Conquering the Dutch ERP Mid-Market

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Conquering the Dutch ERP Mid-Market

Designing an Indirect Channel for PeopleSoft in The Netherlands

Klaas-Jan Dijkstra

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Conquering the Dutch ERP Mid-Market

Designing an Indirect Channel for PeopleSoft in The Netherlands

Klaas-Jan Dijkstra

Rijksuniversiteit Groningen

Faculty of Management and Organization January 2005

1^st supervisor: dr. T.W. de Boer 2^nd supervisor: drs. R.W. de Vries IBM supervisor: dhr. J. Eshuis

The author is responsible for the contents of this work; the rights of Klaas-Jan Dijkstra to be identified as the author of this work have been asserted by him.

IBM Nederland N.V. and the author hereby give permission for this publication to be placed in libraries for reference purposes. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without the prior permission of IBM Nederland N.V. and the author.

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Preface

Today, the segment of small and medium-sized businesses is a very hot topic in the world of IT vendors. Because of its growth potential, these IT vendors are focusing their efforts more and more on this market segment. However, a major problem facing all IT vendors targeting this market is how to create a channel that can effectively serve these small and medium-sized enterprises. This problem also has to be tackled by PeopleSoft, the No. 2 enterprise application software vendor in the world.

In this study I will conduct a thorough analysis of the small and medium-sized businesses market segment and the customers in this market. Based on these analyses I will present recommendations on how PeopleSoft should serve these small and medium-sized customers.

This study was initiated by IBM The Netherlands (one of PeopleSoft’s business partners) and was my graduation thesis for the degree of Master of Science in Management & Organization at Groningen State University (Rijksuniversiteit Groningen) in The Netherlands.

At this place I’d also like to thank those people that made a significant contribution to this study. First of all the respondents to a survey I conducted among Dutch small and medium-sized companies.

Without these respondents I could not have conducted this study. During the research process I received considerable feedback from both my supervisors at Groningen State University and at IBM The Netherlands. Thomas de Boer and Rudi de Vries from Groningen State University, and in

particular Jelte Eshuis and Jan Kriek from IBM The Netherlands were willing to read the draft versions of this study and to give their detailed remarks and suggestions. This feedback very much helped to improve the quality of the text. Thank you all!

Klaas-Jan Dijkstra January 2005

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Executive Summary

This study aims to answer the following question:

• What is a suitable design for PeopleSoft’s indirect channel for selling its PeopleSoft

EnterpriseOne product in the mid-market segment of the ERP market in The Netherlands in the industries of Wholesale Distribution, CPG, and Discrete Manufacturing, and how can this new indirect channel be created and managed?

In order to answer this main question, the following sub-questions were formulated:

1. What are the characteristics of, and developments in the mid-market segment?

2. What are the characteristics of, and developments in the industries of Wholesale Distribution, CPG, and Discrete Manufacturing?

3. What is the buying behavior of the customers in the mid-market segment?

4. What is a suitable overall structure for PeopleSoft’s indirect channel for selling its PeopleSoft EnterpriseOne product in the mid-market segment?

5. What are relevant issues in the management of PeopleSoft’s indirect channel, and how can these be tackled?

6. What are suitable partner selection criteria?

7. How can PeopleSoft recruit new channel partners and build commitment among these partners?

These research questions were answered using secondary data sources like Gartner and IDC, and a survey among Dutch mid-market companies carried out by the author.

Currently, several relevant trends are underway in the mid-market. These include the shift in balance between direct and indirect sales towards a preference for indirect sales, the continuing trend of Business Process Outsourcing (BPO), the change in payment models towards more flexibility, and IT spending growth rates that will outperform all other segments. When looking at the industries of Wholesale Distribution, Consumer Packaged Goods (CPG), and Discrete Manufacturing, Wholesale Distribution offers the best opportunities for ERP vendors with 64% of Dutch mid-market companies planning to invest in Enterprise Resource Planning (ERP) applications. The survey among Dutch mid- market companies seems to indicate that ERP growth rates in The Netherlands are lower than in Western Europe. This is related to very high adoption rates of ERP applications among Dutch mid- market companies and bleak GDP growth forecasts in the Benelux.

Customer buying behavior is a very important factor to take into account when designing an indirect channel. This buying behavior of mid-market companies can be analyzed by looking at the buying process, the internal and external influencers, the buying criteria, and channel preferences.

