Marketing Innovation

Dell: Return to its Roots to Find a New Future?

Dell is (again) restructuring its top management, and altering its strategy in an effort to rekindle growth.  Sometimes, there is value at looking at history through a different lens to gain insights into what made a company great.

In Dell’s case, the company started by selling a product directly to consumers.  What were the characteristics of that product (and the business model) that made the company even possible, much less successful?

Six factors:

• It used commodity components, meaning that there were multiple suppliers and (perhaps more importantly) no research and development was required.
• There was value added in the assembly (however minor) by the company.
• Supplier terms were favorable to Dell, especially later.  Multiple suppliers of each component meant competition kept prices low.  The exception was the CPU, where paradoxically the Intel monopoly kept prices low because there was always the threat of going to AMD.
• Mass customization of the end product was possible through mixing and matching a virtually infinite number of different component configurations.
• Massive inventory turns enabled by the direct-to-customer model meant that Dell could collect the price of the machine before they had to pay for the parts.
• A brand name that stood for quality.

This is ideal for a desktop computer.  It could be built in a dorm room (or a garage, or pretty much anywhere, which ultimately gave birth to the “white box” built in the so-called “screwdriver shops”, so named because anyone with a screwdriver could build a PC.)  It is also ideal for a PC-based server.

Notebook computers, on the other hand, remove four or five of these sources of competitive advantage.

• Assembly is not done by Dell, but by contract manufacturers, removing that value add.
• Supplier terms aren’t as favorable, because there are fewer contract manufacturers, and they aren’t able to be played off against one and other like, say, power supply suppliers could be.
• Mass customization was much more difficult, because there were a relatively low number of fixed configurations in notebooks.
• All the above three factors combined to produce much lower inventory turns.

As Dell grew, they diversified their product line to include more and more peripherals (printers, for instance) and other electronics (flat screen TV’s, for instance).  These items moved even further away from the six core principles that made Dell successful -- where was the ability to differentiate?  Why was a printer or TV purchased from Dell any better than one from Best Buy?

So what does this mean for the future?  For one possible answer, let’s ask the question a different way:  What products of the next 5 - 20 years share the six characteristics of the original PC?

Perhaps those products are in the PC business, like blade servers, or even parallel supercomputers.  On the other hand, the answer might be in completely different industries.  NOTHING about the “Six Success Factors of Dell” say anything about personal computing or even electronics.  The next industry to be transformed might be something like transportation, where the six competencies described above can provide some competitive advantage in an emerging and/or high growth market.

As for transportation:  We can compare the not-as-Big Three of today to the IBM and Digital Equipment of the 80’s.  Who would have thought that the lowly PC (a “toy”, in some early reviews) would transform one of those business so completely, and eliminate the other one?

Open Letter to the PC Industry: Please Innovate!

Lenovo has announced that they have formed a consumer division to sell more PCs to consumers.  The bulk of their sales (outside China) have been to businesses that buy a bunch of the same thing, all at once.  Lenovo calls this their "relationship model". 

Consumers, along with small and medium businesses, behave differently, buying off the shelf items singly or in small quantities.  Lenovo calls this their "transaction model", and has formed the consumer division to increase the contribution of the "transaction model" to their business.

I think that their opportunity goes far beyond selling more PCs to consumers.  I'd even argue that consumers are getting pretty fed up with PCs.

Here is an open letter to all PC vendors -- a sort of consumer's manifesto, if you will.

---

To All PC Makers:

I want start by asking you:  How do you add value to your customer? Do you add value to your customer?

We don't need or want a bigger, faster, better computer. They're just about as cheap as they can get, so you can't compete on price.  We don't care about processor maker or speed, video RAM, or hard drive size.  We don't care about networking, or residential gateways, or the operating system.  We don't even use PCs to "compute".

We do need new ways to interact with digital content and web services.  Content - software, entertainment, information -- used to be distributed through physical means:  books, CDs, papers, magazines, etc.  Now it comes over the Internet.

When you think about it, there are only four things you can do with "content":

• Consume it (listening, reading, watching);
• Store it (photos, music);
• Make it (documents); and
• Move it (e-mail, phone calls).

Invent new systems that let us do these things in fun, convenient, easy, inexpensive ways (and make them available in ways that make the purchase process a pleasant one).

The word "system" is very important.  Look at the iPod -- 100 million sold. 

