The words come from this article in last week's News.Com...
Compaq aims for direct hit
By Michael Kanellos
Staff Writer, CNET News.com
October 30, 1998, 2:35 p.m. PT
update Compaq's holy war against Dell will ratchet
up November 11 when the No. 1 PC vendor rolls
out a new program to target small and
medium-sized businesses through direct sales and
new product bundles.
The new effort, which will be unveiled by CEO
Eckhard Pfeiffer with
fanfare in New York,
will essentially be the
latest, and most
comprehensive, effort
Compaq has thus far
launched to stem the
popularity of direct
vendors such as Dell.
Small and medium-sized
businesses will be encouraged to buy directly from
Compaq's Web site. To entice them, Compaq will
be offering special all-in-one product bundles, said
sources.
Compaq currently features desktop PCs, notebook
PCs, servers, and workstations through its
DirectPlus direct sales site, but in the future, the
company will put additional emphasis on its
secondary products, such as networking equipment
and printers. To date, Compaq has been selling a
line of small business PCs including the Deskpro
EP desktop model, an Armada SB notebook PC,
and Prosignia 200 server.
Compaq also sells third party products, including
Microsoft software, on the DirectPlus site, and
some have speculated that greater emphasis on
these products may also be in the works.
"They are looking at a whole bunch of ways of
getting directly to customers," said a computer
dealer who attended a recent Compaq briefing.
"They are going for the Dell model. You can't really
blame them. They have been getting beat up by
Dell."
Full details are not yet known, and sources caution
that elements of the effort could change.
The Houston, Texas-based vendor has talked
about selling directly to customers for over a year,
but has generally avoided aggressively pursuing
direct sales in an effort to avoid alienating its dealer
base. Now, however, the trend toward direct sales
is inevitable, said dealers and analysts.
Compaq has said in the past that it estimates there
are about 165,000 medium-sized businesses,
770,000 small businesses, and 6,300,000 very
small businesses. Medium-sized businesses have
fewer than 1,000 employees, small businesses have
fewer than 100, and very small businesses fewer
than 20, according to the company.
This is a market also targeted by Hewlett-Packard,
represented by its Brio line of computers, and by
Gateway, which has boosted advertising aimed at
this market.
While more Compaq sales will be direct, dealers
will receive commissions for customers it sends to
the site. Compaq has also already rolled out new
service contracts with its dealers which provide
incentive bonuses for dealers who get
better-than-average marks from customers on
warranty work.
Dell, meanwhile, is not sitting still. The company,
which mostly sells to
large institutions, has
been actively recruiting
regional computer
dealers, including
Compaq partners, to sell
Dell products into the
small and medium- sized business market. Dell has
also been recently ramped up an informational
effort to reach this audience.
Dell's growth spurs plan
Compaq's new program comes as a result of Dell's
growth in the past year, said dealers and analysts.
Compaq has rolled out a number of initiatives and
programs to stem the advantages Dell achieves
through its direct sales model without disrupting
relationships with its dealers and distributors, who
earn income from reselling Compaq products.
While these measures have worked, they haven't
worked well enough.
Compaq, for instance, launched a "build-to-order"
initiative last year which was designed to mimic the
manufacturing cost advantages Dell historically has
enjoyed. Building computers to customer order has
reduced costs, pointed out Roger Kay, an analyst
with International Data Corporation, but not
completely eliminated the delta. Overall, Compaq's
manufacturing costs are still around 3 percent or
more higher, a figure which grows when distribution
gets factored in.
Build to order manufacturing, moreover, only
replicates some of Dell's advantages. Because Dell
actually sells the computer directly to the customer,
they effectively become a constant presence with
the customer.
"It's not just Web selling, or configuring computers
to order. It's customer intimacy and being closer to
the orders," he said. "They (Compaq) have made
the decision to go direct. When Compaq jumps in,
they own a piece of it."
"Channel" programs under fire
Another effort to trim costs, the "channel assembly"
programs under which dealers or distributors
manufacture PCs for the major vendors, seems
destined for similarly mixed results, said Charles
Smulders, an analyst at Dataquest.
"It's potentially more efficient than traditional
(manufacturing), but its not as efficient as the direct
model," he said. "I'm skeptical that channel
assembly makes sense."
"The effort has taken more work than they thought
and the benefits are less than they imagined," added
Kay of these delayed manufacturing efforts. IBM
and Hewlett-Packard have been the lead
advocates of channel assembly.
While the exact content of Compaq's program is
not yet known, observers say the company will
emphasize a broad product line and special
bundles. One area Compaq is expected to more
aggressively enter is networking equipment.
Through the Digital acquisition, Compaq has
inherited an agreement to purchase approximately
$1 billion worth of networking equipment from
Cabletron for eventual resale.
"They want to offer customers a complete solution,"
said another dealer. "They want to take on Cisco.
The ultimate success of the program is uncertain.
Computer vendors have tried and failed to blend
direct and indirect sales models before, and have
failed. In the past, dealers have reacted to a
vendor's direct efforts by switching their allegiance
to a competing computer brand. Circumstances to
some degree favor a direct effort at the moment.
Customers, after all, seem to want to order directly.
And, since dealers earn very little margin on
hardware, the losses that result from direct sales
aren't as large as in the past. Still, questions persist.
"The real question is how much they get paid in
lead generation," said Ian Morton, a computer
distribution analyst at Hambrecht & Quist.
So far, Compaq's direct efforts have also caused
friction. "We have run into them as competition
already," said one large Compaq dealer. "There's a
lot of people concerned."
Service reps key
A factor that could help the program succeed is the
fact that small customers need service
representatives. Most small businesses do not have
IS department and therefore often hire dealers to
build, repair, or maintain their networks.
Compaq has encouraged cooperation of its dealer
base by offering incentive compensation. Compaq
calls customers after a warranty repair. If the dealer
gets a better than average review, Compaq pays
the dealer $75 an hour for the work, rather than the
standard $50.
The need for handholding also lay behind Dell's
efforts to recruit dealers. Approximately 70 percent
of Dell's business comes from large institutions, said
one Dell spokesperson.
Compaq officially will not comment on Pfeiffer's
upcoming program. The company, however, stated
that the November 11 presentation is centered
around a new direction for small and medium-sized
organizations.
Dell is relatively mum about its specific plans for
this market. The company, however, has invested
more resources into this segment over the past
year, according to David Clifton, a Dell
spokesman.
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