Technology and price apart, there was one thing that used to distinguish companies like Dell from those like Compaq ? their different sales strategies. Dell, of course, was set up as a direct marketing company with a telesales operation. Compaq, by contrast, was a company committed to selling through the channel.
These two firms, and others like them, criticised each other?s sales approach. Dell argued that selling through the channel increased the cost of the machine; Compaq countered by pointing out that support over the telephone was inferior to walking into your friendly local dealer for advice and hand-holding. Both arguments had valid elements.
But the battle lines of five years ago have been redrawn. Compaq is dipping into direct selling while Dell has been recruiting resellers for some time. But Compaq?s move into direct marketing is not a full-blooded one. The company has set up two operations, one of which is a telemarketing centre that locates customers? nearest dealers. This operation is aimed at the small to medium enterprise (SME) market. The other operation is aimed at what Compaq describes as the ?micro market? ? companies which have less than 12 employees or individual users.
The SME market has become increasingly important for PC companies, with the network computer threatening to take an increasing share of the corporate PC business. Analysts Dataquest and IDC have both reported a slow-down in PC sales throughout Europe, while sales in the UK grew by only one per cent in the first quarter of the year. Although IBM claims that the smaller companies will suffer the most, the news will worry even the largest PC suppliers.
Unlike IBM, Bull, ICL, Digital and Hewlett Packard, Compaq and Dell are purely PC-based firms. The other major players can fall back on sales of mid-range systems, mainframes, services and systems integration as alternative sources of revenue. Compaq and Dell cannot.
Compaq is more adept than most at altering its marketing and technology strategy. That strategy has always been to be a high-priced vendor ? slightly less than IBM, but more than the cheap clone suppliers. It prided itself on the quality of its engineering and argued that people were prepared to pay a premium for a solid machine with good support.
But in 1992, that model fell apart and Compaq, squeezed between the high-end workstations and cheap clones, set up an independent business unit (IBU) to design and build a cheaper, low-end machine. The result was the highly successful Prolinea, a machine which bore all the hallmarks of Compaq quality but was substantially cheaper than anything the company had ever produced before.
Compaq was aware that market leadership in any product sector does not carry a three-year warranty, let alone a lifetime guarantee. In the early 90s it looked uneasily over its shoulder at the decline of Digital, the undisputed leader in minicomputers throughout the previous decade, and at the experience of Wang.
In the 70s and early 80s, Wang had also been a leading supplier of standalone word processing machines, but it failed to recognise that a general-purpose PC would cut its market from under its feet and eventually it was forced to apply for Chapter 11, the US protection from bankruptcy. Now, Compaq is again under threat ? from the NC, from the cheaper clones and from the perceived long-term cost of PCs. A change in marketing strategy is called for.
Bob Grindley, marketing manager of Metrologie, one of Compaq?s distributors, believes the channel is unnecessarily worried by the news that Compaq is to sell direct. ?From what I can understand, the market has heard the word ?direct? and got alarmed. Compaq has made it clear that it is only that small sector of companies with one to nine employees, which has not really been addressed by any vendor, that will be affected,? he says.
Grindley believes Compaq?s drive into the SME market ? companies with up to 500 employees ? is actually good news for the channel. The majority of dealers eye the corporate market avariciously, he concedes, but the smaller resellers do not have the clout to penetrate it. Even the SME market remains difficult sales territory for small dealers.
?The smaller resellers may not have the knowledge and expertise of the whole of the Compaq range, some of which, like the large servers, can be very complex. We are in a position where we can offer advice to the dealers and even build, pre-load and pre-test the systems for them,? Grindley says.
In June this year, Compaq launched its Net PC, which it claimed would reduce the total cost of IT ownership in the latest salvo in the PC versus NC debate. The Deskpro 4000N runs Windows NT on Intel Pentium chips and Pentiums with MMX technology. According to Compaq, the Net PC will offer a cost of ownership lower than the NC. But Compaq has refused to name a price until shipments begin in the third quarter of the year.
The Net PC will have a hard disk system but neither a floppy nor CD-Rom drive. ?The general perception in the market is that it will be a halfway house between the NC and the PC,? says Robin Bloor, chairman and CEO of consultancy Bloor Research. ?What Compaq has to prove is that it is manageable from afar.?