During the buying process of IT products, a good personal fit between customer managers and supplier managers is very important to mid-market companies. Also, during this buying process, important internal influencers are IT managers, the owner/president/Chief Executive Officer (CEO), and the users of the IT applications. Important external influencers are firms in the same industry, a selected vendor, business partners, and a local trusted advisor (accountant, tax advisor, etc.). There are differences between the lower-end and the upper-end of the mid-market in terms of influencers;

users, the Chief Intelligence Officer (CIO), and the Value-added Reseller (VAR; a company that not only resells hardware and software, but also adds value on its own, usually knowledge and services) are more important among larger mid-market companies. Mid-market companies indicated that the cost of implementing a vendor’s offerings, quality/reliability, a low Total Cost of Ownership (TCO), after-sales services, industry expertise, financial stability of the supplier, and experience of the supplier in the customer’s industry topped the charts in terms of vendor selection criteria. These criteria apply to all three industries. VARs are the preferred channel for mid-market companies for the acquisition of application software. There are differences in preferences among the three industries. The VAR is most used in Wholesale Distribution and the least used in Discrete Manufacturing; this industry prefers an IT vendor’s direct sales force.

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Based on the analyses of the market and customer buying behavior, a suitable indirect channel was developed.

PeopleSoft’s indirect channel should be organized by industry. The VAR fits best with the wants and needs of customers and the characteristics of PeopleSoft EnterpriseOne. PeopleSoft should employ a selective distribution strategy; however this distribution strategy needs to be more intense for the lower mid-market than for the upper mid-market. Within this indirect channel, the VAR should perform all distribution functions, except for channel support. PeopleSoft should perform this function.

Having outlined the basic structure of the indirect channel, attention needs to be given to relevant issues concerning the management of the indirect channel. Among others, these recommendations relate to channel management, channel power, channel conflict, and channel partner evaluation.

Several issues are very important in the organization of channel management: PeopleSoft should have both its direct and indirect channel report to one functional manager, appoint a channel diplomat, and assign a channel mentor to each channel partner. There are 6 basic sources of power PeopleSoft can use in its indirect channel: rewards, coercion, expertness, reference, legitimacy, and information.

PeopleSoft should mainly use the power bases of expertness, reference, and information. One of the most important and common types of conflict within indirect channels are role conflicts. PeopleSoft can prevent role conflicts between its direct sales force and its channel partners by involving its direct sales force in the VAR selection process, having both its direct and indirect channel report to the same functional manager, and compensating its direct sales people for VAR sales within their territory. Major tools that PeopleSoft can use for detecting and resolving conflict and building channel trust are a channel partner summit and a channel diplomat. PeopleSoft can evaluate channel partner

performance by 6 broad classes of criteria: sales performance, selling capabilities, competition faced by the channel partner, growth prospects of the channel partner, quality of after-sales services delivered, and other miscellaneous criteria. Sales performance, growth prospects, total project costs, technical skills, quality of services, financial stability, and industry/business expertise are the most important partner evaluation criteria. PeopleSoft could also use the channel partner summit for evaluation purposes.

The next step for PeopleSoft is to select suitable channel partners. The most important partner selection criteria the company should use are industry expertise, customer references from within that industry, financial stability, proven experience in the customer’s industry, quality of services, and technical skills. These criteria should be classified as ‘must have’ selection criteria.

Once channel partners have been signed, they need to be made committed and motivated. PeopleSoft can employ two basic programs to motivate its channel partners: incentive programs, and sales

training. Sales and product training can act as very effective motivational tools for PeopleSoft’s channel partners.

All of the above leads to the recommendation that PeopleSoft should sign specific VARs for each of the three industries. Smaller, more regional VARs should be signed to target the lower mid-market. A few larger nation-wide VARs should be signed to target the upper mid-market. In order for the indirect channel to be successful, PeopleSoft’s internal management structure should be ‘channel-ready’. This means that a channel diplomat should be assigned, and each channel partner should be given a channel mentor. Additionally, both the direct sales force and the channel partners should report to one functional manager.

However, before PeopleSoft can implement the indirect channel outlined in this report, it has to take some very important issues into account. These issues mainly relate to the question whether or not PeopleSoft is genuinely ‘channel-ready’. The most effective method of verifying this ‘channel- readiness’ is to clearly communicate total corporate commitment to the new channel of distribution, from the highest level of management to ‘soldiers in the field’. Potential internal channel conflict should be located and dealt with in a quick and decisive fashion, since it can seriously affect the success of PeopleSoft’s new indirect channel and thus its overall success in the Dutch mid-market. Tools to prevent these internal conflicts are involving PeopleSoft’s direct sales force in the VAR selection process, and having both the direct sales force and the channel partners report to one functional manager.

