MicroAge Corporation Case Analysis. MicroAge Analysis Team Bryan Butakis Colleen Smith Elyse Cole...

MicroAge Corporation

Case Analysis

MicroAge Analysis Team

Bryan Butakis Colleen Smith Elyse Cole Paul Ridder Noël Croiger

Should MicroAge continue with the hybrid model, or focus on stand-alone

distribution or integration businesses?

Terminology Microsoft Suite

VB, Exchange, etc.

Relational Databases

Information Warehouse

Channel assembly OEM VAR Open/closed sourcing Client Server

Industry Analysis

Quick OverviewEarly 1990’s: MicroAge reinvents

industry by segmenting the channel

Mid 1990’s: “Closed Sourcing” gives way to “Open Sourcing” Expand product lines and enter high

margin Integration Services business

Quick OverviewLate 1990’s: Companies focus now on

becoming either a Full-Line Distributor or Corporate Systems Integrator Go from Build-to-Forecast to Build-to-Order MicroAge becomes a high volume channel

assembler

Channel Models

Component

Manufacturer

Component

ManufacturerOEMOEM Full-Line

Distributor

Full-Line

Distributor

System

Integrator

System

Integrator

Corporate

Customer

Corporate

Customer

Days of Inventory 39 =53+ 92

Build-to-forecastBuild-to-order (Dell Direct)Build-to-order (Channel Assembly)


Component

Manufacturer

Component

ManufacturerOEMOEM

Full-Line

Distributor

Full-Line

DistributorSystem

Integrator

System

Integrator

Corporate

Customer

Corporate

Customer


Component

Manufacturer

Component

ManufacturerOEMOEM Full-Line

Distributor

Full-Line

Distributor

System

Integrator

System

Integrator

Corporate

Customer

Corporate

Customer

Life-Cycle Services

Focuses on overall corporate networkDivided into 3 areas:

Procurement- mgt. of product inventory Distribution- pick, pack, and ship Configuration- loading of software, additional

hardware, etc..Configuration is the KEY to the entire

process

Life-Cycle Services Con’t.Asset tracking is the underrated tool

Allows continual management of the corporate IT assets

Perform technical renewal or upgrade servicesHigh value-added functions arise during roll-

outs of new technologyGross margins: 6 to 13% with operating

margins of 1 to 2%

Network ServicesDesign and end-user support are sweet spotsMostly long-term contractsOngoing operation is crucial but maintenance is

the BIG factor Develop core competency

NS provider and VAR Lock-in by Increasing services to avoid switching

costsGross margins: mid 20% to mid 40% range

Channel AssemblyProven costly

Paying for inventory and depreciationWill not account for more than 8% of

systems sold by 2002BTO and contract manufacturing will

dominate PC supply chainWill have limited roles

Problem: Open Sourcing

Has left the company’s distribution business exposed to competitive threats from larger, more diversified, full-line distributors Ingram Micro and Tech Data

Large resellers leverage size and margin opportunities

Hard to escape pricing pressures

Problem: Transition to Hybrid Distribution

Purchasing key VARs to create nationwide reseller base Offset exposure to the wholesale distribution

marketResellers who are best positioned are the

ones influencing the purchase decisions of large corporate buyers

Playing catch-up & forced to this model rapidly

IT Discussion

Technical Architecture - Advancements

New initiatives between 1995 – 1997

Internet Order Status Tracking Invoice History Account Status

E-Commerce On-Line Catalogs

IT advancements Cont. Real Fax Service

Touch-Tone Phone access for products, services, suppliers

Enhanced marketing and customer support services POWERDisc

CD-ROM of on-line catalog (updated monthly) ECadvantage

Internet Order fulfillment, quoting, configuration tool Expanded E-Commerce reach Expanded to its own division

ECadvantage 1st 13 weeks – 4,000

users Mid 1997 – 8,000 Late 1997 – 28,000

0

5000

10000

15000

20000

25000

30000

Late1996

Apr-97 Dec-97

Users on ECadvatage

ECadvantage – Technical ArchitectureClient / ServerRemote AccessApplication Servers (12NT Servers)Database

Sybase / UNIX Sybase / NT 3 MS SQL Server / NT

Legacy Systems

ECadvantage Technical Architecture

ECadvantage Application Servers (12NT Servers)

Catalog Search Pricing Configurations Ordering

ECadvantage DB Servers1 Sybase/Unix, 1 Sybase/NT

2 Microsoft SQL/NT DB Servers

Orders Products Pricing AvailabilityLegacySystem

pcOrder.Com

Web Server

Web Browser orReseller Web Site

ECadvantageClient

Web Browser &Web Site

Systems & Network Integration Wanted most sophisticate, global network

available Unite E-mail, Internet into 1 system Microsoft

Exchange Internet Explorer (Internet and Intranet) Windows MS Office (Word, Excel, Power Point, etc.) Visual Basic

Systems & Network Integration cont.

