Computer clone suffers as big names fight back: Mary Fagan explains why Dell, once a rising star, is now struggling to keep up

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THE history of the computer industry is littered with tales of companies that rose like meteors only to fall suddenly, and often unexpectedly, from grace.

The latest of these is Dell, which grew from nothing to sales of almost dollars 3bn last year but which is expected later this week to announce its first annual loss for the year to 31 January 1994.

Dell rocketed to fame as the company that made mail-order computer selling respectable and highly profitable. It built up a reputation for quality machines, money-back guarantees and good customer back-up, with the result that it metamorphosed from one of a host of IBM 'clones' into a respected personal computer name.

The company admits that its downfall was rooted in its early success and the ensuing lack of attention to future growth and changes in the marketplace. Dell, once among the most fleet of foot, took its eye off the ball.

Michael Dell, founder and chairman, is the first to admit that Dell lost track of where it was going. The popular view is that the company's internal procedures and infrastructure simply failed to keep servicing a mushrooming business.

Maurice Cowey, who heads the new European customer support centre at Bray in Ireland, says ruefully: 'We just could not foresee the huge popularity we would have. People wanted 'peace of mind' computing, the value-for- money approach.'

The company's problems were exacerbated by its abortive entry into the notebook computer business, which is one of the fastest-growing market segments.

Last autumn, Dell had to recall thousands of notebook computers because of a design fault. The setback embarrassed a company that prides itself on quality and left a serious gap in its product portfolio - notebooks account for about one-sixth of all PCs sold today, and the proportion is rising.

The company has recently made up for this shortfall by entering into an agreement with AST Research, another American rising star, which although a rival of Dell's will now also supply the company with notebook PCs. Dell has also recruited new managers and has reorganised itself into product groups. Within the past few weeks, it has unveiled a new set of computer products that it hopes will return it to its former glory.

There have been other hiccups in the company's expansion related to lack of understanding of different European marketplaces. Charles Smulders of Dataquest, the industry analysis group, says: 'Dell's performance in Europe has left something to be desired. It tried to apply the direct sales model across Europe, which is a classic mistake.

'Direct sales worked well in the US and the UK because it is an accepted way of selling, which is not the case in other countries.'

Mr Smulders says Dell will have to look seriously at alternatives, including retail outlets and dealer networks, if it hopes to fulfil its early promise in Europe.

Internal problems aside, the market in which Dell operates is tough, but at least it is growing. Dataquest says 10.3 million PCs were sold in Europe last year - an increase of 9 per cent on the previous year - representing an expenditure by consumers of dollars 20.3bn ( pounds 13.7bn).

Dataquest predicts an increase of around 11 per cent in the number of units sold this year. But the growth is much stronger in some regions, such as the UK and Scandinavian countries, while the economies in some southern European countries continue to drag the overall picture down.

The shape of PC business is changing, too, with the heady rise of the clones seemingly coming to an end and the big names, including IBM, Compaq and Apple, fighting back. The sea-change began back in mid-1992 when Compaq abandoned its high-price, high- quality approach and took the quality image further down the price scale.

Others followed suit and soon people realised that they could have the big name and the low price. Some of the IBM clones, Dell being one, had already established themselves as names in their own right. But Mr Smulders says: 'The real no-names have fallen back because they traded purely on price.'

Industry sources estimate that IBM clones lost almost 9 per cent market share in Europe last year, almost all to the big players.

Worldwide, the picture is much the same, with the top five companies taking a market share of 44.1 per cent in 1993, up 6.2 per cent on 1992. IBM, in spite of its much-publicised corporate problems, remains top of the PC league with a market share of 13.6 per cent in 1993.

Compaq, meanwhile, vindicated its move into cheaper machines by increasing its share to 10 per cent from 6.1 per cent a year earlier, nibbling at the heels of Apple which was in second place with a share of 11 per cent. NEC of Japan came next, ahead of Dell which was at number five in the Dataquest pecking order with a market share of 3.8 per cent.

While no one can dispute that the established names are fighting back, the conditions in which they do battle are becoming increasingly difficult. The companies have had to adapt to a high-volume, low- margin marketplace and there is no sign of any relief from the downward pressure in prices.

Andrew Lees, UK marketing manager of Microsoft, the leading supplier of PC software, takes a slightly different view. 'There is a lot of talk about prices in the market coming down, but in reality people are paying the same but getting a lot more for their money,' he says.

There is no doubt that even if things get easier in 1994, this remains a buyers' market and one in which the customers are becoming ever more sophisticated and aware of the choices open to them.

The chances are that later this week, when it reflects on the past year, Dell will also emphasise for the future a more vigorous approach than ever to putting the consumer first.

(Photograph omitted)