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May 9, 2002

Sizing Up the State of Distribution. Global Technology Distribution Summit. May 9, 2002. Richard March, Senior Vice President Rmarch@roperasw.com. RoperNOP Technology: A global leader in turning market intelligence into action. We help marketers:

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May 9, 2002

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  1. Sizing Up the State of Distribution Global Technology Distribution Summit May 9, 2002 Richard March, Senior Vice President Rmarch@roperasw.com

  2. RoperNOP Technology:A global leader in turning market intelligence into action We help marketers: • Understand B2B technology decision-makers and technology buyers in the US and globally • Build great brands, products, and services • Attract and retain customers • Improve communications effectiveness • Manage corporate reputation • Forecast IT spending and confidence levels Richard March, Senior Vice President Rmarch@roperasw.com 212 240 5448

  3. Presentation Agenda • Study background • Data report and analysis: A ‘360’ View of Distribution • SALES IN: product manufacturers to distributors • SALES OUT: distributors to resellers

  4. SALES IN: Product Manufacturers to Distributors

  5. RoperNOP Technology conducted in-depth qualitative interviews with 16 executive-level respondents from major computer hardware and software manufacturers in North America. The interviews focused on percentage shares of product shipments, and on the value of distributor services. Interviews were conducted in March and April 2002. Because of confidentiality or legal restrictions at individual companies, total percentage sales information was not available from all respondents. Findings based on percentage share data is intended as directional. Methodology

  6. Methodology (continued) • Respondents were recruited from proprietary RoperNOP Technology sources. The screening process confirmed that respondents were most knowledgeable about sales fulfillment through indirect channels at their organizations. • Manufacturers represented: • Apple Microsoft • Cisco NEC • Citrix Oracle • IBM (Systems) Seagate • Intel Toshiba • Kingston Viewsonic • Lexmark Xerox • Lucent 3Com

  7. Throughout this study, RoperNOP Technology uses the following terms: 1) End-User Direct: manufacturer sells directly to end-users (businesses and consumers), e.g., Dell model 2) OEM: manufacturer sells to directly to another manufacturer 3) Distributor: manufacturer sells directly to distributor 4) Reseller-Direct: manufacturer sells directly to reseller Definition of Terms

  8. IT Products Supply Chain IT Product Manufacturers: Computers, Software, Networking 1 2 3 4 OEM Distributor Resellers, Integrators, Solution Providers End-Customers: Businesses, Public Sector, Consumers

  9. IT Products Sold by ChannelsRemain Consistent in ’01 and ‘02 2001 Product Volumes Sold by Channel Reported by IT Product Manufacturers 4) Reseller-Direct 1) End-User Direct 2) OEM 3) Distributor 2002 Product Volumes Sold by Channel Estimated by IT Product Manufacturers 4) Reseller-Direct 1) End-User Direct 2) OEM 3) Distributor

  10. Of the manufacturers providing percentages of product shipments to 1) End-User Direct 2) OEM 3) Distributor 4) Reseller-Direct Respondents reported six out of 10 products were sold through distributors in 2001. For 2002, these manufacturers estimate that sales through distributors will continue to account for six out of 10 products. Summary Findings

  11. Manufacturer Ratings of DistributorStrategic and Tactical Services • Strategic Services • Market Coverage • Product Fulfillment/Logistics • Recruits/Trains Solution Providers (resellers) • Inventory Management • Tactical Services • Product Order Entry • Product Technical Support • Configuration Services • Credit • IT product manufacturers asked to rate importance of distributor service on a scale of 1 to 5 where 5 is extremely important

  12. Importance of Strategic Support From First-Tier Distributors Considering the role of your first-tier distributors in your sales strategy, please rate the following functions in terms of how important they are to your company’s sales strategy. 5 =extremely important: * Market Product Recruits/Trains Inventory Manufacturer Coverage Fulfillment/Logistics Solution Providers Mgt. Cisco 5 5 3 5 Kingston 5 5 4 4 ViewSonic 5 5 4 4 Seagate 2 5 3 5 Lexmark 5 5 1 5 Apple 4 5 4 5 Intel 2 3 2 3 Toshiba 5 5 2 4

  13. Importance of Strategic Support From First-Tier Distributors Cont’d. Considering the role of your first-tier distributors in your sales strategy, please rate the following functions in terms of how important they are to your company’s sales strategy. 5 =extremely important: * Market Product Recruits/Trains InventoryManufacturer Coverage Fulfillment/Logistics Solution Providers Mgt. IBM 4 5 4 5 NEC 5 5 5 5 Xerox 3 5 2 3 Citrix 2 5 4 5 Microsoft 3 5 2 4 Oracle 5 2 5 1 Lucent 4 4 3 4 3Com 4 4 3 4

