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About the Author ChannelCorp Workshops
5.1 Channels of the Future or Channels of the PastThe best channel organizations plot channel strategy the way a great pool player plays pool. The great pool player is never shooting the shot that sits before him/her on the table. The best pool players are thinking five to ten shots down the table. The best channel organizations are the same. This year, they are making decisions and investments that will pay off two to three years down the line. Investments that are paying off this year were made two to three years ago. The purpose of this article is to encourage channel executives like yourself to think about the answers to four key questions. As you (and your team, hopefully) prepare to attend the ChannelCorp Advanced Channels and/or the eChannels Workshop, we ask you to consider the following questions: 1. Is your organization building channels of the future or optimizing channels of the past? 2. Will your organization’s current channel strategy become “stranded” with no salvage value as new channels and channel technologies emerge and grow? 3. What will the impact of the Internet and electronic channels of distribution be on your markets and your segments within your markets? 4. Do you have the talent in your organization needed to make any changes that you have identified as having to be made? The article is divided into four sections: threats to the business options - don’t play vs. play don’t play play
Threats to the businessThere are a whole host of potential threats to the businesses of computer hardware, software and telecommunications vendors. New primary demand has emerged. The small/medium business market has evolved as a major market. The Internet and its emergence as a driver of global structural change in the way business is done, is driving primary demand in ways not imagined even two years ago. New competing technologies are emerging in all areas of the hardware, software and telecommunications industry. New technologies, the Internet in particular, are emerging in the channels business. Vendors and channel partners are redefining their markets and their business models. PC vendors are giving away computers if they can sell a block of Internet access. Software is being provided almost for free in order for a vendor or channel partner to make money providing support, training and consulting services. White box PCs have emerged as an “anti brand” and are holding major market shares in many markets. Channels are changing. Older channel institutions in the industry are being pushed out of the way by newer types of partners with higher levels of focus or dramatically lower cost levels. Bricks and mortar resellers of software (Egghead) have given way to electronic channels for software. Distributors have been forced to become either volume focused (Ingram Micro) or value focused (Access Graphics). Major markets are “overstored” with computer superstores, leading to store closures, retrenchment and major changes in business models. Electronic channels are threatening to take large streams of revenue for bought products, and sold products sold to sophisticated purchasers. Channel responses are, for many organizations, the key to survival and growth.
Options - don’t play vs. playFigure 1 outlines the channel related options or responses that are available to vendors. Figure 1 - Options Key strategic investment decisions emerge as one reviews the options: when should a product/service “line” be abandoned, a market abandoned, or a species of channel partner abandoned? with existing/conventional channels, should channel investment be reduced, kept the same or expanded? when should new investments be committed to new channels - never, now or later? on what scale should investment decreases or increases be made? Channels are about money. All critical channel decisions eventually become financial decisions.
Don’t playMany vendors will decide not to play or they will delay participation until it is too late. They will deny that there are structural changes going on in the channels for hardware, software and telecommunications products and services. The industry has seen denial before - the late 80s and early 90s saw major organizations brought to their financial knees as they denied that closed systems would be replaced by networks of open PCs, ASPs and margins would fall and that indirect channels of distribution would become larger than their direct salesforces. Those that don’t play immediately will likely respond in one of five ways: some vendors will do nothing until it is too late. They will be bought and “parted out” like an old car being bought by a wrecking yard. Products, businesses and channels will be taken apart. We have seen several situations like this in the industry in the past few years. some vendors will see “monitoring developments” or “undertaking constant studies” as their key response. Unless action is taken as a result of the monitoring or studying, the second option is just a more expensive version of the first. some vendors - those who like to move slowly with a lot of data/experience to go on - will “take options” on emerging channels and channel structures. They will get involved in alliances, make investments in start-ups and generally invest time and money to reduce the risk of wrong moves. Those vendors with large, productive conventional channels will likely move slowly before they make big moves into electronic channels. Depending on how the experiments or “options” work out, some vendors will rapidly expand into new channels; some will not. invariably, some vendors will attempt to fight the emerging channels with legal means and public relations. Attempts will be made to keep product out of electronic channels that went in through the “back door” of conventional channels. Legal hassles will ensue. Pro-conventional channel public information will be placed into the market to counter the “no channel needed” messages being offered to the market by Dell and many of the electronic channel partners. If the truth be known, customers will pay for value if it is there and if it is not, they won’t pay for it. many vendors, while buying time to develop a long term response, will attempt to fight the impact of the new channels with improvements in their conventional channels. Channel assembly is such a move. Channel assembly has reduced the cost spread between PCs purchased from the direct marketers and those assembled from conventional channels from 25-30% to 10-15%. At a difference of 25-30%, the conventional channels were clearly “out of the range”. At a delta of 10-15%, enough value can be created to justify the difference. Channel consolidation, like Compaq’s 1999 move to reduce the number of North American distributors, are attempts to take CPOD down to lower the customer cost of the product. Not playing may be the most costly decisions that the managers of some vendors ever made.
PlayThe decision to play does not guarantee success, only a different future than not playing. Figure 2 outlines in a schematic the impact of making decisions to play and adapt to changes. Figure 2 - The playing field As can be seen from Figure 2, the decision to play or actively experiment with new species of channel partner (conventional or electronic) has an impact on the entire channel system. All of the key questions that had been answered, need to be asked and answered all over again. As a result of the questions, management must thoroughly think through how the channels of the future are going to unfold. Key questions include: are the skills required to meet the changes outside of the traditional competencies of the vendor’s staff? will change be accomplished in minor adjustments (logical and incremental) or will changes take place in big steps (big bang)? how much time does the vendor actually have to make the changes before there is a negative and structural impact on earnings? what features of the vendor’s organization will impede adoption of the new strategies, behaviors and operations that are required (direct channel legacy/strong service organization/strong conventional channel)? Can the vendor afford to tamper “with a good thing”? what approach will be used to acquire the new skills to make the changes: develop people internally (make) or hire them from outside (buy)? will the contemplated change obsolete a large number of existing ways of doing things or can the old and new coexist comfortably? is there a market, segment, niche that the vendor can hide in to avoid any requirement to make change? Is the size of this opportunity acceptable? how much is at stake? The more at stake, the more investment than can be made.
Chapter summaryMoving forward, the key strategic questions that needs to be asked by vendors of computer hardware, software and telecommunications are simple: are you building channels of the future, or simply optimizing channels of the past? what questions need to be asked? The Advanced Channels Workshop and the eChannels Workshop will help you and your channel colleagues ask the right questions and get the right answers. About the article
ChannelCorp Consulting services ChannelCorps’s management consulting expertise is built on a solid foundation of fifteen years of researching and analyzing the evolving business models and marketing strategies of the vendor and solution providers worldwide. Suggested Reading Availability For information on republication, contact Bruce Stuart - channelcorp@telus.net Back to ChannelCorp Intelligence |
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