5-104-039

MOHANBIR SAWHNEY

Rockwell Automation:
The Channel Challenge

In June 2001, Lowell Ricklefs sat down after cheering on the Brewers in the seventh-inning
stretch at Miller Park in Milwaukee, Wisconsin. As he watched the Brewers’ early, large lead slip
into a tied game, he could not help but see parallels to his own situation at Rockwell Automation.
In his fifteen years at the firm, Ricklefs had seen Rockwell achieve record growth and establish
itself as a market leader in industrial automation. In the past three years, however, growth had
stalled and margins were under pressure because of changes in Rockwell’s distribution channels.

Ricklefs was into his third year as vice president for global and strategic market access at
Rockwell. His focus was on the Allen-Bradley (A-B) brand, which provided industrial
automation solutions for original equipment manufacturers (OEMs) and system integrators, as
well as maintenance, repair, and operations (MRO) products for manufacturers in a wide range of
industries. Over the preceding years A-B had established a powerful market presence as a high-
quality, top-service provider through a strong network of dedicated local distributors.

In recent years, however, A-B’s locked-in distribution network on the MRO side of the
business was starting to feel like a liability to Ricklefs. Increasingly, national distributors not
beholden to A-B were using their national presence, price competitiveness, and ability to
integrate with manufacturers’ enterprise systems to steal large customers from A-B’s local
distributors. Yet A-B could not afford to alienate its dedicated local distributors, who controlled
almost all its current sales. To make matters worse, A-B’s first attempt to respond to this
challenge, an electronic marketplace called SourceAlliance.com, had been a painful and
expensive failure.

Ricklefs realized that his company’s market lead was steadily eroding because of the
consolidation of A-B’s channels and the increasing power of national distributors. This raised
several questions in his mind: How pervasive was this trend toward nationwide and integrated
distribution? Was it something that required a dramatic change to the way A-B did business, or
could it be addressed by adapting the current marketing strategy and distribution network? What
range of options should A-B consider in adapting its strategy? What partnerships could prove
beneficial to A-B? If the situation demanded drastic action, how could he convince A-B’s
management and local distributors to try something new, given their negative experience with
SourceAlliance.com? Finally, how could Rockwell use e-business technologies as an integral part
of its revised distribution-channel strategy?

©2004 by the Kellogg School of Management, Northwestern University. This case was prepared by Michael Biddlecom ’01, Robert
Day ’01, Patrick Franke ’01, John Lee-Tin ’01, Robert Leonard ’01, and Brian Poger ’01 under the supervision of Professor Mohanbir
Sawhney. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of
primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call
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without the permission of the Kellogg School of Management.
ROCKWELL AUTOMATION: THE CHANNEL CHALLENGE 5-104-039

Company History
In 1903 Lynde Bradley and Dr. Stanton Allen formed the Compression Rheostat Company
(renamed Allen-Bradley in 1909) with an initial investment of $1,000. In 1919 Willard Rockwell
purchased the Wisconsin Parts Company to produce small axles. A few years later Arthur Collins
formed the Collins Radio Company, which provided the radio transmitters for Admiral Byrd’s
historic expedition to the South Pole.

In 1953 Rockwell merged Wisconsin Parts with Timken Detroit and Standard Steel and
Spring to form Rockwell Spring and Axle Company. The Rockwell Spring and Axle Company
was renamed the Rockwell Standard Corporation in 1958. In 1966 North American Aviation
merged with Rockwell Standard and became the North American Rockwell Corporation. The
new company posted sales of $2.4 billion in the first year. North American Rockwell acquired the
Collins Radio Company in 1973 and the company name was changed to Rockwell International.

In 1985 Rockwell purchased Allen-Bradley, which had become the North American leader in
the industrial automation equipment market. It acquired Reliance Electric in 1995, significantly
improving its ability to compete globally in the served factory automation markets. After the
Reliance transaction Rockwell sold its aerospace and defense business to Boeing and its graphic
systems department to Stonington Partners. The company also spun off its automotive and
semiconductor systems business lines as a publicly traded company called Conexant Systems. At
the end of 2000 Rockwell announced plans to spin off its Rockwell Collins avionics and
communications business unit to its shareholders in a tax-free transaction. It also announced that
the name of the parent company would be changed to Rockwell Automation to reflect its sharper
focus on industrial automation.

In 2000 Rockwell was a $7 billion electronic controls and communications company with
global leadership positions in industrial automation, avionics and communication, and electronic
commerce. In North America, Rockwell had up to 60 percent market share with some of its
automation products, which were supported by an excellent brand name and quality service. The
company employed about 40,000 people at more than 450 locations and served customers in
more than 80 countries. Exhibit 1 shows Rockwell’s income statement for FY 2000.

Rockwell was a conservatively managed company. Senior management had taken great care
to preserve the elements of business that had made the firm successful in the past. Over the last
quarter century these success factors helped Rockwell enjoy a “growth company” label on Wall
Street.

In the previous five years, competition, rapidly changing technology, and shifting distribution
patterns had taken their toll. As sales slowed, investors no longer viewed Rockwell as a growth
company, and Rockwell began to suffer from volatile and below-market stock performance (see
Figure 1). Given this performance downturn, senior management was keen to reexamine the
competitive landscape and its own strategy for success.

