Internet Mini Case #2
Tech Data Corporation
Maryanne M. Rouse
The Company
TECH DATA CORPORATION’S (TECD) AGGRESSIVE GROWTH HAD TAKEN THE COMPANY from 10 employees and $2 million in sales in 1983 to approximately 8,000 employees and $15.7 billion in sales for fiscal 2002 (fiscal year ended January 31, 2003) and secured the company’s position as a leading distributor of information technology (IT), logistics management, and other value-added services to “solution providers,” including value-added resellers (VARs), direct marketers, retailers, corporate resellers, and Internet resellers. Ranked 117 on the Fortune 500 list, the company and its subsidiaries served more than 100,000 technology resellers in the United States, Canada, the Caribbean, Latin America, Europe, and the Middle East.
Tech Data was incorporated in 1974 to market data processing supplies, including tape, disk packs, and custom and stock tab forms for mini and mainframe computers directly to end users. With the growing popularity of microcomputers and the emergence of microcomputer dealers, the company withdrew entirely from end-user sales and made the transition to wholesale distribution in 1984.
The company’s flexible structure comprised five major product divisions (components, systems, peripherals, networking, and software) plus Strategic Business Units (SBUs) designed to address specific market, channel, customer, or product opportunities. Tech Data’s current SBUs included digital imaging/CAD, mobile solutions, security, storage, and telephony. Fiscal 2002 sales by product category were peripherals, 46%; components and systems, 24%; networking, 15%; and software, 15%. On a channel basis, VARs accounted for 58% of the company’s $17.2 billion 2002 sales, with direct marketers, retailers, and Internet resellers comprising 24% and corporate resellers accounting for the remaining 18%. No single customer accounted for more than 5% of sales during fiscal 2002.
This case was prepared by Professor Maryanne M. Rouse, MBA, CPA, University of South Florida. Copyright ©2005 by Professor Maryanne M. Rouse. This case cannot be reproduced in any form without the written permission of the copyright holder, Maryanne M. Rouse. Reprint permission is solely granted to the publisher, Prentice Hall, for the books, Strategic Management and Business Policy–10th and 11th Editions (and the International version of this book) and Cases in Strategic Management and Business Policy–10th Edition by the copyright holder, Maryanne M. Rouse. This case was edited for SMBP and Cases in SMBP–10th Edition. The copyright holder, is solely responsible for case content. Any other publication of the case (translation, any form of electronics or other media) or sold (any form of partnership) to another publisher will be in violation of copyright law, unless Maryanne M. Rouse has granted an additional written reprint permission.
Tech Data’s broad vendor base included such manufacturers and publishers as Adobe, Apple, Cisco, Computer Associates, Creative Labs, Epson, Hewlett-Packard/Compaq, IBM, Intel, Iomega, Lexmark, Microsoft, Nortel Networks, NEC, Palm, Seagate, Sony, Symantec, 3Com, Toshiba, Viewsonic, and Western Digital. With the exception of Hewlett-Packard/Compaq, no vendor accounted for more than 10% of the company’s sales. Sales of HP/Compaq products accounted for 38% of Tech Data’s net sales in 2002, 39% in 2001, and 35% in 2000.
Strategies
Tech Data was the second largest global IT distributor, and its business model was based on a four-point strategy of excellence in execution, proactive initiatives, cost leadership, and e-business, with each element focused on enhancing the company’s relationships with its business partners. The company defined excellence in execution as the promotion of six key elements for ensuring customer/partner satisfaction and loyalty: accessibility, availability, pricing, shipping metrics and service-level agreements, planning and execution, and people. Proactive initiatives, such as customer relationship management and comprehensive business development, were designed to support internal growth via market penetration and product development. The company’s SBU initiative was a good example of its proactive initiatives strategy. Cost leadership, based on centralized purchasing, benchmarking, continuous improvement, and capacity management, was considered critical to profitability and return on investment in an industry characterized by increasingly thin profit margins. Tech Data’s strategic emphasis on e-business supported the first three key elements by increasing efficiency and transaction speed, reducing costs, and supplying information that was critical to identifying and developing proactive initiatives.
