Dell's Lack of Innovation Disappoints

Dell (DELL) showed the industry a new way to do business in personal computers. It was revolutionary at the time and created a very large, very profitable franchise in computing. A one-trick pony is plenty when the trick is good enough. Unfortunately the trick is no longer unique.

There’s no point in rehashing the misfortunes of Dell customer service and the legendary “Dell Hell” that was created for customers and users. When Michael Dell came back to run the company in 2007, it offered hope for a new chapter in Dell innovation. So far, though, it’s hard not to be disappointed with what the company has done. Dell has made two fairly large acquisitions:

1. The purchase of Perot recognizes one clear fact in the enterprise market: professional services are required. IBM led the way here with IBM Global Services many years ago and even exited the PC business. More recently, HP (HPQ) acquired EDS. In contrast, Dell professional services were so bad that customers didn’t even use them when they were included at no additional charge. Perot addresses this weakness but merely follows market reality and is a somewhat lesser solution than what is already offered by the competition.
2. Dell also acquired EqualLogic at the beginning of 2008. Although a very strong player in storage area networking, EqualLogic doesn’t bring unique capabilities or a change in positioning for Dell. Most of the major systems vendors, HP, IBM, even Sun Microsystems, have storage solutions. Any gaps are easily filled with components from vendors like EMC, NetApp (NTAP) or .Brocade (BRCD)

Unfortunately, the best case scenario for moves like this is possible parity with other competitors in the market, and that looks like quite a stretch given the size of HP/EDS and IBM in the marketplace.

Dell still has a reasonably solid position with enterprise customers who appreciate Dell technology for its price/performance and execution on promised delivery. That one bright spot is enough to keep them in the game within the enterprise for some time.

On the consumer side, Dell now has to face a new leader in terms of innovation (Apple (AAPL)) and a plethora of very good, very low cost products from firms like ASUS and Acer in addition to behemoth HP. Dell still can win often enough with good prices, online configuration and fast delivery to stay afloat but not enough to really gain share. The growth of good alternative online channels for computers like Newegg and Amazon (AMZN) diminishes the advantage Dell once enjoyed online.

While Dell has been catching up, the market has also been moving - increasingly toward mobile computing as the new locus of innovation and activity. To be fair, Apple is the only computer company that really saw this coming and exploited it fully with the iPhone. Still, Dell is nowhere to be found here and although they have made some noises about having their own branded device in this space, it doesn’t appear that they are investing heavily in it. Contrast that with Motorola (MOT) who has basically decided to bet the company on the next generation of Google (GOOG) Android powered phones.

The other major trend towards RealVR and Cloud Computing would also appear to leave Dell in a support role where they may be supplying servers into the racks of some of the service providers. Although it’s good business today, it won’t support high margins given the power of the buyers versus the suppliers.

The crux of the matter is that as long as Dell feels they are a channel rather than a creator for great innovation and client solutions, they are going to suffer. Why? Because there are channel technologies everywhere and they have been copied and made commonplace. Dell has also been stuck with the Microsoft (MSFT)OS which hasn’t helped them much in the past two years. Now with Windows 7, Dell has at least some wind at their back in their loyal enterprise accounts and with consumers who will still respond to Dell price/performance leadership.

The point here isn’t that there is no innovation at Dell; just that there is not nearly enough. The company has done some good things in that it generated practical online communities, has leveraged social networks like Twitter, built a fairly good all-in-one computer to try and match the iMac, and has designed a cool laptop called the Adamo, etc. But these are all changes at the margin rather than being at the level of corporate identity and positioning.

Dell needs to do something deep, daring, daunting and potentially delightful. What is it going to be?

Disclosure: Author has no position in Dell, HP, IBM at the time of this writing.

Comments

[SiliconValleyJoe]

There are no surprises here. Dell is specifically a hardware manufacturer. It is narrower than H-P, IBM and Sony and Hitachi. H-P and IBM have software expertise and knows to build its own OS and software application suites for business use. Sony makes consumer electronics and owns entertainment media. Hitachi makes consumer electronics and appliances.

Dell has tightly focused itself on making PC before branching out into services but purchasing other firms. Until it can develop software prowess to add value to its hardware, it must rely heavily on others for software and it can only compete on price. We all know how PC builders compete on price, it is a maddening race to being near-free.

