With all the talk about Dell vs. Compaq on the other thread, I thought this was a timely news article from the Chicago Trib.
Chicago Tribune
Monday, August 4, 1997
COMPAQ IS WATCHING ITS BACK
Driving to break into the ranks of the world's top three
computer companies, Compaq Computer Corp. is keeping an eye on the
rear-view mirror.
And it's troubled by what it sees.
Compaq, already the world's largest supplier of personal
computers, wants to catch up to the likes of International Business
Machines Corp. and Fujitsu Ltd., the No. 1 and No. 2 computer
companies, respectively. Houston-based Compaq ranks fifth.
But just down the road a spell in Round Rock, Texas, rival
Dell Computer Corp. has been tearing up the PC industry like a
monster pickup barreling down a Texas highway. Dell's growth rate
in the second quarter bested Compaq and other major computer
suppliers by a healthy margin. And Dell, the world's fourth-largest
PC supplier, is gaining momentum in the lucrative corporate PC
market. Before Dell beats Compaq in that race, it will have to
overtake IBM and Hewlett-Packard Co.
"If you look at the growth rates, it's a mathematical fact
that Dell will overtake Compaq," said Roger L. Kay, a senior
research analyst at International Data Corp. in Framingham, Mass.
"Will that really happen? I don't know. I think it could be a horse
race."
In the second quarter, Dell shipped more than one million
PCs, a 52 percent surge from 671,000 units in the year-earlier
period, according to IDC. But while Compaq's growth rate wasn't as
dramatic as Dell's, Compaq grew from a larger base, shipping nearly
2.2 million computers in the quarter, up 42 percent from 1.5
million. The industry average growth rate was 15 percent.
Dell's gains, particularly in the corporate market, have
Compaq worried. Leaping to an 11 percent market share in the first
quarter from 8 percent, Dell is now nipping at Compaq's heels. But
Compaq still retains its edge with a 12.6 percent market share, up
only slightly from 12.3 percent, according to Dataquest Inc., a
technology market-research firm in San Jose, Calif.
Bigness in the computer industry is no small matter these
days. Industry observers agree consolidation will accelerate as
long as competition among the largest remains hot. This will force
midsize companies like AST Research Inc., Digital Equipment Corp.
and Apple Computer Inc. to "either adjust or go out of business,"
says Scott Miller, a senior industry analyst for Dataquest.
"Consolidation on this scale has the potential to shift the balance
of power in the PC industry."
With the industry in flux, Compaq saw an opportunity to
bolster its advantage. Even though it's been cruising along quite
nicely financially and the stock hit a 52-week closing high of
$57.81 on Friday, Compaq decided last month to invest hundreds of
millions of dollars to change the way it does business. Its new
strategy involves building computers as orders come in, rather than
trying to forecast which products suppliers might order each
quarter.
Compaq anticipates it can cut costs by up to 15 percent by
reducing inventories and delivering products quicker and more
efficiently.
"This is our way of enhancing relationships with our
customers while increasing shareholder value," said Compaq
president and chief executive Eckhard Pfeiffer.
In the past, Compaq would build products it thought resellers
would order based on quarterly forecasts. The problem was that if
Compaq misread the market, it could be stuck with a bunch of
computers no one wanted. They'd either have to write them off, sell
at deep discounts or open up thousands of boxes to replace them
with more desirable components.
Under Compaq's build-to-order program, resellers will
continue to take customers' orders. Compaq then assembles the
machines to specifications and ships them out to a distributor for
software installation. Compaq will also design its computers to be
more modular, much like today's office furniture, allowing
resellers to custom-build the machines.
It's not a novel idea. Dell and others have been building
computers to order for years. Putting a computer together only
after an order comes in allows these companies to install the
latest technology and adjust prices according to market demand.
These so-called direct vendors also offered prices 10 to 15 percent
lower than traditional PC-makers because they cut out the middleman.
"It's a pretty nice compliment to us," said Kevin Rollins,
senior vice president and general manager of Dell's Americas
Region. "They're clearly trying to replicate what we do."
By building computers to order, Compaq will now offer more
competitive prices on its models. For example, the first new
built-to-order Compaq Deskpro 2000 with a 166-MHz Intel Pentium
processor costs $999, 16 percent less than before. Monitors are
sold separately.
Compaq's goal is to lower prices while maintaining profits
through its more efficient manufacturing and distribution. It hopes
other computer-makers will have to cut into their margins in order
to compete on price.
It's easy to see why Compaq would want to emulate direct
vendors such as Dell, Gateway 2000 Inc. and Micron Electronics Inc.
The direct model also has made believers out of IBM and
Hewlett-Packard, who plan to incorporate elements of the strategy.
Compaq reportedly tried to acquire Dell and Micron, but was
rebuffed each time. Gateway reportedly turned Compaq away twice.
Yet, for all the efficiencies Compaq has discovered in
building to order, it isn't entirely sold on the entire direct
model. The company continues to rely on delivering products through
its network of 30,000 resellers. Because they're local, Compaq
believes, its resellers can build relationships with customers and
provide technical support and services more efficiently.
"The direct model is a unique model," said Dell's Rollins.
"To get its full advantages you can't replicate only a part of it."
Built-to-order only addresses an inventory problem, but fails to
tackle reseller markup, he says.
Dell prefers to cover customer support on its own. It employs
a force of 500 account executives and another large group of
systems consultants who work with customers on-site. It's also
broadening its services and product offerings with cradle-to-grave
asset management and one-stop shopping for peripherals.
Dell would love to see its rivalry with Compaq ultimately end
up as a battle in cyberspace, where it already rings up sales of $2
million a day. "That's the ultimate form of direct," Rollins said.
"Our goal is to conduct all of our business over the Net. That's
something an indirect model cannot do."
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