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Competitors
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Below are brief profiles of Dell’s principal competitors in the global PC market.
In 1999 Compaq Computer Corporation was the world’s largest supplier of personal computer systems and the second largest global computing company (behind IBM), with annual sales of $38.5 billion and profits of $569 million. Compaq became the world’s largest seller of PCs in 1995, displacing IBM as the world leader. Compaq acquired Tandem Computer in 1997 and Digital Equipment Corporation in 1998 to give it capabilities, products, and service offerings that allowed it to compete in every sector of the computer industry.35 When Compaq purchased Digital, Digital was a troubled company with high operating costs, an inability to maintain technological leadership in high-end computing, and a nine-year string of having either lost money or barely broken even.36 The acquisitions gave Compaq a product line that included PCs, servers, workstations, mainframes, peripherals, and such services as business and e-commerce solutions, hardware and software support, systems integration, and technology consulting. Compaq management believed that additional unit volume provided by the Digital acquisition permitted greater economies of scale in production and gave it more leverage in securing favorable pricing from component suppliers.37 Digital’s extensive service and support network allowed Compaq to offer a comprehensive portfolio of professional computing services and technical support through a global network of approximately 27,000 employees as well as 30,000 service delivery partners.38 Compaq had very strong brand recognition because of its status as the global market share leader in the PC market.
Compaq’s Strategy Compaq’s strategy was to sell almost exclusively through resellers—distributors and PC retailers, particularly large computer stores like CompUSA. In 1998 Compaq, responding to mounting competition in PCs, launched internal actions to emulate some of the key elements of Dell Computer’s strategy. Compaq began efforts to switch from a build-to-stock to a build-to-order production model and intended to maintain Internet connections with its suppliers and customers to achieve a five-day or less cycle time between the receipt of an order and product shipment.39 However, as of mid-1999 the company’s order-to-delivery time was approximately 12 days (versus an order-to-delivery time of 3.1 days at Dell).40 Compaq was also striving to improve inventory management and reduce transportation costs, but the results going into 2000 had been modest.41 Because Compaq had bigger components inventories than Dell and because its resellers sometimes had sizable inventories of Compaq’s models on hand, Compaq was slower than Dell in getting new generations of its PCs into the marketplace.
Compaq’s extensive network of authorized reseller partners gave it strong distribution capability that covered more than 100 countries across the world. But Compaq’s strategy of using reseller partners as its primary distribution channel was a weakness as well as a strength. Reliance on resellers put Compaq at a cost disadvantage relative to Dell, since Dell’s direct sales approach entailed lower sales and marketing costs than Compaq’s use of resellers. (Resellers had to mark up the factory price they paid Compaq to cover their own selling, general, and administrative costs and realize an adequate return on investment.) Compaq made a push in 1998 to promote direct sales over its Web site, an effort that irritated its 20 distributors and hundreds of reseller partners and may have prompted some resellers to push rival PC/server/workstation brands.42 Nonetheless, there continued to be much debate among Compaq investors and Wall Street securities analysts about whether Compaq needed to put considerably more emphasis on direct sales and cut back its number of distributors in North America. Despite the pressures, Compaq management had so far refrained from further attempts to increase direct sales.
Compaq offered a full line of desktop PCs, from sub-$1,000 PCs to top-of-the-line models. It was an aggressive seller of PCs priced under $1,000. It also offered a broad line of laptop PCs. Compaq was also the market leader in PC servers priced under $25,000. Compaq’s market strength was greatest among Fortune 1000 companies; it had weaker penetration in the small and medium business segments. To combat the volume discounts that Dell and other direct vendors typically used to help win the accounts of small and medium businesses, Compaq had recently begun working more closely with its resellers on special pricing to make the Compaq brand more competitive in the bidding process for these accounts. To boost its subpar 3 percent share of the Japanese market for PCs, in 1997 Compaq signed a deal that gave Canon Sales Company exclusive distribution and sales rights to Compaq’s consumer-oriented Presario models.