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Figure 1: Rockwell’s Stock Performance Relative to the Dow Jones Index, 1996–2001

Allen-Bradley
As Rockwell’s most profitable division (see Exhibit 2), A-B produced drives, motors, and
process and motion controllers, as well as a host of other products that helped manufacturers
produce their products. A-B had earned a solid reputation for high-quality products and was
sometimes viewed as the “IBM of the industry,” where the rule of thumb was “no manager ever
gets fired for buying A-B products.” See Exhibit 3 for sample product categories from A-B.

To supplement its quality products, A-B focused on excellent service. A-B and its dedicated
distributors maintained a network of technical experts to ensure that each A-B installation was
successful. The distributors and A-B’s technical experts modeled their solutions on a proprietary
Automation Investment Life Cycle (AILC) model that spanned the conceptualization, design,
installation, operation, maintenance, and ongoing improvement stages of industrial automation
(see Figure 2). The AILC model emphasized the optimization of the current investment and
maximization of the long-term return in new investments in advanced industrial automation.

This life-cycle approach and high level of service was costly, but it had been an important
source of A-B’s competitive advantage and a key contributor to A-B’s market leadership position.
Competitors typically did not bundle this level of service with their offerings.

Figure 2: Rockwell’s Automation Investment Life Cycle Model

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A-B treated its distributors as true partners in providing high-quality solutions to its
customers. Both A-B and the distributors benefited from this partnership approach. Distributors
employed 900 service engineers versus A-B’s 400. In return, A-B distributors were typically
more profitable than other electrical suppliers because of the 15 to 20 percent premiums they
were able to command in the market.

The Industrial Automation Market

A-B operated in the industrial automation market with its industrial automation group. This
market included products and services that controlled, monitored, and automated manufacturing
processes. Products included programmable logic controllers (PLCs), network equipment, and
software and support services. Margins for suppliers were strong, with hardware margins of
around 60 percent, and even higher software margins.

The worldwide industrial automation market was approximately $150 billion in size, with
North America accounting for roughly a third of the global market. Customer segments included
OEMs who manufactured industrial automation equipment, system integrators, contractors, and
end customers who owned and operated manufacturing plants where industrial automation
products were used.

Industrial automation products could be sold in two ways. They could be sold as components
of original equipment manufactured by OEMs and system integrators who built large
manufacturing plants in discrete manufacturing, process manufacturing, or material handling
applications. Then once an OEM delivered, installed, and deployed a plant, the end customer
(typically a manufacturer) would continue to need industrial automation products for MRO
purposes. The MRO market represented the “aftermarket” for industrial automation equipment.
MRO customers could be large multinational corporations with multiple manufacturing facilities,
or smaller manufacturers with single-site operations. See Exhibit 4 for a description of the
different segments of A-B’s business. The MRO market accounted for about 30 percent of A-B’s
sales to end customers, with about 70 percent of end-user sales coming from original equipment
sold into capital projects. Ricklefs’s responsibility was limited to the MRO market.

The MRO Market

MRO Daily defines the MRO market as “companies primarily engaged in the manufacturing,
distribution, and redistribution of maintenance, repair, and operation supplies, including:
janitorial, electrical, bearings, tools, machinery, accessories, fire/safety equipment, and many
other industrial items, to a diversified market of distributors and end users.”

MRO products are the day-to-day materials any business needs for its operations. MRO
goods are typically indirect materials because they do not end up as part of the finished product,
unlike raw materials and components. MRO goods can be classified into consumables (high-
volume, low-value products such as lubricants and office supplies) and spare parts (high-value,
engineered products such as actuators and controllers).

The size of the U.S. MRO market was difficult to gauge due to overlap with the general
industrial equipment market. Estimates of the MRO market size ranged between $187 billion and

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$352 billion. W. W. Grainger, a leading distributor in this market, had stated it had slightly less
than 2 percent share with $4.5 billion in sales, which implied a market size of around $250
billion. The MRO market had shown a growth rate between 4 and 5 percent. The market
consisted of manufacturers, distributors, end customers, and support applications (see Exhibit 5
for the MRO channel structure for capital purchases versus MRO purchases of industrial
automation).

Industrial automation products made up only a small part of the overall MRO market because
of the immense breadth of product categories that a business might need for running its
operations.

Manufacturers

Due to its diffuse and broad definition and the diversity of its customers, the MRO market
was extremely fragmented at the manufacturer level, with more than five million products and
tens of thousands of MRO suppliers. Manufacturers typically worked on very thin margins and
distributed a large majority of their products through local, national, and global distributors.

End Customers

Although all types and sizes of businesses utilized MRO supplies, heavy-use customers
tended to be large industrial manufacturing concerns. Large-scale industrial clients accounted for
approximately $45 billion of the total MRO market. Industries with heavy MRO use included
appliance, automotive, aerospace (both OEM and commercial carriers), and chemical
manufacturers. These industries had a large physical-asset base in the form of plant, property, and
equipment. Consequently, they required significant ongoing maintenance, repair, and upgrades to
their operations.

