This 'Virtual' Company Is for Real

Fast-growing Monorail Inc. doesn't just invent cutting-edge PCs — it reinvents how to compete in the computer business.

What would you call a computer manufacturer with no factories, no warehouses, no credit department, and no help desks or call centers? Vaporware Unlimited? Virtual Ventures? Try Monorail Inc., a fast-growing startup based in Marietta, Georgia. In the computer industry today, the battles that matter aren't between products but between business models: Dell's direct-to-the-customer distribution system vs. Compaq's dealer network; Gateway 2000's emphasis on first-time buyers vs. IBM's clout with savvy business users. Now Monorail has invented yet another way to competea model as sleek as its lightweight computers.

monorail"This business has become like the fashion business," says Monorail Chairman and CEO H. Douglas Johns, 49, who cofounded the company after spending nine years at Compaq, where he was senior vice president and general manager of the personal computer division. "It's gone from product to process. And it's hard to change how successful organizations do things. It's the equivalent of a brain transplant."

Johns and two cofounders, Compaq veterans David Hocker, 48, and Nicholas Forlenza, 36, launched the company in 1995 and based it on a daring new competitive formula. Like their Compaq colleagues, Monorail's founders believed that most consumers would rather buy computers from retailers they trust than from catalogs or the Internetthe direct channels embraced by Dell and Gateway. The founders also grasped the market power of the build-to-order approach that Dell and Gateway had pioneered. Their solution: take the best of both modelsand push both further.

Andrew Watson, 37, Monorail's vice president of marketing, has dubbed the company's strategic formula "Dellpaq." Monorail competes aggressively on costit was one of the first companies to offer a PC for less than $1,000, a magic price pointeven as it boasts about its outstanding service. "Seventy-five percent of the people who buy a computer want to buy it in a retail setting," Watson explains. "They want to see it, feel it, touch it."

The Dellpaq formula seems to be working. The company is barely two years old and has fewer than 50 employees, but it's already the 14th leading manufacturer of desktop PCs in terms of unit sales. It's growing at a rate of 50% per quarter. Johns wants Monorail to be a $2 billion company by 2003.

How can a company grow so fast and stay so lean? By concentrating on a few core skillsproduct design, marketing, logisticsand outsourcing everything else. Everything. Here's how a typical Monorail transaction works. Retailer CompUSA orders a PC from the company. That order gets transmitted electronically through FedEx Logistics Services to one of Monorail's many contract manufacturers. The manufacturer assembles the PC from an inventory of Monorail parts and ships it directly to the appropriate CompUSA outletagain by FedEx. The entire process takes between two and four business days.

Meanwhile, FedEx wires an invoice to SunTrust Bank in Atlanta, whose factoring department handles Monorail's billing and its credit approvals. Monorail quickly receives a cash payment from SunTrust (at a discount from the face value of the invoice), and the bank assumes the risk of collecting the funds from CompUSA. Customers who need help call Monorail's 1-800 service centerwhich is staffed and run by Sykes Enterprises Inc., a call-center outsourcing company based in Tampa, Florida. Customers who want to upgrade their hardware simply call a toll-free number. FedEx picks up the computer the next day, delivers it to an upgrade center, and returns it to the customerall within four days.

Talk about lean and mean! By the time Johns left Compaq, he was managing 6 million square feet of warehouse and office space. His new company owns no factories or warehouses, and operates from a single leased floor in an office building in an Atlanta suburb. "We have the shortest supply lines in the world," Johns says.

What can't Monorail outsource? The CEO and his colleagues identify two must-have capabilities. The first is world-class management expertise. Monorail's top executives have held senior positions at Compaq, Global Village, Oracle, Texas Instruments, and other tough competitors.

"Our management team has more than 100 years of combined experience in designing, developing, manufacturing, marketing, and selling high-volume computer products," says Johns. As he sees it, if competition in the computer industry is really a war between ideas about the future, there's no substitute for assembling an executive team with battle scars.

The second must-have competence is a knack for partnerships. Monorail's business model simply can't work without seamless integration with its two major strategic partners: SunTrust and FedEx. These companies are better at what they do than almost any other organization in the worldand what they do is critical to Monorail. It's no coincidence, for example, that the company's chief financial officer, James Clarke, 34, was a senior vice president at SunTrust before he joined Monorail. FedEx plays an equally central role. Indeed, the most unique design feature of Monorail's product linethe remarkably compact dimensions of its computers, which take up only 20% of the desk space occupied by a traditional PCgrew directly out of its partnership with FedEx. Monorail's founders set out to design a PC that could fit easily into a standard FedEx box. "We asked ourselves, How do we start a company that can leverage what FedEx does? How do we design something that is 'FedEx-compliant'?" says Hocker, Monorail's chief technology officer.

Doug Johns argues that relationships are the glue that holds Monorail's virtual company together. "This company was started on handshakes," he says. "We view people as fixed costs. And we put a premium on relationships."

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