Siebel Technologies Sales force

Automation Customer support

technologies Supply Chain Mgmt

Software

ECadvantage Client and Web Site

Management Support Systems

Category Management and Focused Decision Support

Information packaging and deliveryMicrosoft Office, IE

Communication and CoordinationMicrosoft Mail, Exchange

Application DevelopmentJava, Visual Basic

Information WarehouseRelation Database, Data Modeling, Distributed Data Management

Information Technology Architecture

Challenges to success Cost Implementation Feasibility Training User Acceptance Technology Curve Maintenance Y2K Will this business continue

to be profitable?

Disadvantages of IT Implementation

Requires continuous enhancementAffects barriers to entryTimingNot guaranteed to improve performance

Keys to Success Planning Commitment,

Confidentiality, and Competition

Partnership Managers Technical Specialists

MicroAge Specifics

MicroAge Business Units

Distribution Group Full line IT products distributor

Integration Group System design, reengineering, development, operation and

maintenance

Logistics Group Services designed to streamline and coordinate physical

supply chain management

ECadvantage Internet based electronic commerce platform

Technology Services Comprehensive technology asset management services

Business Unit Key Customers

Distribution Group Systems integrators, dealers, independent resellers,

MicroAge resellers, value -added resellers (VARs)

Integration Group Fortune 2000 companies, governments, schools

Logistics Group Corporate outsourcers, small businesses, channel assembly

partners

ECadvantage Corporate end-users, VARs, MicroAge resellers

Technology Services Small businesses, VARs, MicroAge resellers

Distribution Group Customer Conflicts

Internal Sales create competitive advantage MicroAge resellers receive favorable pricing or.. Price at points to promote volume profit for

distribution group

Value chain conflicts Systems integrators rely on distributors Value chain includes industry competitor Situation precludes intense coordination with value

chain partners and reduces competitiveness

Does this mean MicroAge must be a distributor or systems integrator?

Critical Distribution Success Factors

Is the market large enough to “share” Size of end-user computer market ? Size of reseller and systems integrator market?

Can we create or do we have a competitive advantage Non-lasting advantages created through value-

chain management Physical goods and information flow enhancement,

increased item value, etc.

Critical Distribution Success Factors (cont.)

Are we perceived as an industry leader? Industry comprised of computer system, software, mass

storage, network products, peripherals and emerging technology sales

Ranked 4th in all categories behind “pure” distributors

Of 11 key criteria, MicroAge falls significantly below the “excellence norm” in almost every category

Is it worth it? Open sourcing and “Dell-direct model” cut distributor

margins drastically Product margins at 6-7% with industry leaders at 10%

Can we create value?

Porter’s Five Forces Model - PC Distribution

RivalryBargaining Power

Of Suppliers

Threat of New Entrants

Threat of Substitutes

Bargaining PowerOf Buyers

Threat of New Entrants Slower market growth in the US and Europe, as well

as shrinking margins, make this industry less appealing to new entrants

New distribution models favor large firms that can achieve economies of scale, streamline costs through Internet sales, develop “seamless links” to suppliers, and cover greater geographic areas

Channel consolidations may restrict direct access to suppliers

0 5 10 15 20

US

Europe

Asia

Rest of World

1997-1998

1998-2002

Source: Dataquest 1200

1400

1600

1800

2000

1996 1997 1998 1999 2000 2001 2002

Price

Bargaining Power of Suppliers Strong reliance on access to core suppliers for

competitive advantage Suppliers demand ability to assemble and distribute high

volumes of products while maintaining premium quality Pressure from suppliers to maintain low cost structure,

flexibility and speed Changing model towards “build-to-order” may reduce

number of distributors in the channel

MicroAge Distribution Sales 1998

26%

19%13%

42%Compaq

HP

IBM

Other

Determinants of Buyer Power Little differentiation between hardware

components Product availability and price, as well as

quality and service, acting as key determinants

Ease of purchase becoming increasingly important

Substitution Threats Services provided by distributors may be scaled back

as suppliers seek to maintain more control over inventory management and end-user demand

0% 20% 40% 60% 80% 100%

Evaluation Criteria By Importance

Product Availability Delivery Accuracy

Price Return Policies

Rivalry Narrowing channel as

suppliers shift to build-to-order model

Growing emphasis on effective cost and inventory management, and ability to steamline flow of products through the channel