Support Applications
With the advent of the Internet and e-business, a number of support applications had emerged
to facilitate electronic procurement of MRO goods. These support applications capitalized on the
fragmented nature of the MRO business and the ad-hoc nature of the MRO-procurement process
by aggregating thousands of suppliers into a centralized marketplace and automating the MRO-
procurement process. The value proposition of the support applications for buyers included cost
savings due to the elimination of “rogue purchasing” and increased convenience due to a single
interface for a large universe of suppliers. Support applications took various forms, including
independent MRO e-marketplaces such as MRO Software and PurchasePro.com, e-procurement
software vendors such as Ariba and Commerce One, supply-chain vendors such as i2
Technologies, distributor-operated catalogs such as W. W. Grainger’s Grainger.com, and
traditional enterprise resource planning software vendors such as SAP. These applications
combined multisupplier catalogs with workflow and process-automation solutions for managing
the MRO-procurement process.

Despite the increase in e-procurement software spending and the emergence of business-to-
business (B2B) e-marketplaces, the migration of MRO-procurement transactions to the Internet
had been slow. According to a survey by Market Facts Inc. commissioned by W. W. Grainger,
the most common method of ordering MRO supplies continued to be the telephone, with 85

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percent of all companies using this channel. Other major ordering methods included visiting retail
outlets (79 percent), fax (64 percent), sales representatives from MRO suppliers (64 percent), and
visiting MRO suppliers’ local branches or distribution centers (50 percent).

However, the compelling cost savings from automation of MRO procurement and cost
pressures arising from the economic downturn of 2001 were predicted to fuel the growth of
online MRO transactions. Frank Lynn & Associates, a consulting firm, estimated that up to one-
third of all MRO transactions would be executed through online channels by 2005. Lynn believed
that “early adopters” of online channels, which were typically large distributors, made up only 5
to 7 percent of the market in 2000.

A-B’s Distribution Channels

A-B sold its products to end customers for OEM sales (capital purchases for new
manufacturing plants) as well as for MRO sales (aftermarket purchases for existing plants)
through local electrical distributors. Local distributors typically generated 70 percent of their
revenues through electrical commodity products, and 30 percent through the higher-margin A-B
control and automation products. Capital purchases accounted for roughly two-thirds of the total
revenues of the distributor sales of A-B products to end customers, while MRO purchases
accounted for about one-third.

Local Distributors

You have reached XYZ Distribution Company. Our normal business hours are from 7:30
a.m. to 4:30 p.m. Monday through Friday. However, if you need immediate assistance,
please press 1 if it is Allen-Bradley related, or 2 for a company directory . . . .1

In 2000, 92 percent of A-B’s sales came through local distributors, who were the key agents
charged with ensuring that A-B customers were “never allowed to fail.” A-B maintained a unique
relationship with its distributors, based on limited intra-brand competition and premium service
levels.

Unlike its competitors, A-B granted exclusive distribution rights to only one authorized
distributor within a geographic region. Distributors received extensive training on product
offerings and field support from A-B engineers. In exchange for the exclusivity and training, A-B
required its distributors to become specialists in its products, well versed with the A-B product
line and capable of supporting customers’ field needs. Since A-B’s value proposition relied on
high-quality products teamed with unparalleled support, distributor service quality was central to
A-B’s success in the marketplace. For this reason, A-B carefully monitored end-customer
satisfaction to ensure that its distributor partnerships were performing as desired.

The typical A-B distributor carried products from 160 different manufacturers, with volumes
varying greatly among different manufacturers. Due to the exclusive distribution rights and the
fact that margins on A-B products were usually 20 to 30 percent higher than those on other
manufacturers, sales of A-B products generated on average 35 percent of total revenue for A-B’s

1
An A-B distributor’s phone message, reflecting the typical local distributor’s dedication to supporting A-B products.

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distributors, and an even larger share of their profits. In addition, distributors enjoyed increased
volume due to the A-B product line driving other brands’ sales—a benefit that would be
threatened if intra-brand competition were allowed. The distribution-system design allowed A-B
to support customers’ needs to:

• Aggregate suppliers for purchasing ease

• Match products to customer needs
• Respond in a timely manner to customer needs at the local level
• Purchase small quantities
• Outsource some service needs

The distribution system also allowed A-B to offload a number of activities to its distributors.
For instance, distributors were responsible for direct-selling activities, customer aggregation,
credit-risk management, bill collection, promotion, logistics coordination, technical help, and
service. A-B’s distributors also served as an extension of the A-B culture.

Although this distribution system had served A-B well, the distribution channel had been
steadily consolidating in recent years. National distributors were increasingly winning the large
MRO business and elbowing out A-B and its local distributors from large accounts. Ricklefs was
worried that A-B’s distributors did not share his concern about this trend. Commenting on the
threat of national distributors, one skeptical local distributor said, “I keep hearing about all the
business that the nationals are winning away . . . Show it to me.”

To learn more about the challenges A-B faced and to get a more complete view of the
possible solutions and risks associated with each, Ricklefs started talking with local distributors.
Here is an excerpt from one conversation.

