Compaq has detailed its full distribution strategy, encompassing retail stores, Internet initiatives, a call centre and new products, following recriminations from some of its channel partners, support from others and intense media scrutiny.
Underpinning its entire supply chain reinvention is what Greg Healy, Compaq's general manager, business and consumer, coins a "plan to grow into new market segments and give the customer a choice".
Through research over the last 18 months, Compaq identified "some big markets that were growing quickly that Compaq only had a low share in. We don't configure to order for some market segments and you can't take components out of our products. We just didn't have the capabilities to meet the needs of some of these fast-growing markets," Healy said.
Most significantly, Compaq singled out experienced consumers and small businesses, a segment it has only an 11 per cent presence in but is growing at a rate of 17 per cent. "Compaq started in the large business space then jumped to the other end of the spectrum with consumers. We now need to work on the markets in between," Healy said.
With small businesses demanding a more flexible approach from Compaq and the ability to pick and choose "the latest and greatest technology", the vendor proposed a more customised and direct relationship. "The stores and the Internet will be focused on the small business and consumer space. The remainder of the markets will continue to be fulfilled through the channel," said Healy, who suggested that Compaq's "direct models will be for more experienced consumers".
According to Ben Reeve, Compaq manager, segment and channel marketing, the vendor has taken on the burden of moving itself into the virgin territory of small business because the existing channel has failed to inspire confidence in that market segment. "We are going to challenge the existing channel especially in the white box market because customer satisfaction is just not there at the moment. Once the stores are up and running, our intention is to give it back to the channel," said Reeve, who insists that Compaq needs to retain "the channel's entrepreneurial flair, but with the reassurance of the Compaq brand".
Healy believes Compaq can succeed where the existing channel has apparently failed because it can rely on its "number one brand image and give customers the assurances they want.
"We can de-risk the customer experience. We are investing a lot of money into this but running a channel is not our core competency and we have already had unsolicited interest from a number of partners wanting to become involved," Healy said.
Putting the theory into practice, Compaq has initially planned eight retail stores in Brisbane and Melbourne, all of which will have individual configuration centres located on the premises. "The store network we are building includes small shops of only 100 to 150 square metres. This includes a front office and a back office dedicated to configuration-to-order facilities. The stores won't keep a lot of inventory," explained Healy of Compaq's fast-to-market approach. Consequently, Healy predicted a "lean and efficient supply chain that pushes the configuration of products far closer to the consumer than it has ever been before".
However, some scepticism surrounds Compaq's ability to sustain a retail chain, as well as the vendor's intentions to compete against its existing channel, and analyst IDC is predicting ongoing conflict for both Compaq and its partners in the following months. "As Compaq moves to a hybrid distribution model there will be some downturn in business performance. The transition will not be as smooth as Compaq might hope as it attempts to balance a direct strategy with an ongoing relationship with the indirect players," IDC's report said.
IDC was proven correct with Compaq and mass retail outlet Harvey Norman undergoing weeks of intense jostling, with HN eventually banning Compaq and its more than $50 million worth of business from its stores.
"Demand for Compaq products will be channelled through to other retail partners so we will still deliver the numbers. Hopefully we will reopen the doors and go back and talk to Harvey Norman but we are willing to make short-term sacrifices to tap into markets we don't already have a share in and would like to," Healy said.
According to IDC, other vendors may adopt similar strategies following the success of Dell and Gateway, forcing Harvey Norman to face this market reality again in the future.
Compaq is confident of the path it is treading and Healy claims Compaq can sustain both a channel and direct focus. "We haven't got a time frame to prove the stores successful. Instead, we have a series of performance metrics such as customer experience, financial and the logistics of moving product to different stores. But until we get the stores to market we don't really know how it will work," said Healy. If the project is successful, Compaq plans to roll the stores out on a national basis. "Should the pilot store be successful, it will be taken out to the channel to become a franchise. The exact nature of that is yet to be determined," Healy added.
According to Reeve, this model could possibly move into markets similar to Australia in terms of channel prominence such as those in the Asia-Pacific region. "The stores in Australia are a pilot and the rest of the company is watching keenly. In the US direct is more prevalent so this probably won't happen there but it is more relevant to the Asia-Pacific," suggested Reeve.
In line with Healy's philosophy of "click and mortar", Compaq, in conjunction with its retail announcements, has also expanded its Internet direct selling operations. "A lot of companies see the merit in expanding and investing into offline type strategies as well as their Internet stores," said Healy, citing Drugstore.com as an example. The Internet will be the conduit for Compaq's Presario and Prosignia units, as well as service offerings such as care packs and software support, said Healy. Again it will be directed towards the small business market, with Reeve explaining that "there will be a segment of that market that absolutely wants a real relationship but that will eventually migrate to the Internet".
The Internet model will be supported by a call centre which allows customers to enquire about information posted on Compaq's site.
Products going through the retail and Internet distribution channels have been designed specifically for Compaq's new focus markets. The Presario CTO will be targeted at consumers and the small office market while the Prosignia will be aimed at small businesses and will include a range of mobile computers, desktops and servers. Both will have configure-to-order capabilities.
"The enhancements to the Presario and the new Prosignia will be strong offerings in a market we are not traditionally strong in," Healy said.
Both these products will also be offered through Compaq resellers but are more specifically designed to circulate through Compaq's newly dedicated small business channels.