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    Categories: Case StudiesLaura

The Demise of Dell

The personal
computer is one of the most important developments of the 20th
century. Its importance as a product, category and industry continue today.

 

Hindsight is
always 20/20. But try to imagine going back in time.

 

Back in 1980
if I asked a multiple choice question about the emerging personal computer
industry, what would your answer be?

 

What company
is most likely to dominate the personal computer market?

     (a) IBM, the
company that invented the mainframe computer?

     (b) Apple,
the leading home computer?

     (c) Sony,
the leading electronics brand?

     (d) Digital
Equipment, the inventor of the minicomputer?

     (e) Dell, a
company started by a sophomore at the University of Texas?

 

Most people would
probably answer IBM. With the rest answering Apple, Sony or Digital Equipment. I
doubt anyone would have said Dell.

 

It isn’t
logical, rational or reasonable to believe that a nerdy student from the
University of Texas could take on some of the biggest companies and brands in
the world and win.

 

But of
course he did. He took them all on and won. Michael Dell built Dell Computer
into the world’s largest computer company leaving IBM, Apple, Sony and Digital
Equipment in the dust.

 

Marketing
isn’t logical and marketing doesn’t follow the rules of common sense. Which is
why the best way to understand marketing and to predict the future is by
studying the past.

 

How did Dell
come out of nowhere to dominate the computer market? It wasn’t an accident that
Dell succeeded. They succeeded because unlike IBM, Apple, Sony, Digital
Equipment or any of the other computer makers, Dell was totally focused.

 

Dell focused
on one product: the personal computer.

Dell focused
on one distribution system: direct.

Dell focused
on one market: business.

 

And as a
result, Dell became the largest selling brand of personal computers in the
world and had the best stock-market performance of the 500 companies in the
Standard & Poor’s Index in the decade of the 1990’s.

 

But success
can go to your head. And a great stock performance can lead to intense pressure.
And that (perhaps unreasonable) pressure to keep up the growth leads to
expansion which can undermine a company and a brand. This is exactly what
happened at Dell.

In 1997,
Dell announced it would begin taking aim at consumers.

 

 

In 2003, it announced it
would be diving into the consumer electronics marketing.

 

Also in 2003, it
announced it would be selling computers in Sears and other large chains. In
2007, Dell announced it would be selling computers in Wal-Mart. In 2009 Dell
announced it would start to sell smartphones.

 

All of this
has diluted Dell’s focus and eroded the strength of Dell’s brand. No longer
does Dell stand for “direct” in the mind. Dell is just another computer
company. The expansion of the brand hasn’t helped it gain market share either,
quite the opposite, Dell lost its PC leadership HP.

 

Today
Hewlett-Packard is the world leader.

HP              19
%

Dell            15 %

Lenovo       7 %

Acer            7 %

Toshiba      4 %

 



In 2007, Michael
Dell returned as CEO in an attempt to right the ship. And while his personality
and presence has helped the company. Michael has not made the tough calls
necessary to refocus the company and brand.

 

Why is Dell
still relentlessly chasing consumers. Dell’s consumer division accounts for 20%
percent of sales and it operates at a dismal profit margin of 2.4% (far lower than
Dell’s other divisions.)

 

Why isn’t
Dell making money on consumers? Because the brand doesn’t have power with
consumers.

 

The
low-cost, no-frills, personalized, direct model isn’t appealing to consumers.
Consumers like cool, consumers don’t know enough to personalize their
computers, consumers like to touch before they buy and consumers are turning to
laptops which are harder to customize.

 

Consumers
have distracted Dell. Dell spends so much time trying to make itself more
appealing to consumers that they become less appealing to businesses. “Dude
you’re getting a Dell!” was the kind of advertising that doesn’t win over
company procurement departments.

 

The Wall
Street Journal blames Dell’s demise
on the “faltering” of its direct sales
model. I think it is just the opposite. I blame Dell’s demise on its drifting
away from its direct sales model. Dell should have stuck to its focus on
selling direct to businesses.

 

The Dell
brand will never work with consumers. Dell will never be cool. The more it
tries, the worse the results. And when a brand isn’t cool, a company is forces
to sell on price which is why Dell will never make any money selling to
consumers.  

