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Special Columns
Arindam Chaudhuri, Editor-in-Chief, 4Ps B&M Chief Consulting Editor's Desk
Rajita Chaudhuri
K.K.Srivastava Guest Column
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Changing Channels: Distribution Strategies in the PC Industry
A new statistical model can help managers determine which distribution channel works best and evaluate the financial implications of changing the firm’s distribution strategy and channel-product line combinations.
Dell entered the retail channel in 1990 but exited in 1994 due to heavy losses. Through policy simulations, we found that if Dell switched any of its current product lines from direct channels to retail channels, it would be worse off by several million dollars. Adding product lines from direct channels to retail channels slightly increases Dell’s profits, but if these profits cannot recover the fixed costs associated with entering the retail channel, Dell will be better off not entering offline retailing.

One of the major strategy shifts for Compaq in the late 1990s was a shift to direct selling. Switching product lines from retail channels to the Internet or extending product lines from dealer to direct inbound would increase Compaq’s profits substantially. But while Compaq’s decision to sell direct was economically justified, the firm should have taken measures to coordinate with its channel partners due to substantial losses for the intermediaries.

Gateway’s major channel strategy shift was to close all its retail outlets and use third-party retailers. Gateway would have higher profits by switching retail sales to the Internet.

Consumers are better off when a product line is added to another channel because they will have more choices. They also benefit when product lines are switched from the retail channel to the Internet. However, consumers are worse off when product lines are moved from direct channels to retail channels.

We next studied the HP-Compaq merger, because one motivation for the merger was to change the firm’s distribution strategies. The $25 billion merger in 2002 was considered the largest deal in PC industry, creating a powerhouse firm that could compete with IBM and potentially develop a business structure similar to Dell. We simulated the potential impact of the merger on all parties involved – the new company, rival firms, and consumers – under various post-merger channel strategies.

Our findings are consistent with what HP and Compaq discussed; the companies would have been much better off by selling directly to consumers. However, distributors’ profits would have decreased dramatically. The changes in the distribution strategy resulting from the merger might have been better managed if the firms could have predicted the economic impact on their channel partners. This is where a structural model such as ours comes in.

New Research Tools Our study is significant for firms considering restructuring their distribution channels, as well as rival firms interested in understanding the impact of a channel mix change by a competing manufacturer. The model can be applied to other industries with channel structures similar to the PC industry.

Amir Moin           
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