Acquisitions
Tech Data had grown both internally via market penetration and product/market development and externally through acquisition:
_ May 1989: The company entered the Canadian market via the acquisition of a privately
held distributor that was subsequently named Tech Data Canada.
_ March 1994: Tech Data entered the European market through the acquisition of a second privately held company that was renamed Tech Data France, SA.
_ February 1997: The company expanded its Miami-based Latin American export business by opening a sales and logistics office in Sao Paolo, Brazil.
_ July 1998: Tech Data completed acquisition of 83% of the voting stock of Computer 2000 AG, Europe’s leading technology products distributor; in April 1999, all the shares of Computer 2000 were integrated into Tech Data Germany AG. This acquisition gave Tech Data a presence in important markets in Europe, the Middle East, and Latin America and expanded the company’s presence to 29 countries worldwide.
_ May 1999: The company acquired Globelle Corporation, a leading publicly held Canadian distributor, which almost doubled Tech Data’s Canadian presence.
_ March 2003: Tech Data agreed to acquire UK-based Azlan Group PLC, a distributor of networking and communications products.
Financial Performance
Reflecting an uncertain economy, tight-fisted business technology buyers, the aftermath of 9/11, and severe pricing pressure, Tech Data’s sales decreased from $20.4 billion in fiscal 2001 to $17.2 billion for the same period in 2002; however, the company’s quick action in cutting costs salvaged what could have been a disastrous year. Among other steps, Tech Data reduced its headcount from 10,500 to approximately 8,000, scaled back on infrastructure, and aggressively pursued efficiency in operations. Although net income declined just under 38%, from $178.3 million to $110.8 million for fiscal 2002, Tech Data was a bright spot in an industry full of calamity.
In a conference call with analysts on March 17, 2003, Chief Executive Steve Raymund reported that sales for the fiscal year ended January 31 had further eroded to $15.7 billion. The company’s $199.8 million loss for the year was entirely due to a $334.6 million write-off of goodwill associated with Tech Data’s 1998 acquisition of Computer 2000 AG.
The Industry
Distribution channels for IT products had changed substantially over the past two decades, as the wholesale distribution model had evolved to serve the needs of both vendors and resellers; the large number and diversity of resellers made it cost-efficient for manufacturers and publishers of IT products to rely on wholesale distributors to serve this customer base, while the large number of vendors and products allowed resellers access to broad product lines without requiring them to establish direct purchasing relationships. In addition to costefficiency, large two-tier wholesalers such as Tech Data and Ingram Micro could offer their customers special pricing, credit, financing, and other valued-added services not available to small and midsized business from manufacturers.
Direct sales initiatives by IBM and the recently merged Hewlett-Packard/Compaq posed a growing threat, luring systems integrator and end-user customers from distributors. In 1998, the then “Big Three” distributed approximately 90% of their products via indirect channels; that number was estimated at less than 50% in 2004. Among the factors cited for the growing emphasis on direct distribution were the commoditization of technology, which had placed a ceiling on prices; the increased sophistication of end users, which translated into a greater willingness to purchase IT products via web sites; and pressures to reduce costs. At the other end of the value chain, distributors were concerned that an increasing number of VARs might choose to focus on services and drop hardware because they could no longer afford to support it.
Overall weak sales in the technology sector and increasing pressure on margins had channel members at least discussing alternatives to the current model. Many solution providers were concerned that distributors would eventually have to sell directly to end users to squeeze more revenue from the small/medium-sized business and corporate markets. In addition, some channel observers believed that sales gains by direct marketers, such as CDW, would increase the pressure for direct sales. And, while few thought such major players as Tech Data and Ingram Micro would abandon their solution provider businesses altogether, increased competitive pressures could cause distributors to reexamine their reluctance to break the existing value chain. To some extent, two-tier distributors had heightened concerns among solution providers by offering their logistics, back-end capabilities, and broad product lines to such e-tailers as Buy.com, Amazon.com, and auction sites such as eBay and by giving large IT purchasers reseller status (as Ingram Micro did with Lockheed-Martin).