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Table of Contents

Preface ... 3

Executive Summary... 5

List of Tables and Figures ... 9

List of Abbreviations ... 11

Introduction ... 13

1. Research Methodology ... 15

1.1 PeopleSoft’s Current Situation... 15

1.2 The Industries ... 15

1.3 Research Objective... 16

1.4 Research Questions and Theoretical Framework ... 16

1.4.1 Main Research Question... 16

1.4.2 Literature Review ... 16

1.4.3 Sub-Questions... 26

1.4.4 Theoretical Framework ... 26

1.5 Definitions ... 28

1.6 Research Design ... 28

1.6.1 Research Approach ... 29

1.6.2 Research Strategy ... 29

1.7 Research Methods... 30

1.7.1 Data Sources... 30

1.7.2 Data Collection Methods ... 30

1.7.3 Data Analysis ... 31

1.8 Validity, Reliability, and Generalizability ... 32

1.8.1 Validity... 32

1.8.2 Reliability ... 33

1.8.3 Generalizability... 33

2. Background Information on PeopleSoft... 34

2.1 The ‘Old’ PeopleSoft ... 34

2.2 The ‘Old’ J.D. Edwards ... 34

2.3 The ‘New’ PeopleSoft ... 35

3. Environmental Analysis ... 37

3.1 Market Size ... 37

3.2 Market Trends... 37

3.2.1 General Mid-market Trends ... 38

3.2.2 Trends in Wholesale Distribution ... 40

3.2.3 Trends in CPG... 43

3.2.4 Trends in Discrete Manufacturing ... 45

3.2.5 Conclusions... 47

3.3 Analysis of Market Attractiveness... 48

3.3.1 The Current Competition... 48

3.3.2 The Threat of Substitutes... 50

3.3.3 The Threat of New Entrants ... 52

3.3.4 The Power of Suppliers... 53

3.3.5 The Power of Buyers... 53

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4. Customer Analysis ... 55

4.1 Customers’ IT Solutions Investment Plans ... 55

4.1.1 Mid-market IT Solutions Investment Plans ... 55

4.1.2 Wholesale Distribution IT Solutions Investment Plans ... 57

4.1.3 CPG IT Solutions Investment Plans... 59

4.1.4 Discrete Manufacturing IT Solutions Investment Plans ... 61

4.2 Buying Behavior... 63

4.2.1 The Organizational Buying Process... 63

4.2.2 The Influencers... 64

4.2.3 The Buying Criteria ... 66

4.2.4 Channel Preferences ... 69

5. A Suitable Indirect Channel ... 74

5.1 Channel Structure ... 74

5.1.1 Overall Channel Structure... 74

5.1.2 Overall Administrative System ... 77

5.1.3 Class and Type of Intermediary ... 78

5.1.4 Intensity of Distribution ... 79

5.1.5 Locus of Distribution Functions ... 81

5.1.6 Organization of Channel Management ... 82

5.1.7 Channel Communication... 83

5.2 Channel Management... 87

5.2.1 Product Strategy ... 87

5.2.2 Pricing Strategy ... 88

5.2.3 Channel Power... 89

5.2.4 Channel Conflict ... 93

5.2.5 Evaluating Channel Effectiveness... 97

5.2.6 The Channel Mentor, Channel Diplomat, and Channel Partner Summit ... 102

6. Creating PeopleSoft’s New Indirect Channel... 105

6.1 Partner Recruitment... 105

6.2 Partner Selection ... 106

6.2.1 Sales and Market Factors ... 106

6.2.2 Product and Service Factors... 107

6.2.3 General Channel Partner Factors ... 107

6.3 Partner Commitment and Motivation ... 110

6.3.1 Partner Commitment ... 110

6.3.2 Partner Motivation ... 111

6.4 A Note on Culture ... 113

6.5 Conclusions ... 114

Conclusions and Recommendations... 116

Bibliography ... 119

Appendix...Error! Bookmark not defined.

Appendix A NACE-codes ...Error! Bookmark not defined.

Appendix B Survey Design...Error! Bookmark not defined.

Appendix C Tables ...Error! Bookmark not defined.

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List of Tables and Figures

Table Title Page

Table 0.1 Overview of PeopleSoft and J.D. Edwards before the July 2003 merger 13 Table 1.1 Breakdown of the total valid sample according to industry and company size 141

Table 1.2 Questionnaire distribution per industry 141

Table 1.3 Questionnaire distribution within Wholesale Distribution per company size class 141 Table 1.4 Questionnaire distribution within CPG per company size class 142 Table 1.5 Questionnaire distribution within Discrete Manufacturing per company size class 142 Table 1.6 Composition of survey sample according to industry 143 Table 1.7 Composition of survey sample according to company size 143

Table 2.1 ‘Old’ PeopleSoft financials 34

Table 2.2 ‘Old’ J.D. Edwards financials 35

Table 2.3 ‘New’ PeopleSoft financials 35

Table 3.1 Total number of companies in The Netherlands per 01-01-2004, classified according to number of 143 employees

Table 3.2 Total number of companies in the Wholesale Distribution sector in The Netherlands per 143 01-01-2004, classified according to number of employees and NACE-codes

Table 3.3 Total number of companies in the CPG sector in The Netherlands per 01-01-2004, classified 144 according to number of employees and NACE-codes

Table 3.4 Total number of companies in the Discrete Manufacturing sector in The Netherlands per 144 01-01-2004, classified according to number of employees and NACE-codes

Table 3.5 Western European Wholesale/Retail IT Spending, $ billion 144 Table 3.6 Western European Wholesale/Retail IT Spending, % growth 144 Table 3.7 Western European Wholesale/Retail, Software Spending, $ billion 144