The iPod isn't successful just because it's a cool device.  It's just a hard drive with a user interface, and there are tons of other similar devices out there. 

The iPod is successful because it is part of a system made up of the fun device, the easy organizing software (iTunes), and the convenient, inexpensive source (the iTunes Music Store). 

We want and need new systems, designed around electronic content and distribution. 

Old style entertainment systems were optimized around physical content - tapes, records, and compact discs.  Complete businesses grew up around these systems:  the record industry (still called that, ironically), then movies; Maxell and TDK made blank tapes; Sony Walkpeople for portability; the now defunct Tower Records; and, of course, Blockbuster.  (Netflix is a neat twist, but it is still all about physical distribution.)

The PC used to be a content system when information was distributed physically -- floppies and CDs.  It was designed to create content using productivity software.  Over time, the usage pattern shifted to consumption. 

Then came broadband and the World Wide Web.

Today, the PC isn't a system.  It is a component. But it is still the same (25 year old) design, sold the same way, in the same places, and with the same messages.

This creates a huge opportunity for innovation.  Absolutely huge. Inventing exciting new components and integrating them into complete systems that people will flock to buy.

        You have to ask yourselves: How can I add value to my customer? And what do they need now?

This is "disruptive" thinking, to take Clayton Christensen's word.  We consumers are "overserved" by the PC industry.  We are "underserved" by the promise of web services.  We have latent needs that we can't express.

We need innovations that go beyond virus protection and fingerprint scanners.  These aren't innovations -- they're cages.  We need you to make viruses irrelevant.  Design a system for us that makes that happen.

We don't care how PCs are made -- or how successful your supply chain management is.  We care about price, reliability and convenience.  Now that HP has figured out how to match Dell on price, we'd rather buy it from a store and get it right away.  Direct-to-consumer isn't important if it makes us wait and doesn't save us money.

        Ask yourselves again: How do I add value to my customer?

You need new supply chains for new products, and more importantly, new value chains.  Currently, the value (and profit) in the PC is owned by the processor companies and the OS company.  That leaves little money left over you to sell commodities that start depreciating the instant they are assembled.

Tinkering with the current supply chain leads to "innovative" new sources of revenue that really annoy your customers.   PC's are loaded with what Walter Mossberg recently called "craplets" that you are paid to put on your products.  He wrote two columns (here's a link to the second one; click on "craplets" above for the first) in the Wall Street Journal about the awful experience of starting a new PC for the first time.

He says the  "problem is a lack of respect for the consumer".  He's right.

We want respect.  We want to be excited by the products we buy and the things they enable us to do. We want to like the companies that produce these goods and services.

So please innovate -- don't try to sell us more PCs.

Thank you in advance.

---

P.S.  Apple seems to "get" this.  They own much more of the value chain, and take a goodly piece of the part they don't own (content) because they are the gatekeeper for the distribution of it (iTunes Music Store). 

They even took a version of UNIX and made it into a friendly, secure, crash-resistant operating system that adds value to the user experience.  (Interestingly, they've achieved this better user experience largely by removing the operating system from our awareness.)  So they get to keep that part of the profit, too.

Walt Mossberg likes Apple's approach (as does Apple's growing customer base).  From the second of the two columns I mentioned earlier:

Finally, an excellent way to avoid or minimize the craplet problem is to simply buy an Apple Macintosh computer. New Macs don't have any craplets displayed on their desktops. On a new Mac, no third-party software is automatically launched when you start the computer, and you don't need antivirus or antispyware programs because the Mac is essentially free from those menaces. So, even my year-old Mac laptop reboots roughly three times as fast as my three-week-old Sony.

And, tellingly, Apple recently removed the word "Computer" from their company name. That raises the bar for the entire industry.

Vista at Circuit City?

It would be fair to say that Circuit City makes a fair amount of money off of the upgrade cycle of personal computers.  In fact, having watched their fiercest competitor, Best Buy, make even more money off of PCs through their Geek Squad, they've recently launched Firedog.  To call it a copycat service is probably harsh, and there are stark distinctions between the two.  The Geek Squad uses VW Beetles, while Firedog uses Scion xBs.  (Those are the cars designed by someone who thought Volvos were too aerodynamic.)