  14. Strategic Support Importance RatingsManufacturer Averages: 2002 vs. 2001 Considering the role of your first-tier distributors in your sales strategy, please rate the following functions in terms of how important they are to your company’s sales strategy. 5 =extremely important 2002 2001

  15. Importance of Tactical Support From First-Tier Distributors Considering the role of your first-tier distributors in your sales strategy, please rate the following functions in terms of how important they are to your company’s sales strategy. 5 =extremely important: * Product Product Tech Support Config Credit Manufacturer Order Entry Services Services Cisco 5 3 3 5 Kingston 4 4 3 4 ViewSonic 5 3 3 5 Seagate 4 2 3 5 Lexmark 5 3 5 5 Apple 5 3 3 5 Intel 5 2 NA 5 Toshiba 3 2 3 3

  16. Importance of Tactical Support From First-Tier Distributors Cont’d. Considering the role of your first-tier distributors in your sales strategy, please rate the following functions in terms of how important they are to your company’s sales strategy. 5 =extremely important: * Product Product Tech Support Config Credit Manufacturer Order Entry Services Services IBM 4 3 4 5 NEC 5 3 3 5 Xerox 5 2 1 5 Citrix 5 4 4 5 Microsoft 4 3 2 4 Oracle 3 3 5 5 Lucent 4 2 2 4 3Com 4 3 3 5

  17. Tactical Support Importance RatingsManufacturer Averages: 2002 vs. 2001 Considering the role of your first-tier distributors in your sales strategy, please rate the following functions in terms of how important they are to your company’s sales strategy. 5 =extremely important 2002 2001

  18. Summary Findings • IT product manufacturers consistently placed high importance on the value of strategic and tactical services provided by distributors in 2000 and 2001. • In tracking studies in both years, on an overall basis, IT product manufacturers rated distributor services a 3.8 on a scale where 5 is extremely important.

  19. SALES OUT: Distributors to Resellers

  20. Product purchasing volumes are based on telephone interviews with 400 second-tier reseller and service provider organizations in August, September and October 2001. Combined data reflects +/- 5 percent margin of error. Methodology

  21. Amount of IT product purchases made by resellers (solution providers) through distributors is estimated at $71.5 billion (for October 2000 – September 2001) In 2000 and 2001, the estimated share of IT product purchases made by resellers (solution providers) through distributors remained consistent at approximately 60 percent of all computer product purchases by resellers. Market Summary

  22. Product Purchase SourcesConsidering the following purchase sources, what percent of your company’s computer product purchases (including systems, software and networking hardware) were actually made and ordered from the following sources in the last 12 months? Distributor telesales rep Distributor Internet site Direct through product manufacturer rep Local Reseller (Gray Market) Online retailer/catalog Internet site Product manufacturer Internet site EDI or XML-based distributor order Conclusion: Although purchases through telesales reps account for the highest percentage, more than one-fifth of purchases are now made through distributor Internet sites. This is consistent with distributor efforts to encourage Internet purchases. Also, purchases made through online retailers and catalog sites reflect significant volumes of products sourced from distributors.

  23. Reseller Purchases Financed with Distributor Credit Distributors financed $39.3 billion in purchases by second-tier resellersin 2001. This represents 55% of all purchases. In 2000, distributors financed $32.7 billion in purchases by resellers. The increased volume of credit in 2001 sought by resellers reflects a shortage of capital amid an economic slowdown and a greater reliance on distributors by resellers for financing. $39.3 billion

  24. Business Value of Distributors Considering such issues as access to product information, credit and ordering and shipment of products, please rate the value of your primary distributor to your company’s overall business. (Rated on a scale of 1 to 5 where 1 is “No Value” and 5 is “Extremely Valuable”.) 4 4 Conclusion: The value of the primary distributor to the reseller’s overall business is consistent year to year, but the sluggish economy in 2001 has led to more specific evaluation and appreciation of distributor services, resulting in higher importance and satisfaction ratings of the individual distributor services provided.

