Great article on this issue in yesterday's WSJ. Enjoy.
Big Companies Fear Online Sales
May Alienate Marketing Staff
By GEORGE ANDERS
Staff Reporter of THE WALL STREET JOURNAL
The Internet commerce boom is posing a tormenting challenge for many
of America's biggest companies. They are tempted to move a lot of business
online -- but they worry that this new way of selling will betray the
salespeople and distributors who have long kept the cash registers ringing.
At the medical-products unit of Hewlett-Packard Co., an army of 500
sales representatives and dozens of distributors account for sales of more
than $1 billion a year world-wide. For years, this has been a
people-centered business, in which face-to-face meetings, handshakes and
product demonstrations have built customer relationships that translated
into big money.
Now, some leading hospital chains want one-stop shopping on the
Internet, says James Cyrier, H-P's head of medical sales and marketing. With
a few mouse clicks, these customers could buy everything from ultrasound
machines to electrodes without ever seeing a salesman. Mr. Cyrier is
intrigued, but if he moves too fast, he risks a mutiny from his traditional
sales force and distributors, who don't want to surrender their commissions.
Across the U.S., hundreds of manufacturers face the same dilemma.
The Internet could prove to be the most effective sales tool since the
telephone, letting companies reach millions of potential customers quickly
and cheaply. Online commerce is an outright menace, however, to the men and
women who do in-person selling or distribution, and who still control 90% or
more of most companies' order flow. As a result, jittery corporate
strategists are trying to capitalize on the Internet's potential without
sabotaging traditional sales channels.
Typically, it is large corporations in highly competitive industries
that feel most boxed in, says Vish Krishnan, an assistant professor at the
University of Texas business school in Austin, who specializes in Internet
applications. Such companies have the most to lose, he says, because they
have spent fortunes mastering traditional sales methods. Anything different
is a threat to their corporate culture -- and next quarter's earnings.
Ignoring the Internet isn't much of an alternative, though. Selling
online can slash costs as much as 15% by getting rid of paperwork and sales
commissions. Those potential efficiencies are attracting swarms of online
entrepreneurs. So if established manufacturers don't sell their cars,
catheters or chinos over the Internet, odds are that some upstart will.
Those who hesitate risk being "amazoned," forfeiting business to an Internet
newcomer, in the way that bookstore chains have lost ground to Amazon.com
Inc., the online bookseller.
A Sugar Coating
As a result, producers are engaged in awkward dances with
distributors, trying to develop Internet sales channels that won't rock the
boat. In some cases, that means launching Web commerce sites with no
publicity or limited merchandise offerings. In other cases, it means keeping
online prices high, so traditional vendors can lead the way in offering
discounts. Some manufacturers are even trying to placate dealers and
salespeople with a cut of each Internet sale, regardless of whether they
played a role in generating it.
In essence, companies are sugar-coating what may be the most
disruptive sales transformation in a generation. Corporate executives insist
that online commerce is merely another way to serve the consumer. But sales
representatives and dealers privately question whether they will be cast
aside someday as relics of a bygone era.
At Hewlett-Packard's medical unit, managers have decided that
Internet commerce can't be ignored. In the next few months, they will roll
out a Web site that will let major buyers such as Columbia/HCA Healthcare
Corp. and the Premier hospital-purchasing alliance place orders over the
Internet. At the outset, says H-P's Mr. Cyrier, online prices will be
carefully aligned with those available in other sales channels. Online
orders may still generate commissions for the sales representatives who
usually handle those accounts.
Learning From Experience
"We'll learn as we go," Mr. Cyrier says. "We have a big direct-sales
force calling on hospitals, and it would be very demotivational for them if
customers placed an order through this new e-channel, and they didn't get
paid. At the same time, selling online could be more cost-effective. So
maybe we will end up passing the savings on to the consumer."
In the car industry, Internet-assisted commerce is starting to shake
up the ties between the Big Three manufacturers and their independent
dealers. Traditionally, dealers have enjoyed free rein to boost car prices
above cost, generally collecting 3% to 15% of the eventual sales price for
themselves. So far, auto makers and Internet car-buying services are merely
collecting leads online and sending potential buyers to dealerships. But
some industry observers think bigger changes lie ahead.
In Seattle, car dealer Ron Clauden is keeping a close eye on General
Motors Corp. So far, Mr. Clauden has been a willing partner in GM's Internet
initiatives. He has gained 10 sales in the past year from the Detroit car
maker's Web sites, and GM officials say that cooperative approach is all
they want from online commerce for now. But Mr. Clauden thinks GM someday
might consider taking orders directly and getting rid of middlemen such as
"I would be disappointed if GM didn't think about that eventually,"
Mr. Clauden says. "They've always got to look for better ways to sell cars."
The struggle between old and new sales methods is most intense in
the computer industry and related high-technology fields. There, online
commerce already is a multibillion-dollar alternative to traditional
selling. In Round Rock, Texas, Dell Computer Corp. collects $2.2 billion a
year, or 14% of its personal-computer sales, from customer orders placed
directly over the Internet. That helps Dell hold down inventories and costs,
giving it an edge over rival makers of PCs such as Compaq Computer Corp.
"We can't afford to lose business to anyone," says Enrico Pesatori,
Compaq's senior vice president for corporate marketing. In the past few
months, Compaq, which is based in Houston, has rolled out its own Web
commerce site, selling computers at rock-bottom prices directly to
small-business customers and individuals.