Table 3.8 Western Europe, Discrete Manufacturing software spending, $ billion 145 Table 3.9 Western Europe, Discrete Manufacturing software spending, % growth 145 Table 4.1 Western European mid-market companies, IT solutions adoption status, % of companies having 145 the application in place

Table 4.2 Dutch mid-market companies, IT solutions adoption status, % of respondents having the 145

application in place

Table 4.3 ERP vendor market shares among Dutch mid-market companies currently having some form of 146 ERP applications in place

Table 4.4 Western European mid-market companies, ERP investment plans for 2004 146 Table 4.5 Western European mid-market companies, CRM investment plans for 2004 147 Table 4.6 Western European mid-market companies, SCM investment plans for 2004 147 Table 4.7 Dutch mid-market companies, IT solutions investment plans, % of respondents planning to invest 147 Table 4.8 Western European mid-market companies, web-enabled ERP adoption and investment plans for 147 2004

Table 4.9 Western European mid-market companies, web-enabled CRM adoption and investment plans for 148 2004

Table 4.10 Western European mid-market companies, web-enabled SCM adoption and investment plans for 148 2004

Table 4.11 Western European Retail/Wholesale sector, IT solutions adoption status, % of companies having 148 the application in place

Table 4.12 Dutch mid-market companies in Wholesale Distribution, IT solutions adoption status, % of 148 respondents having the application in place

Table 4.13 Western European Retail/Wholesale sector, ERP investment plans for 2004 148 Table 4.14 Western European Retail/Wholesale sector, CRM investment plans for 2004 148 Table 4.15 Western European Retail/Wholesale sector, SCM investment plans for 2004 149 Table 4.16 Dutch mid-market companies in Wholesale Distribution, IT solutions investment plans 149 Table 4.17 Western European Retail/Wholesale sector, web-enabled ERP adoption and investment plans for 149 2004

Table 4.18 Western European Retail/Wholesale sector, web-enabled CRM adoption and investment plans for 149 2004

Table 4.19 Western European Retail/Wholesale sector, web-enabled supply chain applications adoption and 149 investment plans for 2004

Table 4.20 Western European CPG, IT solutions adoption status, % of companies having the application in 149 place

Table 4.21 Dutch mid-market companies in CPG, IT solutions adoption status, % of respondents having the 149

application in place

Table 4.22 Western European CPG sector, ERP, CRM and SCM investment plans for 2004 150 Table 4.23 Dutch mid-market companies in CPG, IT solutions investment plans 150 Table 4.24 Western European CPG sector, web-enabled IT solutions adoption and investment plans for 150 2004

Table 4.25 Western European Discrete Manufacturing sector, IT solutions adoption status, % of companies 150 having the application in place

Table 4.26 Dutch mid-market companies in Discrete Manufacturing, IT solutions adoption status, % of 150 respondents having the application in place

Table 4.27 Western European Discrete Manufacturing sector, ERP, CRM and SCM investment plans for 2004 150 Table 4.28 Dutch mid-market companies in Discrete Manufacturing, IT solutions investment plans 151

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Table Title Page

Table 4.29 Western European Discrete Manufacturing sector, web-enabled IT solutions adoption and 151 investment plans for 2004

Table 4.30 Internal influencers at Dutch mid-market companies, % of all respondents rating the influencer 151

as important

Table 4.31 Internal influencers at Dutch mid-market companies with 50-499 employees, % of all 151 respondents in 50-499 size class rating the influencer as important

Table 4.32 Internal influencers at Dutch mid-market companies with 500-999 employees, % of all 152 respondents in 500-999 size class rating the influencer as important

Table 4.33 External influencers at Dutch mid-market companies, % of all respondents rating the influencer 152

as important

Table 4.34 External influencers at Dutch mid-market companies with 50-499 employees, % of all 152 respondents in 50-499 size class rating the influencer as important

Table 4.35 External influencers at Dutch mid-market companies with 500-999 employees, % of all 152 respondents in 500-999 size class rating the influencer as important

Table 4.36 Dutch mid-market companies application software buying criteria, % of all respondents rating 153 the criterion as one of the three most important buying criteria

Table 4.37 Western Europe, Discrete Manufacturing and Retail/Wholesale IT buying criteria, % of companies 153 rating the criterion as one of the three most important buying criteria

Table 4.38 Dutch mid-market companies in Wholesale Distribution application software buying criteria, 154

% of all respondents in Wholesale Distribution rating the criterion as one of the three most important buying criteria

Table 4.39 Dutch mid-market companies in Discrete Manufacturing application software buying criteria, 155

% of all respondents in Discrete Manufacturing rating the criterion as one of the three most important buying criteria

Table 4.40 Dutch mid-market companies in CPG application software buying criteria, % of all respondents in 156 CPG rating the criterion as one of the three most important buying criteria

