Story of the Blues

At this month's Computacenter conference, Compaq CEO Eckhard Pfeiffer raced ahead with his millennial vision for the future. Can IBM catch up?

At Computacenter's annual conference three weeks ago, there was affer raced ahead with his millennial vision for the future. Can IBM catch up? marked difference between the presentations given by Compaq and IBM.

IBM got the laughs: vice president of market intelligence Gary Bridge selling the audience the dream of a network computer future, ridiculing the NetPC - a valley of the shadow of death product - and telling jokes like Scott McNealy, Sun's CEO, in a suit.

Meanwhile, Compaq CEO Eckhard Pfeiffer said little about the latest fashion in the desktop computer world, and instead sold a more prosaic dream: Compaq as the world's second largest computer company by the millennium.

This difference in approach has a lot to do with the difference in the speakers. Bridge is a charismatic futurist, Pfeiffer lived up to his reputation of what one reseller calls 'Mr Financial Accountability Man'. But unlike his audience, Mr Accountability Man had the last laugh last week when Dataquest announced its third quarter PC shipments. Compaq powers on with 17 per cent of the European market, while Dell holds steady at 11 per cent and IBM is slipping, with its 8.4 per cent market share almost a point down from this time last year.

It's a similar story in the UK, with IBM slipping, HP and Compaq booming, and Dell keeping up.

It's not the script that many had imagined in the third quarter of 1996.

IBM had heavily backed the NC to make a major impact in 1997, and rediscovering its competitive spirit, Compaq, with its Wintel computing model and will-it-won't-it dithering over direct sales, was looking vulnerable, perhaps for the first time. Yet, somehow, IBM has snatched defeat form the jaws of victory. Instead, Dataquest shows Hewlett Packard, Siemens Nixdorf and Dell picking up sales in a booming PC sector.

Computacenter head of corporate marketing Phil Williams thinks he knows why - IBM has lost focus.

He says: 'IBM is not doing as well as other vendors for a lot of reasons, but the focus comes on two of them. The first is that Compaq, under Joe McNally, retains a very strong local sales focus, while IBM has taken more of a trans-European perspective, which does not work so well in the UK.'

The second problem, he claims, is the product. IBM simply has too much of it. 'The product range is too wide right now. It needs to be trimmed because it is very difficult for us to take a stocking position that suits everybody.' This contrasts, he adds, with the lean Compaq portfolio.

It is an embarrassing position for Computacenter to be in, following chief executive Mike Norris' gushing praise of IBM at the recent reseller conference in Lisbon. 'You are by far the most committed to the channel,' he said, 'and we appreciate it.'

That channel commitment will be tested in the coming weeks by Computacenter, which has given IBM a list of things it wants putting right with UK sales.

'IBM knows what we want, now it has to go away and do it,' says Williams, rather matter-of-factly.

IBM's first response, outlined at the Lisbon reseller conference, is its advanced fulfilment initiative (AFI), the first major step on the road to the manufacturing and supply chain economies that has been obsessing Pfeiffer's calculator mind for years. 'Our goal, using AFI, is to not just be competitive with Hewlett Packard and Compaq, but with direct sellers like Dell and Gateway,' said Mike Lunch, IBM PC Company UK managing director, on his return from Portugal. 'We have no more warehousing today than we did in 1992 and 1993, but our revenues are three or four times what they were,' he said. ' But our value is in the design and the logistical systems we have created.'

Under AFI, selected channel partners will handle configuration of systems - IBM estimated that seven out of 10 of its PCs are reconfigured in the channel, so why duplicate the work? Yet unless it can rationalise its range, this work may only succeed in increasing channel inventory problems.

'As time goes by,' Lunch speculates, 'there's no reason why large resellers should not do all the final assembly work for us, and we will simply divert our component shipments to them. That's the model that Dell is so successful with, but it is going to be done by our resellers. As long as the billing is done through the channel, it doesn't matter where the PC comes from.'

IBM's new PC designs are made to work this way, featuring clip-in, clip-out motherboards that should, if the AFI scheme works, make on-site customisation cheap and technically straightforward.

Yet other manufacturers doubt that IBM's internal systems can adapt so quickly when the focus of its product development is changing so quickly.

'IBM may be struggling. It seems as if it is,' says Mike Maloney, director of marketing for Gateway's EMEA region. 'What everyone is trying to do is manage the inventory better, something with which we always had an advantage because of where we came from. But we know this was never a sustainable advantage,' he says. Maloney thinks that Dell and Compaq have an easier job of taking the manufacturing cost out of their PCs. 'Organisations like Digital and IBM have convoluted logistics, and when I came to Gateway I saw the light. Closing the gap between manufacturing and sales is traumatic. It is a hard issue for a company like IBM, which will change the business forecasting at the front end.

'Some manufacturers can pull up information saying what they sold yesterday.

Try doing that at IBM.'

IBM's position is complicated because of the breadth of its business.

Williams' complaint that the company was supporting too broad a range of models would have seemed ridiculous five years ago, when its PC business took a Big Blue knows best stance. Now there are NCs, sealed PCs, desktop PCs, managed PCs, and originally plans to build a NetPC.