Although I do not feel that we are losing much to national distributors or system
integration, I think if done right, they are powerful approaches to the market. I think that
the current A-B network could be leveraged to offer a better solution for our customers. I
believe that A-B should help fund an effort to link my region with that of neighboring
regions in a pilot program. By developing technologies that are compatible, we can link
all of our ordering and inventory management systems so we would be better positioned
to offer an integrated solution. I believe it will be successful in generating new business
and this will be a step towards implementing common systems throughout the A-B
network.

I also believe there are opportunities to drive more volume so we can compete with the
pricing of other national distributors. In cases where customers have a lot of in-house
expertise, where service is not really needed, we should offer a lower price. Most of my
current customers appreciate service and are willing to pay for it. But I also see those
who do not need the support and would like to do business with A-B, but require lower
prices.

A brief comparison of income statements from a national and local distributor is shown in
Exhibit 6.

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Growth of National Distributors

Despite the local nature of electrical equipment purchasing, significant consolidation was
occurring within the highly fragmented MRO-distribution channel. The consolidation trend was
led by a handful of global distribution firms, including Rexel and Sonepar of France and
Hagemeyer of Holland, and by the largest domestic distributors, including Graybar and Wesco.
Exhibit 7 ranks the relative size of major global distributors; Exhibit 8 lists recent acquisitions
by major distributors.

Electrical distribution was highly fragmented, with more than 8,000 firms thought to make up
the estimated $67 billion electrical supply market. Nevertheless, the top twenty-five firms
accounted for 28 percent of industry sales in 2000. The share of these large firms had been
increasing at a rate of more than one percentage point per year, according to the National
Association of Electrical Distributors. A-B estimated that 31 percent of its annual bookings were
currently attributable to the large consolidating distributors.

The consolidation trend in electrical equipment distribution was a global phenomenon;

lackluster category growth made acquisition one of the few viable means to generate sustained
revenue and increase earnings. Furthermore, the channel-consolidation trend mirrored the
consolidation that had already taken place among equipment manufacturers and customers.

Pursuit of scale economies also drove the consolidation trend, particularly in logistics. For
example, Graybar, the largest U.S. distributor, believed that it could efficiently service the entire
United States within forty-eight hours through a network of only four or five distribution centers,
and needed just sixteen “zone” warehouses to allow it to service the country within twenty-four
hours.2 In addition to logistics advantages, scale also allowed national distributors to leverage
costly information technology (IT) investments, and, importantly, to wield greater purchasing
power with manufacturers such as A-B.

The rise of e-business and consequent changes in customers’ buying behavior was another
factor driving distributor consolidation. Many large U.S. and global companies were moving
away from local, factory-level MRO ordering to a more coordinated, national buying model
facilitated by enterprise-wide e-procurement software systems. Large national customers were
aggressively consolidating their supplier base for electrical commodity supply, and national
distributors were better positioned to provide the scale and scope of electrical and industrial
automation products than A-B’s traditional local distributors.

To illustrate how a national distributor might market its value, consider a large multinational
client such as Procter & Gamble (P&G). As a manufacturer of consumer products, P&G was a
very large and diverse customer for automation equipment within its manufacturing plants. Due
to the broad geographical scope of its markets, P&G did not manufacture out of one centralized
plant. Instead it operated twenty-three different plants in multiple geographic regions, such as
California, New York, Georgia, and Missouri. P&G therefore would have at least twenty-three
different purchasing departments—one for every plant—to source and purchase the necessary
automation equipment for the plant.

2
Nancy Syverson, “Inside Graybar: A Profile of the Nation’s Top Electrical Distributor,” Industrial Maintenance & Plant Operation,
November 2000, 14.

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In this illustration, a national distributor could approach P&G’s chief financial officer rather
than the traditional, plant-level purchasing directors, and highlight the inefficiency of maintaining
twenty-three different local distributor relationships. The national distributor could quantify the
cost savings of consolidating MRO purchasing into one centralized department. In addition to
cost savings due to overlap elimination, the national distributor would offer better pricing to P&G
because of the increased procurement volume represented by the centralized purchasing
operation.

When A-B’s distributors lost the MRO sales for a large national customer, A-B in turn lost a
key point of access to the account for all sales, unless it could create a new channel to that
customer through direct sales, or if the customer allowed the distributor to fulfill only its capital
projects needs. A-B’s exclusive distribution policy prevented it from serving the MRO needs for
the customer through the national distributors. Therefore, the decision by large national customers
to consolidate their MRO supplies consumption, which accounted for only 30 percent of A-B’s
sales to a typical customer, could have the more serious, unintended consequence of affecting
A-B’s ability to sell the other 70 percent through its distributors.

National distributors claimed to be better able to meet the needs of large, distributed
organizations such as P&G because they had strong IT capabilities, low-cost logistics, and were
able to deliver MRO purchases to plants anywhere in the United States. By aggregating a
customer’s total national business, they were able to offer a discount based on the total volume as
well as reduced transaction costs through process standardization, consistent pricing, and simpler
billing.

