During the mid-1970s, industry pioneers such as Apple began marketing personal computers to the gen¬eral public. They released machines that were capable of both word-processing and spreadsheet functions. Apple became the industry leader and remained on top until 1981, when IBM introduced its first PC. The 1980s saw computers invade homes, businesses, and schools at a staggering rate. The number of personal computers in use grew from 5.5 million in 1982 to 65 million in 1992
Both IBM and Apple had installed proprietary operating systems during the 1970s. Therefore, control of the hardware sector was tantamount to control of the software sector. However, before releasing its PC in 1981, IBM approached Bill Gates, who had recently founded Microsoft with his friend Paul Allen. Gates reluctantly agreed to provide an operating system for IBM, but realized his firm would not have enough time to develop the new software. In order to meet the dead¬line, Microsoft purchased the rights to an operating sys¬tem called QDOS from Seattle Computer Products for $75,000.8
IBM was satisfied with the software and agreed to a contractual provision that prohibited IBM from licensing DOS, but allowed Microsoft unfettered discre¬tion to license the product. Incredibly, this simple clause led to the rapid decline in IBM’s market power while catapulting Microsoft to a position of domi¬nance. With unlimited rights to license DOS, Microsoft contracted with numerous companies manufacturing IBM clones. IBM’s ability to distinguish itself from competitors diminished because the clone manufactur¬ers were able to obtain and run the same operating sys¬tem. Established rivals Hewlett-Packard (HP) and Compaq gained significant market share as a result.
Dell Inc. and Gateway were founded in 1984 and 1985. respectively. Michael Dell recognized that while people were satisfied with the PC as it existed, they were eager for a simpler way to obtain the product. His com¬pany responded to this desire by creating a direct sales approach. Rather than going to a brick-and-mortar store and purchasing a PC from a salesperson, con¬sumers can order the machine they want by telephone or online at a discounted price. Gateway employs simi¬lar methods to sell its products, but has not captured the market share that Dell now commands.
THE COMPETITIVE ENVIRONMENT IN THE HARDWARE SECTOR Today, the personal computer has reached the status of a commodity and the battle for market share is all the more intense (see Exhibits 1 and 2). Clearly, the market has reached maturity and only the strong survive. The boom of the late 1990s is over, and weathering the storm has led all the players in the industry to reevalu¬ate the way they do business.
Today the only way to increase market share is to take customers away from the competition. Dell contin¬ues to adhere to its direct marketing approach focused on the corporate segment, with a great deal of success. Gateway uses a similar strategy, but seeks to differenti¬ate itself by offering a PC with unique features focused on the consumer segment, including distinctive design and packaging as well as outstanding customer service. Some companies, on the other hand, are surviving through consolidation. The acquisition of Compaq by HP is an example of such a strategic move. While acqui¬sition is typically viewed as a tool for expansion during an economic boom, these two companies have joined forces to weather the economic downturn and develop new technologies faster. Finally, IBM hopes to remain an industry leader by retaining its installed base and attracting new customers by developing the most advanced computing technologies. Each company’s strategy merits a closer look.
THE DELL DIRECT MODEL Dell’s direct-to-customer business model adds value in five ways.9 First, Dell customers avoid (delays, and. price markupsjbecause there is no middleman. Second, Dell’s model allows for customization; customers get exactly what they want. Third, the direct model allows Dell cus-tomers to receive outstanding service after the sale that is tailored to their needs. Fourth, Dell is able to imple¬ment the latest technological advances in computer hardware and software quickly because the time between assembly and delivery is so short. Fifth. Dell’s efficiency creates shareholder value.
BUILDING LIFELONG RELATIONSHIPS AT GATEWAY Gateway believes that customer service is the key to suc-cess. “From financing and consulting to training and support, we're here to help at every stage in the rela-tionship, so you get the most from your investment.”10 While advertising and promotions are a part of Gate¬way’s strategy, the company hopes to attract many of its customers by word of mouth, believing that no market¬ing technique is as effective as satisfied customers who promote Gateway to their friends and family. Gateway is most notably distinguishable from Dell in that it operates brick-and-mortar stores. Customers who wish to use a computer or talk to a sales representative in person are able to do so at these locations.