Compaq’s Acquisition of Digital Equipment Company In early 1998, Compaq acquired the floundering Digital Equipment Company for $9.6 billion, a move intended to turn Compaq into more of a full-spectrum global supplier of computer hardware and services and put it into better position to challenge IBM as a "global enterprise computing company." Digital had 1997 revenues of $13 billion (versus $14.5 billion in 1996) and net earnings of $141 million (versus a loss of $112 million in 1996). The merged companies would have combined revenues of $37.6 billion, making Compaq the second largest computer company in the world. Following the merger, Compaq set a goal of $50 billion in revenues in 2000.
Digital considered itself a "network solutions company" with strengths in multivendor integration, Internet security, continuous computing, high-availability data, and high-performance networked platforms. Its chief products were large servers (those priced over $1 million), entry servers (those priced under $100,000), large computers and workstations, and personal computers (55 percent of revenues). Services accounted for 45 percent of revenues (about $6 billion); Digital had 25,000 engineers and support people in the field working with customers. (Compaq had 8,000 sales and support people in the field, many of whom spent much of their time servicing retailers of Compaq PCs.) Digital’s gross margins on services averaged 34 percent compared to Compaq’s 25 percent margins on PC sales. Compaq’s corporate customers had been requesting the company to provide more service for years.
In May 1998, Compaq announced plans to cut about 15,000 jobs at Digital when the acquisition was completed; the layoffs were concentrated mainly in Digital’s personal computer division, portions of its sales force, and corporate computer operations—where there were significant overlaps with Compaq’s business. Digital had a total of 53,500 employees, down from a peak of 130,000 in the 1980s. But despite its recent workforce downsizings, Digital in 1997 employed about 65 percent more people than Compaq to produce about half the volume of sales revenues. Compaq also moved aggressively to reduce Digital’s high selling, general, and administrative (SG&A) costs (equal to 24 percent of total 1997 revenues) and bring them more in line with Compaq’s SG&A expense ratio of 12 percent of revenues.
Compaq believed that Digital’s expertise in networking and information systems integration, coupled with the combined product lines, would give it an advantage with large corporate customers over companies like Dell that offered mainly PC-related services. Compaq also believed that Digital’s worldwide service and support capabilities would help it win corporate business for PCs, workstations, and servers away from IBM. (Prior to the Compaq-Digital merger, Dell had contracted with Digital’s service organization to maintain its PowerEdge line of servers at a number of corporate accounts; following the merger announcement, Dell replaced Digital as a service provider.)
Problems at Compaq Despite its status as the world’s leading PC manufacturer and the new capabilities seemingly gained from the Tandem and Digital acquisitions, Compaq struggled throughout the 1997–99 period to maintain market share and profitability in the face of mounting price competition and declining PC prices. Furthermore, Compaq management got bogged down in trying to make a success of its acquisition of Digital. While Compaq was described as a company that was "consistently doing the right things and doing them well" at the time of the Digital acquisition, its efforts to get Digital’s operations on track and integrated with those of Compaq were behind schedule and not going as well as had been anticipated.43
In April 1999, Compaq’s board of directors removed CEO Eckhard Pfeiffer because of difficulty with the Digital acquisition and problems in executing the company’s plans to copy Dell Computer’s build-to-order, just-in-time-inventory, and direct-sales approaches.44 After a three-month search to find a replacement for Pfeiffer from outside the company, the board chose an insider, Michael Capellas, the company’s former chief information officer, to fill the vacant CEO position. Despite the leadership change and aggressive actions initiated by Capellas to return Compaq to profitable growth, Compaq’s market share in PCs continued to erode in the United States, Europe, and Asia during the remainder of 1999. Compaq lost its claim to market share leadership to Dell in the U.S. market in the third quarter of 1999 and seemed in danger of losing its global market share leadership to Dell in 2000 if Capellas’s turnaround efforts did not produce results. The financial performance of the company’s three major business groups was as follows:
Despite the weak 1999 performance, by early 2000 Compaq management believed that the aggressive actions taken in the last six months of 1999 were taking hold and laying the foundation for a comeback in 2000. Capellas said, "During the fourth quarter, we made great strides in defining a clear strategy, realigning for success, getting our cost structure in order, and re-energizing employees . . . We upped the pace in launching innovative new products, signing strategic partnership deals and alliances, and securing major customer wins."45 Capellas went on to say that the performance of the Enterprise Solutions and Services group indicated "growing market acceptance of Compaq’s high-end systems, solutions, and services, which customers are demanding to build nonstop 24 3 7 Internet computing environments." In January 2000, Compaq announced that it was spending $370 million to acquire certain assets of Inacom Corporation that would reduce inventories, speed cycle time, and enhance its capabilities to do business with customers via the Internet.
