ARN: What prompted Compaq to pursue what is seen as a retail strategy?
Penman: It's a little broader than a retail strategy. The message I want to convey is that the retail stores are only one part of a bigger strategy.
It's a customer choice strategy, and in fact we are labelling it Customer Choice because it concentrates on the strategy and what we are trying to achieve rather than some glib codename.
We are trying to offer access to a suite of products and services that we haven't had before. Our customers tell us that to compete with the `white box' part of the PC market, we need to have this strategy.
This is a strategy focused more on the small-to-medium business market and the savvy home consumer than our enterprise or larger business customer.
And in that space, if you look at the statistics - IDC calls it the `other category' - which is the non-brand category, it has the lion's share of the market. That really annoys me. I'm trying to make that other category smaller and the Compaq category larger.
I've said this to thousands of people in this company. I still want to be the managing director of the `other' category and I shouldn't be after 15 years in this business.
We've done a lot of work over the last 12 to 18 months to work out what makes those customers tick and why they're attracted to a non-brand solution, rather than Compaq.
We have found that it's actually not the product, it's the relationship those customers have with the purveyor of services and products. It's the relationship they have with the corner store guy who is there late on a Friday night and is prepared to come to their house and help them install it if they really need him too.
So when we got over our somewhat damaged self-image that the brand of Compaq was not the only thing that made people buy we said: `Well how about we offer the same sort of flexibility and responsiveness and access and include the Compaq branded PC as well?' Would that be a potent solution or not? We thought yes, it would be.
We thought we could do it even better because we have worldwide component access, the ability to customise products to units of one, we can afford to go out and hire the very best people to manage those stores. If it is successful, as I'm sure it will be, we will roll out a franchisee deal.
Does this reflect your opinion that the mass retailers do not have the ability to target that market?
Yes, but let's put it this way, they haven't shown an ability to do that. We have been working with retailers for years, and despite the attempts of our retail friends, who have done a fantastic job and helped us get to number one in the home market space, we haven't made much of an impact into this white box market at all.
The ideal for me is to be able to convince people who sell non-branded products today to sell Compaq. And that way I would be assured the stores would be doing the right job, that they were not taking business from the retailers and simply substituting one distribution channel for another, which I don't want to do.
This is very much a case of saying if the stores are successful, and our retailers notice a significant downturn in their business, then I would have failed dismally.
This is just another channel of distribution, we are not attempting to compete with the retailers. There is nothing further from my mind than that because they are our partners.
Did Compaq hold any discussions with retailers to see if they could change their strategy to achieve what you wanted?
Absolutely, but in most cases the sticking point was the stores. We are currently talking to some retailers about a number of different priorities and initiatives that will assist them to drive their business harder.
We are in discussions with them about stores within stores, kiosk concepts and demand generation programs which will increase the traffic to them.
The problem today is we have in certain suburbs of Sydney Harvey Norman stores and Dick Smith stores up the road from a `ma and pop store' and it is moving almost as many units per week as the Dick Smith or Harvey Norman store. How does that happen? With all the national advertising, branding and promotion those retailers have, those customers are getting something else at those `ma and pop' stores, as I call them.
You have mentioned how Compaq has the ability to custom-build PCs in conjunction with its Web site. Isn't this a similar strategy to the likes of Dell and Gateway?
Yes, but it takes them 14 to 15 days to get you the product. We can actually build it in the store and we have got the system down so well we will know what's in the box you bought from the Bennettswood [Victoria] store two years ago.
The stores are one part of it. The other part involves the call centre, because most of the Dell sales are Web-enabled sales, they are not Web sales. You see what you want on the Net, configure what you want, then ring up someone and order it or order it online. We also have a call centre, whereby people are answering the calls from interested customers.
Where has Compaq looked to for examples of how to build this strategy?
We looked to our successful competition, asked our customers, talked to our retail partners, our reseller partners. The one thing this is building on is the success of these partners.
For example, a person walked into one of our retail stores in Melbourne [during the first week] and wanted to buy 20 Armadas. Now Armadas are not yet available from the stores - Prosignias and Presarios are. So the guy in the store picked up the phone and made an appointment with his local reseller. They had a meeting, decided how they would divide up the booty and the Armada got supplied to the customer through the reseller who got a cut of the action. In addition, the store, because it was his contact, maintains control of the customer.
So obviously you are hoping to replicate that scenario?
Yes, but on a much bigger scale where the two channels work together so there isn't any conflict between the two. The stores, for instance, have a strict pricing policy. The same pricing is offered on the Net and in the call centre because we don't want to have competing channels.
But isn't it possible that channel conflict will still occur where other resellers are involved?
It won't occur from our point of view. If the reseller chooses to change the price, that's fine, but we won't change our price, because we have got to have a consistent platform. We think with the Prosignia and Presario, which are not sold through our resellers, we can be very competitive with the white box market.
How do other retailers besides Harvey Norman have to change their business given your strategy?
I was hoping I could convince some or all white box resellers to sell Compaq. How successful we are going to be in that area I don't know. When we have proven how successful our stores are, a number of those [resellers] will think seriously about applying for a franchise.
