The smaller companies also have cost structures that allow them to make money selling lots of 10s or 20s, says Bruce Dunlevie, vice-president for Everex's computer division. Because of a thinner management structure and generally lower overhead, he argues, smaller companies such as Everex require gross margins of roughly 25%, significantly less than the rate required by an enormous bureaucracy.
"A company like IBM has general sales, marketing, and administrative systems that they have to maintain and that can get in the way," Dunlevie says. "The Japanese and Koreans have shown an even greater lack of versatility. Their manufacturing strategy -- not customer needs -- drives their marketing strategy. Their need for mass manufacturing requires a high degree of product stability. They seek a homogenous market that doesn't change.
"But in this business, it's all pandemonium, constant change, and specialized needs," he continues. "That creates a lot of opportunities for companies like ours."
The telemarketing strategy Dell and Everex use reflects the increasing complexity in the distribution of computers. Whereas earlier entrepreneurs made their mark by building flashier boxes, the new ventures find new ways to sell and distribute established products.
Central to this process has been the fracturing of marketing channels. In 1984 Fortune ran a story called "More Power to the PC Chains." The central points were that the future of computer sales would lie in the hands of a relatively limited number of major chains and that size was critical in establishing a strong distribution channel. Yet instead of the window closing to new outlets, the market opened dramatically to those newcomers who saw the undercurrents of change.
One of the most prominent of these newcomers was AST Research Inc., in Irvine, Calif. Founded by three immigrant engineers, two from Hong Kong and one from Pakistan, AST started as a manufacturer of add-on boards for PCs and did not enter the PC market until October 1986.
By making add-on boards, AST gained valuable manufacturing expertise and exposure to the marketplace. And what was happening in the marketplace was fantastic growth among so-called value-added dealers and resellers, or VADs and VARs. Mostly small companies employing fewer than 20 people, VADs and VARs buy computers from distributors and then customize them for the particular needs of users. Tom Yuen, cofounder and chief operating officer of AST, estimates that the number of VADs and VARS has doubled over the past five years to nearly 20,000. These resellers now account for as much as half of all PC sales, up from around 10% just five years ago.
Driving this shift has been the increasing integration of microcomputers into more and more workplaces. Many VADs and VARs specialize in servicing such markets as doctors, lawyers, and funeral directors.
These new users are not likely to buy computers in the traditional ways -- through mass marketers or by their own data-processing managers -- since they possess highly specialized needs and often have no experienced computer-oriented personnel. On the other hand, VADs and VARs, who often bundle service and specialized software with their hardware, are perfectly suited for meeting these kinds of needs.
"Too many companies have concentrated simply on the mass market, on competing on price," says Roberta Graves, president of Qualitative Marketing, a leading microcomputer marketing company, in San Jose, Calif. "They have not realized that for many of the new users, the key is not price, but service, support, and solutions."
These dynamics have created opportunities for smaller manufacturers. In contrast to large retail chains, which usually favor either name brands or cheap clones, VARs and VADs place more emphasis on the price performance of products -- and the willingness of the manufacturer to customize hardware -- than on price or name brand. In the world of VADs and VARs, the premium is on flexibility, not mass production, mass marketing, or mass strategy.
"There's been a decentralization of the channels because people have become more sophisticated about computers," Yuen says. "People are more interested in having choices. The users have become so diverse that you have a real segmentation."
This decentralization, so evident in the rise of VADS and VARs, plays to the strength of small, highly focused microcomputer companies. "AST keeps its finger on the VAR pulse better than anyone I've ever seen," observes Mary Margaret Gibson, president of Corporate Information Group Inc. "What they are doing are things that are not well suited for large, monolithic organizations. It is difficult for them to be flexible to meet very individual needs. A Hitachi or an AT&T doesn't want to be flexible. They want to be a steamroller going down the road."
New companies such as Dell, Everex, and AST were never supposed to have succeeded. As personal computers grew into a multibillion-dollar industry, the smaller microcomputer companies -- like the carmakers in the early part of this century -- were supposed to fall under the heel of competitors that were larger, better-organized, and better-capitalized.
The entrance of IBM into the PC market seemed to confirm this logic. Within the first two years in the business, IBM established a dominant market share both at home and abroad. Big Blue's standard soon became the indus-try's, and smaller companies that refused to adopt that standard quickly, such as Osborne Computer Corp., failed.
But by refocusing their innovation on management issues, the newcomers have demonstrated that entrepreneurs can still flourish in industries dominated by major corporations. "Everyone has been saying there is no room for the small companies in this business, but that's not true at all," Gibson says. "These companies are succeeding because they are small and focused, because their culture is not IBM or AT&T or the Japanese. Those companies aren't always sure who they are and want to be. But guys like Michael Dell know their focus. They take their ground and stand on it."
