IBM, Dell see success in each other's strategy

IBM is on a crusade to cut costs and raise its online profile after revealing a $1 billion loss in its PC business, despite a major push in the booming sub-$1,000 PC segment.

Dell, on the other hand, has ridden its manufacturing efficiencies and Internet strategy to lower its costs and raise profits. But the company has been a no-show in the low-cost PC market.

In the process, IBM and Dell are beginning to look more alike these days, as both companies mine each other's business plans for new strategies.

IBM plans to continue to beef up its online business which can already handle a large chunk of IBM's product offerings, including Aptiva consumer PCs, some ThinkPad notebook computers, printers, monitors, servers, storage devices, workstations, and other products such as software.

The newest wrinkle to this effort, called Project Odyssey, is aimed at boosting its ability to deal with small businesses online. This will be launched in May, IBM spokesperson Edward Barbini said. IBM's combined ecommerce sales--which includes the company's business partners and IBM online--already total close to $40 million a day. Project Odyssey will put all of IBM's 1600 products online.

IBM is making a big play for the small business customer via new ecommerce software and a new line of ThinkPad products for small business.

Big Blue is also intently focusing its formidable cache of e-commerce technologies at small business by launching Web authoring and graphic design software. IBM's strategy is to offer entrepreneurs and small businesses "everything they need to quickly create a presence on the Internet and engage in e-commerce," said Bill McCracken, general manager of Strategy and Marketing for IBM's Personal Systems Group.

"I thought IBM would eventually get out of the PC business, but it doesn't look like they're doing this. Now, it looks like they're trying to turn around their PC business," said Ashok Kumar of Piper Jaffray. "Dell has about 12 cents of overhead per dollar of sales. IBM doesn't come close to this," he added, alluding to the fact that IBM lost about a billion dollars on $12 billion of PC sales.

But this isn't stopping IBM. It has been targeting Dell corporate customers aggressively, according to sources at Dell which claim that IBM has been selling at what Dell thinks are prohibitively low prices to steal customers.

Meanwhile, Dell Computer is becoming more serious about the sub-$1,000 PC market, a segment from which it has been virtually absent. Despite Dell's success with more expensive PCs, this is now an imperative since more and more buyers--both corporate and consumer--are snapping up low-cost boxes.

IBM has been a major player in this market, with a broad lineup of consumer and business PCs based on chips from Advanced Micro Devices--though apparently it has had little success making money. Dell thinks that it can and believes now the time is right.

"The problem is that 58 percent of Dell's sales are in the $2,500-$3,000 segment, but this is only about one percent of the overall market," said Kumar. "Soon 90 percent of the market will be below $1,500...if Dell doesn't move now their strategy will fall through the cracks," Kumar said.

Dell's strategy is tied closely to Intel's newfound zeal for the sub-$1,000 sector and a mending of the chip giant's ways, according to sources familiar with Dell's upcoming strategy. Intel initially bungled its low-cost Celeron strategy by taking a Pentium II chip and essentially crippling it. But it has now revamped the Celeron and the chip is more advanced in some ways than its more expensive Pentium II cousin, giving Dell an opportunity to sell relatively powerful PCs at low cost.

Dell is the last major PC vendor to use Intel chips exclusively across all of its PC lines.

Celeron a key player
"Intel is now very serious about Celeron. It was tainted before but they fixed it," said a source familiar with Dell's plans. "[Dell] finally has a platform for this segment. Before it was just a matter of throwing out old inventory," the source said.

Indeed, Intel is quickly revving up the speed of the Celeron to make it as attractive as possible to PC makers in the sub-$1,000 market. The Celeron will get a further shot in the arm when Intel debuts technology that combines part of the chip set with a graphics processor. This is expected to allow PC makers to lower costs even more.

"[Dell admits] that there is a new center of gravity forming," said the source, referring to the growing size of the sub-$1,000 segment.

Meanwhile, IBM, unlike Dell, still has some critical products that it doesn't sell online. The popular ThinkPad lines for businesses such as the 600, 770, and 560 models, are not sold online. Also, some of its business desktops are not sold online--though all of this may change in the future.

However, like Dell, all of IBM's personal computers can be purchased over the phone directly from IBM.