The Innovation Upstarts

The growing diversity of computer consumers is attributed to the strength of small, focused microcomputer companies.

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How a group of technology newcomers are moving innovation out of the R&D lab and into the marketing department

Just when all the experts declared the personal-computer industry closed to newcomers, along comes a new generation of brash entrepreneurs to prove them wrong. A few years ago IBM and a handful of other billion-dollar giants seemed to own the industry and dictate all the rules -- but no longer. The fact that the newcomers have so quickly grabbed a piece of the action is surprising enough, but it's how they did it that's the real story. -- J. K.

In a sprawling room in an Austin office tower, nearly 100 salespeople pick up calls from interested buyers around the country. The sales staff is young, mostly under 30. The fluorescent-lit area has the electric atmosphere of a brokerage house on a big day. Everyone is glued to a phone or computer, begging, cajoling, persuading customers amidst a clutter of Coke cans and order forms.

Welcome to innovation in the personal-computer industry, 1989 style. True, it is not the kind of innovation we are used to seeing -- new computer models, faster chips, more complex software. But innovation it is, benefiting enough customers to enable Dell Computer Corp. to grow into a $159-million business in less than four years, with projected 1989 sales of more than $400 million.

Technology was always the ticket in the PC industry. Company founders and financiers always relied on fancier bells and whistles to win market share. But as the market matured and as the technology coalesced around the IBM standard, industry pundits declared that the game was closed to newcomers.

"The winner is . . . IBM," Business Week proclaimed on a 1983 cover, adding ominously on the inside, "The battle for supremacy is over, and few will survive." Sonny Monosson, a Boston-based publisher of computer newsletters and founder of American Technology Appraisal Services, predicted that Asians would soon own this business. "The domination of this industry can't be American in the future." And industry guru Esther Dyson advised entrepreneurs at small computer companies "to go into the restaurant business."

That they didn't take her advice was a good thing. Newcomers continued to flourish, but not necessarily because they had a faster chip or a more powerful box. What these newcomers discovered is that innovation in the way they managed their companies was as powerful a tool as innovation in product design and technology. They found a way to compete successfully by devising sales and marketing strategies that provided added value to their customers.

As a student at the University of Texas in 1984, Michael Dell saw a personal-computer industry that was still full of promise. The 19-year-old premed student started a business selling microcomputer components to local computer enthusiasts. The next year Dell started assembling his own line of PCs. By the end of fiscal 1986 annual sales reached $33 million. "Everything was wrong -- we didn't have the money, the people, the resources," Dell says. "But I had a gut feeling that drove me to start this company."

Direct marketing by phone is at the heart of Dell's success. When he entered the computer market, it was too late to challenge the technological standard that IBM had es-tablished with its PC. So Dell searched for a different niche, one that could be defined by a unique marketing and distribution strategy.

One potential approach -- developing a strong dealers-only network for a PC clone -- had already been worked to perfection by Compaq Computer Corp., while Tandy Corp. enjoyed the benefit of its network of 6,500 Radio Shack stores. IBM, of course, exercised its traditional sway through both dealers and its own vaunted sales staff.

So Dell decided on telemarketing, selling PC compatibles. By sidestepping the dealers and their big markups, Dell has been able to undersell such competitors as IBM and Compaq by as much as 40% while staying in roughly the same price league with the low-balling Korean and Taiwanese clone manufacturers.

But low price is only one piece of Dell's marketing strategy. By selling directly to customers, ranging from individuals to major corporations, Dell gains an instantaneous reading of the latest trends. "Direct sales," one sales manager notes, "gives you fantastic market intelligence."

That intelligence, gleaned from more than 1,000 phone calls a day, coaxed Dell into a new product line. Despite all the hoopla about IBM's new PS/2 line, many customers still wanted upgraded versions of computers based on Intel Corp.'s popular 286 and 386 microprocessors. Rather than meekly following Big Blue's lead, the company developed a series of highly successful PCs based on the older technology.

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