With 1999 sales of $87.5 billion and earnings of $7.7 billion, IBM was the world’s largest seller of computer systems. IBM was considered a "computer solutions" company and operated in more segments of the overall computer industry than Dell. It had the broadest and deepest capabilities in customer service, technical support, and systems integration of any company in the world. The company’s slow-growing computer hardware business had total 1999 revenues of over $37 billion from its internal and external sales of mainframe computers, PCs, servers, workstations, display devices, semiconductors, hard disk drives, printer systems, and storage and networking devices. IBM’s global services business group, the company’s fastest-growing group, was the world’s largest information technology services provider, with 1999 sales of nearly $32.2 billion. The company’s software business group had 1999 sales of over $12.7 billion and supported more than 29,000 independent software vendors (ISVs) to ensure that the company’s software and hardware was included in ISV partner solutions.46 In 2000, IBM had a lineup of over 40,000 hardware and software products.
IBM’s Troubles in PCs IBM’s market share in PCs was in a death spiral—it had lost more market share in the 1990s than any other PC maker. Once the dominant global and U.S. market leader in the late 1980s and early 1990s, with a market share exceeding 50 percent, it was fast becoming an also-ran in PCs, with a global market share under 8 percent. Its last stronghold in PCs was in laptop computers, where its ThinkPad line was a consistent award winner on performance, features, and reliability. The vast majority of IBM’s laptop and desktop sales were to corporate customers that had IBM mainframe computers and had been long-standing IBM customers.
Despite its eroding market share, IBM’s position as the longtime global leader in mainframe computers and, more recently, as a broad line supplier of computer products and services gave it strong global distribution capability and potent brand-name credibility throughout the world. IBM distributed its PCs, workstations, and servers through reseller partners but relied on its own direct sales force for most corporate customers. IBM competed against its PC rivals by emphasizing confidence in the IBM brand and the company’s long-standing strengths in software applications, service, and technical support. IBM had responded to the direct sales inroads Dell had made in the corporate market by allowing some of its resellers to custom-assemble IBM PCs to buyer specifications; it was hoping this effort would cut costs up to 10 percent.
Going into 2000, IBM’s personal systems (PCs and workstations) and server businesses accounted for just under 30 percent of corporate revenues, but both groups turned in weak performances in 1998 and 1999 and lost market share to rivals:
IBM’s PC group had higher costs than rivals, making it virtually impossible to match rivals on price and make a profit. In late 1999, IBM announced that it was discontinuing sales of its Aptiva Desktop PCs through retail channels in North America, although it would continue to sell Aptivas at its Web site. It also announced layoffs of up to 10 percent of its PC workforce and up to 6 percent of its server workforce. Like Dell, IBM was trying to cut technical support costs by getting its customers to use Internet-based support tools; for every service call handled through www.ibm.com, the company estimated it saved 70 to 90 percent of the cost of having a person take the call.47 In 1999, IBM handled 35 million online service requests, saving an estimated $750 million in customer support costs.
