Following Dell

Guide to E-Commerce Technology

When Compaq Computer Corp. started in business 20 years ago, the PC market was new and Compaq was in there grabbing its share of business, initially with the first portable PC, then with desktop models. It was so successful that it became the fastest growing company in history and moved to the Fortune 500 in record time. In 1995, it became the leader in worldwide PC shipments.

Fast forward six years to 2001: When the year began, Compaq was still the world leader in PC shipments. When the year ended, it had ceded that spot to Dell Computer Corp.

The market share numbers tell the story: Worldwide in the fourth quarter 2000, Compaq had 13% of shipments, Dell 12%, according to researchers IDC. A mere one year later, Dell led worldwide with a 14.2% share while Compaq trailed in second with 11.2%.

Compaq had already been No. 2 to Dell`s No. 1 in the U.S. for some time, but the daylight between Dell and Compaq grew even wider in 2001: In the fourth quarter 2000, Dell sold 22.3% of PCs in the U.S.; Compaq sold 15.3%, IDC says. In Q4 2001, Dell had a 27.5% share; Compaq, 12.7%.

Doing something

Clearly, Compaq had to do something. In fact, it did two somethings related to each other. First it took a page from Dell`s playbook and stepped up its web-selling strategy. It didn`t take a lot of research to realize that Dell was doing something that consumers wanted—allowing configuration and ordering of computer systems on the web with no intervention from Dell. And it used the web to target the small and medium-sized business market.

Early indications are that the strategy is paying off. In 2001, Compaq`s sales of PCs over the Internet grew 80.5% from the year earlier and sales of all products grew 87.5%, IDC reports. By contrast, Dell`s sales of PCs over the web grew 19% while all sales grew 17.1%. Compaq`s Internet direct sales were the fastest growing of any manufacturer last year, IDC says. And at the end of 2001, Compaq had 11% of the small and medium-sized business market, up from 9% a year earlier, also according to IDC. “They`ve made good progress targeting companies in the SMB space,” says Rob Enderle, research fellow with Giga Information Group Inc. who follows Compaq and other technology companies. “This is one of the really good stories within Compaq.”

The web is a key part of Compaq`s strategy, not only because it can bring in new customers and cause existing customers to spend more but also because it keeps expenses under control, Compaq says. “Everything we do on the web is to make it easier to do business with Compaq, reduce costs and enhance customer relationships,” says Patrick Vogt, vice president of the e-business group for North America.

Until Dell and Gateway Inc. showed that consumers would enthusiastically buy technology on the web in a self-help environment, many believed that computers were too complex to sell over the Internet. Add to that the fear by manufacturers that selling direct on the web would alienate their re-sellers and what resulted was a market in which upstarts were taking customers and the existing behemoths were paralyzed in responding to them.

But Compaq and the other big, established manufacturers had a secret weapon that many didn`t even realize at first was a weapon: their very networks of re-sellers. Far from the web alienating re-sellers, Compaq has used it to tie re-sellers more closely to the company. Compaq has tightened the knot by giving re-sellers a 6% commission when a customer of the re-seller buys Compaq equipment online—even if the re-seller did not have a direct hand in the sale.

And Compaq points out that the re-seller no longer must obtain the merchandise and carry the receivables on it until the customer pays; Compaq deals with all that. “Do the math,” says Pete Carrier, director of strategic business planning for the small and mid-sized business market in North America. “It highlights the benefits of freeing up your receivables vs. tying up your receivables.” One of every three transactions includes a re-seller partner, Vogt says.

The $25 saving

Compaq`s approach, analysts say, will go a long way to helping Compaq fight Dell and Gateway. “This changes the equation as to who will survive the fallout,” says Marty Gruhn, vice president and practice director for researchers/-consultants Summit Strategies, who has followed the efforts of computer sellers to change their sales and marketing approaches in the face of new competition. “The box pushers will not keep their rankings as the strategic partners push these vendors.”

Compaq`s benefit to keeping re-sellers happy, of course, is that the re-sellers represent a large network of Compaq sales outlets--more than Compaq could field on its own. And re-sellers bring other key ingredients to the equation, Gruhn says: handholding, unique software that the partners have developed and training of users. “The re-sellers now are in great shape,” she says. “Something as simple as bringing the re-sellers in has given these vendors an advantage.”

Most sellers on the web have by now accepted the fact that the web is only one part of a sales process—customers shop on the web and buy in the store, shop on the web and buy on the web, shop in the catalog and buy on the web and engage in infinite variations of those activities. Compaq believes it gains flexibility by not dictating how its customers should shop and buy. “The hybrid model that we`ve adopted is a more flexible model,” Vogt says. “We don`t force customers to purchase one way. Customers who have relationships with re-sellers can keep those relationships. And we`ll also maintain a direct relationship with the customer if that`s what the customer wants.”

