Technology Distribution Meets New SMB Realities

Distribution channels are moving front and center in the competitive arms race. Virtually everywhere in our scan of a hundred-plus markets, companies are finding that channel design, execution, and management are becoming critical to profitability, defensibility, and long-term growth.

This isn’t too surprising in mature commodity product categories, but it’s also the case in technology markets as well.

And even though technology offerings for small and mid-sized businesses (SMBs) seem tailor-made for direct-channel delivery, upstream providers and downstream customers often continue to favor the value created through new one- and two-step distribution models. The reason, we’re finding, is that SMB owners and managers still find themselves stymied by the dizzying pace of technology change, a proliferating universe of sources, and an insurmountable array of adoption hurdles.

And because they usually lack sophisticated and dedicated technology staff, SMBs are looking for best solution packages tailored to their business processes and integrated seamlessly into existing operations. In fact, share gains in the SMB market will increasingly accrue to distribution channels that efficiently and effectively deliver new value in areas related to solution customization, one-stop sourcing, on-site demonstrations, small-scale pilot testing, non-disruptive and affordable installation, enhanced adoption training, easy upgrade, and lower total adoption costs. And more.

Superb technical expertise is no longer adequate. SMB technology sales are evolving from one-off, pick-and-pack hardware and software licensing sales into persisting cloud-based subscription services. As hardware and software products become less stand-alone and more like component parts in a larger on-premise or off-premise cloud solution, physical product adoption and distribution services are taking a back seat to more consultative approaches to solving vertical- and user-specific business challenges.

Many sophisticated solution providers understand this shift and are attempting to ramp up the skill sets of their 3rd-party distribution partners. From a practical standpoint, this requires clear and actionable answers to two closely related questions:

• What specific channel behaviors will move market share? and,
• How do we incent desired channel behaviors?

For example, What steps should be followed to educate SMBs about their technology design and delivery options, in terms they find clear and compelling? What are the best ways to demonstrate tailored web-based solutions? What concrete channel activities are needed to maximize ease of adoption and use for SMBs? How can channel players best collaborate to ensure one-stop process integration and make upgrades effort-free for the SMB? Is this SMB’s business security best guarded through on-premise or off-premise cloud solutions? How can the channel help reduce an SMB’s all-in cost of adoption?

While major technology solution providers have largely figured out the product and price side of new offline and online technology offerings, many of the biggest players have yet to pin down a distribution-based competitive advantage. And while Gartner estimates that over the next five years companies will spend $112 billion cumulatively on cloud-based solutions, the road to SMB adoption has been bumpy.

SAP, for example, recently acknowledged that poor downstream value-added meant that over the past three years adoption rates of its internet-enabled offering ran barely 1% of target. IBM is finding that barely 20% of its partners are driving meaningful results in their local markets.

In the end, better results for all technology providers and their distribution partners will take detailed, customer-based understanding of the market combined with disciplined execution in the heart of the channel system – in other words, the what and the how.

Cracks in Amazon's Strategy

Source: Wall Street Journal; Media & Marketing; Oct. 17, 2012

Cracks are starting to show in Amazon's "win through low prices and free-riding on brick&mortar services" strategy. That model was always vulnerable to product providers waking up and refusing to let that game be played in their distribution channel portfolios. Those long-overdue vendor channel management moves are starting to happen and the potential impact on Amazon will be significant.

You see, it's not really good for consumers or brands, let alone high-service channels, to allow free-riding in the distribution system. In a world where Amazon only gets the consumer's order because another channel was willing to promote, educate, or demonstrate the product, the channel incurring those costs stops performing the activities in the marketplace. But it turns out consumers still want to be educated and to see and touch many products. They still want a trusted source, not a vendor's paid online recommendation or search engine optimization. When the option to have it all - get great service in one channel and buy at a discount from Amazon - goes away, many consumers will drop Amazon like a hot potato. And they already are!

Let's look at Amazon's flagship product category: books. Here's what the WSJ had to say about the impact on sales of books that are excluded from brick and mortar stores by awakened book purveyors Barnes & Noble and others:

[a] likely factor in the book's poor sales is its severely limited availability. It wasn't stocked in the 689 stores of Barnes & Noble Inc., Wal-Mart Stores, or Target. Some independent booksellers don't stock the title either. Nor is the digital book for sale in e-book stores operated by Sony Corp, Apple Inc. or Google.  In the case of the nation's largest bookstore chain, the absence is the result of a deliberate boycott. Barnes & Noble said in January it wouldn't stock titles published by Amazon in its stores…

We'll see more of this and the impact on Amazon sales will be significant. Sure, there will always be consumers who only seek discounts and will pursue them even without the touch and feel of a high-service brick and mortar store. But will that segment sustain Amazon's growth ambitions? Rocky waters ahead!

Best Buy Throwing in the Towel?

The evidence now is clear that the consumer electronics manufacturing and retailing industries are both at a profound strategic crossroads, and weak-kneed responses from top retailers and product brands alike are dramatically reshaping the competitive landscape in potentially destructive ways for tomorrow’s consumers.

In the early-2000s we saw CompUSA and Circuit City go bankrupt and ultimately defunct on the back of tragic customer experience decisions to buckle under rampant flat screen price commoditization pressures. Passivity by lead product vendors was a missed opportunity then and a bigger one now. Thankfully we still had Steve Jobs around to offer an exciting new Apple Store shopping experience that consumers lined up for, even while the same Apple products were available in old school retail locations down the street (sometimes even at a lower price).

So it is disheartening to learn that Best Buy is throwing in the towel and all but abandoning any hope of reinvigorating its core customer experience (see this article in the WSJ on 12 October 2012). Does anyone really believe that Best Buy can out-online Amazon and other stripped-down, low-cost, no-frills, “services are free” and "taxes aren’t paid" online discounters?

The future is cloudier than ever for top branded product manufacturers as well, especially those investing heavily in innovation. When all the so-called “retail showrooms” are closed down or turned into local online shipping warehouses a la Wal-Mart’s lead, where is it that consumers will touch, experience, learn and get excited about new product innovations? Will vendor paid online recommendations and testimonials really do the trick for tomorrow’s shoppers?

Look around investors, where are the new strategic visions worth betting on? And consumers beware, it’s still true that’s there’s no free lunch.

Customer Experience Lost

Borders just announced it is letting go 20 percent of its corporate staff and may put itself up for sale. Its archrival Barnes and Noble is said to be interested. A combined company would have about twice the market share as online retailer Amazon.

Part of the reason to consider selling is of course that in a tight economy consumers cut back on discretionary expenditures. Arguably the most discretionary categories of all is books. Although people do continue to buy them, fewer and fewer seem to actually read them. Partly too, an activist investor is pushing Borders management to sell

But let’s look deeper. When’s the last time you visited a Borders store? I can tell you mine, Christmas, and it was a disappointing experience. The suburban Chicago Borders looked shabby, thinned out, and unrefreshed. The local B&N, where I went next, felt spacious and happening. I couldn’t tell if Borders had lost the money to invest or just the will. Can a chain whose face-to-the-public is obviously on the way down stay open?

I can’t tell you whether Borders will survive. But I can tell you that it has no future if it can’t find its way back to the kind of exciting customer experiences it created, routinely, in its hayday.