Ailing Biz: Will Dell Be Back On Success Track?

13 April, 2012

Dell is a dog. From $25/share a decade ago, the company rose to around $40/share around 2005, only to collapse. The stock now trades around $15, rising from recent lows of about $10. The company’s value is only $30 billion, only half revenues of $61 billion, instead of the revenue multiple obtained by most growth stocks. But then, revenues have been flat for the last four years so maybe it’s time to say Dell isn’t a growth stock any longer.

And that would be correct.

In the 1990s, Dell was a darling. The company could do no wrong as its revenues and valuation soared. Founder and CEO Michael Dell was a highly desired speaker at fees of $100,000-plus. Michael Dell was quick to tell people his success formula, which was pretty simple:

Do no R&D. Outsource product development to key vendors (Intel and Microsoft). Focus on price and cost. Be operationally excellent! Be the best, most focused manufacturer/assembler.

Genericise the product. Make it easy to buy, thus cheap and easy to sell.

Sell direct, rather than through distributors, so you lower sales cost.

Use supply chain practices to drive down parts cost and inventory, making it possible to compete on price and collect your funds before paying vendors.

In short, focus on operational excellence to be really fast and cheap. Faster and cheaper than anyone else.

And this success formula worked! As long as folks wanted personal computers, Dell was the game to beat. And the company reaped the reward of PC market growth, expanding as the PC, especially the Wintel PC, market exploded.

Dell’s problems today are not the result of bad management. Dell has been focused, diligent, hard-working and very cost conscientious. Dell made no horrible decisions and made no serious mistakes in its strategy or tactics. Although for a while, it was vilified for weaker support from outsourced vendors in India (again, a tactic used in all parts of Dell’s strategy), that was rectified. Largely for two decades, Dell has continued to perform better and better at its internal metrics its success formula.

Dell’s fall from grace was due to the market shifting. Firstly, competitors figured out how to do what Dell did, pretty much as good as Dell did it. No operationally oriented strategy is immune from copy-cats, and Dell discovered that other companies could do pretty much what it did. It becomes a dog-eat-dog world quickly when your discussions are all “price, delivery, service” and you can’t offer something truly unique. It may not be obvious when markets are growing and there’s plenty of business for everyone. But oh, how quickly it shows up in declining margins when growth slows.

Secondly, and more importantly, the market shifted away from Dell’s primary products. PC sales are now flat-to-declining, depending on the marketplace, as customers shift from Wintel platforms to smartphones and tablets. In spite of big acquisitions in data storage and services (to the tune of $5 billion in the last couple of years), Dell still has 70 per cent of its revenues in PCs (55 per cent hardware, 15 per cent software and services). Most of that money was spent attempting to shore up the Dell success formula by extending its core offerings to core customers. Now, all future forecasts show that the market will continue to move away from PCs and towards new platforms, making it impossible to create organic growth and pinching margins in all sectors.

So, were Dell’s executives dumb, incompetent, lethargic or some combination of all three? Actually, none of those things, as CNNMoney.com points out in Dell’s Dilemma. They were simply stuck. Stuck with their own best practices, doing what they do really well and continuing to do more of it. Unable to move forward, because most attention was focused on defending and extending the old core.

Nobody knows the Dell core better than Michael Dell. His return spells only less likelihood of success for Dell. As opportunities emerged in smartphones and other markets, he found it simply easier, faster, cheaper and more consistent to wait on those markets while defending the core PC business. Key vendors Intel and Microsoft, critical to historical success, were not offering new solutions for these markets or promoting sales in them. Key customers, the IT departments in government and corporate accounts, were not clamouring for these new products. They wanted more PCs which were better, faster and cheaper. Dell was looking for the divine light of perfect future understanding to change the company investments. And when it didn’t emerge, he kept right on plunking money into the business headed for decline.

Inside consultants (Bain and Co. is well-known to be the primary strategists and tacticians at Dell) and employee experts had never-ending opportunities to improve the Dell systems, in their efforts to defend the Dell sales against other PC competitors and seek out additional expansion opportunities in targeted offshore or niche markets. Suppliers wanted Dell to keep building and promoting PCs. And customers locked in to old platforms were just experimenting with new solutions far from adopting anything new in the volumes that would match historical PC sales. “If just the economy comes around, I’m sure sales will return” it’s easy to imagine everyone at Dell saying.

Now, Dell is in declining products, with an outdated strategy chasing a larger competitor as margins continue to remain squeezed. Nobody wants to exit this business quickly, so prices are under even greater pressure especially since Android tablets are cheaper than laptops already and smartphones can be had for free from the right wireless supplier.

It’s too late for Dell. The time to act was five years ago. Then, Dell could have set up a team to explore the market for new solutions. Dell could have been the first to offer an Android phone or tablet the company has plenty of smart folks who could experiment and figure it out. They could have championed the Zune and created a download store for the product to compete with iPods and iTunes (the Zune is no longer supported by Microsoft). But there were no resources and no permission given to try changing the success formula.

As Chromebooks are launched (The First Google Chromebooks are On Sale Now, Here’s Everything You Need to Know: BusinessInsider.com), Dell could have been the market leader, instead of Acer and Samsung. There’s even a chance that Dell might have blunted the huge market lead Apple created since 2005, if the management had just created a team with the opportunity to really discover what people would do with these new solutions. There was a time a ‘strategic partnership’ between Dell and Google could have been a big threat to Apple. But no longer.

Apple, which put its resources into pioneering new markets in the last decade, has seen its value explode manifold. Its value is over 10x Dell. Apple has enough cash to buy Dell outright. But why would it? Dell has become a niche player and due to its lock-in to historical best practices and its old success formula, it has no opportunities to grow.

All companies risk becoming marginalised. Focusing on your core products, core technology vendors and core customers leads to blindness about the possibility of market shifts. You can work yourself to death, be focused and diligent, and remain dedicated to constant improvement even excellence! But when markets shift, it is easy to become obsolete and fall into margin-killing price wars as growth stagnates. Just look at Dell. From darling to dog in just 10 years.

If you still own DELL, the recent price rise makes this a great time to SELL. Dell has no new products and no idea how to move into new markets. Its commitment to its core is a death knell. And without the white space to do anything new, it can’t (and won’t) transform itself into a winner.


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Ailing Biz: Will Dell Be Back On Success Track?

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