Table: Dealing with the Dell Effect
To compete with Dell's (DELL ) ability to cut prices to the bone and still make a profit, rivals are seeking any edge they can find.
Merging with Compaq makes HP (HPQ ) No. 1 in low-end servers, allowing it to buy parts in huge volume. But with operating expenses at twice Dell's 9.9% rate, HP must cut costs more--or risk being bloodied in another price war.
It has an army of consultants and is working on a way to make servers heal themselves-pluses Dell doesn't have. Big Blue (IBM ) is also offering double-digit discounts against Dell and making it up on sales of high-end servers and services.
After sales of high-end servers tanked in '01, Sun (SUNW ) began developing cheaper boxes that run the free Linux operating system. Those low-end boxes will squeeze Sun's hefty 42% gross profit margins, but they might keep customers from defecting to Dell.