Competitors
Tech Data’s key competitors in the industry included Ingram Micro, Arrow Electronics, Avnet, and Pioneer Standard. Tech Data also competed with manufacturers that sold directly to resellers and end users. As the company had diversified into new products and related industries, it had had to face new competitors and master new critical success factors.
Ingram Micro was the world’s largest distributor of IT products. It offered more than 280,000 products, including desktop and notebook PCs, servers, storage devices, CD-ROM drives, monitors, printers, and software, to approximately 175,000 reseller customers around the world. The company also provided its business partners a wide range of services for both resellers and suppliers, including contract manufacturing and warehousing, customer care, financing, logistics, and enterprise network support services. The Ingram family controlled more than 70% of the company’s voting stock. Ingram’s revenue declined 10.8% from 2001 to 2002, and its profit declined 10.3% for the same period; this reflected both industry conditions and Ingram’s low price strategy.
Arrow Electronics was the world’s largest distributor of electronic components and computer products. Arrow sold semiconductors, computer peripherals, passive components, and interconnection products from over 600 suppliers to more than 200,000 computer manufacturers and commercial customers. Arrow distributed products made by such vendors as 3Com, Computer Associates, Intel, Hitachi, Motorola, and Texas Instruments. Arrow also provided value-added services such as component design, inventory management, and contract manufacturing.
Avnet was the second-largest distributor of electronic components and computer products in the United States. Avnet’s suppliers included more than 250 components and systems manufacturers; the company distributed these suppliers’ products to more than 100,000 other manufacturers. Avnet’s Electronics Marketing Group handled semiconductors and other components, while its Computer Marketing Group provided computer products and services to resellers and large end users. A third unit, Avnet Applied Computing, marketed system-level components such as motherboards. Avnet also provided services such as logistics, integration, and consulting.
Pioneer Standard sold thousands of products to manufacturers, resellers, research laboratories, government agencies, and end users. The company supplemented its product offerings with a range of services, including design engineering, connector and cable assembly, logistics support, integration, and outsourcing.
Recent Developments
In 2003, industry observers expected weak demand for IT products as economic uncertainty and a less-than-robust global economy had put a damper on technology spending by businesses and consumers. The potential interest rate and currency fluctuations, as well as the impact of geopolitical instability and continued downward pressure on pricing, were expected to contribute to a lackluster 2003.
Analysts in the PC industry, which had been racked by customer indifference for the past two years, expected only a modest rebound of 6% to 8% in 2003. However, with aggressive price-cutting, revenue was expected to be flat. On a more positive note, falling prices for components created opportunities to shift customers to alternative tablet and notebook PCs, and Microsoft’s recent announcement that it would cease providing support for Windows 98 was expected to create an opportunity for third-party service providers and to shore up demand as users shifted to computers that would support later software editions. Analysts expected somewhat stronger demand in several segments, including servers, digital imaging/CAD, mobile solutions, security, and storage.
Computer disposal was becoming a serious problem, particularly because a new machine had an average life expectancy of two years. According to the U.S. Environmental Protection Agency, 20 million computers were taken out of service in 1998 alone, and the number continued to grow. Of these, 12% were recycled; an estimated 75% were stored in closets, garages, etc.; and the remaining 13% were sent out with the trash. Environmentally, PCs still rated poorly, despite ongoing improvements in manufacturing. While electronics in landfills leached toxins into groundwater and incinerated ones polluted the air, manufacturers, distributors, and end users disagreed over who bore the burden of seeking out responsible means of disposal.
The Challenge
As technology had become a commodity, the role of the “pure-play” distributor had disappeared. In this new environment, the challenge facing Tech Data and its competitors would be to continually develop and provide their partners with attractive, value-adding technology solutions in new and developing markets characterized by intense competition and declining prices.