Dell Has to Rethink Its Business-Level Strategies
As we have discussed in our story of Dell so far, the company achieved its position as the cost leader on the value creation frontier because of its ability to manage its supply chain and thus make and sell a PC at a lower price than its competitors. In the 1990s, its low-cost advantage resulted in many of its competitors, such as IBM, being driven from the market, and others, like HP and Gateway, struggled to reduce their cost structures to remain profitable. By the early 2000s, however, things had changed. Dell found that its main rival HP had learned how to manage its supply chain and could now build a PC at a price competitive with Dell’s, one important reason being that it used powerful low-cost chips made by AMD. Dell also found that Apple computer’s new sleek designs were attracting more and more customers, especially because in 2006, Apple began to use Intel’s chips, which made its machines Windows-compatible. Dell was now feeling the heat on all sides. Analysts started to criticize the pedestrian look of its computers, which were almost always plain black boxes, and make unfavorable comparisons with HP’s and Apple’s redesigned computers. So, starting in 2006, Dell decided to improve the look and design of its PCs and invest resources to make them more differentiated—even though this would increase costs. It hired 500 new design engineers to beef up its internal team of industrial designers, recruiting specialists from carmakers and consumer products companies to make them more attractive and functional. And it also bought the PC focus differentiator Alien ware Corp., which made high-powered/high-priced gaming PCs whose sleek futuristic machines, modeled after the beast from the movie Alien, were regarded by many as the best looking PCs on the market. One result was that in 2006, Dell introduced the $3,500 XPS M2010, a cross between a desktop and laptop targeted at entertainment enthusiasts, which features a detachable wireless keyboard and a monitor with adjustable height. And with its black, leather like exterior, it resembles a luxury briefcase when closed. Dell then began to introduce innovative lower priced models such as the new $1,990 XPS 700 desktop, also aimed at hard-core video gamers. Its new designs allowed Dell to charge a premium price for its top-of-the line machines, which represent only about 1% of Dell’s total 2005 sales of $55.9 billion. Dell’s eventual goal, however, is for all these design innovations to trickle down into its principle lines of PCs so that it can charge higher prices for them and so increase its overall profit margins. By focusing more on product development and differentiation, Dell hopes not only to increase its profits, but also to fight back the challenge from HP and Apple so that it will occupy the middle of the value creation frontier and thus strengthen its competitive advantage. With its mass-market PCs, Dell’s goal is also to make them easier and more comfortable to use; for example, Dell set out to make the controls for laptop touch pads, PC keyboards, and LCD monitors more functional and easier to use. Another battle Dell has had to fight to stay on the value creation frontier is to increase the level of its customer service after it outsourced most of this function to companies in India. Long the leader in customer service, Dell lost its lead to HP and Gateway in 2005 as customer complaints about poor quality service increased. Even though its goal is to squeeze out every cent of costs, in 2006, Dell pumped back over $250 million into improved customer service and brought the corporate customer service department back to the United States to protect its dominating position in the important business server and PC market segment. Only time will tell if Dell’s new business-level strategies will work. Its stock price plummeted in 2006 as its profit margins shrank and those of HP and Apple increased. But by the fall, there were increasing signs that its new lines of PCs were attracting customers back. It also began to use AMD’s chips, breaking its long alliance with Intel, to keep the cost of its new machines low and competitive. Product and market development, as well as product proliferation, is a never-ending process, especially when technology changes quickly, as it does in the computer industry.
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