Compaq is taking the same approach to its customer account reps as it takes to the re-seller. “We have reps on the phone who own the customer, but they don`t care how the customer buys,” Vogt says.

The benefits that Compaq gains from promoting the web channel to customers outweigh the concerns about who owns the customer. One of the prime benefits is cost avoidance, Vogt says. Orders that come in via the web site cost Compaq $25 less to process than orders that come via phone or fax. “When you do millions and millions of transactions, the operating expense avoidance really adds up,” he says.

Another benefit is that customers who place their orders electronically pay faster than other customers. And then there are the unquantifiable benefits. “Customer experience is the softer side of e-business,” Vogt says. “Selling on the web today is all about being the best mover—who can improve the customer experience.”

Compaq offers its customers the opportunity to buy electronically a number of ways—not just at Compaq.com. A major initiative in its small and mid-sized business market is to establish extranets that host private online stores for customers. Those online stores feature customized pricing for each customer, feedback and alerts about orders, warnings to the customer when it appears that someone has exceeded purchasing authority and other services.

3,000 private stores

The number of such stores grew sevenfold last year to 3,000, Carrier says. “We get customers involved through the public store, then retain them through the private stores,” Carrier says. “It doesn`t cost us anything to set up the stores.” That strategy has been working, Carrier says: The average order of customers who buy over the extranets is six times higher than the average customer and they buy two to three times more often, he says.

But while Compaq is promoting unassisted buying on the web for its small and medium-sized business clients, it also is not insisting that customers interact only via the web. It has stepped up its investment in call center technology and reps, doubling the number of reps in the past year. It constantly moves more customers to reps: Any customer who spends more than $10,000 is automatically assigned to an account manager, who initiates contact with the customer. “It`s a good approach because if you don`t do assignments like that in the SMB space, relationships get lost,” Giga`s Enderle says.

And to further promote itself to the small and mid-sized market, Compaq in March released its first e-catalog aimed at that market. The catalog features products that Compaq believes appeal to that market. And it allows Compaq to monitor what entrepreneurs are buying and adjust its offers accordingly.

Carrier says sales to small and medium-sized businesses, which Compaq defines as having fewer than 1,000 employees, grew 25% in 2001 over 2000 and in some quarters were 50% higher than the prior year. “Our goals this year are very aggressive,” he says.

Analysts note that the small and medium-sized business market is a smart one to go after—although many other technology vendors have recognized the power of that market as well and have it in their sights. “The SMB space has historically gotten short shrift from technology vendors, so it`s an emerging market for them,” Enderle says. “The winners in this market today aren`t so much taking market share from each other as they are growing the overall market faster than it would have grown otherwise.”

One problem that arises when sellers offer customers the option to buy through multiple channels is that of coordinating information about customers. Compaq has integrated its web interface with its order management system and links all information about special pricing for customers as well as its customer relationship management system into a single database.

Boosting reps’ productivity

Thus when an account manager or customer service rep receives a call from a customer, all the information comes together from the database to that person`s desktop. “It increases productivity substantially,” Carrier says. “We`re able to measure how much revenue each rep generated and what the gross margin is. We`re in the middle of the pack there now in our industry and our goal is to be No. 1.”

Reps` productivity increased 20% last year over the prior year. So far this year, productivity is increasing at an even faster rate than last year. Part of Compaq`s strategy in that area involved training the reps not only in sales skills but in the functionality of the web as well, he says.

As successful as Compaq`s strategy has been, it is not without risks, especially as it appears that the merger between Compaq and Hewlett-Packard Co. is going forward, observers say. The biggest decision will be to make sure that Compaq and Hewlett-Packard brands don`t compete with or cannibalize each other. “This shifts Compaq to the online brand and Hewlett-Packard to the retail brand,” Enderle says. “It`s a lot like GE where Hotpoint is the builder brand and GE is the retail brand.”

Whatever the potential problems, though, Compaq says it is committed to the direct-on-the web strategy. Says Vogt: “Companies that don`t drive e-business into their businesses will struggle to compete.”

kurt@verticalwebmedia.com

How 3-D fits Compaq`s web strategy

3-D product views have worked so well at Compaq.com that Compaq Computer Corp. is rolling the technology out to other products. “Rich media is another part of our strategy,” says Patrick Vogt, vice president for the e-business group of North America. He likens 3-D presentation to the presentation of products on special displays in stores. “Using rich media is the end cap approach,” he says.

Starting with the most visible and frequently viewed products on its site, Compaq has extended 3-D to about a dozen product lines in the past two months, including Presario and Evo desktop computers and notebooks. The company says it will continue to roll out the 3-D technology from Viewpoint Corp. until all product lines feature the 3-D treatment.

The company, while not providing details, says it is expecting a substantial increase in conversion rates because customers will be able to see more details about the devices they are considering. “This is our entry point into developing a great user experience,” Vogt says. “The customer can look at the product and get a much better understanding of it.”