Integrated Supply Services

In addition to acting only as national distributors of electrical equipment, major distributors

had begun to provide a value-added offering called “integrated supply services” to further
simplify the MRO-procurement process. Under an integrated supply contract, a distributor would
take control of a customer’s MRO ordering and inventory management activities. The distributor
would then drive costs down through vendor simplification, more efficient inventory practices,
and better supply chain coordination.

This “managed supply” was similar in some ways to the rise of “managed care” in the
healthcare industry, where health maintenance organizations (HMOs) emerged as gatekeepers to
mediate the transactions between healthcare product and service providers, and consumers or
employers who paid for healthcare.

In 2000 integrated supply contracts accounted for an estimated $10 billion, or 15 percent, of
the electrical supply industry volume. They were expected to show a 20 percent annual growth in
2001 according to Frank Lynn & Associates.

Integrated supply contracts gave distributors the ability to select the least expensive goods
while actively steering customers’ purchases toward their own preferred suppliers, who competed
for A-B’s profitable automation control product business. A-B was concerned that the rise of
integrated supply services would threaten its relationships with large companies, which A-B
currently serviced through local distributors. In the integrated supply scenario, A-B could be
relegated to a transactional role, with the national distributor gaining control over the customer
relationship. Even worse, A-B’s local distributors would be completely cut out of the loop

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because of their inability to compete on a similar scale or scope of services provided by the
integrated supply vendors.

However, integrated supply was not without its flaws. Some customers complained about the
lack of service they received at the plant level through these contracts. The slogan of “global
operations, local service” tended to emphasize the global operations and low cost, and some
customers missed the local presence and the emphasis on service that the local distributors
offered. Yet the cost arguments were compelling enough to fuel the trend. According to a study
by Frank Lynn & Associates, 75 to 80 percent of companies with integrated supply agreements
coming up for renewal chose to renew them, though not always with the original integrator.
Exhibit 9 illustrates the trend toward integrated supply.

WESCO

In 2000 Wesco was the leading player in the U.S. integrated-supply arena, with an estimated
5 percent share of total integrated supply sales. Originally a captive division of Westinghouse, the
company had been spun off and taken private by the leveraged buyout firm Clayton, Dubilier &
Rice. A second private equity concern, the Cypress Group, later replaced Clayton, Dubilier &
Rice, and eventually led Wesco to an initial public offering.

As an independent distributor, Wesco became an aggressive consolidator in the industry,

completing twenty-four acquisitions covering 121 outlets and more than $1 billion in sales from
1995 to 2000. However, after its successful IPO on May 12, 1999, the company’s stock
languished below $8, more than 60 percent below its offering price. Wesco had a preferred
supplier relationship with A-B competitor Cutler-Hammer (a division of Eaton Corporation),
which accounted for about 13 percent of Wesco’s sales. No other firm contributed more than 5
percent of Wesco’s revenue.

Through its Bruckner integrated supply division, Wesco offered solutions ranging from just-
in-time fulfillment to assuming the entire materials-management responsibility for all indirect
purchases. Bruckner focused on reducing total costs of acquisition, ownership, and use through
services such as program management, centralized sourcing, and on-site materials-management
services.

GRAYBAR

Graybar, a 130-year-old privately held firm, was the largest domestic distributor, with $4.3
billion in revenue in 1999 and 12 percent annual growth. The firm had 2.4 percent of the
integrated supply market, and it had a preferred supplier relationship with A-B rival Square D.
Graybar did not sell A-B products.

REXEL

Rexel North America was A-B’s top domestic distributor, a position it attained through the
aggressive acquisition of A-B distributors. The company was a subsidiary of the French company
Rexel S.A., the world’s largest distributor of electrical equipment. Rexel S.A., in turn, was
majority-owned by the French retail and luxury goods giant Pinault-Printemps-Redoute. The
European parent distributed 15 percent of the total European market and had close ties with A-B
competitors Schneider and Siemens. Rexel North America, on the other hand, remained supplier-
neutral and had honored the A-B limited-distribution agreements that it gained through

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acquisition. Rexel intended to double its U.S. business over the next three years and had plans for
six local warehouses.

SONEPAR

Sonepar, another French firm, was the second largest distributor in the world and number
four in the United States. The firm had $5.5 billion in revenue and 11 percent annual growth,
driven equally by acquisition and organic growth. The firm was A-B’s sixth largest distributor.

HAGEMEYER

Hagemeyer, a $4.8 billion, one-hundred-year-old Dutch firm, was the third largest global
distributor and the fifth largest in the United States. With the purchase of Charleston, South
Carolina–based Cameron & Barkley, Hagemeyer was the third largest integrated supply vendor in
the United States. Hagemeyer did not control any A-B distributors, but it had grown its U.S.
distribution presence from zero to $1.5 billion in three years, with plans for growing to $5–7
billion in the next five years. Like the other European firms, Hagemeyer had strong ties with
Schneider and Siemens.

SourceAlliance.com
Aware of the growing threat from national distributors, Rockwell announced the creation of
SourceAlliance.com (SA.com) in September 1999. The formation of SA.com sought to leverage
A-B’s strong network of local distributors in combination with products from A-B and other
manufacturers to respond to the challenge of national distribution. SA.com’s goal was to offer a
one-stop shop for electrical products that would minimize procurement costs, provide a single
point of contact with MRO distributors, offer consistency (e.g., in billing, pricing, product
offering, and standards) and simplify fulfillment, while also allowing access to unparalleled levels
of local support.

