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.

Microsoft Escalates Vertical Integration Wars

The WSJ reported today that Microsoft has decided to enter the rapidly escalating battle over how the consumer electronics market space is being fundamentally restructured (Microsoft Seeks to Take a Bite Out of Apple With New Stores).

Unlike Gateway's anemic efforts at forward integration into retail (1997-2004), I anticipate Microsoft's moves, along with those of other leading players, will dramatically reshape the landscape. Those moves include Best Buy's backward integration in private label (see: In Hard Times, Is Best Buy’s Best Good Enough? ), Wal-Mart's and wireless service reseller Tracfone's entry into mass market electronics (see: Wal-Mart Wireless Expands), Samsung's designs on the content and apps end of digital retail (see: Samsung Seeks Some iPhone Magic ) and Amazon's rabid appetite to dominate the conventional 'click and buy' internet merchant space (see: Can Amazon Be the Wal-Mart of the Web?).

But back to Microsoft's forward integration into consumer electronics retailing: here's the bottom line perspective from the company:

"Our customers have told us they want more choice, more value and better service, and that's what we'll deliver through our Microsoft Stores" David Porter, corporate vice president . Microsoft retail stores, WSJ, 10/15/09

This is only the latest entry of another major player in what is shaping up to be a battle of the titans. Noisy dithering by wall street analysts, journalists, and other pundits over who's making the most aggressive price reductions, who's sourcing smartest, who's ramping up their M&A engines for greater scale and efficiency, and who's "getting the value message from consumer" is simply obscuring a more fundamental and ultimately dramatic business model restructuting hidden in plain sight.

So, buckle up - it's going to become a (much) bumpier ride competing in the consumer electronics space! (due credit to Bette)

Channel Collaboration Brings Wireless Innovation to Market

Sometimes real news isn’t new. Sometimes it’s enough to discover that something you barely noticed has subsequently blossomed.

In today’s New York Times, David Pogue reminds us of a market-making collaboration between two companies more than two years ago. But back in 2007 it was hard to tell how big the collaboration’s payoff would be. Now we know.

The two companies are Apple, maker of iPhones, and Cingular Wireless, a network provider later rebranded AT&T Mobility. Apple had developed “Visual Voicemail,” which would let people check their incoming voice messages by glancing at a list on their phone screen and chosing the order instead of being tied to sequential listening to each message one at a time. No doubt, phone users would love this feature. Problem was, big wireless networks at the time weren’t designed to link with software that converted voice data into visible readouts.

For both engineering and business reasons collaboration was key, and in this case an exclusive relationship between supplier and carrier probably proved indispensible. As Mr. Pogue points out, the engineering costs were too high for Cingular, or any carrier, to absorb without relaible assurances about adequate product sales. In this situation, that was done by gaining sole rights to iPhone’s sales. An exclusive also benefited Apple, which could then concentrate on perfecting a single phone for use on a single network, an approach very much in keeping with Apple’s preference to wait for its pitch then swing for the fences.

Was Visual Voicemail either company’s only reason to go exclusive? I doubt it. But VV probably helped focus executives on both sides to get past the head-to-head negotiation mentality and accent the value for each party of focusing on new solutions and usage experiences for end consumers.

Working together like Apple and Cingular apparently did remains the exception. But intensifying competition in all industries is going to make it the rule. Where relationship exclusivity helped both companies win big, tomorrow’s collaborations will be essential simply to win small.

Healthcare Distribution - A Must-Read

In my twenty-five years of work on distribution strategy, I have never read a more fascinating analysis of distribution system challenges and opportunities as the one recently published by Dr.Atul Gawande, a surgeon, writer, and a staff member of Brigham and Women's Hospital, the Dana Farber Cancer Institute, and the New Yorker magazine.

If you have not yet read his piece in The New Yorker, I strongly encourage you to take the time. It's an absolute must-read analysis for anyone interested in designing and managing higher-performing, lower-cost complex distribution systems.

Enjoy!

Not Only a Matter of Time

Shipping is the circulatory system of the global economy. And as the economy’s metabolism gets sluggish, it appears that shipping is slowing down with it – quite literally. Freighters and tankers are steaming at reduced knots per hour.

Today’s Wall Street Journal also shows how boats are going the long way round to avoid toll charges at the Suez Canal. Supply chains are affected, all the way down to consumer and business buyers. Channels are feeling the pain.

Cost-cutting is certainly needed. But I hope owners aren’t decreeing half-speed ahead and manaña deliveries across the board. Efficient, long supply chains are fine, but it would be a serious miscalculation to let all their container vessels (read: valuable and costly inventory!) be caught at sea when smart competing skippers are racing into port.

Trade- and end-customers with time-sensitive cargos will defect, and once the economy rebounds they may not come back. Conceptually, these customers might appreciate that providers have to lower their costs to stay solvent. But no customer fully gets it that benefits to them – availability in this case – should have to fall too. And that is why shippers (and buyers?) who figure out how to maintain at least the illusion of a satisfying shipping experience for their customers will come out of this period stronger than ever.

