the beginning slowing down economy and the stagnation in the PC market.

3.3 HP product and business portfolio

After the merger the new HP has the four main business parts Imaging & Printing Group, Enterprise Systems Group, Personal Systems group and HP Services.

Imaging & Printing Group (IPG )

Print and image solutions for business and private customers. For example: print hardware, all-in-one products, digital cameras, scanner and equipment

Enterprise Systems Group (ESG )

IT infrastructure like enterprise storage solutions, servers and management software for a large number of solutions

Personal Systems Group (PSG )

Personal computing solutions with Laptops and Desktops for business and private customers as well as Workstations, Handhelds^[16] and Internet appliances.

HP Services (HPS )

IT service organisation with consultancy in mission critical infrastructure services

The different business branches are differentiated on various channels:^[17]

ESG , Enterprise Channel: Corporate Companies

IPG , Retail Channel, Supplies Channel: Small Companies and private customers

PSG , Commercial Channel, Direct Business (Prime), Teleweb: Medium and small companies

3.4 HP organizational structure

With its four business areas (ESG, IPG, PSG and HPS), HP is also structured in dependence of the geographical responsibilities. As a global active company HP does business in 160 countries and is present in every continent. The geographical areas are subdivided in Americas (United States of America and South America), EMEA (Europe, Middle East and Africa) and Asia / Pacific (Asia, Australia, China, Singapore, Japan and all pacific Islands). Each department is assigned to a business area and also has its own geographical definition (see Image 3)

The way HP organized their business units and the way of managing them is called tensor matrix. This organisation is three-dimensional structured and has links between all business units.

The following image 3 shows HP organization chart with the allocation to the geographical regions.

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Image 3: HP’s organisational structure shown in the tensor matrix

As an example of defining a department in HP’s organisational structure image 4 shows the location of the PSG Sales Development Department, Grenoble / France.

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Image 4: Position of HP Sales Dev. Department Grenoble in a tensor matrix

All business areas come together to the C.E.O. (Image 5) which is based in Palo Alto, California / USA. This way of structuring the organisation keeps the hierarchy as low as possible and gives in the same time responsibility and decision power in the different business units.

Having trust in their employees was an important aspect of Bill Hewlett’s and Walter Packard’s business philosophy. After the merge with Compaq, despite the fact that both founders are not any more involved in the companies faith this way of thinking still continues.

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Image 5: HP’s organisational structure

The middle management has the most executive responsibility and can decide on its own how to react in business circumstances. The justification for these decisions has to be given through to the top management. The C.E.O. and the board of directors plays for this reason a more political role in HP and take care of the Corporate PR strategies and business relationships on a government level.

[...]

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^[1] Brindley, L.J. (1993: 297-305), “Information service and information product pricing”, Aslib Proceedings, Vol. 45 Nos. 11/12, November/December

^[2] Expression which stands typically for the easy overcome of geographical distances with the communication and logistic development

^[3] Gartner Dataquest, PC-Market results 2Q02

^[4] “Big deal” is a expression used in HP PSG EMEA and stands for deals for key accounts with a volume above 500.000USD

^[5] By Bill Hewlett HP Co-founder

^[6] http://www.hp.com/hpinfo/abouthp/histnfacts/index.htm (06/08/02)

^[7] Packard, D. (1995: 38), “The HP way”, How Bill Hewlett and I built our company, HarperBusiness New York

^[8] Les réalisations d’une entreprise sont la résultante des efforts combines de tous les individus. Et plus loin, HP réaffirme son attachement aux innovateurs, philosophie qui sous-tend le succès de l’entreprise.

Peters, T. et al. (1992 : 287), « Le prix d’excellence. Les secrets des meilleures entreprises », InterEditions Paris

^[9] http://www.hewlett-packard.de/presse/merger/unternehmen.html (06/08/02)

^[10] http://ps.inet.cpqcorp.net/sm_references/references2/nzdairy_article.htm (09/08/02)

^[11] http://www.hewlett-packard.de/presse/merger/ziele.html (06/08/02)

^[12] By Carleton S. Fiorina (“Carly”), HP Chairman & Chief Executive Officer, Annual report 2001 p.22

^[13] By Carleton S. Fiorina, HP Chairman & Chief Executive Officer, Aspen, Colorado — August 22, 2000

^[14] HP Annual report 2001, p.3

^[15] D. Packard (1995), “The HP way”, How Bill Hewlett and I built our company, HarperBusiness New York

^[16] Mobile time planning devices for example the HP Jornada

^[17] http://www.hewlett-packard.de/presse/merger/organisation.html (06/08/02)