The company was formed to be independent of Rockwell, a perception strengthened by

SA.com’s December 1999 decision to move its headquarters from Rockwell’s offices in
Milwaukee to Raleigh, North Carolina. The perception of independence was further strengthened
by a March 2000 announcement that SA.com had raised $25 million in private financing,
including equity commitments from local and global electrical distribution companies and
manufacturers. The company boasted about offering “one million electrical products online” and
set targets for gross revenues of $50 million, $250 million, and $500 million in 2000, 2001, and
2002, respectively.

In September 2000, SA.com announced Owens Corning’s commitment to purchase its

electrical products through SA.com’s Web site, which was expected to provide “measured
improvements in its business process and cost savings.”

However, by January 2001 the company had to lay off eighty of its original 120 workers and
was seeking additional forms of financing. Despite estimates that Rockwell had invested $15
million in cash ($50 million if the value of staff time was included), the company decided not to
invest any more money, commenting that if the industry did not support the site, it would not be
prudent for Rockwell to do so either. In March 2001, after having failed to find additional

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financing or a buyer, SA.com was shut down. All that remained on the company’s Web site was a
sad tombstone with the following message:

SourceAlliance established many alliances and greatly valued relationships in the

Electrical Industry and with its customers. Despite its best efforts, recent market
conditions and general uncertainty toward e-commerce businesses required the
discontinuation of this site. SourceAlliance would again like to thank [sic] to all that
have supported the business—customers, employees, and stakeholders.3

The reasons for SA.com’s failure could be traced to several key problems with its
conceptualization and implementation. First, SA.com was set up as an “e-commerce only”
channel. It did not allow customers to do business via traditional channels such as the phone, fax,
or e-mail. In contrast, national distributors like Wesco and Graybar could transact business any
way the customer wanted. Converting customers to online procurement involved a long and
difficult process of cleansing the customers’ data and convincing customers to change their
buying behavior. This significantly delayed SA.com’s ability to recognize revenue, and forced it
to absorb a lot of the customer-integration costs. The customer-integration process was more
difficult, time-consuming, and expensive than anyone had originally thought.

Second, SA.com used a transaction-fee model to generate revenues, charging customers

2 percent of the transaction value. Customers balked at paying the transaction fee because it
required them to pass on the added cost to their distributors without giving them an offsetting
reduction. The only advantage for distributors was the opportunity to bid for national contracts
for which they could not otherwise compete.

Another issue was the cost of supporting the IT infrastructure needed for SA.com. As an early
adopter of e-business infrastructure software, SA.com was forced to rely on extremely expensive,
customized software for automating transactions and workflow. More robust and standardized
platforms that were subsequently introduced could do the bulk of the work for a fraction of the
price. Further, SA.com spent a lot of money and resources building “content and community”
instead of a bare-bones, transaction-routing platform.

At the height of the Internet frenzy, SA.com targeted fast growth and failed to institute strong
management controls over costs. Staff was hired much faster and at twice the cost as originally
planned. Furthermore, some believed that top SA.com management’s attention was focused on
expanding the concept to Europe instead of executing the business plan in the United States.

The difficult funding environment after the burst of the dot-com bubble and the failure of
independent B2B marketplaces also contributed to SA.com’s demise. The SA.com closure left
many distributors feeling burned. They had invested significant time and in many cases had even
contributed capital to the failed venture. Despite the feeling among some distributors that it was
flawed implementation and not a flawed concept that led to SA.com’s failure, the experience had
left the founders and distributor partners with little appetite for further experimentation with B2B
e-marketplaces.

3
http://www.sourcealliance.com.

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CoLinx
While the failure of SA.com was still vivid in Ricklefs’s mind, he was also aware of another
attempt at e-commerce within Rockwell that had seemed to fare much better.

Two brands within Rockwell—Dodge and Reliance Electric—had launched an e-commerce

site called PTPlace.com. These businesses, which provided equipment for power transmission
and power generation respectively, were not nearly the size of A-B in terms of sales.
Nevertheless, PTPlace.com had achieved enough traction to become the platform for CoLinx, a
partnership between Rockwell and several complementary manufacturers: Timken, a
manufacturer of highly engineered bearings and alloy steels; INA, a German manufacturer of
bearings, linear systems, and engine components; and SKF Group, a Swedish manufacturer of
electric motor and automotive components.

The original PTPlace.com had generated $70 million in revenues in its first year of
operations. Its early success could be attributed to many factors. First, Dodge and Reliance
Electric’s customers (authorized North American distributors and OEMs) were relatively
concentrated, and thus the biggest users of the site had been relatively easy to bring onto the site.
Second, because it was a Rockwell-only venture, all planning and execution for the site took
place internally. Third, it was kept relatively simple: an e-commerce site designed to be a
complementary sales channel to support—not supplant—Dodge and Reliance Electric’s main
sales efforts.