To offset its declining share of PC and server sales, in 1998 and 1999 IBM moved to boost its R&D and manufacturing efforts to become a leading global supplier of computing components (hard drives and storage devices) and microelectronics products. During 1999, for example, it signed a long-term agreement with Dell to supply over $7 billion in components; it was increasing its sales of parts and components to other PC makers as well.
IBM’s E-Business Strategy Throughout the 1990s IBM had struggled to reinvent itself as the growing use of PCs continued to erode corporate dependence on mainframe computers and made mainframe sales and services a stagnating business. (Mainframe prices were falling faster than sales were rising.) While the company added new hardware and software products, revenue growth lagged and lower-cost rivals undercut many of IBM’s strategic initiatives to grow. IBM’s sales of computer hardware remained flat; revenue growth came chiefly from services and software. IBM’s global dominance as a computer hardware systems provider faded. No cohesive new strategic theme really took root at IBM during the 1990s.
However, starting in 1998 and continuing on into 2000, the company’s efforts to reinvent itself began to take on a distinct Internet and e-business theme. By early 2000 IBM was directing most of its strategic initiatives toward "e-business services" where it saw explosive growth opportunities. More than 50 percent of IBM’s R&D budget was directed to Internet projects. Senior management believed that software and services were the soul of e-business and that the company had a full complement of resources to help corporate customers put integrated e-business capabilities in place. A growing majority of the company’s 130,000 consultants were working to provide customers with integrated e-commerce and Internet technology solutions. The company was opening e-business integration centers around the world where customers could meet with IBM specialists to develop next-generation e-business solutions. During the past three years, IBM had handled 18,000 Internet-related jobs for customers, ranging from Web page design to hosting entire online storefronts to hooking corporate databases into new online systems. IBM’s revenues from pure e-business projects totaled $3 billion in 1999, but the company estimated that some $20 billion of its revenues was driven by customer demand for e-business solutions, an amount that was expected to grow significantly.
Most observers, as well as IBM executives, seemed to believe that IBM’s future success depended far more on becoming the world’s leading provider of e-business services than on strengthening its position as a provider of computer hardware. But it faced significant competition in e-business services and software from Intel (which was spending over $1 billion to set up rooms of servers to host Internet sites); Hewlett-Packard (which had a variety of initiatives aimed at do-it-yourself Internet technologies that required minimal consulting services and support); Microsoft (which was focusing increasing efforts on Internet-related software and serving e-business customers); Sun Microsystems; and numerous others.
Going into 2000, Hewlett-Packard (HP) was the world’s leading seller of computer printers, the second-ranking seller of workstations, and a top-tier seller of PCs and servers. HP’s product line also included scanners, digital cameras, storage devices, and networking software and equipment. The company recorded 1999 revenues and earnings of $42.4 billion and $3.1 billion, respectively.48 Dell regarded Hewlett-Packard as a strong competitor because of the company’s global leadership in printers (a 52 percent market share), HP’s strong reputation with corporate customers in most all parts of the world, and its growing strategic emphasis on PCs, workstations, and servers. HP ranked fourth worldwide in desktop PC sales, first in worldwide sales of workstations, first in worldwide sale of handheld PCs, first in worldwide sales of both midrange and high-end servers running on UNIX operating systems, and among the top five worldwide vendors of servers running on Windows NT and Windows 2000. HP Pavillion PCs were the top-selling PC brand in U.S. retail stores. HP was a co-designer of Intel’s new family of 64-bit Itanium microprocessors. HP’s partnership with Intel on the Itanium was expected to put HP on the cutting edge of computer technology for the next several years and boost its brand image in PCs, workstations, and servers. The company spent $2.4 billion on R&D in 1998 and the same amount in 1999.
