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| Analyze This: Knowledge Is Not Enough |
November 10, 2005 |
By Jim Harris
IF DELL’S MODEL IS SO SUCCESSFUL, WHY HASN’T ANYONE ELSE COPIED IT?
Is knowledge enough to stay ahead of your competitors? No.
For years Dell’s competitors have known about its direct strategy. Ever since Michael Dell started his company in 1984, much ink has been spilt over it: by cutting out retail, dealing directly with customers and offering higher value products at a lower price, Dell has grown relentlessly. Pretty simple, really.
Dell’s revenue for the last four quarters was more than US$52 billion, placing it 28th on the Fortune 500 list. Dell has experienced a compound annual growth rate of 37.5 per cent a year since the company went public in 1989 and it’s still growing 50 per cent faster than the industry. Dell is the number one PC maker; one of every three PCs sold in the U.S. is a Dell and globally it’s almost one in every five.
Dell was the first computer company to embrace selling over the Web. By August 2000, more than 50 per cent of its volume was moving over the Internet. Given that the cost of a Web-based sale is a fraction of retail, Dell had the flexibility to choose how to invest its cost advantage: by either lowering its prices below its competitors or dropping the difference to its bottom line. So Dell could gain market share or increase profitability depending on the competitive environment.
Part of Dell’s success has been its drive to work in real time. Today Dell’s suppliers are updated on an hourly basis about order status. While Dell assembles more than 90,000 computers a day it maintains only two hours of inventory in its factories and three days of inventory across its entire organization. Given that computer components fall in value on average by one per cent a week, Dell benefits from an immediate cost advantage over indirect sellers who have weeks of depreciating inventory in their value chain.
Dell’s competitors have been unable to stop the relentless onslaught. Companies that once dominated the PC landscape have all fallen: Apple, IBM, Compaq, HP, Digital, and the list goes on.
Once mighty
Why have the biggest PC companies fallen in Dell’s wake? Because the old PC companies were beholden to their structure and strategy.
Whenever a traditional PC vendor tried to implement a direct model it was attacked by its own distribution partners. Retailers, Value Added Resellers (VARs), wholesalers and system integrators all protested so loudly, threatened to switch allegiance to another PC vendor, that no maker could bear the brunt of implementing a direct strategy. PC makers worried about putting at risk 100 per cent of their existing sales for a new online strategy that would initially represent a small chunk of sales. They were always cowed back into the traditional model, leaving the direct market to Dell.
In other words, what was once IBM’s very strength - its dominant distribution and retail presence - became its greatest weakness.
For indirect PC makers death came by a thousand cuts: a little market share one
every quarter to Dell. These companies knew about Dell’s advantage but were unable to act. “To know but not to do, is not to know,” according to Confucius - or to put it differently, knowledge without action is worthless.
But Dell’s dominance is now haunting it: a 37.5 per cent compound growth rate is a lot easier for a US$10 billion company to maintain than a US$52 billion one. Dell grew by only 15 per cent last quarter, one per cent below expectations. The stock dropped 10 per cent immediately. Consistently delivering on expectations is essential to maintaining a premium in the stock market. And relentless cost cutting at Dell may have gone overboard as the company’s once exceptional service ratings have fallen to average, causing customer complaints.
To maintain its growth, Dell is diversifying. Seventy per cent of its revenue comes from PCs, servers and notebooks, so it is growing its business internationally and extending the direct model into storage, printers, PDAs, MP3 players and digital cameras.
By the end of 2005, Dell will achieve its goal, set in 2002, of becoming a US$60 billion company, a year ahead of schedule. So it has raised the goal to US$80 billion. The company is seeking to extend and apply its direct philosophy in new ways. Dell’s dominance will continue because its underlying business model guarantees a strategic advantage over indirect vendors.
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