Enlarging market share through on-line methods of marketing, ordering and system configuration

Focusing on “one-stop shopping” for end-users Increasing competition not just for distribution

clients, but for direct access to suppliers

Porter’s Five Forces Model - Services

RivalryBargaining Power

Of Suppliers


Threat of Substitutes

Bargaining PowerOf Buyers

Threat of New Entrants: Services Higher margins and expected future growth, as

compared to the distribution business, may attract new entrants

Changing channel models will increase the need for PC support services as well as integration services

Revenue Growth of Information Services

0

20

40

60

80

100

120

1990 1992 1994 1996 1998

($ b

illio

ns

)

0% 20% 40% 60% 80% 100%

Distribution

SystemsIntegration

IT Consulting

Comparison of Gross Margins

0% 10% 20% 30% 40%

Distribution

SystemsIntegration

IT Consulting

Comparison of Operating Margins


Market Share of Service Companies as a Percentage of 1997 Worldwide

RevenuesEDS

Anderson

Computer Sciences

GE Capital ITS

Science Applications

Vanstar

Entex

KPMG

Deloitte & Touche/Inacom

CompuCom

MCI Systemhouse

MicroAge

Others

Buying Power: Services Services are substitutable - differentiation

based on location, quality and response time End-users looking to lower costs will want

one source for all service needs

Rivalry: Services Expected growth and profitability in service

segment By 2002, 60% of distributors will earn a majority of

their profits from post-sale services

Compete on cost and value added services

Value Chain Analysis

Inbound Logistics Activity: Introducing “Seamless Supply Chains” ECadvantage: integrating orders fulfillment, inventory

management, warehouse tracking, and accounting to on-line ordering systems and other distributors’ inventories

Firm Infrastructure

Human Resource Management

Technology Development

Procurement of Resources

Warehouse&

InventoryMgmt.

ProductAssembly

ITServices----------Distri-bution

Sales&

MarketingSupport

0 10 20 30 40

MicroAge

Inacom

Ingram Micro

TechData

Merisel

Compucom

Days Inventory

Competitive Comparisons - Inventory Management

Competitive Comparisons - Distributor Ratings

05

1015202530354045

Ingra

m M

icro

Tech D

ata

Mic

roAge

Mer

isel

Product Availability

Price

Breadth of Line

Opportunities:Warehouse & Inventory Management Continue efforts to

develop “seamless supply chains” with suppliers and distribution clients

Enhance integration between on-line ordering systems, inventory status and warehouse tracking

Utilize links with suppliers’ inventories to reduce inventory carrying costs and realize savings from declining component costs more quickly

Value Chain AnalysisFirm Infrastructure




Warehouse&

InventoryMgmt.

ProductAssembly

IT Services----------Distri-bution

Sales&

MarketingSupport

Product Assembly Activity: Performing final assembly of products for major suppliers Reconfiguring systems for System Integrators and VAR’s

Expand “seamless supply chain” concept and leverage tighter integration with component manufacturers and OEMs (suppliers) to move upstream in the value chain

Utilize links with suppliers’ inventory to synchronize activity and minimize the cycle time involved in product assembly

Opportunities:Product Assembly

ComponentManufacturer

OEM MicroAgeComponent

ManufacturerOEM

MicroAge





Warehouse&

InventoryMgmt.

ProductAssembly

IT Services-----------Distri-bution

Sales&

MarketingSupport

Outbound Logistics Activity: Little application of technology to IT Services group ECadvantage: simplify distribution process by integrating on-line ordering

with product availability, system configuration, orders fulfillment and delivery tracking

Opportunities:Distribution

Continue utilizing ECadvantage to develop links between Sales/Service systems and Warehouse order tracking 0 10 20 30 40

Distributor Ratings

Delivery Accuracy

Leverage technology to reduce delivery errors and speed the entire distribution process

Increased sharing and coordination of sales information, including its distribution products sales, among regional offices (through Intranet) may provide future opportunities

Additional partnerships with OEM’s and Component Manufacturers

Opportunities:IT Services

Acquisitions and global teams ensure breadth of coverage as service sector grows domestically and internationally

Service business is less influenced or dependent upon vendors and effects of changing distribution models

Opportunities:IT Services





Warehouse&

InventoryMgmt.

