The industry continues to struggle for sales and profits as manufacturers and the distribution channels continue to work against each other. Hardware and software producers as well as VARs and integrators are going to have to put their adversarial positions aside if the industry is to return to a healthy
growth condition.
The most serious problem threatening the health of the industry is channelconflict.
Like it or not, the two sides (producers and resellers) are interdependent. Without better understanding, communication and cooperation, the channels will continue to work against each other.
Today, sales channels include manufacturers’ direct sales forces, manufacturers’ reps, distributors, dealers, VARs, online resellers, integrators, and large corporate buyers. There’s considerable overlap between these groups. There is even more conflict.
The problem has existed for as long as third parties have been involved in the selling process. And, although there are many other, more matureindustries that have resolved most of their channel problems; the computer,network and services industry conflict problem remains serious.
Unfortunately, everyone is pointing a finger rather than trying to solve theproblem.
System/software distributors blame industrial distributors for selling tousers. Industrial distributors blame manufacturers for questionable sales policies. Manufacturers complain about dealers who sell stock off their receiving dock to the grey market to meet volume-pricing quotas. Resellerscondemn distributors for selling against them into SMB accounts. Andall of them blame the manufacturers who have sales forces who strive to meetquotas as well as web sites that sell to almost anyone.
Everyone Wants to Win
Everyone wants to win in the marketplace. Manufacturers want to win the entire war. Distributors want to win the battles for a county or territory. VARs and integrators want to capture a city or two or market area. Web-direct operations want the volume.
The only thing that all of them agree on is that they want to do business— profitably. They want a bigger share of the profit in a specific area or marketplace.(Ideally, each would like all of the dollars forthemselves.) HP, as sophisticated as it is, contributes to (and denies) the problem. They use all of the channels mentioned. At the same time, they expand their sales/service force. And, with additional staff “realignments” forecast to drive sales and profits, there will probably be even more vertical market focus this year.
No one really believes that all of these sales/service people are there just to help distributors, VARs and integrators. They’re out there making sales calls and deals for HP. But HP is just one example.
The long-time Taiwanese and mainland China manufacturing firms see all of the big profits OEMs and channel partners are making and they that with theirsuper-efficient production capabilities they can increase their market/profitshare by eliminating non-essentials. These non-essentials include marketing, service, support, and channel protection and channel programs.
While Acer learned five years ago this approach wouldn’t work and has onlyrecently reentered the Americas market with a more reasoned committed channel approach. There are undoubtedly hundreds if not thousands of Taiwanese and Chinese firms that will see this as mere folly.
On the other hand Lenovo with its acquisition of IBM‚s PC group has taken adifferent and equally sensible approach, they are immersing themselves in theAmericas market immediately by setting up their Americas‚ headquarters inArmonk, NY. Whether it was at IBM‚s urging or a move they initiated on their own they are ingraining their operation with experienced service, support and marketing experts who can ensure the new organization will succeed.
Committed to a multi-channel approach, Lenovo will be a major challenge toestablished players because they have their feet firmly set in the key segments low cost manufacturing expertise and sales/service focus.
But for others, the solutions to channel conflict won’t be found until eachsees the value and the need for the others.
Manufacturers can’t offer the customer support that VARs are able to provide. VARs are providing an important service to the manufacturer by giving the customers the installation support, training and service they need. Itsimply isn’t cost-effective for manufacturers to provide this kind of support.
Industry-Wide Problem
Many of the industry’s problems can be laid at the manufacturers’ front doors because they don’t really understand the complexities of distribution channels. Manufacturers have been expending a lot of time, money and effort looking for the “quick fix” in sales, rather than focusing on marketing.
Despite all of our best ideas, plans and programs; it is the environment and the marketplace (not R&D, engineering or any other department) that defines and gives meaning to our products.
Manufacturers tend to get hung up on technology, because that’s something they understand; and sales because sales are tangible. Short-term sales decisions are made without considering the potential impact on their long-term objectives or relationships.
