VIGLEN - Do Re Mi Var

It's a year since Viglen severed links with Amstrad and floated. So far, the vendor has made only slow progress and chief executive Bordan Tkachuk is now retuning business strategy to try to reverse its fortunes.

In August last year, direct PC sales vendor Viglen broke free fromo far, the vendor has made only slow progress and chief executive Bordan Tkachuk is now retuning business strategy to try to reverse its fortunes. Alan Sugar's troubled Amstrad empire and floated on the Stock Exchange.

Although the company had seen a five per cent slump in sales, which it blamed on customers delaying purchase while waiting for the Pentium PII chip, Viglen had made good money for Amstrad and its future looked relatively bright.

But the float didn't go well. The share price of 64.5p valued Viglen at just #80 million, less than the City expected. However, it kicked off a brief period of bravado for Viglen. At the time of the float, chief executive Bordan Tkachuk said it was aiming to snatch more than 20 per cent of the UK market for the direct sale of PCs.

But Viglen then made a rash move into the retail market. It teamed up with Microsoft to market a range of jointly branded PCs in the UK. The plan, which involved selling the machines only through the Dixons Stores Group, comprising Dixons, Currys and PC World stores, backfired.

Viglen was trying to compete with much cheaper suppliers and cloned hardware.

Some said it was doomed to failure and analysts certainly believe it affected the vendor's sales operation.

More significantly, it could not avoid the inevitable route to market conflict. As Dataquest analyst Chris Jones explains: 'You can't have a direct sales operation working alongside a retail market because, inevitably, you are competing with your partners.'

He adds that the Microsoft deal coincided with the most cutthroat period of PC retail sales, in which price became crucial: 'The bigger companies - the Compaqs and Hewlett Packards of the world - were able to be much more competitive than Viglen.'

The advantage the larger companies had was that their profitable server products were subsidising the PC desktop market.

Tkachuk admits the Microsoft deal was a mistake: 'We thought it would be easier if we distributed through the Dixons stores. But it was a particularly tough Christmas, which featured the sub-#1,000 PC. We just weren't prepared to shrink the prices that much.'

According to Dataquest figures, 1998 was the year Viglen saw its sales drop to less than 1.7 per cent of the direct sales market. This represents a drop from 2.8 per cent last year. 'It's because Viglen is losing ground in its direct sales market to competition from Tiny, Time and fax phone companies,' Jones says.

He argues that for Viglen to survive as a direct sales company, it would have needed to focus on the areas in which it has a strong foothold, namely the local government and education sectors: 'It's here that the fact Viglen is a UK company will win it contracts.'

But figures from the Society of IT Managers (SocITm) show that Viglen has slipped out of the local and central government market. Bob Griffith, a representative of SocITm, says its latest survey of members revealed that less than two per cent had purchased Viglen equipment.

But he points out that the figures weren't for education authorities where Viglen has traditionally had a better showing. 'Compaq was the leader on servers and PCs, followed by Dell and IBM - Viglen was seventh,' Griffith says.

The 1998 survey of UK IT managers by IT consultancy Banner Corporation backs this up. Martin Forrest, analyst at Banner, says the figures show a decline in ownership of Viglen PCs last year. Among all organisations in the UK, less than 2.9 per cent owned Viglen PCs, compared to 4.1 per cent in 1996.

In competitive terms, Viglen has been the invisible rival. A representative at Tiny argues that Viglen's marketing has been practically non-existent.

'There has been virtually no promotion for its products. We used to come up against Viglen all the time in the public sector. Now our rivals are the likes of Dell,' he says.

Dealers have been unable to work out how Viglen was planning to turn its fortunes around. The company's previous experience has forced Tkachuk to rethink its strategy, since it couldn't compete in the cutthroat first-time buyer market. This area involves huge support and marketing costs and it wasn't worth fighting over the shrinking margins it demanded, Tkachuk says. 'We have decided to let Tiny, Time and Dixons fight over the first-time buyer market and establish ourselves as a seller to second-time buyers,' he adds.