  25. “Those distributor services such as product availability, logistics and support are all competitive advantages that we utilize as part of our business process. We find that product availability and the ability to provide products and support on time is something that our customers value.” “We think they (distributors) are continually improving their processes. They are doing more than they used to do. Things like on-line tracking of orders are improvements. There’s also the tech support and other services that they are adding that make a difference in our business.” “It’s service, quick response, the support on the product – all the technical support. When we do have issues, they call back in a timely response. The value to our customers is that I can guarantee I will have it (the product) to them the next day.” “Product availability and tracking of shipments are the big things. Knowing when it (the product) is going to arrive so I can schedule my staff to meet it at the customer’s site is critical. I can’t afford having people sitting around.” Resellers Explain the Business Value of Distributors

  26. Distributor Importance RatingsConsidering the following reasons as to why your company purchases computer products from distributors, please rate the importance of each reason on a scale of 1 (not important at all) to 5 (most important). Ability to determine product availability, shipment Lowest price compared to other sources Relationship/trust with distributor sales rep Post-purchase logistics (order tracking, etc.) Ability to aggregate purchases Pre-sales information on a variety of products Post-sale tech support on multiple products Credit extended by distributor Marketing and sales tools from Internet Conclusion: In a slower IT products market, resellers are seeking greater efficiencies in costs and operations to remain competitive. As a result, they are placing high values on services that help achieve these objectives.

  27. Distributor Importance Ratings (2)Considering the following reasons as to why your company purchases computer products from distributors, please rate the importance of each reason on a scale of 1 (not important at all) to 5 (most important). Outsourced logistics and delivery Online configuration tools Training and certification Lead generation Ability for on-line invoicing Outsourced configuration & assembly Ability to provide “electronic storefront” Joint sales calls Conclusion: Services such as on-line invoicing and providing an “electronic storefront” are somewhat less important than the core business-to-business services identified in the prior slide. Also, the highly publicized failures of “dot.coms” have reduced the motivation among resellers to radically transform their businesses into e-commerce operations.

  28. Distributor Satisfaction RatingsHow would you rate your company’s satisfaction with your primary distributor in the following areas, where 1 is not satisfied at all and 5 is extremely satisfied? Timely product, pricing, availability info Timely order confirmation and tracking Accurate and on-schedule shipments Aggregation of multiple products Ability to handle product returns Access to necessary credit terms Access to informed account rep Conclusion: Satisfaction ratings with core, business-to-business services provided by distributors are closely linked to the high importance values that resellers assign to these services. The ability of distributors to provide timely and accurate order and shipping information are critical factors in helping resellers retain customers in a challenging market.

  29. Distributor Satisfaction Ratings (2) How would you rate your company’s satisfaction with your primary distributor in the following areas, where 1 is not satisfied at all and 5 is extremely satisfied? Pre-sales technical information Post-sale technical support Web site: navigation, information, etc. Outsourced logistics & delivery of products Marketing & sales tools from Internet site Outsourced systems configuration Conclusion: The increasing complexity of solutions such as voice/data and storage area networks (SANs) that are sold by resellers require technical information on a cross-platform and cross-product basis in pre- and post-sale environments. As distributors become the aggregation point for purchase of these complex technologies, they also become the source of tech support and information.

  30. Distributor Role in Business DevelopmentWhich of the following services provided by distributors does your company use to help increase sales and/or enter new technology markets? Phone or e-mail access to technology solutions specialists Local seminars or technology product demonstrations Internet-based seminars and/or discussion groups Subsidies or co-op money for technical training Subsidies or co-op money for sales training Conclusion: As distributors extend their service offerings, they are taking an active role in helping resellers expand into new technology markets. Typically, distributors provide resellers with a multiple-product “solutions view” of new technologies, which helps resellers build their overall businesses. This, in turn, raises reseller sales volumes, benefiting the manufacturers.

  31. Reseller Primary Customer BaseWhat size company makes up your company’s primary customer base in terms of largest percentage of sales in the last 12 months? One to 20 employees 21 to 100 employees 101 to 500 employees More than 500 employees Conclusion: Historically, small businesses (100 or fewer employees) have been the primary customer base for resellers. Small businesses represent a more stable market for resellers because the reseller typically acts as the outsourced IT department, which leads to a high incidence of repeat business. Additionally, as IT product spending rebounds, it is expected that small business will be a key segment to lead the recovery.

  32. Summary Findings • In the timeframe of 2000 and 2001, the most turbulent period to date in the IT industry, product volumes and business value ratings for distributors have remained steady: • The percentage of IT products that are purchased by resellers (solution providers) through distributors remained consistent, with six out of 10 products being purchased by resellers from distributors. • Resellers (solution providers) consistently placed a high value on the role that distributors play in their businesses, rating them a 4 on a scale where 5 is extremely valuable.

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