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CDW Battles Dell, Slowing Industry Growth

CDW Corp. has long fashioned itself as David to Dell Inc.'s Goliath -- a role CEO John Edwardson embraced when he took a sledgehammer to a Dell laptop at a gathering of senior managers on his very first day.

Five years later, the flattened Inspiron sits encased on a wall of his office like a trophy and Dell remains Enemy No. 1. But the company once known as Computer Discount Warehouse is now a giant in its own right -- and one facing its own Dell-sized issue of how to cope with slowing industry growth.

Unlike its bigger rival, CDW is not a manufacturer. It buys computers and related equipment from such manufacturers as Hewlett-Packard Co., IBM Corp. and Apple Computer Inc. and markets them to small and mid-size businesses, governments and school systems, customizing the products and offering other services.

Not only must it endure a price war with the world's largest personal computer maker, it faces stiffening competition from 80,000 small U.S. value-added resellers that vie to outdo it in service. All this at a time when a three-year stretch of double-digit PC growth has ended.

Edwardson himself posed the challenge in an interview: "The question is, can we continue to grow at rates faster than the market rate of growth?"

His answer, of course, is yes. Industry analysts aren't so sure, skepticism that's reflected in a 25 percent drop in CDW's stock since 2004. Shares have been hovering around $55 after topping $70 two years ago.

"The environment couldn't be any worse for selling computer products," said Fred Hickey, editor of The High-Tech Strategist, a Nashua, N.H.-based newsletter. "We have an economy that's stretched, there isn't any pent-up demand, and to make matters worse ... CDW is engaging in an expansion program" in its government and education markets, he noted.

CDW has proven doubters wrong before. In 1995 -- 11 years after used-car salesman Michael Krasny founded the company reselling personal computers through newspaper ads out of his home in nearby Skokie -- Forbes magazine wrote of the prospering firm: "As the Internet blooms, CDW risks losing its price advantage."

So much for that threat; revenues have since increased tenfold. CDW cracked the Fortune 500 list of largest U.S. companies in 2001 just after Krasny, who remains the largest shareholder with 22 percent, handed the reins to Edwardson. It's now up to No. 343 and climbing, with sales of $6.3 billion last year.

Morningstar analyst Andrew Golomb believes CDW can continue increasing revenues at a healthy rate because of its ability to tailor products to clients' requests and ship most orders the day they are received.

"The service aspect is what's really driving the CDW story," he said. "They provide better service than their competitors."

The company invests heavily in its sales staff, which comprises slightly more than half its work force of 4,300. Sales employees undergo basic training for six months, then spend up to another year training with a co-worker. Trying to get the most out of them, CDW assigns an account manager for nearly every customer and recently realigned the sales force by geographic region, the biggest initiative in its history.

Edwardson, a former president and chief operating officer of United Airlines, claims the pilot of a jumbo jet is trained less than a CDW sales associate, something his former employer might debate.

There's no question CDW's business model is still flying high. Its latest earnings report, for the first quarter, showed better-than-expected profits on an 8 percent increase in sales.

But that's well off the strong double-digit sales pace the company long enjoyed, so eyebrows shot up around the industry when Edwardson recently announced a goal of $10 billion in revenue by 2008. That would require annual sales growth of 17 percent in an information technology market that IDC Research Inc. projects to increase at a pace of just 4 percent to 4.5 percent over the next five years.

Buying another company, as it did in 2003 with rival computer reseller Micro Warehouse, is one obvious way to meet the objective, and Edwardson acknowledged that a number of firms are under consideration in the United States, Asia and Canada.

"As you look at trying to make that ($10 billion revenue target) happen, you've got to grow at rates of growth way above the market or you've got to make an acquisition or two," said Edwardson, wearing a blue shirt with a CDW logo over the pocket. "We intend to do both."

It also is eyeing more market-share gains like the ones made recently at the expense of smaller companies competing with it in a fragmented market that CDW estimates at $120 billion.

"As big as we are, we're still only 5 1/2 percent of the market," said the 56-year-old chairman and chief executive. Likening the little rivals to the dots in Ms. Pac Man, one of his favorite classic video games, he said "we're going around gobbling them up not by buying them but by being able to do what we do better than they can do it, to take that market share."

Dell's recent skid, losing ground to HP and other competitors during seven straight quarters of declining revenue growth, has helped keep the mood light in Vernon Hills.

While crediting Dell for being "very, very good at what they do," Edwardson noted almost gleefully that the PC company's letter to shareholders, which he read twice, made no mention of its problems. Soon after, two technology research firms reported that Dell's PC sales were growing more slowly than rivals' and the company acknowledged that the competitive environment was more intense than it had planned for or understood.

"They never really owned up to their service issues, which I thought was great," Edwardson said. "I was really happy that they didn't seem to be wanting to recognize that."

Calling the rivalry with a company nine times bigger than CDW "fun," he gestured to a wall containing his collection of armored helmets and swords used by warriors in medieval times. He hefted a huge German broadsword from the 15th century and said with a grin: "Fighting for market share today is a heck of a lot easier than it was 500 years ago."

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