Anyway, in this week's Circuit City sale circular, Firedog is offering a free PC checkup to -- among other things -- "find out what you need to get your PC Windows(R) Vista(TM)-ready".  I've been reading a fair amount of what sort of computing resources Vista will require, and it wouldn't surprise me if the vast majority of people who avail themselves of this free offer (a $39.99 value, by the way) will "find out" that they need a new PC!  Pretty clever!

I like the integration of the service with the product, and it makes sense from a business model perspective.  IBM might have kicked the whole idea off with the establishment of its Global Services business ten or so years ago, when they discovered that there was as much (if not more) money to be made helping people use the computers instead of just selling them the computers themselves.  "Moving up the value chain" is another way to look at it.

It so happens that I was in a brand new Circuit City yesterday -- so new that its "Grand Opening" is still underway.  (I was looking for that still-elusive Ninteno Wii.)  On one of the endcap displays was a PC with a flat panel monitor.  On that monitor (captured on my cellphone, so I apologize for the quality -- but click the picture to enlarge it if you'd like), was the Windows 98 logo, along with the words "Windows is shutting down".  It was that way the whole time I was in the store. 

Apparently, Circuit City's internal IT staff isn't going to mess around with any new technology until they're sure all the bugs will be worked out.  (I guess they prefer to stick with the old bugs, even if unsupported!)

I really don't know what to make of this discovery.  On one hand, I suppose that Circuit City's shareholders should applaud the frugality.  On the other hand, Microsoft doesn't even support Windows 98 any more, having released Windows ME, 2000, XP, SP1 and SP2, and is on the verge of shipping Vista in a week or so.  How much time does the Circuit City IT staff spend loading W98 onto systems in a brand new store?  Where did they get the licenses? 

Maybe this is innovative in that they've managed to resist the siren song of upgrade, upgrade, upgrade.  In that case, I give them a round of applause!

Where is the PC headed?

A couple weeks ago, I was a guest lecturer at Duke University, teaching "Principles of Technology Marketing" to a session of the Commercializing Technology Innovations course.  This course is taught by a friend and colleague, Joey Holmes and is part of the Masters of Engineering Management curriculum.  One of my main messages is that any innovation has to solve a problem to become successful - the larger the problem, the bigger the market.

As the launch date for Microsoft's next operating system (named "Vista") approaches, I've started wondering about what problems computers that use this new (and supposedly innovative) operating system will solve.   PC's are pretty much commodity products now, and it is really quite difficult to create meaningful differentiation in the products themselves. 

Design is one area, and the first "official" Lenovo blog is called "Design Matters", lending credence to the importance of design.  That said, there is really only so much you can do with the shape of a desktop box or notebook computer. 

The larger question is this:  What is it that customers are doing with computers that requires Vista? Or a faster PC at all? 

Most trends are toward software moving off of the box and onto the Web (variously called "Web Services", "Software as a Service (SAAS)", and so on), which require a browser and not much more.  Some things, like photo and video editing, still need powerful processors, big hard drives, sophisticated software, and lots of memory, but that is becoming the exception rather than the rule.  Documents, spreadsheets, and the other common office documents are increasingly created in online, collaborative communities, with little demand placed on the computer in front of the user. 

I think that Vista will be more than most companies and people need and are willing to pay for.  Other than PC vendors looking for Vista to breathe new life (hopefully) into sales, I haven't heard the customer community asking for a new OS.  This may signal a fundamental change in the industry.

The business model in the PC business is well established, and probably ready for disruption.  In his groundbreaking 1996 book "Value Migration", Adrian Slywotsky charts three phases of value migration:

• Value Inflow, where a new business design attracts revenue because it does a better job of satisfying customer needs.  Think of how PC's beat out all the alternatives in the 1980's.
• Stability, where the business design meets customer needs and an overall "competetive equilibrium" is maintained.  This describes the last ten to fifteen years of the PC industry.
• Value Outflow, where money flows away from the old business design toward new business designs that better meet customers' evolving needs.

Customers are looking for ways to turn information into competitive advantage.  Future innovations in personal computing will help them do that, and likely do it online.  Innovations are needed to add value in accessing, creating, transforming, and viewing the online information in new and useful ways, and the companies that make such products will gain their own competitive advantage.

iLove my iMac!

