Poor Michael Dell. Well, not really. The 42-year-old Texas entrepreneur remains a multibillionaire whose eponymous company still dominates the personal computing marketplace. Persistently mismanaged expectations and surprisingly skinnier margins, however, have provoked an investor backlash.
As resurgent competitors such as Apple, Hewlett-Packard and Lenovo recapture consumer and corporate attention worldwide, Dell’s once-innovative build-to-order business model seem a little tired. Where Apple’s Steve Jobs constantly produces “cool” digital innovations, Dell’s Mr Dell relentlessly cranks out more of the same for less. Has Dell’s business model passed the point of diminishing returns as a reliable growth engine?
Probably not. While Dell undeniably lacks the product innovation prowess of an Apple, the company’s brilliance as a process innovator remains unparalleled. Even Toyota pays attention to how Dell manages global supply chain relationships and logistics. Dell’s disciplined moves into computer servers, storage and printers successfully defied the sceptics. Precisely because the company’s business model is engineered around minimising costs per unit time and accelerating process velocity, Dell embraces fast-followership, not pioneering.
“We’re not going to be missionaries for innovation,” Kevin Rollins, Dell’s chief executive, told me in an interview a few years ago. “We only want to go into a market where the product or service is definable, standardisable, simplifiable and repeatable . . . We don’t count on our margins existing because the technology is proprietary or because the customer is stupid.”
Indeed, the Dell production model remains as flexible, adaptable and opportunistic as when Mr Dell launched it in 1983 from his college dormitory. But market competition has relentlessly eroded vital elements of that model’s value proposition. For one thing, many customers are prepared to pay a premium for the genuinely innovative products that Dell eschews; there are no “DellPods”. For another, Dell’s cost and price advantages have become less significant as Hewlett-Packard and Lenovo have retooled their own supply chains and production processes while becoming more innovative.
More serious for Dell, however, is that the perceived locus of value is evolving away from what the company does best. As prices have relentlessly dropped, customers increasingly appear less interested in the most cost-effective buy than in “convenience”, “ease of use” and “support”. Service matters more than ever.
As more people become more reliant and dependent on their personal computers, printers, servers and networks, they demand ever-higher quality of service and support. Managing expectations and execution around service-related “process innovation” has proven far more difficult and expensive than Dell expected – particularly for its cheapest and least profitable machines. The economics of support are hard.
So just as customers of all kinds were thrilled to have more computer for less money, they also expected more service and support for less, as well. For years, Dell enjoyed a top
reputation for customer service and support. But as product portfolios and their inherent software complexity increase, Dell’s production challenge of “build to order” is giving way to the challenge of “service to order”. That is apparently not a natural extension.
Mr Dell noted a few years ago that
in 1990, the company was number 25
of the top 25 PC manufacturers in
the world. “But our model was just
as valid then as it is now. The
model didn’t depend on economies of scale to work; it doesn’t depend on economies of scale.” But here he was wrong. The reality is that while Dell has successfully grown as the world’s low-cost provider of computer hardware, its ability successfully to meet the service and support expectations of its global customers has measurably declined. These expectations may be unrealistic but they exist. Services and support have not scaled as well or as reliably as design, production and distribution. Simply adding more call centres in India does not address the core problem.
Just as they did to US car manufacturers, customers will abandon companies that are not seen to stand behind their products. This is Dell’s risk. Perhaps it will pioneer new forms of “remote diagnostics” for its machines in partnership with Microsoft or Intel; maybe it will create new genres of web-based customer support.
Given that India and China lack the robust digital infrastructures that Dell relies on for serving the support needs of its US and European customers, the company has every economic incentive to rethink and re-engineer how it wants to serve its global customers. Whether Dell can cost-effectively manage process innovation for computing services as superbly as it has for
computer production remains an open question. However, that is precisely the sort of question sceptics raised when Dell brought its business model to other digital products. Mr Dell needs to come up with a persuasive answer.
The writer researches the economics of innovation and technology transfer at MIT and is a visiting professor at Sweden’s Royal Institute of Technology