A Chunk out of Sales
PC dealers are seriously unhappy about the switch. "It's taking a
chunk out of our business," says Richard Wong, head of Sefco Computers Inc.,
South San Francisco, Calif. His company sells about $8 million a year of
computers, and Compaq used to be a major part of his business. "We still
have people ask us for bids on small-business installations, but we don't
win the orders anymore," Mr. Wong says. Compaq's Internet site typically
underprices him by about $50 a machine, he explains.
Some other PC makers, such as International Business Machines Corp.,
have tried a gentler approach, using their Internet sites mainly to steer
customers to online ordering sites run by long-established dealers. But that
approach doesn't take full advantage of the Internet's ability to wring
costs out of the distribution system. For its part, Compaq makes no
apologies for its more aggressive approach; Mr. Pesatori says distributors
should recognize that all-out use of the Internet is essential if Compaq is
going to stay competitive.
Even technology companies approaching the Internet more gingerly are
amazed at how rapidly sales can take off. In May, Radius Inc. began online
sales of its software for handling digital photos. The Mountain View,
Calif., company did almost nothing to promote its Web site, says Mark
Housley, chairman and chief executive officer, because it didn't want to
alienate its traditional distributors. Nonetheless, within three months,
nearly 10% of its sales were coming from the Internet. "The Web lets us try
new promotions quickly, at almost no cost," Mr. Housley adds.
Yet the executive shudders at the notion of trying to turn his Web
site into a heavily promoted discount marketplace for Radius software.
Distributors still provide more than 90% of his sales, he says, and he
doesn't want to risk anything that might hurt their profit -- and perhaps
lead them to stop stocking Radius products.
Software maker Intuit Inc. shares this aversion to online
discounting. "We could decide to market aggressively on the Web," says
William Harris, the Mountain View company's CEO, "but we don't do that, in
deference to our third-party resellers." Intuit for more than a year has
offered best-selling programs such as Quicken and TurboTax on its Web site,
but only at list price. Discounting is left to the bricks-and-mortar
retailers who deliver the bulk of its sales.
Outside the high-tech sector, manufacturers aren't feeling as much
immediate pressure to decide their online commerce strategy -- but the same
tensions loom. "None of them really want to start selling on the Web, but
all of them feel compelled to do so," says Trevor Traina, president of
CompareNet Inc., a San Francisco provider of online shopping information.
A year ago, he says, most manufacturers viewed the Internet as a way
to disseminate product brochures. Now, they increasingly are devising ways
for customers to place online orders, rather than lose that business to an
In the airline industry, AMR Corp.'s American Airlines unit has
signed up 1.6 million people who get regular e-mail about cut-rate fares
available that weekend. John Samuel, American's head of Internet commerce,
calls the program "a clear home run." It gives American a quick, cheap way
to communicate directly with fliers and generally lets the carrier avoid the
usual overhead of about $20 a ticket associated with staffing a toll-free
phone bank, as well as travel agents' commissions that run as high as 8%.
As the airline moves into electronic commerce, it must tread
carefully to avoid alienating travel agents or hampering its ability to sell
seats at much higher prices. "We don't want our site to become a haven for
cheap seats," Mr. Samuel says. "But we will use it to manage inventory." In
particular, he says, the Internet is a great way to sell "distressed
inventory" -- the long-haul Saturday afternoon flights unpopular with both
business and vacation travelers.
To some companies, even such limited use of Internet commerce is
unsettling. Minnesota Mining & Manufacturing Co., St. Paul, Minn., lists
hundreds of its products on its Web site, but generally doesn't provide any
way to order them directly from the company. That is deliberate, says Peter
Jacobs, an Internet strategist for 3M.
"We are very concerned about our distribution-channel structure,"
Mr. Jacobs says. "We take care not to damage those relationships." Besides,
he says, many customer-generated orders would be too tiny to be profitable.
A single consumer might want two dozen floppy disks, for example, he says.
His company would much rather fill two loading-dock pallets with computer
disks and ship them off to a distributor.
One of the starkest contrasts in online strategy is playing out in
the home-mortgage market. Many big lenders, such as Chase Manhattan Corp.,
PNC Bank Corp. and Countrywide Credit Industries Inc., have begun offering
consumers ways to execute most of a mortgage application online. Doing so is
faster and cheaper than the traditional approach of having a loan officer
collect all the paperwork, says Cameron King, head of Countrywide's Internet
efforts. Online transactions now account for 1% of Countrywide's loan
volume, he says, and could grow rapidly.
But the nation's biggest mortgage lender, the Norwest Mortgage unit
of Wells Fargo Co., is fighting the trend. It has built a 4,000-person sales
force, with more branch offices than any of its rivals. Face-to-face contact
is crucial in Norwest's business model; even on its Web site, Norwest
repeatedly tells mortgage seekers to call a toll-free number and talk to a
Not a 'Threat'
For now, Norwest's approach is keeping its powerful sales force
happy. "When we first started hearing about mortgages on the Internet, a lot
of sales people panicked," says Scharol Battaglia, manager of Norwest's
Saratoga, Calif., office. "They thought they'd be replaced. But when you
take care of customers the way we do, the Internet isn't really a threat."
Online competitors say that's exactly what they want to hear. Seth
Werner, chief executive officer of First Mortgage Network Inc., Plantation,
Fla., calculates that he can originate mortgages online at a cost of about
0.6% of the loan amount -- about half of what traditional lenders spend. The
biggest savings, he says, come from eliminating costly sales forces packed
with loan officers earning $150,000 a year or more.
If some of the mortgage industry's giants don't want to change their
business models, Mr. Werner says, that gives him plenty of room to undercut
their rates by a fraction of a percentage point, and still do business more
profitably. In the hotly competitive mortgage market, he says, "the Internet
is clearly the future."
Manager, Interactive Marketing
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