I am a switcher.  A couple weeks ago, I bought one of the new Intel-based, dual core, 2.1GHz, Apple iMac, with a 20" diagonal screen.  That's bigger than my first couple of TV sets, and whole lot nicer.  That's it in the picture.  That's the whole computer -- no other boxes. The CD/DVD slot drive is on the right edge (out of sight in this picture), and it will create both CDs an DVDs. It is running Mac OS X 10.4, also known as "Tiger". Other than a version of Microsoft Office.X that I had for the other two Macs in the house (an iBook and a Mac Mini), I only needed to download Firefox. OK, "need" is a strong word, since Safari is a great browser, but I *like* Firefox.

An interesting thing about Microsoft Office.X -- this is the student and teacher edition, which is apparently available to anyone who is, was, teaches, or has, a student -- is that they let you install it on three different computers. Legally. This is totally unlike Office for Windows PC's, which allows you to install it on only one PC. This is the main reason I started looking at other operating systems -- alternatives to Windows. As I got more PC's in the house, the prospect of paying $400+ for legal versions of MS Office was ludicrous. So I found Open Source software, and the very good OpenOffice (which is free, almost totally compatible with MS Office, and available for Windows, Mac, and Linux), and thus started a four year tech journey that culminated with this purchase.

Back to the iMac...I tried Microsoft Entourage for email, but that was awful, so I switched to Apple Mail. Very nice, with some substantial usability improvements over the version in Panther (the previous OS X version before Tiger).

I've set up my Palm Tungsten T5 to sync with iCal and Address Book, and it does it wirelessly via Bluetooth, which is built in to both machines.

The point here is that everything you'd need to use a computer comes with this machine.  Here's what you get with the machine:

• iPhoto for digital photography;
  
• iTunes for music (of course);
  
• iCal for calendars;
  
• Mail for, well, mail;
  
• Safari for browsing;
  
• iChat for AIM compatible instant messaging (and video conferencing with the built in camara - the little black dot at the top center of the iMac in the picture);
• TextEdit for preparing documents (compatible with MS Word);
  
• and a ton of other little things, all nicely done.
  

I've moved all of my old ThinkPad files over to the iMac (and they all work)!  And my old eyes love the new screen! It is stunning. (And no need for anti-virus software or anti spyware spyware, either!)  And the iMac blends pretty much automatically into the home network -- all I had to do was enter the WEP code for wireless networking (which is built-in as well).

The only small problem I had was receiving some emails from a colleague that hd attachments that came as a "winmail.dat" file.  (Only one sender has this problem, and I receive a lot of email.)  I found a utility called TNEF's Enough that takes care of the problem.

In addition to Firefox, I've also downloaded Skype (an Internet phone/IM program) that works flawlessly.

All told, I am delighted with the purchase, and highly recommend what Walter Mossberg of the Wall Street Journal calls the "best desktop PC on the market today".

Dell 's Alien Strategy

I've puzzled over the recent announcement by Dell Computer that it was acquiring Alienware, a maker of very high performance personal computers prized by gamers and other power users.   In an industry characterized by commodity products, why not just use Dell's logistics expertise to put the exact same parts that Alienware uses into a Dell-branded box?

Two reasons:  first, the Alienware brand is very strong in this segment and Dell's is not.  ("Alienware has tremendous brand appeal with consumers and creative business professionals," said Michael Dell, chairman.)  This allows the company to have significantly higher profit margins than Dell -- perhaps as much as 10 times higher -- on an average selling price (ASP) that is about 3 to 4 times higher than Dell's.

Second, Dell's operational prowess applied to Alienware's business is far more profitable than to the same components in a beige box from Dell.  Alienware is only a tiny fraction of Dell's $60 billion size, so it is reasonable to expect that they aren't getting the same terms and conditions on components as Dell is.  A reasonable assumption for their inventory turnover is 10-20 times per year.  Dell turns inventory 100+ times per year.

The key formula is that total profit is the product of profit margin and inventory turns.

Now it makes sense.  Alienware's great brand will bring great margins, and Dell's operations will dramatically increase turns.  That drops a lot of money straight to the bottom line.  Factor in Dell's marketing muscle, and the growth prospects are even brighter for Alienware products.

Caveat:  Alienware will have to work hard to maintain its brand reputation and not let Dell's recent image woes tarnish it.   A brand is a reputation -- hard to build and easy to destroy.  Alienware will have to consistently produce products with amazing performance, unique design, and superb support to keep their core audience loyal.