Hewlett-Packard marketed its PC line through resellers. HP’s resellers could deliver orders to major corporate accounts within 12 to 24 hours. Hewlett-Packard had the capability to offer after-sale support to PC, workstation, and server purchasers around the world through 600 support offices, 35 response center locations in 110 countries, and a support staff of 17,500 people. The company had won numerous awards for the caliber of its services and technical support. It had 83,200 employees worldwide.
Over the past several years, HP had moved to improve operating efficiencies by outsourcing manufacturing assembly, reducing inventory and field-sales costs, and improving supply chain management. These efforts, combined with lowered component prices, had made HP aggressive in competing on price against its PC, workstation, and server rivals. Nonetheless, Hewlett-Packard’s PC division, despite growing unit volume, was thought to be only marginally profitable. However, the company’s sales of workstations and servers were major contributors to revenues and profits. In early 2000, the company reported that sales of home PCs and laptops were particularly strong.
Hewlett-Packard’s board of directors chose Carly Fiorina, the head of Lucent Technology’s Global Service Provider Business, as the company’s new CEO in July 1999, to replace the company’s retiring CEO. Fiorina had been designated by Fortune as the most powerful woman in business in 1998 and 1999. Believing that HP had grown sluggish and lacked entrepreneurial drive, Fiorina had immediately spearheaded initiatives to boost HP’s revenue growth and profitability through increased attention to inventiveness and innovation. Fiorina’s top priorities were to renew the company’s energy and focus and to develop a stream of innovative products and new types of electronic services aimed at making the Internet "more warm, friendly, pervasive and personal." In late 1999, Fiorina announced a new global brand campaign and a new logo to reflect the reinvented, reenergized Hewlett-Packard.
Gateway, formerly called Gateway 2000, was a San Diego–based company (recently relocated from South Dakota) with 1999 revenues of $8.6 billion and profits of $428 million. Founder and chairman Ted Waitt, 38, and his brother owned over 40 percent of the company. Waitt had dropped out of college in 1985 to go to work for a computer retailer in Des Moines, Iowa; after nine months, he quit to form his own company. The company, operating out of a barn on his father’s cattle ranch, sold add-on parts by phone for Texas Instruments PCs. In 1987, the company, using its own PC design, started selling fully equipped PCs at a price near that of other PC makers. Sales took off, and in 1991 Gateway topped the list of Inc. magazine’s list of the fastest-growing private companies. The company went public in 1993, achieving sales of $1.7 billion and earnings of $151 million. The company had differentiated itself from rivals with eye-catching ads; some featured cows with black-and-white spots, while others featured company employees (including one with Waitt dressed as Robin Hood). Gateway, like Dell, built to order and sold direct. It had entered the server segment in 1997. To promote the Gateway name in the retail marketplace, the company had opened 280 Gateway Country Stores—227 in the United States, 27 in Europe, and 26 in the Asia-Pacific region—that stocked Gateway PCs and peripheral products and that conducted classes for individuals and businesses on the use of PCs.
Going into 2000, Gateway was the number one seller of PCs to consumers. It was also a major contender in the small-business, educational, and government segments. Despite growing at a rate of nearly 38 percent annually in the 1994–97 period, Gateway saw its profit margins erode steadily from a high of 9.6 percent in 1992 to only 1.7 percent in 1997. Since then, however, company cost-cutting efforts and efficiency improvements had resulted in eight straight quarters of year-over-year margin improvement. Profits in 1999 were at record levels. Nonetheless, Gateway was feeling the pressures of falling PC prices and stiff price competition—although 1999 unit sales were up 32.3 percent over 1998 levels, revenues increased only 15.8 percent. The company’s entry-level PC models, which started at $799, accounted for 20 percent of its sales to consumers.
