It seems too perfect that the electronic frontier’s version of High Noon is being staged in Texas, the legendary territory of gunslingers and upstarts. The showdown is between two Texas companies—Compaq, the world’s largest manufacturer of computers, and Dell, the world’s fastest growing computermaker—that have come to represent different ways of doing business in the insanely competitive PC market. Both have reached the top of the field from humble beginnings, and both pioneered their respective business models, reshaping the industry along the way. Now they’ve taken their fight to the World Wide Web, which they view as the key to future success—and other companies are watching closely to learn what they can about the evolution of electronic commerce. Compaq, which is based in Houston, thrived in the eighties and early nineties by selling computers through resellers and wholesalers, a sector of the business known simply as “the channel.” This approach gave Compaq an edge over its larger rivals, particularly IBM, since it didn’t have to reproduce their worldwide sales forces or match their marketing budgets. But the copycat mentality of the computer business has created problems for Compaq and other name-brand companies. These days PCs are nearly all the same in terms of components and performance; in fact, the largest slice of the world PC market—between 30 and 40 percent—goes to “white boxes,” generic PCs that are assembled from Asian-produced components and sold by channel resellers at cut-rate prices. To compete, companies like Com-paq have had to slash their own prices, so their profit margins have become razor thin.
That has made the cost of doing business all-important. And that’s where Round Rock—based Dell has upended the industry: by avoiding the reseller channel and selling directly to users. Back when he was still hawking PCs from his dorm room at the University of Texas at Austin, CEO Michael Dell went the direct sales route as a way to compete with companies that had locked up the channel with exclusive or preferred contracts. The cost advantages have been clear. When a company like Compaq ships computers to resellers, it has to use a build-to-forecast model, meaning the company has to predict market demand. It doesn’t always do so successfully. “Channel inventory has been as high as ninety days in the past two years,” says Neal Johnson, an assistant vice president of Robinson-Humphrey, an Atlanta investment banking and brokerage firm that produces a quarterly survey on channel activity. By contrast, Dell doesn’t hold parts longer than eight days. Its manufacturing line gets its orders from confirmed sales, so the company doesn’t have to predict what customers will want and doesn’t burn up money sitting on unsold product. Moreover, when PC component prices fall, build-to-order companies like Dell can ratchet down their system prices, but the inventory of build-to-forecast companies stays stuck at a higher cost.
Because of this disparity in pricing almost identical products, Dell has catapulted itself to neck-and-neck parity with Compaq in U.S. sales: Both companies are now shipping about a million and a half