April 30, 2002, 12:00 AM

Following Dell

Just as technology competitors have done, Compaq has turned to the web. It`s now carving out a niche in the small and mid-size business market.

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.

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