Dell regards Compaq?s decision to sell direct as an endorsement of its own long-term strategy. But the company is in no position to gloat: it has itself been recruiting dealers for some time, a direct reversal of the direct-only policy of founder Michael Dell. Earlier this year, Dell launched its UK Web site, which enables customers to order products over the Net. In the US, where the scheme was launched last year, Dell says it is now doing about $2 million of business a day.
Not all suppliers believe there is a need for direct marketing and are keeping faith with the channel. Con Mallon, marketing director at AST, argues that the direct versus indirect argument is cyclical and we are merely in the latest phase of the cycle. Four or five years ago, he says, many companies entered the direct market, including IBM and Digital, and Compaq itself has in the past sold direct in the US.
Compaq, Mallon believes, is a reluctant bride at the direct selling wedding. ?Compaq has a fixation with Dell. The percentage of sales between indirect and direct sales has remained fairly constant, at 70 per cent to 30 per cent. Dell has always dominated the market, with smaller companies like Elonex and Viglen having some share.?
The question remains, he says, whether Compaq?s entry into the market will alter the direct/ indirect balance to 60/40 per cent or even a 50/50 split. The other possibility, he speculates, is that it will merely intensify pressure on smaller players, leaving a straight fight between Dell and Compaq.
AST has never sold direct and has no plans to do so now. ?Our claim to fame is that we have always remained committed to the indirect channel, which gives confidence to the reseller community,? says Mallon.
As long as the 70/30 ratio remains constant, the channel will have little to worry about. The dog fight over the 30 per cent will be fought out between Dell, Compaq, Gateway 2000 and the other established players. But if the direct model begins to eat into the 70 per cent of indirect sales, the picture could change rapidly and to the detriment of the channel. Although Compaq has said it will keep faith with the channel and that its direct operation covers only a small sector of the market, there is no guarantee that if it proves a success, the firm will not extend the scheme.
David Petts, Compaq national sales manager, denies that the company is breaking away from the channel. ?It is not an experiment in direct selling and it will not be extended. What we have to do is remove the inefficiencies within the channel,? he says.
Compaq?s channel partners were briefed about its plans weeks ago and are happy that it is still committed to selling through its resellers, says Petts.?I believe we have the channel on our side.?
Direct sales into the micro market are dictated by economics rather than a desire to cut down the number of dealers, Petts explains: ?The simple reason for doing it is that the costs of sales in this sector are very high and the replacement cycle a very long one.?
This is the same argument used by IBM in 1981 when, for the first time in the company?s history, it decided to sell the PC through the dealer channel. But IBM misread the market. It underestimated demand for the PC, not only among the general public and the SMEs, but among corporate customers as well.
According to Petts, today?s situation is merely a recognition that Compaq needs to evaluate its channel continually. He admits Compaq has never been strong in the SME market and that with the slow-down in corporate PC purchasing it needs to find new markets.
As Grindley points out, the SME market is becoming more sophisticated in its computing demands and often requires tailor-made machines. Like Metrologie, Compaq will build to order, so the resellers don?t have to take on additional technical and support staff, which in turn leads to a quicker time to market.
The slow-down of PC sales into the corporate sector, fuelled by concern over the long-term cost of ownership, the forthcoming NC and sector saturation, means the major PC players will have to look further afield. For companies like Dell, which was successful in selling PC clients into the corporate sector and never cracked the server market, a turn to SME seems inevitable. Similarly Compaq, the acknowledged market leader, needs to reinforce its revenue streams in a stagnant market.
But the SME customer requires hand-holding. This is a potential source of revenue for the channel, according to Compaq, and a possible reason for Dell?s decision over the past few years to recruit resellers.
The direct and indirect models both have their place in the sales and marketing scheme of things. Compaq?s pledge of loyalty to its channel has reassured many dealers, but its denials that the direct operation will be confined to the micro market have a hollow ring. Should the scheme prove a runaway success and attract SME customers, surely Compaq will extend it to bigger companies?
For Compaq, Dell and the smaller PC players, times are changing more than ever. If other firms follow Compaq?s lead in direct selling, it could be bad news for the small manufacturers and small dealers.
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