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.
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?
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.
Posted by: Dan D | July 27, 2009 at 02:58 PM
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.
Posted by: Sunil S Chiplunkar | July 23, 2009 at 12:08 AM
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.
Posted by: Heather Torres | July 20, 2009 at 11:08 AM
ust tell me one thing why don't Micheal Dell and many others don't read your articles??? or do they?...do reply!!!!
Posted by: Kamil | July 17, 2009 at 08:04 AM
ust tell me one thing why don't Micheal Dell and many others don't read your articles??? or do they?...do reply!!!!
Posted by: Kmail | July 17, 2009 at 08:03 AM
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.
Posted by: Laura Ries | July 16, 2009 at 01:59 PM
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.
Posted by: Erik | July 16, 2009 at 01:52 PM
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?
Posted by: Charles Jolley | July 16, 2009 at 01:37 PM