US Report: IBM gets tough on Dell

Michael Dell has been making IBM's life miserable. Now IBM is planning to return the favour.

In a move designed to blunt Dell's increasing success in the corporate market, IBM has instructed its sales force to get tough on Dell and make hard-ball pitches for business that feature direct comparisons between the products and services offered by the two companies.

In one sense, IBM is fighting an age-old argument. Direct vendors such as Dell and Gateway have long contended that companies such as IBM, which rely on the middlemen known as computer resellers, are slow to deliver and charge more for their products.

"I don't think it will work -- not unless IBM's pricing is competitive," said Seymour Merrin, an industry consultant. "The people buying Dell are performance-at-the-price buyers -- whether they be corporations, small businesses or individuals.

But amid indications of softening demand in the industry, IBM has ordered its sales team to turn up the pressure and more aggressively challenge the conventional wisdom about direct sales of PCs.

To be sure, Dell has done well dealing direct. The company that Michael Dell founded on a shoestring budget in 1984 is expected to finish its second fiscal quarter with sales of $4.2bn (£2.56bn), up from $3.9bn (£2.37bn) in the first quarter. Powered in large part by server and workstation sales, the company is also likely to yet again beat Wall Street's consensus earnings estimate of 46 cents per share.

Dell has grown as IBM has slipped. Indeed, its share of the worldwide PC market fell to 7.2 percent last year from 7.6 percent in 1993, according to the research organization, ZD Market Intelligence (owned by the same company that publishes ZDNN). By comparison, Dell's share climbed to 4.5 percent from 2.6 percent. Dell has enjoyed a structural advantage over IBM. As a direct vendor, it operates with about eight days of inventory. Computer resellers usually keep five times as much inventory on hand as do manufacturers that run their businesses by relying on a distribution channel. That translates into a price advantage of as much as 15 percent over its rivals, according to Dell.

Along with rivals such as Compaq and Hewlett-Packard, IBM began changing the way it builds and ships computers. Instead of stocking large inventories of pre-manufactured computers, IBM began letting resellers and distributors assemble the machines in their own warehouses and then ship them out to customers. IBM says the switch has allowed it to reduce shipment timetables and cut costs.

With that past as prologue, IBM's sales team has been instructed to shatter "some of the myths that Dell is spreading," according to one source.

"The key is to engage customers regarding IBM PCs with the same intensity as other IBM products and services," according to the source. "In fact, over the past year, when the client team personally leads the strategy (as you do with other IBM products and services), we win the PC business 75 percent of the time."

At the same time, IBM's sales force will play up what officials say are the hidden costs associated with buying systems from direct vendors like Dell.

Is Dell vulnerable? Lou Mazzucchelli, a vice president at the Gerard, Klauer, & Mattison Co., an investment firm, believes so. In a research report issued earlier this week, he predicted Dell will lose its historical advantage over indirect vendors such as IBM, though he does not expect the pressure to materialise this year.

Nonetheless, Mazzuchelli cautioned that Dell "will be increasingly challenged to evolve its business model away from its "pure" direct focus."

A spokesman for Dell had no direct comment on IBM's salvo.

"We'll have to see what transpires," said the spokesman, Rob Crawley. "We're going to continue to focus on the customer experience and if you look at the momentum in our notebook line and in customer satisfaction, I can only point to evidence that we're doing the right thing."

A spokesman for IBM confirmed the change of direction, saying "the company is aggressively stepping up the pressure on direct marketers, people who just sell on price."