Compaq: Turning The Tables On Dell?

Compaq Chief Executive Eckhard Pfeiffer insists he's not on a "get Dell" vendetta. But he may as well be. Starting Mar. 8, the Houston PC maker launched a three-pronged assault that strikes at the heart of its Austin rival. First, Compaq Computer Co. dropped its prices by as much as 15%, undercutting onetime price leader Dell Computer Co. for the second time in a year and leading IBM to cut prices, too. At the same time, it brought out 39 new models, challenging Dell's engineers to keep up. Worst, on Mar. 22, Compaq is slated to plunge into direct-response selling--the business that put Dell on the map.

All these moves, says Pfeiffer, are simply part of the turnaround plan he put in place when he took over from founder Rod Canion in late 1991. Back then, Compaq was feeling the heat as Dell and other rivals shot ahead with hot products at low prices. But starting last summer with its highly successful ProLinea line of cut-rate PCs, Compaq has turned the tables. Now, Compaq and IBM are price leaders, and they're gaining in the fast-growing consumer and small-business market, a Dell stronghold. "We've introduced a long-term model for leadership," says Pfeiffer. "And there's nothing left in Dell's [model] that is superior to it."

SPEEDY DELIVERY. The final frontier is direct-response selling. Compaq studied that sales channel, which accounts for 20% of U.S. PC sales, for almost a year. Its fear: upsetting relations with dealers. To keep them happy, the company promises not to sell at prices they can't match, says Vice-President Barbara P. Krumland, who is in charge of the operation. "We really agonized about this all last summer."

Competitors say Compaq can't prevail in both channels at the same time. "As long as they have a major reseller focus, I'm not losing any sleep," says Ted Waitt, founder of $1.1 billion Gateway 2000, now No.1 in mail order.

Compaq says it has some tricks up its sleeve. It has rejiggered its assembly lines to match Dell's build-to-order formula and promises to deliver PCs within 48 hours vs. IBM's and Dell's three to five days. Compaq also plans to offer canned configurations of hardware and software aimed at particular types of buyers, such as notebook packages for mobile workers. And for a price, Compaq will even dispatch a technician to set up the computer--an industry first, says Krumland.

Pfeiffer's strategy is to meet competitors on price, then up the ante with more features and services. For example, Compaq was first with a three-year warranty instead of the usual one-year plan. "Price alone is not what wins the battle," says Pfeiffer.

He's not giving up on the price front, though. With Compaq's latest cuts, "we're having difficulty finding anybody with a lower notebook price," says Brian Clarke, an analyst at International Data Corp. Pfeiffer says there's more to come. "We have more low-end products on the drawing board, and we'll unload with a major bang later in the year."

In a continuing price war, Compaq's fatter margins could be an important advantage. Even though lower prices slashed operating margins from 11.5% to 10.5% between the fourth quarters of 1991 and 1992, the company still earned 6.2% after-tax. And Pfeiffer has more room to cut cost before he approaches Dell's meager operating margins--7.2% in the fourth quarter ended Jan. 31. Dell, on the other hand, has told analysts that its costs will rise and its net margin may drop from around 5% to between 3.5% and 4.5%.

PAIN TO SPARE. Clearly, Dell won't be the only player feeling the pain from the current round of Compaq-inspired price cuts. "This could break some backs," says Clarke of International Data. Some small players have already been forced to cut the number of models they sell, he says. Even before the latest moves, $944 million AST Research Inc. said its net margin could dip to between 3% and 4%. The squeeze, notes PC analyst John C. Maxwell at SoundView Financial Group, will favor the biggest players. "I think that companies like Compaq and IBM should benefit," he says.

So what will Dell do? Turn the tables once more, of course. It's slowly adding more retailers such as superstores and pulling more manufacturing in-house to ensure quality. After years of mocking Compaq's bloated staffs, it is recruiting Compaq alumni--including three credited with launching the ProLinea line. One says he joined Michael Dell's team because Compaq is not really committed to a low-cost strategy. An angry Pfeiffer disagrees. "It's one last cheap shot of someone who is against the wall," he says. It will almost certainly not be the last shot between these rivals.

      Within 48 hours 
      Three to five days 
      For $135 per computer, a technician will set up the system at a home or business
      Dell says it will offer this service soon
      Customers can buy "bundles" of popular PC programs at discounts, with free 
      installa-tion for 16 of the programs
      Sells third-party software; charges for installation. No bundles
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