Table 4.41 Mid-market IT products acquisition channels, % of companies using the specific channel 156 Table 4.42 Dutch mid-market companies application software acquisition channels, % of all respondents 156

using the specific channel

Table 4.43 Western Europe, Discrete Manufacturing and Retail/Wholesale 2004 IT budget allocation per 157

channel, % of budget

Table 4.44 Dutch mid-market companies in Wholesale Distribution application software acquisition channels, 157

% of all respondents in Wholesale Distribution using the specific channel

Table 4.45 Dutch mid-market companies in CPG application software acquisition channels, % of all 157 respondents in CPG using the specific channel

Table 4.46 Dutch mid-market companies in Discrete Manufacturing application software acquisition channels, 157

% of all respondents in Discrete Manufacturing using the specific channel

Figure Title Page

Figure 1.1 The enterprise software application market 15

Figure 1.2 The research topic within the business literature 18

Figure 1.3 Theoretical framework 27

Figure 3.1 Western European Wholesale IT spending growth, % change compared to previous year 42 Figure 3.2 Western European Discrete Manufacturing software spending growth, % change compared to 47

previous year

Figure 3.3 Porter’s Five Forces in the ERP industry 48

Figure 3.4 Dutch mid-market BPO growth rates 2004-2008 51

Figure 4.1 Western European mid-market IT solutions adoption status, % of companies having the solution 55

in place

Figure 4.2 Western European Wholesale Distribution IT solutions adoption status, % of companies having 58 the solution in place

Figure 4.3 Western European CPG IT solutions adoption status, % of companies having the solution in place 60 Figure 4.4 Western European Discrete Manufacturing IT solutions adoption status, % of companies having 61

the solution place

Figure 4.5 Mid-market channel usage by company size, % of companies using the specific channel 70 Figure 4.6 Western European Discrete Manufacturing and Wholesale Distribution 2004 IT budget allocation 70

per channel, % of budget

Figure 5.1 The overall channel structure 77

Figure 5.2 PeopleSoft’s direct and indirect channel should report to one functional manager, for example 83

per industry

Figure 5.3 Channel partner evaluation criteria 100

Figure 6.1 Partner selection criteria 108

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List of Abbreviations

A

ALM Asset Lifecycle Management ASP Application Service Provider B

BI Business Intelligence BPO Business Process Outsourcing C

CEO Chief Executive Officer CFO Chief Financial Officer CIO Chief Intelligence Officer

CPG Consumer Packaged Goods

CRM Customer Relationship Management CSI Consultant and System Integrator E

ECR Efficient Consumer Response EDI Electronic Data Interchange EMV Eurocard Mastercard Visa ERP Enterprise Resource Planning

EU European Union

F

FM Financial Management

G

GDP Gross Domestic Product H

HR Human Resources

HRM Human Resources Management

I

ISV Independent Software Vendor

IT Information Technology

L

LSB Large-Sized Businesses P

PLM Product Lifecycle Management

PM Project Management

R

RFID Radio Frequency Identification ROI Return On Investment

S

SCM Supply Chain Management

SMB Small and Medium-sized Businesses SoHo Small Office/Home Office

SRM Supply Relationship Management

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T

TCO Total Cost of Ownership

TF Technology Foundation

U

US United States

V

VAR Value-Added Reseller VMI Vendor Managed Inventory

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Introduction

The enterprise application software market is consolidating. Economic conditions and a maturing market are causing vendors to pursue mergers and acquisitions in order to gain market share, extend product portfolios, and reach out to new markets. Vendors are also turning their attention to the Small and Medium-sized Businesses (SMB) market, a customer segment experiencing strong growth but also fierce competition¹.

The market for Enterprise Resource Planning (ERP) applications can be divided into two main segments. These are the Large-Sized Businesses (LSB) and the SMB market. The SMB market can be divided in the mid-enterprise market, the mid-market, and the Small-Office/Home-Office (SoHo) market. As the opportunities for growth in new software application segments such as Customer Relationship Management (CRM), Supply Chain Management (SCM), and Business Intelligence (BI) in the LSB market start to mature, high-end Independent Software Vendors (ISV) and existing SMB players alike are once again engaged in a land-rush for customers in this market. It’s a high stakes game as annually the SMB market is at least equal in size to the LSB market. Importantly, though, it is a volume play, and having the correct channel in place is just as important as having a good product when it comes to targeting SMBs².

On July 17 2003, PeopleSoft acquired J.D. Edwards. This deal created the new No. 2 vendor in the enterprise software applications market behind SAP and overtaking Oracle.

PeopleSoft and J.D. Edwards concentrated on different customer sets with virtually no customer size overlap, nor industry segment. PeopleSoft itself primarily played in the large corporate space with a strong focus on Human Resources software. J.D. Edwards, on the other hand, had a concentration on the SMB market and a strong Manufacturing integration and Distribution software practice³.

A brief overview of PeopleSoft and J.D. Edwards, before the 2003 merger, is given in the table below.