To reduce its reliance on traditional PC sales, Gateway took aggressive steps in 1999 to diversify its revenue stream. In February, Gateway became the first PC maker to bundle its own Internet service with its PCs; at the same time, following Dell, Gateway launched an online software and peripheral Web store with more than 30,000 products. Meanwhile, Gateway increased its service and training offerings to consumers and small businesses at its 280 Country Store locations worldwide. In October, Gateway entered into a wide-ranging strategic alliance with America Online to accelerate distribution of each company’s products and services. By the end of 1999, after adding 400,000 new subscribers in less than three months, Gateway’s joint Internet service with AOL had more than 1 million subscribers. Gateway management believed its "beyond-the-box" strategy positioned the company extremely well for the future.
Gateway also took aggressive steps in 1999 to boost its sales to small businesses, government agencies, and educational institutions. It established a sales force operating out of its 280 Country Stores that called on area businesses and other organizations. An alliance with GE Capital was formed to promote technology solutions for large enterprises. In Europe, Gateway entered into a two-year partnership with ComputaCenter, Europe’s leading information technology systems and services company, to sell and support Gateway PC products throughout Europe. During 1999, Gateway increased its sales over the Internet by 100 percent over 1998 levels.
To further enhance the Gateway brand with consumers, Gateway committed to sponsorship of the 2002 Winter Olympic Games in Salt Lake City, plus it entered into brand-enhancing alliances with Fidelity Investments and Nickelodeon. Gateway planned to open more than 100 new Country Store locations worldwide during 2000, including 75 in the United States. In early 2000, Gateway introduced a new line of home and small-business desktop PCs powered by Athlon microprocessors made by Advanced Micro Devices (AMD). The new Gateway Select PC line represented an effort to counter the difficulties the company was having in obtaining adequate supplies of Pentium microprocessors from Intel.
Toshiba was a $45 billion diversified Japanese electronics and electrical equipment manufacturer with 300 subsidiaries and affiliates worldwide; it ranked as the world’s 26th largest corporation in terms of revenues and the world’s seventh largest computer and electronics company. Toshiba produced and marketed portable and desktop computers, servers, voice-mail systems, digital business telephone systems, interactive voice-response systems, cable modems, networking systems, and digital, medical, and PC cameras. In the PC arena, Toshiba’s biggest strength was in notebook PCs, where it had an 18 percent global share in 1999.
The company’s Toshiba America Information System (TAIS) division, headquartered in Irvine, California, had annual sales of approximately $2.5 billion across the United States and Latin America. The TAIS division offered a wide array of portable PCs, selling both direct and through dealers—one of its largest U.S. dealers was Computer Discount Warehouse. In the mid-1990s, TAIS enjoyed a commanding lead over its U.S. laptop rivals in both channels, but its lead had been shrinking in recent years. During the 1996–99 period, TAIS’s share of portable computer sales in the United States was in the 15 to 20 percent range. It had a negligible share of the desktop PC market.
There were about 30,000 resellers of generic, or "house-label," PCs in North America alone and countless thousands more worldwide. The generic segment constituted a $7 to $8 billion market in the United States and Canada, representing shipments of about 7 million units and 25 to 30 percent of sales through resellers. No single generic brand, however, accounted for more than 0.25 percent market share, and most had a lot smaller percentage share. Generic PCs assembled in" "screwdriver shops" had been a part of the PC business since its inception—Steve Wozniak and Steve Jobs launched Apple Computer from a garage using components they purchased. Rising technological savvy about how PCs worked and the widespread availability of individual components made it fairly easy for an enterprising operation to assemble a generic PC. Contract manufacturers of PCs, many of whom assembled name brands of PCs for several PC makers, were a major source of house-label PCs marketed by retailers. To keep costs and prices low, the makers of generic PCs typically incorporated components from low-end suppliers. Generic PCs appealed mainly to very price-conscious buyers. The quality and reliability of generic PCs varied from good to poor, depending on the caliber of their components. The makers of generic PCs generally took little responsibility for providing technical support; whatever technical support was available to users typically had to come from resellers.
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Competitors
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