Dell was never a technology innovator. Dell was just a PC maker that hit on a business model that worked for a time. It never adapted, never looked forward and became complacent. It is paying the price now.

2009 Nov 23 12:17 PM

[ryanclarke]

Dell is only a few steps behind Gateway ... to the grave. I go as far to say this, and to save the reader twenty pages of analysis, for a very simple reason.

Dell, just like Gateway, just like Compaq, just like all the other "computer" companies ... relied on other manufacturers to actually do the "hard work" ... such as Intel, Microsoft, and Seagate .. and actually build the factories that make the components of a Dell box.

Assembly work isn't very profitable ... just ask the "mom and pop" computer stores that boomed in the earlier 90's which called it quits with the tech bust in 2000.

I mentioned Seagate in my list ... because it bought Maxtor, another hard drive maker ... a few years back. Seagate is simply a mess. Soon only Western Digital will be around ... and I don't see them surviving the move to "flash hard drives" which is where the Koreans are going to make all their money.


On Nov 23 12:17 PM SiliconValleyJoe wrote:

> There are no surprises here. Dell is specifically a hardware manufacturer.
> It is narrower than H-P, IBM and Sony and Hitachi. H-P and IBM have
> software expertise and knows to build its own OS and software application
> suites for business use. Sony makes consumer electronics and owns
> entertainment media. Hitachi makes consumer electronics and appliances.
>
>
> Dell has tightly focused itself on making PC before branching out
> into services but purchasing other firms. Until it can develop software
> prowess to add value to its hardware, it must rely heavily on others
> for software and it can only compete on price. We all know how PC
> builders compete on price, it is a maddening race to being near-free.
>
>
> Dell was never a technology innovator. Dell was just a PC maker that
> hit on a business model that worked for a time. It never adapted,
> never looked forward and became complacent. It is paying the price
> now.

2009 Nov 23 01:47 PM

[Tom B]

I don't see hard drives going away, but I expect weaker players, like Seagate, will get shaken out.


On Nov 23 01:47 PM ryanclarke wrote:

> Dell is only a few steps behind Gateway ... to the grave. I go as
> far to say this, and to save the reader twenty pages of analysis,
> for a very simple reason.
>
> Dell, just like Gateway, just like Compaq, just like all the other
> "computer" companies ... relied on other manufacturers to actually
> do the "hard work" ... such as Intel, Microsoft, and Seagate .. and
> actually build the factories that make the components of a Dell box.
>
>
> Assembly work isn't very profitable ... just ask the "mom and pop"
> computer stores that boomed in the earlier 90's which called it quits
> with the tech bust in 2000.
>
> I mentioned Seagate in my list ... because it bought Maxtor, another
> hard drive maker ... a few years back. Seagate is simply a mess.
> Soon only Western Digital will be around ... and I don't see them
> surviving the move to "flash hard drives" which is where the Koreans
> are going to make all their money.

2009 Nov 23 01:56 PM

[NoGambler]

Dell is putting an android smartphone in Brazil and China....

Also, it would be most unwise to sneer at the prowess of Perot Systems.

2009 Nov 24 09:24 AM

[slam stocks]

The above comments are dead on. Dell had a brillant business model to build computers at the time of order to avoid stockpiling inventory. It worked well until other mfg. discovered cheaper or more innovative methods to cut costs. There is little to differentiate these companies besides price, quality, style, service and technology. Dell unfortunately lags behind in all these areas. Buying other companies might be short-sighted, but execution is the key. They are dying and being a disappointed owner of multiple DELL computers that are less than 2 years old, I have to agree this company needs to change.

2009 Nov 24 10:33 AM

[brewer]

Apple is not a 'new leader' for Dell. You have not been paying attention. Dell has been copying Apple's lead in hardware design since the very beginning, since LONG before Apple moved it's hardware to Intel, back to the early 90's at least.

2009 Nov 24 11:23 AM

[brewer]

Dell should consider it's own advice for Apple, and think seriously about 'selling the company and refunding the money to the shareholders'.

2009 Nov 24 11:25 AM

[j_remington]

mike dell should resign

2009 Nov 25 01:15 PM

[Ames Tiedeman]

The only chance DELL has is to get into computer services in a big way. They should have purchased EDS years ago. They also must focus on design, design, design. Apple won on design, not the operating system.

2009 Nov 26 02:37 PM