PeopleSoft J.D. Edwards Combined

Revenue ($1,000) $1,926 $886 $2,812

Net Income ($1,000) $177 $53 $230

Employees 8,180 4,950 13,130

Customers ~5,100 ~6,650 ~11,750

Industries with Strong Presence

- Healthcare - Education - Government

- Manufacturing - Distribution - Mining - Construction - Real estate

Table 0.1 Overview of PeopleSoft and J.D. Edwards before the July 2003 merger Source: IBM Americas Market Intelligence, p. 4

Currently, 25% of PeopleSoft customers and 40% of newly signed customers are medium-sized. The acquisition has given PeopleSoft an enhanced presence within the mid-market and has had a

significant impact on PeopleSoft earnings⁴.

Before the 2003 merger, J.D. Edwards faced a problem in The Netherlands. They typically built their business on a direct model. J.D. Edwards needed to formulate a ‘go-to-market’ strategy for the mid- market, because their direct channel model was not suited for scaling down into this market segment.

When PeopleSoft acquired the company, it also ‘acquired’ J.D Edwards’ problem of the ‘go-to-market’

strategy for the mid-market. PeopleSoft’s direct sales force is too expensive to be directed at the mid- market. Furthermore, PeopleSoft’s indirect channel is currently made up of only two resellers.

1 IBM Americas Market Intelligence, 2003, p. 1

2 SG Cowen Equity, 10 July 2002, p. 3

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Therefore, PeopleSoft needs to build a new network of partners to address the mid-market opportunity⁵.

This report will focus on three industries within the Dutch mid-market; Wholesale Distribution, Consumer Packaged Goods (CPG), and Discrete Manufacturing. It will be investigated what kind of indirect channel PeopleSoft needs to have in place for scaling down into this market segment. The main question that this study aims to answer is:

In Chapter 1, the research methodology used for this study will be presented. That is, research objectives and questions will be formulated and the research strategy will be explained. In Chapter 2, some general background information on PeopleSoft will be given. Starting from Chapter 3 the research questions will be answered. In this chapter, and in Chapter 4, a thorough analysis of the mid- market landscape and the customers in this market will be conducted. Based on this analysis, in Chapter 5 a suitable design for PeopleSoft’s new indirect channel will be developed in order to penetrate the mid-market. In Chapter 6, recommendations will be presented on how PeopleSoft can create and build the new indirect channel. This report will end with the conclusions and

recommendations that can be drawn from this research project.

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1. Research Methodology

In this chapter the research methodology will be presented. Research objectives and research questions will be formulated, and the research design will be presented. Attention will also be given to the research methods used and the validity, reliability, and generalizability of this study.

1.1 PeopleSoft’s Current Situation

The total market for ERP applications can be divided in the LSB market and the SMB market. The SMB market can be divided in the mid-enterprise market, the mid-market and the Small-Office/Home- Office market⁶. This is graphically depicted in figure 1.1.

Figure 1.1 The enterprise software application market

PeopleSoft employs its PeopleSoft EnterpriseOne product to serve the total SMB market. In The Netherlands, PeopleSoft already has an appropriate channel for the mid-enterprise market; it uses its direct sales force to target this market. The mid-market segment (highlighted in yellow in figure 1.1) is experiencing strong growth, but currently PeopleSoft doesn’t have an appropriate distribution strategy and channel in place to target this segment. Their direct sales force is too expensive (in terms of Return-On-Investment (ROI)), for targeting this market. PeopleSoft already has two resellers (Getronics and Ordina) that currently serve mid-market customers. However, both these resellers target just one specific segment (Public, and Fresh & Perishables) of the mid-market. Because PeopleSoft wants to be a major player in the mid-market, it now needs a more elaborate indirect channel that will help the company in building a strong position in the Dutch mid-market.

The problem PeopleSoft faces, is a classic marketing problem. A company has a particular product and has identified a particular market for this product. Now the question is how to get the product from the company to the customer in an effective manner. This general situation can be tailored to

PeopleSoft´s situation: PeopleSoft has a product (PeopleSoft EnterpriseOne), and has identified a market for this product; the mid-market segment within the SMB market. PeopleSoft has already concluded that its direct sales force is too expensive for serving the mid-market. The company now needs an indirect channel to penetrate the mid-market. What should PeopleSoft’s indirect channel look like in order to sell its product in the mid-market in an effective manner?

1.2 The Industries

In this study, the focus will be on three specific industries within the mid-market: Wholesale Distribution, Consumer Packaged Goods (CPG), and Discrete Manufacturing.

The Wholesale Distribution industry can be defined as all companies that move products from the supplier to the consumer. So, its primary purpose is logistical. A wholesale distributor acts as a middleman in the supply chain⁷.

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The Consumer Packaged Goods industry can be defined as all companies that acquire raw materials and then manufacture consumer products typically used by families. These products are usually characterized by a low unit price and a short life expectancy and are most often sold in grocery stores and other retail outlets⁸.

The Discrete Manufacturing industry can be defined as all companies that design and manufacture discrete products including clothing, leather and footwear, wood products, publishing, machinery, motor vehicle and electronics.