When CoLinx was formed, the new partnership entity acquired the PTPlace.com site and
platform, which underwent a redesign before being relaunched. The new PTPlace.com claimed to
be a site designed “for distributors by distributors.” The site was created in collaboration with
more than forty beta testers, and a distributor advisory council of twelve top executives from
major industrial distributors. They were involved with all testing and design of the site.

Essentially an online mall, PTPlace.com allowed customers to shop from the four branded
manufacturers in one place with a single user name and password. Each manufacturer was
responsible for providing its own content. As Steve Philpott, president of Bearing Belt Chain, put
it: “I just hope the others will follow Rockwell Automation’s example in terms of the tremendous
amount of content on the site.” PTPlace.com was designed to make the customer’s job faster and
easier by allowing him to place orders electronically, check order status, check availability, and
see customized pricing. CoLinx also had some warehousing capability to support the e-commerce
sales, and had brought on Don Louis, Rockwell’s e-business director, as its new president.

Ricklefs was not sure how successful the new PTPlace.com would be in the end, but so far it
had successfully used Internet technology to promote sales, albeit on a relatively smaller scale
than SA.com had intended. He wondered if there were lessons that could be drawn from the
PTPlace.com experience, and to what extent these lessons could be applied to A-B’s channel
initiatives, given the very different channel structure in A-B’s business.

The Decision
As Ricklefs pondered A-B’s next move in the MRO market, he realized that he would have to
make some crucial decisions on several interrelated issues.

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National vs. Local Distributors

A-B needed to decide what the future shape of its relationship with local and national
distributors would be. Should A-B attempt to continue to lock in exclusive relationships with its
local distributors? Or should A-B move to incorporate national distributors into its network?
Should it follow the lead of its competitors in aligning itself with a major national distributor, at
the risk of alienating its dedicated local distributors?

Whichever direction A-B took, the company needed to make decisions regarding its channels.
If it stayed true to its local distributors, should it try to change that network somehow? Perhaps
A-B could acquire and “roll up” some or all local distributors into a larger national network. Or
maybe A-B could try to design a “virtual national distribution network” out of the local
distributors, akin to what SA.com had attempted to do. A longer-term concern was that the loss of
MRO sales to national accounts would gradually eat into the future sales and profits of A-B’s
more profitable automation-solutions products.

If A-B decided to move into a closer relationship with a national distributor, should it choose
an existing national distributor to partner with, attempt to sell to all existing national distributors,
or create its own proprietary national-distribution organization? If it chose an existing distributor,
should it attempt to court the largest distributors away from the relationships they had with A-B’s
competitors, or should it court one of the nonaligned distributors? And how could A-B undertake
such a strategy without ruining its strong relationships with the local distributors?

Creating an “Integrated MRO Solution”

Ricklefs also thought about the trend among national MRO distributors toward integrated
MRO solutions. By moving into and managing the supply closets—the MRO inventory—of their
customers, these distributors were opening up new ways of locking in customers and of removing
cost from the system. Should A-B and whatever distribution network it developed also undertake
this strategy and attempt to provide an integrated MRO solution to large customers? The
advantage of this strategy was that it responded to a market trend that was likely to accelerate,
and would stem the further erosion of national accounts to national distributors with integrated
supply offerings. However, this strategy was fraught with challenges, and would require the
development of new competencies and interconnectedness between A-B and its current or new
channel partners. How could such a system be designed so that everyone’s incentives were in
alignment and conflicts that contributed to SA.com’s downfall were avoided? In particular, could
A-B be the dominant sponsor of a “neutral” marketplace, and would customers trust that A-B
would not favor its products over competitors’ products in the integrated marketplace?

Competing on Service

It seemed clear that part of A-B’s differentiation from its competitors stemmed from its
superior service offering. A-B products were backed by unparalleled support from local
distribution partners and A-B itself. But Ricklefs was not convinced that A-B was adequately
capturing the value it created for customers. Particularly among cost-conscious MRO customers,
was A-B’s higher-cost service undercutting its competitiveness? If so, should A-B decouple its
service offerings from its products, and try to design a system where at least some customers
would pay for service separately from their product purchases? Or were there other ways A-B
could look to capture value from its current, differentiated, but high-cost service offering?

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Changing with Technology

A-B had attempted to keep up with technology through SA.com, but had not been successful.
Failure, however, did not mean that customers would not increasingly demand the instant access
that emerging communications and Internet technologies allowed. It also did not mean that A-B
should not continue to invest in technology as a means of strengthening its distribution network’s
competitiveness. But what form should those investments take? Several examples leapt to
Ricklefs’s mind. Should A-B invest in its own e-commerce site? Should it create e-commerce
sites for its distributor partners, just like Ingram Micro and Avon had done for their channel
partners in the computer and cosmetics businesses? How could A-B use technology to strengthen
its relationships with local customers and to allow them to compete more effectively with
national distributors? Ricklefs realized the correct technology solution would depend on the
channel network design and strategy A-B would eventually undertake.

To MRO or Not To MRO . . .

