Manufacturers Succeed in a Competitive PC Market

An analysis of strengths, weaknesses and strategies of the top American PC manufacturers

With the shipment of Microsoft's Windows 95 operating system, as well as the companion Office Suite scheduled for Aug. 24, a look at the top five personal computer manufacturers in the United States is in order. Analysts predict Windows 95 will drive strong hardware sales, as well as software sales and related services. As the government year end approaches on Sept. 30, here's an overview of how the PC manufacturers got on top of this competitive market and what they need to stay on top as Windows 95 is poised to become the industry's standard PC operating system. Market share figures were obtained from International Data Corp., Framingham, Mass.

Packard Bell (12.7 percent market share): In May, Packard Bell, Sacramento, Calif., finished its second straight quarter as the No. 1 PC vendor in the United States. The company has prospered by selling low-priced personal computers almost exclusively to the home user. Rather than selling its product through the normal distribution and reseller channels, Packard Bell has peddled its products through mass merchants such as Wal-Mart Stores Inc. and Sears Roebuck & Co. As the consumer market for PCs has grown, Packard Bell increased its sales.

However, the company has also witnessed adversity. In 1992, Packard Bell scrapped a planned public offering after analysts became nervous about the high return rate (17 percent) of personal computers sold in the consumer market. More recently, Compaq Computer Corp. charged that Packard Bell deceptively sells new computers containing used parts. Compaq argued that its computers sell for 10 percent or higher on average because it always uses new parts for new computers. Rather than fight the case, the company changed its warranty policy and set up a $1 million fund to reimburse, for up to $50 per person, any consumer who bought or leased a new Packard Bell computer during the past six years and had to make repairs not covered by the warranty.

Meanwhile, NEC Corp.'s July $170 million purchase of a nearly 20 percent stake in Packard Bell, after French computer company Groupe Bull's 19.9 percent acquisition in 1993, improves the latter's financial position and allows it access to higher quality technology and wider distribution channels.

To gain more market share, Packard Bell will probably have to increase the number of business and education users. But it must invest money to upgrade its customer support capabilities, refurbish its computers and its image, which has been damaged by Compaq's allegations.

Compaq Computer Corp. (11.4 percent market share): While Apple and IBM underestimated customer demand for the crucial fourth quarter of 1994, Houston-based Compaq prepared for the holiday season by manufacturing more PCs to ensure that distributors and resellers would have access to Compaq's product within a reasonable period of time.

This gamble, which could have resulted in a glut of product in inventory, succeeded. Compaq is one of the most efficient manufacturers in the industry, with an average revenue per employee that approaches $1 million. If Apple loses market share to PC manufacturers because of Windows 95 and supporting software, or if IBM continues to underestimate end-user demand, then Compaq will pick up market share. Compaq's recent jousting with Packard Bell may lead to a new standard of PCs.

Apple Computer Inc. (10.2 percent market share): Since 1984, Apple has manufactured microcomputers with its own operating system. The ease-of-use of Apple's Macintosh, aided by the icons that Apple uses, has earned the manufacturer strong market share among educational, graphic design, multimedia and publisher types. Apple has earned many of the most loyal and dedicated users, but it needs to increase its customer base.

Apple has tried to forge alliances with other companies to help increase its market share. With IBM and Motorola, it designed and manufactured the Power PC chip, to challenge Intel's dominance in the microprocessor market, but the Power PC has not made significant inroads against the Pentium chip. While Apple's Power PC has received strong reviews, the company lost a good chance to gain market share as a result of product shortages. During the past year, Apple licensed the Apple operating system to personal computer "clone" manufacturers, in a move designed to increase the operating system's market share. But many analysts think Apple made this change too late. An important issue to software developers is market share: If the Apple operating system market share decreases significantly then some of these developers will no longer develop software supported by the Apple operating system, and more users will switch to Windows 95-based PCs.

With the introduction of Windows 95 coinciding with a strong new lineup of Apples unveiled for fall, unfortunately, Apple can only hope to maintain its market share. To gain market share in the business and government markets (currently, it has 7 percent market share in the government market), Apple must make better predictions of end user demand and forge more successful and timely partnerships with other companies.

IBM (8.8 percent market share): Has IBM recovered from its disastrous showing in the late 1980s and early 1990s? Yes and no. IBM, Armonk, N.Y., through strategic missteps, allowed Microsoft's MS-DOS and Windows to become industry-standard operating systems. IBM's rival operating system, OS2 Warp, has not put a serious dent into Windows' market share, and IBM's venture with Apple and Motorola to manufacture the Power PC chip has not yielded substantial results in its attempt to supplant Intel as a microprocessor manufacturer.

IBM is strong in all markets, and it has excellent products and support. But Big Blue should act more like a small, entrepreneurial-driven company, rather than a large behemoth that continually makes strategic missteps.

Gateway 2000 (5.4 percent market share): Not unlike Dell Computer Corp., Gateway 2000 has pursued a radically different channel strategy than most other manufacturers. In two words, the strategy is: deal direct. Rather than use distributors, mass merchants or resellers, Gateway 2000 of North Sioux City, S.D., operates a toll-free telephone number that end users call to order personal computers directly from the manufacturer. For those who know what they want in hardware and software, this approach works well. By avoiding the distribution and reseller channels, Gateway 2000 shaves about 20 percent from the cost of PCs, but it needs to invest a lot of that money in marketing and customer support.

Gateway is strong in the consumer market, but it has less presence in the corporate and government markets. Without changing its core strategy, there's little chance that Gateway 2000 will increase its share in the corporate and government markets, but if it continues to develop excellent products, operate strong customer service centers and market its products effectively, it could do well.

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