Customer Experience Innovator Makes Unusual Category Move

Ask any leading retail grocer in the U.S. which competitor has them quaking in their shoes and you'll hear a resounding moan about Tesco, the UK retailing innovator that is opening new formats in California and other markets on the west coast. So it's with much interest that we monitor other strategic moves by Tesco in their home market. Is the US next?

Planet Retail reports that Tesco has acquired PC Guys, a computer support company, and is testing a home IT visit concept from one of their grocery stores prior to a possible national rollout. PC Guys will offer support in Tesco stores, over the phone and in customers' homes. The service will compete directly with Best Buy's Geek Squad (Carphone Warehouse).

Services will include installing TVs ($60) and setting up home cinema systems ($140). The retailer is recruiting IT experts and testing a new zone called Tesco Digital, offering a large computer, electrical and mobile phone sales area, with PC Guys on hand to help.

In Tesco's own words: "we want to help consumers keep up with the latest electronic trends and technologies, as well as provide support and maintenance to those who need a helping hand.''

[Note from last year: When you traverse the aisles of a Tesco store in search of baked beans, you can also grab yourself a copy of Tesco Office -- an alternative to Microsoft Office -- or Tesco Antivirus, which is designed to keep your PC free of viruses. Other programs are also available, including personal finance and photo-editing software.]

Software Industry Not Immune to Private Label Threats

While much attention has been given to the acceleration of Private Label strategies by dominant retail companies, the moves have historically been focused on packaged and durables consumer goods. Now there's evidence that branded players should take note of house brand threats in the software business.

Tesco in the UK now offers an astonishingly broad line of house brand consumer software products in six key categories: Antivirus & Antispyware, Internet Security, PhotoRestyle, Personal Finance, Complete Office , and Easy Record.

Planet Retail posts that in the UK, Tesco is rolling out its Tesco Software range with more than 200 new Tesco stores scheduled to have the product on the shelves by yesterday. Launched in October 2006, the Tesco Software range was initially introduced in 150 stores around the UK. Since then 25,000 titles have been sold, and in response to demand, Tesco has increased the total number of stores to 365. The software has been developed for Tesco by Formjet, a specialist in alternative software solutions, who also provide a comprehensive support service. Commenting on the software range Tesco buyer Daniel Cook said "Demand for home computing equipment is bigger than ever, which is why we decided to launch a choice of great value Tesco own range software equipment. We're delighted that the range has proved such a hit, and in response to this demand we're increasing the total number of stores where customers can pick up the popular software."

Service Firms Focus on Customer Value - From Distribution

We're often asked whether Service firms have as much opportunity to differentitate in the Distribution arena. Our experience suggest that more and more evidence is emerging that not only is there an opportunity to better leverage Distribution moves in Services businesses, but it's a Marketing area offering significant opportunity to boost top line and profit results.

A recent Wall Street Journal article provides some excellent insights about how some smaller service firms are using Distribution to create advantages in their marketplace. See excerpts:

A Memphis Presence Gives Small Firms Logistical Advantage
Proximity to FedEx HubOffers More Flexibility,Time to Process Orders
By RAYMUND FLANDEZJuly 10, 2007; Page B7


• What's New: More small companies are setting up a presence in Memphis, Tenn., to be closer to FedEx's overnight cargo facility.

• The Benefits: A later deadline for pickups allows for a greater amount of time and flexibility to process orders and deliveries.

• The Upshot: The proximity gives businesses a competitive edge and provides an opportunity to market the logistical efficiency to potential clients.

Best Buy Should Avoid Home Depot Strategy as it Targets Business Market

Best Buy is developing strategies for delivering technology solutions to business, education and government customers, with plans to "grow the Best Buy for Business product and service capabilities to deliver simple, reliable and affordable technology solutions." According to Best Buy business customers make up as much as 10% of its overall traffic.

Sound familiar? It will to devoted followers of the home products marketplace. Recall Home Depot's failed multi-billion dollar attempt at cracking the business markets side of home improvement. The come-uppance that ex-CEO Nardelli and crew experienced was of staggering proportions, and will emerge with time as a classic case in corporate strategic naiveté. Key lesson: never under-estimate how fundamentally different business buyer markets are from consumer markets. Similar products do not make for idential channels!

As Best Buy for Business looks forward, they would be wise to recognise the new B2B competitive arena they'll be competing with including CDW, Cisco, Dell Direct, and the traditional IBM, HP and reseller channels. We would certianly not recommend they model their approach after Staples, Office Depot or OfficeMax. Those three are still struggling to figure out if they're consumer or business market players.

The company indicated that the "small business" strategy will be built from specially selected store employees trained to help business customers navigate their purchasing experience in store and provide introductions to additional business resources available from Best Buy.

Small business growth at Best Buy will only be significant (and profitable) when the company provides real, tangible value added to these new customers. The strategic problem with the Best Buy approach is that it reduces the business buyer market to a "ads, signage and labeling" tactic.