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MicroAge Corporation

MicroAge Corporation. Case Analysis. Bryan Butakis Colleen Smith Elyse Cole Paul Ridder Noël Croiger. MicroAge Analysis Team. Should MicroAge continue with the hybrid model, or focus on stand-alone distribution or integration businesses?. Microsoft Suite VB, Exchange, etc.

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MicroAge Corporation

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  1. MicroAge Corporation Case Analysis

  2. Bryan Butakis Colleen Smith Elyse Cole Paul Ridder Noël Croiger MicroAge Analysis Team Should MicroAge continue with the hybrid model, or focus on stand-alone distribution or integration businesses?

  3. Microsoft Suite VB, Exchange, etc. Relational Databases Information Warehouse Channel assembly OEM VAR Open/closed sourcing Client Server Terminology

  4. Industry Analysis

  5. Quick Overview • Early 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

  6. Quick Overview • Late 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

  7. Component Manufacturer OEM Full-Line Distributor Corporate Customer System Integrator Component Manufacturer OEM Full-Line Distributor Corporate Customer Component Manufacturer OEM Corporate Customer System Integrator + Days of Inventory Full-Line Distributor 39 53 = 92 System Integrator Days of Inventory 21 + 14 = 35 Days of Inventory 12 + 1 = 13 Channel Models • Build-to-forecast • Build-to-order (Dell Direct) • Build-to-order (Channel Assembly)

  8. Life-Cycle Services • Focuses on overall corporate network • Divided 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

  9. Life-Cycle Services Con’t. • Asset tracking is the underrated tool • Allows continual management of the corporate IT assets • Perform technical renewal or upgrade services • High value-added functions arise during roll-outs of new technology • Gross margins: 6 to 13% with operating margins of 1 to 2%

  10. Network Services • Design and end-user support are sweet spots • Mostly long-term contracts • Ongoing operation is crucial but maintenance is the BIG factor • Develop core competency • NS provider and VAR • Lock-in by Increasing services to avoid switching costs • Gross margins: mid 20% to mid 40% range

  11. Channel Assembly • Proven costly • Paying for inventory and depreciation • Will not account for more than 8% of systems sold by 2002 • BTO and contract manufacturing will dominate PC supply chain • Will have limited roles

  12. 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

  13. Problem: Transition to Hybrid Distribution • Purchasing key VARs to create nationwide reseller base • Offset exposure to the wholesale distribution market • Resellers who are best positioned are the ones influencing the purchase decisions of large corporate buyers • Playing catch-up & forced to this model rapidly

  14. IT Discussion

  15. Technical Architecture - Advancements • New initiatives between 1995 – 1997 • Internet • Order Status Tracking • Invoice History • Account Status • E-Commerce • On-Line Catalogs

  16. 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 IT advancements Cont.

  17. ECadvantage • 1st 13 weeks – 4,000 users • Mid 1997 – 8,000 • Late 1997 – 28,000

  18. ECadvantage – Technical Architecture • Client / Server • Remote Access • Application Servers (12NT Servers) • Database • Sybase / UNIX • Sybase / NT • 3 MS SQL Server / NT • Legacy Systems

  19. ECadvantage Technical Architecture Web Browser & Web Site ECadvantage Client Web Browser or Reseller Web Site Web Server ECadvantage Application Servers (12NT Servers) Catalog Search Pricing Configurations Ordering ECadvantage DB Servers 1 Sybase/Unix, 1 Sybase/NT 2 Microsoft SQL/NT DB Servers Orders Products Pricing Availability Legacy System pcOrder.Com

  20. 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

  21. Systems & Network Integration cont. • Siebel Technologies • Sales force Automation • Customer support technologies • Supply Chain Mgmt Software

  22. Information Warehouse • Relation Database, Data Modeling, Distributed Data Management Information Technology Architecture ECadvantage Client and Web Site Management Support Systems Category Management and Focused Decision Support Information packaging and delivery Microsoft Office, IE Communication and Coordination Microsoft Mail, Exchange Application Development Java, Visual Basic

  23. Cost Implementation Feasibility Training User Acceptance Technology Curve Maintenance Y2K Will this business continue to be profitable? Challenges to success

  24. Disadvantages of IT Implementation • Requires continuous enhancement • Affects barriers to entry • Timing • Not guaranteed to improve performance

  25. Keys to Success • Planning • Commitment, Confidentiality, and Competition • Partnership • Managers • Technical Specialists

  26. MicroAge Specifics

  27. 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

  28. 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

  29. 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?

  30. 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.

  31. 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?

  32. Porter’s Five Forces Model - PC Distribution Threat of New Entrants Rivalry Bargaining Power Of Suppliers Bargaining Power Of Buyers Threat of Substitutes

  33. 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 Threat of New Entrants Source: Dataquest

  34. 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

  35. 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

  36. 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

  37. Porter’s Five Forces Model - Services Threat of New Entrants Rivalry Bargaining Power Of Suppliers Bargaining Power Of Buyers Threat of Substitutes

  38. 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

  39. Threat of New Entrants

  40. 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

  41. Value Chain Analysis Firm Infrastructure Human Resource Management Technology Development Procurement of Resources Warehouse & Inventory Mgmt. Product Assembly IT Services ---------- Distri- bution Sales & Marketing Support 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

  42. Competitive Comparisons - Inventory Management

  43. Competitive Comparisons - Distributor Ratings

  44. 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

  45. Value Chain Analysis Firm Infrastructure Human Resource Management Technology Development Procurement of Resources Warehouse & Inventory Mgmt. Product Assembly IT Services ---------- Distri- bution Sales & Marketing Support Product Assembly Activity: • Performing final assembly of products for major suppliers • Reconfiguring systems for System Integrators and VAR’s

  46. Component Manufacturer Component Manufacturer OEM OEM MicroAge MicroAge Opportunities:Product Assembly • 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

  47. Value Chain Analysis Firm Infrastructure Human Resource Management Technology Development Procurement of Resources Warehouse & Inventory Mgmt. Product Assembly IT Services ----------- Distri- bution Sales & Marketing Support 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

  48. Opportunities:Distribution • Continue utilizing ECadvantage to develop links between Sales/Service systems and Warehouse order tracking • Leverage technology to reduce delivery errors and speed the entire distribution process

  49. 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

  50. 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

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