Ricklefs recognized that A-B needed to respond quickly to the pressing challenges in the
MRO market. But he also worried about a bigger problem. The trends in the MRO market toward
price competition and away from brand competition raised the question of whether A-B could
ever hope to maintain acceptable margins in the MRO business. Should it cede the battle and
begin transitioning out of the MRO market to focus on the higher-margin OEM, capital-
purchasing, and consulting businesses? Currently the company depended heavily on MRO for its
revenues and earnings. How could it manage such a transition without seriously impacting its
business in the short term?

Conclusion
As Ricklefs thought about the dilemmas facing A-B in the MRO market, he knew he needed
to act quickly. The failure of SA.com provided an opportunity to rethink A-B’s approach in this
market, but also raised skepticism among A-B managers and partners that a winning solution
could be found. They thought they had developed a winning approach before, only to find that
their strategy and execution were lacking. In order to win over these vital decision makers to any
new plan, Ricklefs needed to clearly articulate A-B’s challenges and then design a comprehensive
strategy that addressed them.

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ROCKWELL AUTOMATION: THE CHANNEL CHALLENGE 5-104-039

Exhibit 1: Rockwell Income Statement ($ in millions)

FY 2000
Revenues:
Sales $ 7,151
Other income, net 69
Total revenue 7,220

Costs & expenses:

Cost of sales 4,916
SG&A 1,288
Purchased R&D —
Interest 73
Total costs & expenses 6,277

Pretax income 943

Income tax provision 307

Net income 636

Source: Company filings

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Exhibit 2: Rockwell Estimated Segment Financial Results ($ in millions)

FY 2000
Sales
Automation/control systems $ 1,783
Power systems 372
Other 113
Total sales 2,268

Operating profit
Automation/control systems 324
Power systems 40
Other 11
Segment operating profit 375

Corporate expense (18)

Goodwill amortization (40)
Total operating profit 317

Interest expense (38)

Unusual items 18
Pretax income 297

Discontinued operations
Sales—avionics 1,176
Operating profit 207
Goodwill amortization (4)
Losses from equity method affiliates (6)
Pretax income on discontinued
197
operations

Total pretax income 494

Operating margins
Automation 18%
Power 11%
Other 10%

Source: Goldman Sachs Equity Research

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ROCKWELL AUTOMATION: THE CHANNEL CHALLENGE 5-104-039

Exhibit 3: Selected Allen-Bradley Automation Products

Power Products:

Man-Machine Interface:

Control Logic: Sensors:

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Exhibit 4: Market Segments and Offerings for Allen-Bradley

Motor Industrial Managing

Control Automation Information
Moto
r
Control
Product Components Programmable, Business system
Description: networked systems integration

Product Integrated circuits, PLCs, motion controllers Consulting services

Attributes: motor drives services

Segment MRO Industrial automation

Served: System integration

Exhibit 5: Channel Structure for Capital vs. MRO Purchases

OEMs

Suppliers Distributors End Users

• Allen-Bradley
• Boise Cascade
• Wesco
• Large nationals
• Graybar
• Small customers
• W. W. Grainger

Capital purchases

MRO purchases
System Integrators

MRO Software Applications

• Enterprise software (SAP, PeopleSoft)
• Horizontal & vertical marketplaces (MRO.com, PurchasePro)
• E-procurement (Ariba, CommerceOne, i2 Technologies/Rightworks)
• Distributor catalogs (Grainger.com, FindMRO.com)

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ROCKWELL AUTOMATION: THE CHANNEL CHALLENGE 5-104-039

Exhibit 6: Income Statement Comparison for National and Local Distributors, FY

2000 ($ in millions)
National Distributor (Wesco) Typical Local Distributor
Net sales $ 3,881.1 $ 100.0
Less:
COGS 3,190.7 76.2
SG&A 519.6 17.8
D&A 24.5 0.4
Operating profit 146.3 5.6
Operating margin 4% 6%

Interest expense –43.9 –1.1

Other income –24.9 0.0

Pretax income 77.5 4.5

Income taxes –31.0 –1.8
Tax rate 40% 40%

Net income from operations 46.5 2.7

One-time –13.1 0.0
Net income 33.4 2.7

Gross margin 17.8% 23.8%

SG&A/sales 13.4% 17.8%
Operating margin 3.8% 5.6%

Source: Goldman Sachs Equity Research; estimates based on interviews with distributors

Exhibit 7: Rankings of Major Global Distributors, 2000

Global Rank U.S. Rank A-B U.S. Rank
Rexel 1 3 2
Sonepar 2 4 6
Hagemeyer 3 5 0
Graybar 4 1 0
Wesco 5 2 4
CED 6 3

Source: Rockwell Automation

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Exhibit 8: Acquisitions by Big Three Global Distributors, 1999–2000

REXEL SONEPAR HAGEMEYER
Norcal Electric Brook Electrical Cameron & Barkley
Valley Electrical Capital Lighting & Supply Tristate Electrical
Branch Group Lee Electric Vallen Corp.
Mader Electric MarLe
Westburne Viking Electric
Cooper Electric
World Electric

Source: Rockwell Automation

Exhibit 9: Industry Trend Toward National Account Buying

Scope of Offering

Automation Electrical Multiple Total Outsourcing &

Only Commodity Commodity System Integration

Multisite

Purchasing
Location

Single Site

The trend is toward a single, national account as e-procurement evolves.

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