By marketing itself as responsive to customer demand, IBM has offered a hostage to fortune at a time when the PC market is more fragmented than ever. While Compaq, Hewlett Packard and others offer a subset of the desktop options, IBM is commonly accused of offering too much choice.

Perhaps there are signs that in trying to be responsive in its customer service, IBM is forced to support a range of systems that few users will require - and will hobble its desire to streamline PC delivery in the process. Lunch hinted at this recently, when he said that many of the stories of corporate accounts committing to new PC ideas were premature - all that companies were signalling was an interest in the technology.

This applied to the NC and new PC designs, and it meant that in being responsive to customer requests, IBM had to expand its offerings dramatically.

Lunch's ideas are supported by IBM European boss Doug Le-Grande, a veteran of the original PC design team who has come to steer the European PC business.

'Manufacturers have an idea and go to customers and say, "do you want this?" The customers are answering, "yes, we do", because they don't want to be blocked from new technology. But to be honest, we just aren't sure what the next big idea is,' he admits.

The company snapping at IBM's heels is Hewlett Packard. Both are hovering with UK sales within a few thousand of each other, and HP is rated by several resellers to be the potential number two to Compaq in corporate accounts 'IBM has a clear focus for the year 2000,' says Williams at Computacenter.

'It wants to be the number one supplier, which is a hell of a goal to go for. But HP's business is growing strongly.'

HP comes without baggage - a clear channel focus. It has not modified its 100 per cent PC channel sales commitment and has nosed into the top-tier portfolios of companies like Compel, replacing in-direct suppliers like Digital and Olivetti whose market share is declining faster than IBM's.

Dave Thompson, HP PC business marketing manager, says HP may be the biggest manufacturer of PCs by the millennium. 'In 1990, we were the 27th biggest PC manufacturer in the world. We're now number three worldwide. I hope we overtake IBM by the end of the year. Look where we came from. Five years ago IBM was the PC and HP was selling LaserJets,' he enthuses.

HP is developing a three-tier sales strategy and Thompson thinks a lot of the pain of taking the cost out of manufacturing has been dealt with.

Its channel assembly programme (CAP), under which Northamber assembles PCs for the channel, has been in place for two quarters. In January, it starts its e-commerce programme for commodity PC business, and later in 1998, there will be a third channel to market that sits in the middle.

If IBM is not paying enough attention to its local markets, Thompson is doing the opposite, detailing its business for each channel customer.

'The Northamber CAP business has gone well, but we want the best fit for our supply channel partners.' To add to this, he says, HP has reorganised its sales force, splitting the distinction between NT and Unix sales.

It has, he claims optimistically, tripled the NT PC salesforce overnight.

That is a simplification, but IBM's attempt to throw off the disadvantages of its history are already looking like it has created a new set of problems.

A representative for the company blamed its slipping position on the lack of consumer market sales. Without those, he says, IBM was doing fine.

Lunch states that IBM's third quarter was 'better than expectations'.

If that really is the case, it must have had some pretty low expectations.

Big Blue's feeling a bit flushed

Compaq marketing manager Peter Blampied's recent assertion that 'IBM has been flushed down the toilet by Compaq over the past few years' is an exaggeration of the market. But looking at the respective market shares of the two vendors, not that big an exaggeration.

The good news for all PC vendors is that PC sales in Europe are booming.

With Europe trailing behind Asia and the US in sales, there's plenty of headroom for improvement, but slow sales early this year led some analysts to predict that the boom was over. In the second quarter, sales were up by 16 per cent, ending several quarters of slower growth.

IDC's figures on European PC shipments are broadly in line with Dataquest, sales up 14 per cent this quarter as opposed to Dataquest's 17 per cent, while last year's fast-growth market, Japan, was 12 per cent down.

With its 16 per cent market share in Europe, Compaq is still taking sales from smaller vendors - and in 1997, that means everybody - as its nearest rival in the channel, IBM, has slipped back to eight per cent.

When he presented the figures at Gartner Group conference IT Expo97, Dataquest analyst Steve Brazier said IBM's problems were its consumer range and the fact that it couldn't bring new product to market fast enough.

'It is beginning to lose second place to Hewlett Packard.' In the UK, the picture is similar. What might alarm IBM further is Compaq's continuing domination of the server market, with 44 per cent of shipments up from 39 per cent. This represents a 58 per cent year-on-year growth and shows that not only is IBM's consumer business under fire, but its servers are in danger too. Compaq claims its largest market share is in large accounts.

The channel will not be sorry to hear that Brazier singled out the direct channel as an underperformer. He claims 'the direct channel is losing its market share in Europe, although Dell is doing well. But others, including Gateway 2000, are faltering.'

It's an analysis that Hewlett Packard's Dave Thompson reinforces. 'The figures show that Dell's share didn't move,' he says. 'The direct channel isn't growing as much as people imagine. We have always had a consistent message about supplying PCs and we haven't muddied the waters by talking about direct sales.'