Having conceded defeat in direct retail sales, Viglen has decided that its only option is to try to carve an alternative niche, shifting away from consumers to providing more networking services on top of the company's PCs.

Tkachuk says: 'The tin lid area is dominated by the big guns such as Dell. It can keep prices cheap because it makes huge numbers. We can't compete with the 90 to 100,000 units Dell produces a year. The only way for us to make money is to go for extra added value.'

This year has seen Viglen kick off the phased development of the value added activities. Tkachuk comments: 'The extra value comes from being able to provide all the hardware, software, network design and support necessary for an IT project without having to call in outside suppliers.

This year, we expanded our networking arm by tripling the staff and strengthening our expertise by buying the Zenon Computer company.'

This meant Viglen could return to its old territory, the education market, offering a total turn-key service. Tkachuk claims this provides a more lucrative market than its previous tin lid service.

Software is one sector where education customers are finding a distinct shortage, which is one of the reasons, according to Tkachuk, Viglen bought ClassLink software.

'The university market has been very good for us,' he says. 'Viglen is the largest supplier in the UK with more than 70 per cent of universities listing it as sole supplier.' Deals with Microsoft to provide hardware and software for schools are also starting to bear fruit.

But public sector sales have been down, which Tkachuk blames on the restructuring of one of its largest customers, The Stationary Office (TSO), formerly Her Majesty's Stationery Office (HMSO), in which Viglen lost its established links with the customer.

He claims Viglen has restored its links with the TSO by working with Computacenter and says he hopes the two companies will begin making in-roads into the public sector next year.

Tkachuk is also optimistic about Viglen's weakest market, the corporate sector, which is starting to respond to its single turn-key service. This year, Vodafone signed up for a big Viglen-only network operation.

Despite shrinking profits last year - for the first half to December 1997, sales were #46.6 million, down from #47.5 million the year before and pre-tax profits #2.6 million down from #5.1 million - Tkachuk is bullish.

He says when this year's financial figures are announced on 24 September, they'll show growth of between five and 10 per cent: 'However, the numbers of computers out the door is slightly below what used to be shipped and the unit margins will be smaller.'

Tkachuk insists Viglen's results are 'pretty much in line with City expectations', adding: 'We are in an extremely solvent position financially. We have no borrowing or loans.' As a result, he says the vendor is in a position to carry out its planned 'strong acquisition policy' in the coming year.

The intent is to expand the business and upgrade Viglen's service package, drawing directly on expertise from networking and consultancy companies by buying them out. Meanwhile, Viglen's marketing and advertising has been refocused away from its traditional mainstream areas into trade magazines that reflect its new direction.

Sharon Saw, consultant at Saw IT, says Viglen's transition makes sense on paper: 'To a user, it would combine the cost advantage of getting products directly, with the stability of having service and installation taken care of too. It could be good for those who want to administer a single contract rather than deal with several suppliers or organise a large installation project themselves.'

She adds: 'It would be interesting to compare prices, to see whether a manufacturer such as Viglen would prove cost-competitive if it was providing an entire system. My instinct is that it would.

'But perhaps the main advantage for Viglen is that the move takes it out of an area where it lacks the resources to compete and into one where it can afford to buy the resources it needs to become a market heavyweight.'

But Saw warns that Viglen might find it difficult to wear both the hats of manufacturer and service provider. 'It would be in the interests of a customer not to be tied to specific equipment,' she comments. 'Bull's service division realised quickly that it had to provide other brands of hardware, otherwise customers would go to a more flexible dealer.'

Rivals are unmoved by the revamp in progress. Steve Torbe, desktop product manager at Compaq, says: 'In some respects, Viglen is aping us, but instead of using a channel of resellers to bring in those extra services, it's effectively doing it in-house.'

He adds that Viglen's service staff will have to favour its equipment over other brands, which could present a problem to customers wanting Viglen service but wanting to purchase different hardware.

In just 12 months, Tkachuk's designs on the direct market have proved hopelessly optimistic. The vendor has had its fingers burnt, which could be why he's less forthcoming about his expectations for the new-look, value-add Viglen.