When Michael Dell founded Dell Computer Corporation, his philosophy was quite simple – small margins but large volumes. In short, he tried and succeeded in commoditizing the computer. He sold the PCs directly to the customers and pared the overhead costs. However, when Dell Inc., currently the world’s largest PC maker, announced a few days ago that it might miss its first quarter earnings target, it read something straight out of a marketing text book – a company cannot get a sustainable competitive advantage over the long-run if it merely competes on price. The logic is quite simple. Competitors with superior processes, leaner operations, and lesser overhead costs will soon emulate what the price leader has done. And this is exactly what happened in this case as well.
Competitors – Hewlett Packard, Lenovo, Acer – are giving a run for the money for Dell.
For instance, HP has been steadily eating into Dell’s share of PC market, though Dell continues to remain a market leader in the PC segment. HP, which once used to have huge operating costs, has made itself a leaner machine now. Its trailing twelve months operating margins now currently is at 6%, while Dell’s margins hover slightly higher at about 8%. HP also has opted a slew of measures to strengthened its presence in the PC market and enhance its market share. For instance, to attract corporate customers the company not only offers PCs with Intel chips, but also with AMD chips. Recently, it also emerged on a marketing campaign to promote that computers is personal and not a commodity.
Triggered by these events, Dell’s stock has lost about 40% over the past one-year. To counter this, Dell reacted in a much more predictable way. It lowered its prices again on its offerings including Inspirion and Dimension, very similar to that of what it did in 2000. However, this time around analysts opine that this move may not necessarily work, as their cost overheads where not the same, unlike five years ago. As the battle for the PC market unfolds, it will be interesting to see who will be the last man standing.
Madhan Gopalan
The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.
3 comments:
Dell has been sticking to Intel, ignoring AMD in the process. This is definitely making them lose a lot of business. HP on the other hand gives what customers ( AMD or Intel, doesnt matter) want on the contrary. I am sure that Dell will start supporting AMD soon to stem some of that loss.
In a way, dell helped reduce prices for the consumers :-).
But, I agree that dell's model may not be sustainable. And suresh also makes a very valid point...
Suresh and Karthik,
The latest in the battle: Last week Dell announced that its going to use AMD's chips for some of its offerings (but not for PCs). The stock price of AMD went up after this, while Intel's stock witnessed a nose-dive.
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