These three industries were chosen for two reasons:

1.) Wholesale Distribution, CPG and Discrete Manufacturing are major sectors within the Dutch mid-market that are relevant to PeopleSoft

2.) PeopleSoft EnterpriseOne offers a solution that fits closely with the wants and needs of these industries

The industries of Wholesale Distribution, CPG, and Discrete Manufacturing within the mid-market will be the focus of the remainder of this study.

1.3 Research Objective

The overall objective for this research project is:

• To design a suitable indirect channel for PeopleSoft for selling its PeopleSoft EnterpriseOne product in the mid-market segment of the ERP market in The Netherlands in the industries of Wholesale Distribution, CPG, and Discrete Manufacturing, and to present recommendations on how to create and manage this new indirect channel.

1.4 Research Questions and Theoretical Framework

In this section the research questions will be formulated. First the main research question will be presented and subsequently, based on a literature review, sub-questions and a theoretical framework will be developed.

1.4.1 Main Research Question

Based on the problem PeopleSoft faces and the overall research objective, the following main research question was formulated:

Using this main question, relevant literature will be reviewed in order to arrive at a theoretical framework and to formulate sub-questions.

1.4.2 Literature Review

In this section relevant literature related to the research topic will be reviewed. From this literature review a theoretical framework will be developed for this particular study. That is, a framework for the overall research process and a theoretical framework that will be used to collect and analyze data in order to answer the research questions.

An Industrial Marketing Problem

The research problem that lies at the heart of this study can be defined as a marketing related one.

Leeflang defines marketing as ‘all activities aimed at stimulating, facilitating and enhancing the trade of

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goods, services and money between at least two parties’⁹. Another definition of marketing is given by Assael. He defines marketing as ‘all activities directed to identifying and satisfying customer needs and wants’¹⁰. This definition also includes the aspect of identifying customer needs and wants. Leeflang’s definition does not explicitly include this activity. These two definitions combined can be applied to PeopleSoft’s situation. The company has identified a market, but the needs and wants of the customers in this market don’t fit with its current direct sales channel. PeopleSoft now faces the problem of how to satisfy the customer wants and needs in the mid-market for ERP applications.

However, these two definitions relate to consumer marketing. PeopleSoft does not sell to consumers, but to other companies. It’s therefore useful to also have a look at definitions that involve the marketing of goods and services to companies.

Corey provides a definition of industrial marketing. He defines industrial marketing as ‘the marketing of goods and services to commercial enterprises, governments, and other non-profit institutions for use in the goods and services that they, in turn, produce or resell to other industrial customers’¹¹. Biemans also uses Corey’s definition in his work on industrial marketing¹². A definition that is related to Corey’s definition is the one provided by Ogilvie: ‘industrial marketing is the performance of business activities that directs the flow from producer to user of the goods and services which produce or become part of other goods and services, or facilitate the operation of an enterprise either business, public, or non- profit’¹³. The definition given by Reeder et al. also fits closely with these definitions. They define industrial marketing as ‘all activities involved in the marketing of products and services in the production of consumer or industrial goods and services, and to facilitate the operation of their enterprise’¹⁴.

These definitions of industrial marketing all relate to a series of business activities. A definition that is broader is given by Ames and Hlavacek. They define industrial marketing as ‘a total business

philosophy aimed at improving profit performance by identifying the needs of each key customer group and then designing and producing a product or service package that will enable the company to serve selected customer groups or segments more effectively than its competition’¹⁵. This last definition highlights that industrial marketing not only involves activities related to the production and sale of goods to other companies, but also is a business philosophy that can relate to other areas of the company as well.

So far, it was established that the research topic of this study is related to marketing and more specifically to industrial marketing. Within this general field of industrial marketing, this study focuses on one particular aspect. That is, the design of a distribution channel or marketing channel. A marketing channel can be defined as the external contractual organization which management operates to achieve its distribution objectives¹⁶. The design of marketing channels is also well covered by the general marketing literature. It is generally conceived of as one of the 4 P’s, Place, within the marketing mix¹⁷. Decisions regarding distribution channels generally focus on the choice between a direct and an indirect distribution channel.

The problem PeopleSoft faces in The Netherlands is that it traditionally used its direct sales force to sell its products, but now it wants to enter a market where its direct channel is too expensive to maintain. This is a common problem for companies in a variety of industries. Luckett discusses the market conditions that favor the use of a direct sales channel¹⁸:

• Knowledge of market conditions, market positions and sound knowledge of broad product lines

• Ability to negotiate large contracts on a total life cost basis in markets historically geared to accepting initial low bid

• Ability and need to sell at high-levels

9 Leeflang, 1995, p. 18

10 Assael, 1990, p. 4

11 Corey, 1991, p. xi

12 Biemans, 1996, p. 16

13 Ogilvie, 1985, p. 33

14 Reeder et al., 1987, p. 8

15 Ames & Hlavacek, 1984, p. 5

16 Rosenbloom, 1987, p. 4

17 See: Mühlbacher (1999), Leeflang (1995), Assael (1996)

18 Luckett, 1975, p. 52

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• Ability to recommend proper product applications

These market conditions apply to the LSB market PeopleSoft has traditionally targeted with a

successful direct channel. The conditions in the mid-market are different. Companies are smaller, and thus order sizes are smaller. Customers in this market segment generally need less sophisticated and less complicated applications. So, according to Luckett’s market conditions, a direct channel is not suitable for the mid-market. PeopleSoft itself also found out that its direct sales force is not suitable for serving the mid-market segment. The company now needs a new indirect channel to target this market.

