There are lessons to be learned from last year's disaster

RECIPE FOR SUCCESS

January 13, 1992|By Sean Silverthorne | Sean Silverthorne,Peninsula Times Tribune

While 1991 was a disaster for many companies that make computers, there were some notable exceptions. The companies that succeeded did so by breaking rules rather than playing by them.

Here is what they taught us about how to do business in 1992:

* Know your customer. In the 1980s, computers were designed by engineers for engineers. That strategy obviously worked well: the PC business grew into a $50 billion industry. But times are different today because buyers are much more techno savvy. They know what they want and don't want in a computer.

That's why Dell Computer Corp. works closely with potential customers even before a new model is designed. The idea is simple: learn what the customer wants, ask how much the customer is willing to pay, then build a computer that meets the criteria.

* Don't count on brand loyalty. In November, the U.S. Air Force awarded one of the largest government PC procurement contracts ever, a three-year, $1.1 billion deal to buy 300,000 machines. Most of the industry titans bid on the project, but the award went to little-known Compuadd Corp. of Austin, Texas.

The reason? Compuadd could deliver a quality product at a cheap price. The message is clear: Buyers, even the government, are looking for values, not brand names.

* Broaden distribution. The traditional way of selling computers has been for manufacturers to use a network of authorized computer dealers such as Computerland or Businessland. But this approach is often laden with costs that eventually result in higher prices to the consumer.

That is why mail-order companies like Gateway 2000 are zooming to prominence. Dealing directly with the manufacturer can shave the price of a basic PC by 30 percent to 50 percent. IBM and Compaq are both considering mail-order operations next year.

The rise of the computer "superstore" was also a powerful trend in 1991. These are warehouse-type operations typified by Fry's and CompUSA, which are geared to sell equipment at low prices in high volume. Big-name players were at first reluctant to sell through this channel because of complaints from their established dealers. Today, however, these same companies are beginning to realize that they cannot afford to ignore the mass market channel.

* Work with thine enemies. It seems some kind of new natural law. Be it in Russia, Germany or Cupertino, former enemies are learning to work together. The computer equivalent of the crumbling of the Berlin Wall came last fall when Apple and IBM, two of the world's great corporate R&D powers, said they will share technology on some future products.

The message: Make friends. No single computer company can do it all anymore.

* Cut costs. Computer prices are falling like President Bush's approval rating, and that means manufacturers are changing the ways they do business.

A few years ago, the big boys could command high prices that threw off gross margins in the high 40 percent to mid-50 percent range for their machines, creating huge profits. No longer. Now the model companies are the ASTs and the Dells. Because their prices are low, their businesses are designed to make money with lower margins, typically in the 20 percent and 30 percent range. That's accomplished by keeping expenses low.

* Keep new products flowing. One way companies can keep margins up is to continually introduce new products. Prices, and profit margins, are highest when the product is young.

That's why the typical new-product cycle in the industry is 12 months. In other words, if you introduced a computer last January, you'll be announcing its successor any day now. Cycle times used to be 18 months to 24 months.

So that is the recipe for success. Work with your customer, don't get cocky, form alliances with other tech companies, cut costs, find more efficient distribution and work like crazed dogs to churn out new machines.

What could be easier?

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