IBM plans a direct-sales assault

The tech giant is in the process of expanding its ambitions to sell and manufacture PCs more like rivals Dell Computer and Gateway. On Monday, the company will increase the number of products it sells directly to consumers and small businesses. IBM also plans to enter into a direct buying relationship with 14 of its largest customers.

In addition, IBM is building up its "build-to-order" manufacturing capabilities, a crucial element in selling PCs and servers directly, and a new campaign to promote direct buying. Big Blue outlined its plans at its Personal Systems Group headquarters here.

As with rival Compaq Computer, Big Blue is finally taking the inevitable steps toward direct sales. The cost advantages of selling direct--less inventory, no middleman mark-ups, etc.--have long been known in the industry. In the past, however, both companies concocted manufacturing and sales programs that sought to replicate some of the cost advantages achieved by direct sellers--without alienating their traditional dealers.

Unfortunately, many of these complex programs failed to work as planned, straining relationships with traditional brick-and-mortar partners. Despite those issues, both IBM and Compaq are moving toward selling their PCs straight to their customers. Last year, for instance, Compaq bought distribution facilities from Inacom.

IBM, meanwhile, pulled out of the retail market and is now building up capabilities to sell more PCs directly in the corporate market. IBM forecasts about $600 million in direct PC system and peripheral sales this year as it moves from 14 percent direct last year to a projected 50 percent in 2001. That's a long way from Dell's $25 million in sales a day, but it's a start.

To succeed, IBM will have to make serious changes in how it organizes its e-commerce Web site and simplify its product line, said International Data Corp. analyst Roger Kay.

"Their Web page in the past wasn't as friendly and useable as it should be, and they really needed to work on that," he said. "You sort of had to wrestle to get where you wanted to go."

IBM is also working against the perception that it's a stodgy, unresponsive company selling high-quality, but overpriced, products, said Rick Thompson, director of IBM's consumer direct and relationship market division.

"We're going to hit people over the head that we're responsive to our customer needs and that we've got good products reasonably priced," he said.

IBM will spend nearly $20 million this quarter promoting its Web site and trying to generate more Web sales. On Monday, Big Blue will expand from nine to 12 the number of products that can be ordered for same-day shipping and offer new promotions aimed at small businesses. IBM initiated the shipping guarantee last week.

Thompson, who previously worked on the Tide brand for Procter & Gamble, believes e-commerce Web sites should be more like their retail counterparts.

"If supermarkets were designed like Web sites, milk and bread would be at the front of the store," he said.

Typically, these and other high-volume items are placed at the back of the supermarket, forcing consumers to walk the aisles of inviting higher-priced items.

"We have to get from being a manufacturer to being a merchandiser, and that's a big change for IBM," Thompson said.

IBM's Web site makeover is an ongoing process. The company's main home page now prominently features products for sale. In recent weeks, IBM moved from "14 clicks to two clicks to buy," added "Call Me Now" buttons for connecting with a salesperson, and started offering popular models 30 percent less than when purchased elsewhere, Thompson said.

The e-commerce site will increasingly focus on brick-and-mortar retail strategies, such as strategically placing impulse items, cross selling and prominently promoting hot, high-margin products. One new feature suggests additional items in a pop-up box at the time of purchase. These range from surge protectors to Microsoft Office 2000 upgrades.

IBM's direct strategy splits low and high between tech-savvy individuals and small businesses, and large corporations looking for end-to-end solutions.

"At the low end, they're aiming at the self-help types, who know what they're doing and are ready to buy on the Web, don't need a lot of handholding and can make their own decisions about services," Kay said.

With its exit from consumer retail, IBM abdicated the "unsophisticated buyers to Compaq and Hewlett-Packard," Kay said.

To fuel its direct strategy, IBM plans to move from a build-to-forecast to a build-to-order model, starting in July. The computer maker also plans to take 14 of its largest accounts direct, offering them built-to-order systems and customized extranets for ordering products.

Later in the year, IBM will begin offering similar services and direct build-to-order sales to small businesses.

"If IBM is going to go whole-hog into build-to-order, they are going to have to greatly simplify their product line," Kay said. "That is one of the best ways to simplify your manufacturing."

Dell uses a similar approach, offering very few models, for example, and lots of commonality of chassis, motherboards and other components, he added.

IBM is moving toward a simplified product offering. In April, Big Blue's Personal Systems Group plans to introduce a new PC brand. The first model, an all-in-one PC built around an LCD display, comes in fewer configurations and is available for consumers or businesses.