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Distribution split a sign of the times

Distribution split a sign of the times

As chief executive officer of US-based PC systems distributor MicroAge, Jeffrey McKeever recently made a gut-wrenching decision to split the company into a MicroAge unit, focused on systems integration, and a Pinacore unit, focused on distribution. The same story can be said for a number of Australian organisations headed up by ComTech and Express Data, which have recognised there is no future in trying to be all things to all people. At the end of the day, the people you hurt the most are the partners who have stuck with you through thick and thin. McKeever recently talked to IDG's Michael Vizard about that decision, and how direct PC sales are changing the nature of the industryIDG: What is the difference today between a distributor and a systems integrator?

McKeever: Not that much. Major distributors today are moving into some type of build-to-order capability. But being able to configure a PC is quite different from true systems integration. We're not Andersen Consulting or EDS or a company like that. We don't do the $US100 million contracts where we take over the entire company. What we do is major technology refresh projects for companies. We are increasingly in the staffing business. We have about 1200 engineers and technicians now that we deploy by the hour.

So what was the thinking behind breaking the company up into separate units?

We decided to break them up because we really felt that each company's market capitalisation should be as much as they were together. So obviously, we weren't getting value for our stockholders. We felt that by breaking them up we would be able to get better visibility for each of them. The model we had has worked well for five years. But it wasn't working so well in the first fiscal quarter this year. The time was right to break the company up.

But why walk away from the MicroAge name for the distribution unit?

It would have been easier to leave the distribution company MicroAge, but there was one little obstacle. We have a couple of hundred branded licensees and they were really the obstacle on the distribution side. A number of VARs, or dealers, wouldn't buy from us because they believed we competed against them.

Well it wasn't us - nine times out of 10, it was a branded dealer using our name. So by changing the name of the distribution company, you eliminate that perceived conflict.

If corporate customers are comfortable buying direct, what is the channel's role?

The PC industry grew up in the '80s using a retail model, which is a push model. What Michael Dell did was basically come to the marketplace as a mail-order company initially, and over time, worked on re-engineering the supply chain to what's called a pull model. The numbers obviously prove that this is a lot less expensive than the push model.

How does this make a difference to the customer?

The price delta between the pull model and the push model is pretty significant. We believe in the mid-teens with a 14 to 17 per cent difference. If you go back to 1996, we really started seeing Dell make headway in corporate America because the price delta was just too significant for companies to ignore it.

Dell, by then, had developed enough of a brand name for people to take him seriously. And the price delta was a 20- or 30-point difference, which was very, very significant. So he started gaining share and then in about '97, the major suppliers - IBM and HP and Compaq started saying "who's Dell?".

Does this mean that Dell has changed the way its competitors do business?

Dell has successfully changed the model, and now Compaq and IBM and HP are moving towards a new model, sometimes called a build-to-order model.

What they could do is just build systems to order and then ship directly to end users, except that assumes that end users view computers as finished goods. But of course, they don't.

They view computers as raw materials to systems that run their businesses. And that's been one of the limiting factors of Dell, and Dell in fact has built up quite a large dealer network to respond to it. We bought a number of dealers last year, many of which had 20 or 30 per cent of their business with Dell.


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