 

Expansion is
what got that got IBM, Sony, Motorola and many other companies into trouble.
You can’t put your name on everything and sell to everyone.

 

That’s not
the way to build a leader brand. Nor is it the way to make decent profits.

 

In the
business world today there are dozens of Dells, all trying to expand their way
to success when the only thing that really works is exactly the opposite.

 

Narrow your
focus. Build your brand. Rake in the dough.

 

Enough said?

Laura Ries :

View Comments (8)

  • Totally agree with you on the diagnosis of Dell's problems.
    I think the question a Dell exec would ask then is: OK, so once we own the "direct sales to business" market segment, where do we turn next for growth if we can't expand our brand?
    To me the big conflict is between the marketing mantra of focus and the drive from Wall Street to continue rapid growth, even once you dominate your target segment.
    If you could go back to meet with the Dell execs before they pushed into consumers but could foresee slowing growth in their main business (assume due to market saturation), what would you suggest that they do?

  • Great post. I wonder what Dell's market share in "business desktops" was before they started expanding. If their market share was over 35% why not expand into other markets. But only with new brands.
    If you have the resources and the patience to enter the new markets I would go for it. Or simply buy other start-up brands that are starting to gain momentum.
    Will public companies ever be able to fight off the pressure of Wall Street? Sooner or later sales will slow (Starbucks) and the intense pressure will follow.
    But still, congrats to the college dropout Michael Dell for beating the other big brands before he was met with the Law of Success.

  • Good Comments!
    The way to grow and stay focused is to launch second brands.
    Second brands would have greatly helped IBM, Dell, Sony, Motorola and others.
    But second brands are something big companies rarely launch.
    Big companies launch brands like IBM-PC jr not new brands like Lexus.

  • ust tell me one thing why don't Micheal Dell and many others don't read your articles??? or do they?...do reply!!!!

  • ust tell me one thing why don't Micheal Dell and many others don't read your articles??? or do they?...do reply!!!!

  • Great example of a clear violation of the Law of Expansion. What were they thinking? Dell was known for having a direct sales/distribution model. They sold their souls, thinking that they would be able to capture more customers if they found new ways to distribute their product. This change, turned their tried and true business model on its head. It confused consumers and made people wonder what their brand really stood for.

  • Marketing is a tricky and tough assignment. Ultimately it is the 'market gap' that helps companies win. Dell found a 'market gap' - direct selling of customized PCs at very competitive rates. Business expansion should take place through proper branding approaches and identification of 'market gaps'. A 'market gap' can also be created through branding and product differentiation. Brand differentiation techniques help create 'market gaps' in the minds of customers or prospects. A 'market gap' based method of marketing helps ensure success of marketing ventures.
    For instance, MJ (Michael Jackson) had a particular style of singing and dancing. This created a 'market gap' for his style of music and dance (like moonwalk). If MJ had deviated from his style to aping some other style of music & dance, his market would certainly have collapsed.

  • Sorry, I disagree with some of the diagnosis.
    I used a cost-effective, capable Dell at work. I bought my first home PC in 1995 from Dell, based on cost, quality, and the ability to get some basic configuration changes from "off the shelf". The direct model worked for numerous consumers as long as Dell focused on quality, value, customization, and good service.
    Service demands for the direct model soared with a combination of bad Microsoft OS products and relentless cost cutting on world-sourced components. A reliable machine required little service support, but the task became gigantic for Dell when hardware refused to work with software.
    Sales growth times exponentially greater quality glitches overwhelmed their ability to service direct consumers. Their foray into retail marketing, Wal-Mart, etc. distracted Dell from executing a consumer built-to-order direct business.
    My second and third Dells were good machines, by the fourth there were many problems, mostly aggravated by Microsoft failings. By that time featuritis had set in, making configure-your-own a much harder process.
    I am convinced Dell for the consumer, sold direct, was a viable business model that failed because of poor execution and lack of understanding that Wintel machines were becoming too complex from a reliability standpoint.
    Apple succeeds by keeping control of hardware and software, charging more for a predictable and reliable ownership experience. Dell could have built a similar experience for Wintel machines had they kept focused, instead of pushing into other channels of distribution.