Simply Pushing Product
During the past two years, when nearly everyone in the industry has been struggling with the slump, manufacturers were stuffing the channels with products — systems, routers, storage systems, media, printers, chips, software, etc.
All of the organizations in the selling cycle have been ignoring theirmarketing to increase sales volume. They ignored product flow through the channels, so conflicts and problems developed.
Unfortunately, most manufacturers respond to volume rather than factors such as healthy distribution channels and strategic relationships. One of the most visible organizations that’s in this situation has been HP, which has changed people, policies and programs more than four times during the past year.
Everyone screams about margins, yet everyone is dealing. Inthis situation, everyone involved loses.
Long-range plans have shrunk to two — three months. Few organizations honestly have long-range plans or truthfully look toward long-term relationships. As a result, they don’t (or won’t) make the investment needed to ensure success.
But, it isn’t all doom and gloom. There are simple solutions that can be used, and there are more complex ones that can be initiated.
A Simple Solution
The simple solution is for manufacturers to provide protection for VARs or integrators within vertical markets. The sales cycle in vertical markets is generally long and requires an investment of time, money and effort. For a VAR to go in and do all of the groundwork only to have the manufacturer come in and sell directly at 30 to 40 per cent off list prohibits the VAR from competing.
With the average sales call costing more than $500 today; it is financiallyimpossible for system and peripheral manufacturers to sell directly to smallusers.
Manufacturers often believe that they have a distribution channel program whe they sign up distributors, VARs and integrators. Then, they sit back and wait for the orders. When the orders don’t flood in, they say it’s the channel participant’s problem — even when they haven’t done a thing to providetraining and support.
If a manufacturer does have a direct sales force and different channels, theyhave to refine their commission program to be beneficial for all of the keyparticipants. The solution is to share the commissions between sales people and VARs. This shows the channel that the manufacturer understands the contributions that are being made and views the channel as a partner — not an adversary.
Another way for manufacturers to eliminate or minimize channel conflicts is to offer two- and three-tier pricing (and stick to it).
Equal Footing
With this approach, distributors, master dealers/VARs and dealers/VARs can compete for the same accounts. And they can do so on a level battlefield.
They all have similar pricing, so the price doesn’t become a major factor inthe buyer’s final decision. None of the players has a hill, knoll or tree tohide behind. Instead, they must deliver beyond price and provide the support and service users so desperately need.
The one sure way for the VAR or integrator to avoid channel conflicts is tostay away from commodity selling and focus on selling solutions. Mostmanufacturers can’t afford to have their sales forces focusing on marketsegments and user solutions.
There are too many small business segments out there for manufacturers to cover them all. The manufacturer doesn’t have the manpower or expertise to cover the niches that can be better understood and better supported by the channel partner.
With this approach, you develop a clear definition of the value of thesolutions, of your strengths and your competitor’s strengths. And you develop a clear picture of how you are perceived and how you want to be perceived.
People Want Solutions
People who are buying systems today want solutions.
It is up to the integrator/VAR to provide the solution and to develop a cleardefinition of the value of the solution, of their strength and how they areperceived in the target market. They can win, even if the hardware or softwaresupplier comes in with a price that is lower, because price alone will loseevery time in today’s business market.
The bottom line: Users want solutions, not technology and not hype.
The ultimate solution to channel conflicts will develop as management becomesmore capable of addressing the conflicts. Then, successful producers will develop equitable policies and pricing. At the same time, they will enforce their policies and pricing.
Until then, channel conflicts can be reduced. The key is open discussions and cooperation to resolve problems promptly when they occur.
When the producer begins to understand that the integrator/VAR network is anintegral part of the company’s marketing and sales effort, volumes will grow. But until both parties come to grips with the fact that they need each other,sales, growth and profits will continue to be hampered.
Andy Marken is the president of Marken Communications Inc. of Santa Clara,Calif. You can email him at [email protected].
