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Impact of Entrepreneurship and Innovation on the Distribution of Personal Computers DAVID A. NORMAN Two trends will have a major effect on the U.S. electronic business equipment industry. First, by the erg of the 1980s distribution power will have shifted from independent retail outlets to company- or manufacturer-owned chairs, and this will limit the number of new ventures and opportunities in this market. Second, standardization of products will mean slower growth for new high technology com- panies that have failed to recognize that there is indeed a standard in the industry today. Changes in the method of product distribution are having and will have a major effect on the computer and electronics high technology industries, particularly in the United States. The U.S. market is huge, and the market for electronic business equipment, which my company, Businessland, ad- dresses, is very large. There are 53 million white-collar workers today, for example, only about 10 percent of whom have personal computers or elec- tronic workstations. (I describe electronic workstations as the telephone and computer coming together.) My former company, Dataquest, the high tech- nology market research firm, estimates that the market will be $25 billion in 1988, in comparison with about $9 billion in 1984. Interesting products will be introduced In 1985, and there will be high growth in 1986, 1987, and 1988. We are looking at a very, very large market opportunity, indeed. Many people forget, however, that we really need to look at the markets for which we are developing products and not just develop products for their own sake. In the past, U.S. electronics manufacturers had direct sales forces calling on the business community. That makes a lot of sense when you are selling a $50,000 or a $100,000 piece of equipment. But now the prices of electronic products have come down dramatically and, at the same time, the cost of 437

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438 DAVID A. NORMAN making a direct sales call has continued to increase. I contend that to be competitive in the world's marketplace any product that has a selling price under $10,000 must now be sold through retail distribution outlets and the manufacturer must have the volume of production necessary to be a low- cost producer. Businessland, for example, buys in large volumes from manufacturers and sells to all segments of the business marketplace. It competes with the man- ufacturer's direct sales force, but it tends to offer more service, training, and support to the end user than the manufacturer's direct sales force does. Businessland is a viable competitor at the high end of the market, selling to the Fortune 1,000 companies, but at the same time it has covered all segments of the business marketplace as well. There are a huge number of computer manufacturers, companies that make peripherals (e.g., printers, hard disk drives, floppy disk drives), and software companies. They are all trying to get marketing distributors because they cannot afford to call on all of the U.S. companies directly. They need to go through retail distribution channels, such as Businessland, in order to reach the marketplace. The problem today, however, is that many of these com- panies are not able to get shelf space and thus are having a very difficult time marketing their products. The point of distribution is where the profit and the power are in the marketplace today. Unfortunately, distribution channels are going to change dramatically over the rest of the decade. Just reflect on what has happened to distribution in other industries in the United States. In the l950s, for example, chains of grocery stores came in and displaced the independent grocers. The same thing is going to happen in this new, infant industry, which is now made up of numerous independent computer stores and franchisescurrently run by independent businesspeople. Independent stores make up about two-thirds of the outlets today; the other one-third are company-owned or manufacturer- owned chains. ~ believe that by the end of the 1980s there will have been a major shift in distribution power from the independents to company- or manufacturer-owned chains. If that happens, and if 8 or 10 major chains have 50 percent of the market, then the variety of products reaching the market through retail distribution will be very limited. Businessland, for example, can carry personal computer product lines from only, perhaps, three manufacturers and a limited number of software and peripheral prod- ucts. Many entrepreneurial, high technology companies are going to lack shelf space in the future. This will greatly limit We number of new ventures and the opportunities in this marketplace. Unfortunately, the grown of new technological products will slow dramatically as this change in the channels of distribution to Me marketplace proceeds. Another trend that will slow technological growth in electronic business equipment is the standardization that is taking place in the industry. Today

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IMPACT OF F=REPRENEURSHIP ED INNOVATION ON DI=~B=ION OF PCs 439 the IBM personal computer, the MS DOS operating system, is clearly a standard in corporate America. It is less so in the home office and in small businesses. But standardization is having a major effect, even though many people are not aware of the changes that have taken place in a short period of time. Today, IBM personal computers account for 60 percent of the units sold, and 70 percent of the volume in the business market. There has been a major ship in the last year to their dominance in the marketplace. This means there will be slower growth for new high technology companies, particularly companies that have not realized or do not believe that there is a standard in the industry today. Major computer manufacturers in the United States have given up billion-dollar markets because they did not recognize early enough that there was a standard and did not build products to meet that standard. They were building products for engineers and designing prod- ucts with features for a very small segment of the market, while the major part of the market was not being listened to. Products were being designed that did not meet the needs of the end user, who wanted standardization. We are now seeing standardization in hardware and software, and we are seeing the need for it in the networking and telecommunications areas. The key is to listen to the marketplace, analyze that market, and develop products that the market really wants and needs. And when you do, you will see explosive growth. Businessland is a good example of that explosive growth. In just 24 months, from November 1982 to December 1984, the company went from start-up to $25 million a month in sales. Its annual sales are now at $300 million. That is the kind of growth that is possible. The markets are large, the opportunity is great, but companies must clearly address the marketplace. They must understand that there is a standard out there, they must build within that standard, and they must develop compatible products that have price and performance advantages for end users. Large, qualified distribution channels are now developing, in all segments of the business marketplace. But clearly they must have products to sell that meet the customers' needs.

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