The Dell Effect

Traditionally, most IT hardware vendors have involved the channel while
reaching out to customers. In countries like India, which encompasses a vast
geography, varied cultural backgrounds, different business models and market
segments, channel partners are the best way for vendors to boost their market
footprints.

It is true, that a select number of IT vendors have been following a direct
model in order to distribute their products. And Dell is leading that pack.

For long, Dell has been the number one PC maker globally with direct sales
and has garnered success even in the dynamic Indian market that is predominantly
channel and relationship driven. Independent research suggests that Dell grew by
an astounding 80 percent in unit terms and 60 percent in value in a market that
only grew by five percent in units YoY. Besides PCs, Dell has done well in the
x86 server market also. Last year the vendor touched a revenue figure of Rs
1,800 crore, while its marketshare moved to around seven percent.

Planned strategy

When Dell embarked on its India roadmap, it succeeded in glamorizing the
direct selling model and gave all other IT giants a run for their money, leaving
resellers unnerved. As a result, whenever vendors drew plans to ramp up sales in
a targeted market space, the dilemma remained whether to go direct or via
channels.

Commenting on Dell's success Rajan Anandan, VP and GM, Dell India said, “The
success of our business has always been about being close to, unders­tanding and
meeting the needs of customers.”

Continuing further, Anandan added, “Today we are among the fastest growing
technology companies in India, and have consistently been the number one systems
to large corporate customers. After achieving leadership in the large corporate
space, we have begun to leverage off that strength and expanded into several new
segments. Our foray into the home and small and medium enterprises has met with
success. Our product line for this space has been expanded and we have
introduced the inspiron and xps ranges, as also the vostro brand of solutions
for the small and medium enterprises. We have excellent capabilities to address
the diverse needs of the markets we are addressing.”

The direct model has been the cornerstone of Dell's success so far. The
company has built a $500 million business that is entirely direct. “The ability
to custom build each unit and offer a single point of contact to customers has
been the biggest advantage we offer,” informed Anandan.

India is Dell's fastest growing market. Recently, the vendor made forays into
key verticals such as government, education and BFSI, besides expansion into
home and small business segment.

Dell has also taken its first few steps into global retail in the US, the UK
and most recently in Japan. “We have built a comprehensive range of products to
meet the needs of each of these segments and have a strong team that helped us
outgrow the market across all products-be it desktops, notebooks servers or
storage. Now that our India manufac­turing has commenced, we will get even more
competitive in the marketplace,” he further added.

Dell has commenced production at its new manufac­turing facility at
Sriperumbudur near Chennai and rolled out the first 'Made in India' Dell
desktop. The company has planned an investment of about $30 million over the
next five years. “We expect delivery times to Indian customers to be shortened
significantly. Depending on customer location, there could be shortening of
lead-time by as much as 30 to 40 percent. We also expect to have an improved
cost structure, which will help us make our value proposition even more
compelling to customers,” indicated Anandan, while adding, “Price is only one
part of the purchasing equation. Customers today recognize and seek value-added
services in their IT investments. Dell is focused on helping customers with
lowering their total cost of ownership through stable, reliable systems with
planned transitions and longer life cycles.”

Even while vendors and partners are still contemplating on how to improve
their success while dealing with Dell's direct business approach, Dell itself in
an unprecedented move announced recently that it would consider working with the
traditional channels. This move by Dell to enlist the services of the channel
and get a wider footprint in the market, sent shock waves in the market. It also
meant that though direct selling is an inherent part of the game, the reseller
community could not be ignored.

Ajay Mittal of HBS System was one of the channel companies that were to
partner with Dell but no official announcements were made. “Dell is not an
entirely channel operated principal; therefore, it won't bring any big change in
the market dynamics. Moreover, the channel model of Dell is not finalized yet;
therefore it is too early to comment on the channel structure of the company,”
said Mittal.

Learning from Dell

This brings into light the question as to whether in price sensitive markets
like India, where end customers opt for special discounted prices, the
challenges are higher for other hardware vendors and partners. Does it also mean
that at some point in time direct selling models could tend to become a less
preferred option if not obsolete?

According to Ashok Pamidi, Director, Commercial Accounts and Enterprise
Partners, Technology Solutions Group, HP India Sales, “One cannot say which
model is the best fit. It really depends on the market. In mature markets where
the buying pattern is different from markets like ours, the direct system of
sales can be effective. However, in emerging markets and for specific products,
customers prefer that partners articulate the benefits of the products and
solutions. Also in growing economies, channel partners can provide the much
needed value addition, especially service and support.”

