Jock, here is the second of several posts I promised on the advantages that Dell has over its competitors. Let me start by referring you to exchange2000.com. This post contains a summary of how Compaq perceives its risks in a channel dominated distribution scheme. In reading this it ought to be painfully obvious why channels are an impediment in dealing in rapidly evolving technologies.
But the question you raised was whether it was possible for Dell to enjoy that advantage while its competitors continue to suffer under its disadvantages. In other words, what protects Dell from emulation of it distribution model? I would like to offer two lines of evidence on this issue.
The first is emprical. Compaq has been attempting to transition for several years now, and every few monthys it seems to announce yet another initiative attempting to accomplish a direct sales channel. It is currently attempting to employ a hybrid model. I think that Compaq's results speak for themselves in terms of the limited success it has enjoyed (that's a euphemism for patent failure!). In a recent press release IBM owned up to the fact that they could not jettison the channel approach. Gateway is the only significant competitor that I know of that uses the direct, BTO model, and I am of the belief that GTW does pose a significant threat to DELL, not because GTW is in a position to challenge Dell (it isn't), but because GTW could be acquired by another, well-capitalized company and used to transition itself into a Dell competitor (see below). I am not familiar with other competitors efforts in this direction -- perhaps some other contributors to the thread might provide additional information.
The second is theoretical. Why should it be so difficult to transition to a direct model? The answer is that the channel acts as a sales force for the product. And the product has many of the characteristics of a commodity (fungible etc.). If a company wishes to extract itself from the cost of channel distribution it must reckon with the possibility that its one-time partner will quickly become a competitor. If Compaq pulls support from channel member XYZ, which contracts with a variety of medium and small businesses, why would it give up those lucrative accounts? It wouldn't. It would suddenly discover the joys and advantages of of IBM machines over Compaq. Or, as in the case of Igram Micro, it might set up a competing white box operation. There is no advantage for these companies to essentially become Compaq salesmen (this is one iteration of Compaq's current plan) because their operation is tied to distribution. Their assets consist of things like warehouses, forklifts and trucks.
So the existence of the intermediate channel is the reason companies like Compaq cannot transition to a direct model. In thermodynamic terms we might call this an energy barrier. I call it a profit chasm. How could these computer manufacturing companies jump off the tiger? IMO they buy a company like Micron or Gateway thereby avoiding compromising existing channels. That is why companies like Gateway pose a risk
I could go on and on with this subject, but I think I have hit the high points. There are sufficient knowledgeable people on this thread who will quickly correct me if I misstated anything material.
In my next post (tomorrow maybe?) I will deal more fully with the issue of shortages.
TTFN,
CTC |