To what degree is this an initiative of Compaq Australia?
If you take each particular initiative, each one has been tried somewhere. But nobody around the world has tried this as a packaged solution to really change the distribution model. So yes, it is very much an Australian initiative.
Will this strategy be adopted in other countries if successful?
That's a difficult one really, because initiatives that happen in the US and UK don't necessarily happen here. We look at our markets [around the world] very differently.
Would it work well in the Asian markets?
We are part of the Asia-Pacific division. I'm quite sure that if it works really well here, it could be ramped up in other parts of the world too. There is a lot we can transport at low cost now in terms of the methodology and competencies we have picked up. We could save other countries a lot of money because we have started from ground zero.
For now, it would seem to me there is some advantage in fast implementation cycles. Once it has proven successful, I think you will see it rolled out in other countries.
Do you have any time frame for a rollout in Asian countries?
We are looking at giving this at least three to six months, and depending on the results of the initial store rollout, to see what happens. My suggestion is we would be very unwise to pre-judge the success of this before Christmas.
How indicative do you think Compaq's new strategy is of the need for supply chain reform in Australia?
The world is changing. The fact is that not only are the vendors changing, customer requirements are changing. If we don't change we are going to be a dinosaur.
The gap between us and second place is quite considerable. What I am trying to do is extend our lead and get us into areas we are not in. That's the whole aim of this exercise - it's not to annoy one particular partner. That's crazy. We are the best partnering organisation this IT industry has ever seen. We built our whole business on partners, so the last thing I want to do is alienate them.
If there is one disappointment I have from all of this it is the Harvey Norman saga. Gerry [Harvey] and I actually get on really well. I like him. He has a fantastic business and two great companies like Compaq and Harvey Norman should be able to work out a way of working together. But unfortunately we were unable to do that, so that's one disappointment. Does that mean it will never work? I hope not, but I have got to prove first that I am not in any way damaging his business by introducing these stores.
He has been very vocal about saying it's not going to hurt his business, so why is he doing it [dumping Compaq from HN's retail shelves], what's the problem? However, that logic doesn't work with Gerry because he is a self- made man. I think he is warning IBM and HP not to do it.
Isn't he just protecting his business?
Well, profitability through the retail channel has never been a strong point. There needs to be a balance between the amount of money you invest in a business and the amount of margin you make.
How did you react to HN's appointment of Acer following your exit?
That is their decision. I make no comment about that. The fact that he didn't introduce Acer before he had a stoush with Compaq seems to explain things.
Five years down the track, are you going to get to the point where Compaq's (planned) franchise operation will introduce other products and services and dilute the original plan?
We probably won't introduce the competitive PC too early, but we are introducing third-party products today. There are Canon printers, digital cameras, and telecommunications offerings as well. We are not trying to be too precious about it, [but] to negotiate a complete solution. So the marketing we are doing is specific to a store's geographic region. We are starting to build up a pocket of customers around that store.
What percentage of Compaq's business comes from services?
Too small. My aim is to get that up to 50 per cent within the next three years, which means they have to grow extremely fast to make that happen.
We've got a big task ahead of us to change that balance of services and product. The business is currently 30 per cent services, 70 per cent product, and I want it to be 50/50.
To what extent will you go to label Compaq as an e-business company?
We are already a strong e-business player today, there is no reason to label it that way. There are some customers who want e-business solutions and we aim to be their partner of choice in that area.
We've got a particularly strong series of assets when it comes to e-business strategies. Our Himalaya series is probably the most reliable series of hardware that has ever been built. Our Alpha technology is constantly being developed and for the first time in four years we have reversed the downward sales spiral of Alpha and are looking forward to a 30 to 40 per cent increase in our Alpha business this year. It's the same with Tandem; we have stopped the Tandem rot. We've really got a good story to tell in the non-stop reliability area.
But it's more important for me to have the right solution for the customer, not to totally become an e-business purveyor overnight. A lot of people actually have a healthy scepticism towards what e-business actually is. And what we are trying to say is we can evolve your business to being totally e-business if you want, or we can start that process in an evolving way.
What is your opinion on the future of the two-tier distribution channel in Australia?
I think there is a huge and promising future for distributors. They are a growing part of our business - we see them as not only increasing their business but also their share of our business. We don't see them as a declining influence on the IT industry, but in fact just the opposite.
How do you respond to suggestions that resellers are losing their value in the distribution chain?
The reseller should not depend on hardware to add value. I've been saying to the distribution channel for five years now if you are going to depend on hardware margins for your profitability you have called it wrong. The value that a reseller brings to the customer is very rarely associated simply with hardware fulfilment. It's a solution.
There is no point in resellers becoming a pure box-dropper, that's a distributor's job. In many cases resellers and distributors are working together because the distributor's core asset is its capability to move a lot of equipment to a lot of places very quickly and cheaply. The added value that a reseller brings to the customer means that if they can then access equipment more cheaply and faster, they have a better solution to offer the customer than what is done solely through distributors.