Agreeing with him was Rajesh Gupta, Director-Sales and Marketing Group,
Intel, South Asia who said, “In the last decade the PC business has evolved from
being a single segment to encompassing various segments like retail, SMB and
enterprise.” He opined that vendors even have specific processors for specific
segments. Similarly, OEMs have different brands for different segments. The
business as a whole has become very segmented. So vendors need to adapt to
different distribution models.

For the consumer segments, retail is a preferred path, while for the SMEs,
the channel (local dealers) is a better option. For many large corporates who
need service and support, vendors prefer to go direct.

Sharing his thoughts, UR Acharya, VP-Distribution and Reseller Channels,
Cisco India said, “In India Cisco does 100 percent of its business through
channel partners. We realized very early that given the various challenges, this
would be the best model to approach our customers. In other regions, we have a
mix model where very large customers are handled directly by Cisco.”

According to S Rajendran, GM-Sales and Marketing, Acer India, “Both models
have their inherent strengths and weaknesses. However, the key to success lies
in the organization being focused on making a business model work. Anytime you
have a mix of models, which are inherently different, the energies within the
organization get divided and you are not able to optimize the resources and send
out consistent messages to stakeholders.”

Stressing that the biggest key to Acer's success has been the channel model,
Rajendran further continued, “In large diverse markets (geographically,
culturally) which are developing and where the Internet penetration is low, the
direct model has proven to be unsuccessful. Today, customers in large developed
markets want to touch, feel and experience the product.”

Echoing similar sentiment was Prashant Mehar, Corporate Champion-Channel
(Uptime Solution), Emerson Network Power (India) who said, “The channel model is
here to stay. The direct model cannot replicate it although in the latter there
is the advantage on pricing due to elimination of a couple of supply chain
tiers. The trend however is a hybrid model.”

Peaceful co-existence

In essence, the direct as well as channel models are here to stay. The
choice between channel v/s direct depends on the type of product and the
customer segment targeted is what vendors feel. While low-end products would
need a well-lubricated logistics and a two-tier channel to address the market,
an enterprise class high tech product/solution will need a direct sales
approach. In some cases, the direct team is responsible for lead
generation/identifying need/selling while the fulfillment is done through
channel. To a large extent it appears that for delivery and post sales
commitments, the channel could be leveraged to support even enterprise
customers.

This means that customers would decide how they would like to purchase. While
some prefer the channel because it is usually local, carries a wide range of
solutions, and provides a relationship, but direct sales also have their
advantages. If a customer knows what he wants, then a direct model may become
his preferred option.

Additionally, the sales model adopted depends on the volumes that a vendor is
dealing in. If it is a case of pure volumes, with knowledgeable users making an
informed decision, the channel model is preferred. However, if the vendor is
manufacturing niche products, which require promotion to make a customer see
value, the direct model is far better. At the end of the day though, it is up to
the OEM vendor to create demand and spur purchase.

This means that though vendors like Dell contemplate going through the
channel, they would still continue with their direct model. Having begun
manufacturing, Dell would need to scale up their volume of sales, which would be
enabled by the channel. However, the channel option would definitely provide
Dell coverage in those geographies where they are currently not present in a big
way, is the vendor verdict.

Channel speak

Most channel partners agree with the vendors that the model of distribution
is really dependent on the product and market segments targeted therefore. KL
Lalani, Chariman, Lalani Infotech, Kolkata said, “In India, unlike Europe and
America, customers trust their local dealer more. So the channel mode is more
viable and acceptable. Therefore, channel has been and will remain the key sales
mode in India.” Ajay Mittal, Director, HBS System, New Delhi too agreed with him
and said, “The model is definitely the trend of the present as well as future.
Channel is the source through which vendors reach their end customers and get
control over the market.”

For Alok Gupta, Director, Cache Technologies, the channel is a route for any
vendor to do successful business in India, given its vast geography. Another
major factor that makes channel important is the after-sales support that
customers get from the partners, he felt.

According to Ravi Verdes, Director, Frontier Business Systems, Bangalore,
with prices of IT products coming down by the minute and margins getting
squeezed, there is enough space for both direct and indirect models to happily
co-exist.

Echoing similar sentiments was Satyen Vyas, CEO, Vitage Systems who felt that
for lower-end products, be it PCs or laptops, the channel is still the best way
to reach out to customers. High-end products, especially those in the consumer
segment could stand to benefit with a direct approach.

“With the rapid move toward retail, and increased demand for multi-branded
solutions, the format of distribution could move towards more of
value-addition,” said, Harish Shetty, Chairman of Bangalore-based Binary
Systems. “This means that channel cannot be wished away but would need to adapt
to changing customer needs,” he added.

