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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: rudedog who wrote (47939)	6/17/1998 7:12:00 PM
From: Geoff Nunn	Read Replies (2) \| Respond to of 176387

Rudedog, Weren't you the one who touted CPQ's recent #1 market-share in laptops? Maybe I'm confusing you with Jim. <gg> Seriously, CPQ along with HWP seem to be mesmerized by market share as if it were an end, not a means to an end. In order to expand market share, CPQ revved Q198/Q197 worldwide PC production (units) by 37% in a market that overall grew only by 11%. HWP has also been on a production tear, growing by an even larger 66% during the same period. In fact HWP has declared its goal to be #1 in PC market share. While Dell's growth has been similar to HWP's, I wouldn't lump it in with its two rivals. Dell's growth can be explained by the fact that its plants are profitable, whereas CPQ and HWP seem determined to grow market share regardless. When firms in an industry collectively pursue the market-share-at-all-costs strategy, the results can be disruptive. Look at what happened in memory chips. Micron decided several yrs ago too many chip plants were underway, and it halted construction of its Utah plant. Meanwhile, Asian manufacturers - who have something of a reputation for pursuing market share - continued to expand RAM production. As we all know, this helped precipitate an oversupply of RAM and a price collapse. The price of 32 MB fell from $778 in 1995 to $35 in 1998. CPQ and HWP are acting on the premise that a larger market share, other things held equal, is more profitable. There is little statistical evidence for this. Two days ago the Wall Street Journal cited a study of 3000 firms questioning the bigger is better dogma. The study found that in more than 70% of the cases the firm with the largest market share didn't have the highest rate of return. In 240 industries with at least 5 competitors, the study looked at the top four firms and found that the #1 firm led in pretax returns only 29% of the time -- only 4% better than random chance. Here's a theoretical reason why increased market share may be hurting CPQ's profit. In order to get more sales CPQ must reduce its price. It may be tempting to assume that this will pay provided the price covers CPQ's incremental costs (marginal costs). Remember though that when CPQ reduces the price to attract the marginal buyer, it must also reduce it to its other buyers. As the WSJ puts it, "Why go after the next 10% of market share when the necessary price reductions will bring discounts from the 30% you already serve?" The loss of revenue from customers who would have paid the higher price can more than offset any gain resulting from additional sales. Why is CPQ so determined to increase market share? My guess is that this is it's Dell strategy. CPQ believes it can fend off Dell by nabbing customers that otherwise would be Dell's. If that's CPQ's strategy it won't work. The only way CPQ will successfully compete with Dell long term is to match Dell's efficiency. If CPQ really thinks greater market share is the answer , then the road ahead for Dell looks easier than I thought. geoff