So far, the exact position of the research topic within the business literature has been established.

First it was established that the issue under discussion is related to marketing, and more specifically to industrial marketing. Within this general field of industrial marketing, the research topic is related to one of the 4 P’s; Place. Finally, it was established that a direct channel is not suitable for the mid- market, so the design of a new indirect marketing channel is required. The position of the research topic within the business literature is graphically depicted in figure 1.2 below.

Figure 1.2 The research topic within the business literature

Framework for the Research Process

Now that the exact position of the research topic within the business literature has been established, a framework for the overall research process needs to be developed. This will be done by reviewing general frameworks for conducting marketing research, and frameworks specifically aimed at the design of a marketing channel. Based on this discussion, a channel design process will be developed that will be used in this study.

Overview of Available Channel Design Processes

Some of the definitions in this section already give some indications about the channel design processes that can be used. These definitions start with identifying customer wants and needs and then fitting the product with these wants and needs. This implies that the research process should start with conducting a market analysis and customer analysis and then fitting the product, or in this case the marketing channel, with the market and customers. This idea is supported by the research frameworks that are used in the marketing literature. Let’s take a look at the literature that focuses on marketing research in general and subsequently at literature that focuses more specifically on the process of designing marketing channels.

Leeflang and Mühlbacher both offer a comprehensive framework for the process of marketing research. Leeflang distinguishes 6 distinctive steps in his marketing planning process¹⁹:

19 Leeflang, 1995, p. vii

Marketing

Consumer Marketing

Industrial Marketing

Product Price Place Promotion

Direct Channel Indirect Channel

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1. Current strategic profile

In the first phase it is determined what the current state and position of the company is, in relation to the marketing issue involved.

2. Analysis of the external environment

In the next phase, the external environment of the organization is described and analyzed. Special attention is given to opportunities for the company in the environment. Possible threats are also identified.

3. Analysis of the internal environment

After the analysis of the external environment, the internal environment is analyzed. During this phase the strengths and weaknesses of the organization are identified.

4. Formulating the organizational objectives and strategies.

Based on the analyses of both the external and internal environments, organizational objectives and strategies are formulated. These act as boundaries within which more detailed objectives and strategies are formulated.

5. Formulating marketing objectives and marketing decisions

Within the boundaries set by the organizational objectives and strategies, operational marketing measures are formulated.

6. Implementation and evaluation

During the sixth and final phase, the marketing decisions are implemented and eventually evaluated.

A marketing planning process related to the one above, is the process suggested by Mühlbacher. His marketing planning process consists of four main stages²⁰:

1. Current policy

The first stage involves the business mission and business philosophy. This involves the purpose and domain of the business, and also its values, norms, and general rules of behavior. Therefore, this stage is not really an analysis stage, but more an overall framework within which the firm conducts business in general.

2. Market assessment

This stage consists of two sub-stages: potential market assessment, and an assessment of the competitive position of the firm. In the first sub-stage the current market trends and the market characteristics are analyzed. Next, the current position of the firm in this market is analyzed.

3. Basic strategic decisions

During the third stage, the basic strategic decisions are made. That is, the competitive strategy and the market-entry strategy are formulated. Based on these formulated strategies, resource allocation decisions are made.

4. Marketing mix decisions

In the fourth and final stage, the marketing mix decisions are taken. Decisions are taken regarding the product, its price, its promotion, and the places where it will be made available.

When comparing the frameworks provided by Leeflang and Mühlbacher, it becomes clear that they have a lot in common. However, there are some differences. Leeflang starts with evaluating the current strategic position of the firm. In Mühlbacher’s framework, this activity is a sub-stage of the second phase in the overall framework. On the other hand, Mühlbacher starts with giving attention to the business mission and business philosophy. Leeflang does not distinguish a separate stage for this activity. This may be due to the fact that the business mission and business philosophy are more a sort of general framework within which a firm conducts business. It is therefore not specific to the marketing planning process. Finally, Leeflang distinguishes a separate phase for the implementation and evaluation of the marketing decisions taken. Despite these differences, both frameworks have a lot in common. They both involve analyses of the external and internal environments. Based on these analyses, basic strategic decisions are made and finally decisions regarding the 4 P’s are made.

20 Mühlbacher, 1999, p. 74