Hi Chuzzlewit, here' an interesting article. Let me know what you think of it.
By Gary McWilliams, Staff Reporter of The Wall Street Journal
Compaq Computer Corp. is about to find out whether it can slow down
archrival Dell Computer Corp. by imitating it.
The Houston-based computer maker is expected to unveil today an
aggressive new effort to sell personal computers directly to customers, bypassing the dealers who helped make it the world's largest seller of PCs. Compaq's battle plan: Use Internet and telephone-sales operations to reach the fast-growing small and medium-size business PC market.
Compaq is promising to deliver orders for a new line of machines
within five days -- faster than Dell's seven-day delivery schedule. At
the same time, Compaq is offering incentives to its 44,000 dealers to
refer their customers to the company. "We see this (combination) as
superior to a limited, direct-only sales model" such as Dell's, says
Eckhard Pfeiffer, Compaq's chief executive officer, who promises better prices and more service.
Though Compaq says it will target smaller customers, many in the
industry see the move as another step toward a full-blown direct-sales
effort. The company adopted direct sales to its largest customers this
year after it acquired Digital Equipment Corp., which had a large
direct-sales force. It tried to bypass dealers with an online catalog in 1993 but scrapped the plan in the face of dealer resistance.
Compaq's latest move will further squeeze computer distributors and
dealers, who have already been hurt by tighter margins, a Compaq
inventory glut earlier this year and difficulties in building service businesses.
Nonetheless, both dealers and Compaq agree that computer makers have little choice. As Compaq and other manufacturers scramble to catch up, Dell keeps raising the ante. The Round Rock, Texas, computer maker squeaked past Compaq to grab the leading share of U.S. business PC shipments in the third quarter, according to a study from market researchers Ziff-Davis Market Intelligence. Meanwhile, the brokerage house Piper Jaffray & Co. predicts that Dell's third-quarter results, due out tomorrow, will show that the company continues to lead the industry in growth with a 64% increase in unit sales.
Dell's surge has competitors overhauling the way they handle sales,
manufacturing and distribution. International Business Machines Corp.
and Hewlett-Packard Co., for instance, have recently tiptoed into direct sales in select markets or with certain models in a bid to sharply reduce inventory and the time it takes to build a PC. Compaq has spent two years streamlining its manufacturing and distribution to try to erase Dell's 10% to 15% cost advantage on PCs.
"It's not working," says Rob Enderle, director of desktop and mobile technology at market researchers Giga Information Group. Compaq counters that its new low prices show the strategy is working.
Like Dell's lines, Compaq's new Prosignia PCs will be custom-built to customers' specifications and shipped directly to buyers. The machines, which will start at $1,219 for desktops and $1,999 for laptops, will be priced at or below Dell's prices for similar PCs, says Mr. Pfeiffer.
Compaq is borrowing a page from its playbook in 1992, when it
launched a low-cost PC line that sparked a price war and temporarily
knocked Dell off its rapid growth track. "This is equally powerful and
more comprehensive" compared with the 1992 launch, Mr. Pfeiffer contends.
For its part, Dell dismisses efforts to mimic what it does. "Direct
isn't one element," says Kevin B. Rollins, Dell's vice chairman. "It
isn't putting in a call or cell manufacturing. It isn't Internet sales. It's all these together to get information flowing from customers back to suppliers."
Compaq's return to direct sales is a clear sign of how drastically
the market is changing. Falling margins for PC hardware have forced such dealers as CompuCom Systems Inc. and Entex Information Services Inc. to increasingly shift their focus to service and away from hardware sales. "The resellers realized in the last year that the more successful Dell got, the less likely they were going to be winning the business," says CIBC Oppenheimer analyst James D. Poyner.
As manufacturers get into sales, dealers are getting into
manufacturing. Several have set up large PC manufacturing operations and are looking for contracts from the big manufacturers.
Ingram Micro Inc., a large distributor based in Santa Ana, Calif.,
has facilities to build 3.2 million PCs a year and is negotiating to
build Prosignias for Compaq, says Ingram Vice President Doug Antone.
Pinacor Inc., a Tempe, Ariz., dealer and distributor, has also set up PC assembly lines. "I've challenged Compaq, IBM and HP to look at where we have capacity," says Robert G. O'Malley, president.
If the big PC makers take too much away from dealers in sales, the
dealers could turn around and use their manufacturing lines to make and sell their own machines. "That historically has not been our business," says Mr. O'Malley. But, he adds, "it doesn't mean we couldn't." Significantly, Compaq is expected to turn over some manufacturing and all deliveries of the new machines to resellers.
"We hope there is a role for dealers and distributors as this
expands," says Anthony A. Ibarguen, president of reseller Tech Data
Corp. "Resellers want to be in the sales process."
Compaq says it hopes to calm such concerns by maintaining separate
brands for small business and corporate markets and by paying dealers an estimated 6% commission for referring their small business customers. (The typical margin on PC sales is 9%.)
In targeting the small- and medium-business market, Compaq will go
head to head with Dell in the hottest area of the business. PC purchases by companies with 500 or fewer employees should reach 9.3 million machines, up 20% from a year ago, compared with just 12% to 13% growth in consumer and corporate markets, says Anindya Bose, president of researcher Access Media International Inc.
"The small-business market has no clear leaders," he adds. "It's very open, very fragmented." Moreover, dealers that currently cater to small-and medium-size business mostly sell no-name PCs.
Copyright (c) 1998 Dow Jones & Company, Inc. All Rights Reserved.
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