As far as the impact of Dell contemplating a channel move is concerned,
partners felt that some product lines are best supported by channels, especially
on issues such as credit, transaction costs, on-site demos or proof-of-concepts.

While on the one hand, Dell's entry into the market could mean more
competition for the vendors, on the other it would also imply a greater
opportunity for the channel as they will get an additional vendor to work with.
However, most channel partner would be watchful of Dell's move and see what kind
of channel policies they would put in place before contemplating an actually
sign up. This is because apprehensions are still rife as to whether Dell would
make use of the channel for a temporary period to increase market penetration
before completely going direct again.

Partners feel that some product lines are best supported by channels, especially on issues such as credit, transaction costs, on-site demos or proof-of-concepts

Impact on channel models

Given that both direct selling and channel routes will continue to exist,
the future of Indian IT distribution could see a lot of innovation coming its
way. Channel models of the future are set to become more efficient given the
likely increase in competition. Efficiencies would be reflected in better
logistics and commercial offerings to the customer. Real-time and good movement
tracking in the supply chain would become the need of the hour.

According to SM Ramprasad, Business Manager-Consumer Product Group, Epson, as
a channel driven company has seen a lot of change as far as customer behavior is
concerned and has adopted different approaches for different product ranges. In
the future the focus would continue to be selling to the final tier who are in
constant touch with the end customer and also spend considerable time to
understand the needs of the end customer.

Said Sunny John, Country Manager, Quantum Corporation India, “The future
would be all about reaching out more effectively to the customer. As of now
direct models are known for their ease of ordering, fast shipping and low cost.
As the channel continues to evolve in these areas the advantages of the direct
model would tend to get blurred.”

This means that as changes happen in the overall market, there would be a
need for a wider channel in terms of the need for more distributors and
partners. This would in turn imply that there would be more regional level
players be it the reseller or distributor is what vendors say. Also with a
retail boom in the offing, the traditional channel would need to re-orient
itself to meet growing customer demands.

In addition, partners could tend to align to a few brands and offer
exclusivity. “Conventional partners are beginning to realize that they need to
snap

out of box selling and focus on value-added services, innovative business
practices, demand generation activities, invest into people, training to keep
updated about trends and technology and having a strong IT infrastructure as the
backbone of their organizations,” felt Rajendran of Acer.

Talking on similar lines Alamuri Sitaramaiah, Director-Sales and Marketing,
Fluke Networks, India said, “In my opinion, products with less differentiation
will go the mass distribution way. Niche products will go the direct sales model
way. However, a new breed of channels called

value-added resellers (VARs) who add value in terms of training, pre and
post-sales support are emerging.”

Win-win proposition

Partners felt that channel models are largely vendor dependent. If vendors
earn profits from an existing model, they would not contemplate changes. Either
way, the channel stands to gain.

Commenting on the future channel models, Vyas opined that trade channels
would move into the consumer durable segment and their survival would depend on
the financial muscle of the partners as well as his stocking capacities,
“Vendors must look to providing better financial support to the channel in the
future. Value addition would become the order of the day,” he said.

Agreeing with him was Mehta who said, “Only box selling would not survive
well in the future. The key to growth would be value addition in terms of
service and support. Channel partners need to gear up for that.”

For Verdes, channel models would change based on product and customer needs
and more value addition would become the order of the day. “While most partners
would wait and watch Dell's move, it could mean an opportunity for the channel
if the vendor's policies are channel friendly,” he felt. Talking in the same
vein, Shetty of Binary Systems said that system integrators would need to gear
up to meet the increased demand for support and service from customers.

As far as Dell is concerned, it is wait and watch time for most partners.
Mittal of HBS System said, “Dell is not an entirely channel operated principal;
therefore, it won't bring any big change in the market dynamics. Moreover, the
channel model of Dell is not finalized yet, therefore it is too early to comment
on the channel structure of the company.”

Going by the above said, it is clear that the aim of any sales strategy by a
vendor is to gain the maximum marketshare while, retaining optimum margins.
Direct selling seems to be a compulsion out of that necessity, while it is the
same necessity-of achieving greater footprints, that prompts vendors to turn
towards channels.

One thing is clear, the channels, both globally and in India, will continue
to have their importance. However, with direct selling companies contemplating a
channel model, the challenge for OEMs as well as channels would be to constantly
provide enhanced customer value in terms of product leadership, customer
proximity and delivery. Going forward, only the best will survive.

Subbalakshmi BM


Subbalakshmibm@cybermedia.co.in

(With inputs from Amrita Tejasvi in Delhi and Piyali Guha in Kolkata)