ProductAssembly

IT Services----------Distri-bution

Sales&

MarketingSupport

Sales & Marketing Activity: ECadvantage: Internet-based order fulfillment, quoting and

configuration, with links to on-line catalogs and product availability

Competitive Comparisons - Distributor Ratings

0

5

10

15

20

25

30Access to SalesRep

Quality of SalesRep

Pre-sale TechSupport

Configuration

Opportunities: Sales & Marketing Leverage information captured about seasonal and

regional buying trends to develop more effective marketing partnerships with suppliers

Utilize category management concepts to improve pre-sales support

Utilize e-commerce capabilities to simplify ordering and configuration process

Identify potential service opportunities by tracking the needs of distribution clients

Position MicroAge as a provider that can offer customers “one-stop shopping”

Target buying patterns and needed services in specific regions with the “agent model”





Warehouse&

InventoryMgmt.

ProductAssembly

ITServices---------Distri-bution

Sales&

MarketingSupport

Support Activity: 24 hour call centers and technical support

Opportunities:Service

Call center and 7 days/week, 24 hours/day customer service support accounted for 10% of company’s overall income and experiencing strong customer demand

Expand ECadvantage to perform on-line technical support

Track the requirements of clients to develop different technical support package offerings

Value Chain Analysis

Firm Infrastructure




Warehouse&

InventoryMgmt.

ProductAssembly

Distri-bution

Sales&

MarketingService

Infrastructure activity: Implementation of Microsoft product suites Siebel applications

Competitive Comparisons

-2

0

2

4

6

8

10

12

14

Five Year Average

Gross Margin

OperatingMargin

Profit Margin

Competitive Comparisons

MicroAge Margins

012345678

1993 1994 1995 1996 1997 1998

Gross Margin

OperatingMargin

Opportunities:Infrastructure

Improve efficiency and reduce Operating costs

Increase communication and coordination between satellite offices and corporate headquarters

Increasingly narrow margins, coupled with channel consolidations, may limit opportunities to increase distribution business

Possible competition conflicts exist with distribution clients who are also IT services competitors

Continued move towards “build-to-order” model by suppliers may squeeze MicroAge (and other distributors) out of the channel entirely

Value Chain Risks:Distribution

Low expected growth in distribution segment may result in fewer service opportunities (less synergies)

Concentrating on service business may discomfort customers familiar with the old reseller model

Shifting focus to a service model will create costs associated with learning curves as Sales and other staff adjust

Value Chain Risks:Services

Advantages to BusinessAllow for better positioning for saleMay be able to command higher

premium on Distribution UnitBecomes profitable then retainTransferability to other parts of business

(Integration business)Possible short-term gains

Disadvantages to BusinessCostlyChance that many improvements may

not command higher price for sale due to outdated channel assembly process

Inefficiency due to user knowledge

Recommendations for MicroAge

Segregate and sell distribution business Customer conflicts Value chain conflicts Deteriorating profit margins dependence on 3 key customers Channel consolidations present opportunity to divest

Focus on value added integration services Protection from larger competitors through reliance on

technology Utilize ability to rapidly develop and deploy new technology

to stay ahead of the curve Leverage full range of services to compete in growing

market where customers require one stop shopping

Distribution Industry Today Vendors Cutting Back on the Number of

Distribution Partners Improve Inventory Management Optimize Relationships and Effectiveness of their Go-to-Market

Strategy

Vendors not chosen will have to Sell or Merge Margin Pressures are also Driving Supply Chain

Integration Pressure to sell at lower prices while cutting internal costs Driving increased consolidation among distributors and resellers

Distribution channels are consolidating and becoming streamlined

MicroAge Today

1999 MicroAge splits into 2 businesses Distribution company called Pinacor Integration and services company called MicroAge

Integration Services

Net loss of $145 million for the Six months ended April 1999

Contemplating sale or spin-off of Pinacor Stock price falls to $3.31 on September 3rd

72% 1-year price decrease

MicroAge - A Divided Company

Pinacor 4th largest technology products distributor in US

Includes Company’s channel assembly business

75% of Company Revenues 25% year over year revenue growth

Gross Margins decrease to 3% of sales 60% of sales from Compaq, HP and IBM

Not Chosen by Compaq as a primary distributor Compaq represents 25% of Pinacor Sales

Negatively impacted by Y2k remediation Latin America unit closed at cost of $32 million Ready to be sold????

MicroAge - A Divided Company (cont.)

MicroAge Integration Services 3 Business Units

Network Services Life-Cycle Services Call Center

Integration Services not yet profitable Predicted to break profitability threshold in year 2000

Sales mix weighted toward life-cycle services Network services are primary focus and now represent 10%

of revenues

MicroAge Corporation Case Analysis. MicroAge Analysis Team Bryan Butakis Colleen Smith Elyse Cole...

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