Perspective: Where Dell went wrong

The resignation of Kevin Rollins as CEO of Dell highlights one of the oldest and most important adages of the PC industry: you can stay on top for only so long.

Relentless competition, product commoditization, prickly customers and the sheer arrogance that comes with being No. 1 (or a strong No. 2) invariably conspire to bring a company down.

Apple was No. 1 in 1990 before flailing in the business market and being knocked out by IBM. IBM thought its name and prestige would carry it, but customers flocked to Compaq, which undercut IBM in price by using Taiwanese contract manufacturers.

Packard-Bell then threatened Compaq, but consumers quickly tired of its strategy of selling low-cost computers made out of parts from a 1977 Gremlin.

Eventually Compaq imploded because of: incredibly poor demand forecasting, an inability to come up with a workable direct sales strategy, and a failure to understand that there was a difference between being King of the World and King of Downtown Houston.

In late 1998, I saw Compaq's CEO at the time, Eckhard Pfeiffer, walking around a trade show flanked by two bodyguards. Six months later, he was out of a job.

So where did Dell go wrong?

Dell began to treat consumers and even some business customers like they were passengers on a Greyhound bus.

First, it hired too many former management consultants like Rollins himself. Back in 2004, a group from CNET News.com visited the Round Rock, Texas, headquarters. Nearly everyone we met had recently parachuted in from places like McKinsey and Co. I met only one guy with any authority who had spent time on the front lines of sales, i.e. setting up cardboard end caps at retailer outlets.

Management consultants typically have very impressive credentials. Unfortunately, most of them also associate only with their fellow Wharton graduates so they are often culturally disconnected from their customer base, which can and often does include 13-year-olds, IT managers at corporate branch offices, and people who skip the crossword puzzle in favor of Junior Jumble. In other words, the rest of us.

Although they try to resist the temptation, the average MBA-trained executive sees people like this as a cost sink and spends most of his or her day trying to figure out how to cut back on services without anyone noticing. Unfortunately, customers--particularly these days--really want to be sucked up to: sites like Yelp.com have seen astounding growth by giving people a way to vent their anger about dismissive waiters.

Dell began to treat consumers and even some business customers like they were passengers on a Greyhound bus. Customer service became a chronic complaint and people flocked to Hewlett "The Computer is Personal Again" Packard.

It was a weird turnaround for Dell. The company's secret weapon for a few decades was strong customer satisfaction. Michael Dell himself, even in recent years, could occasionally be seen in the call center donning a headset and answering the phone. Customer trust will take a while to win back.

Second, Dell has no style. Remember the WebPC, an all-in-one (sort of) computer back in the late 1990s? It looked like a peasant woman from Uzbekistan. The company's MP3 players have always seemed bland. What is one of Dell's most consistent advertising venues? The back of Parade magazine in the Sunday paper.

In some ways, being boring has been an advantage: business customers love dull. But consumer PCs and consumer electronics have become a larger part of the business in recent years. Dell has come out with TVs, but the market share is low. Overall, consumer is still only 15 percent of the company's revenue.

Third, price. Everyone thinks that Dell has been the low-cost leader among major PC makers. In reality, Dell's average selling price has been higher than the industry average and higher than that of rival HP for years.

In 2002, the average selling price for a consumer PC from Dell was $1,084, according to research firm IDC. HP's average selling price for the same year was $1,009, or $75 lower. The average for all manufacturers was $1,030, $54 less than Dell. In the first three quarters of 2005, Dell's average selling price for U.S. consumer PCs was $854, more than $200 above HP's $651 average. It was the same in 1998.

Dell never has gone out of its way to advertise this data, but it has worked to its advantage. Unfortunately, PC prices have declined while capabilities improved. "Now, even low-end PCs are able to deliver the performance customers need," said Charles Smulders at Gartner. "The Achilles' heel has been the precipitous fall of average selling prices in the last few years."

Fourth, call it revenge. I can't prove this empirically, but customers flocked to Dell in the 1990s because the company seemed to embody an American ideal. It was a young company fulfilling a need in a clever way, and many of its employees were becoming millionaires. And every bump in the stock meant a bump in your 401K. Even during the tech implosion Dell managed to maintain its footing.

By 2004, it was just tough to look at them anymore as an underdog eager to do the right thing. It had become the Man.

Biography
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas. He has worked as an attorney, travel writer and sidewalk hawker for a time share resort, among other occupations.

More Perspectives

[jimothyGator]

Arrogance

Other example of Dell's arrogance can be seen on their web site.
Depending on where you happen to click (home, small business,
big business), you can get the same equipment for vastly
different prices. This is not a way to gain customer confidence
and loyalty. "You mean I paid an extra $200 because just
because I said I was a home user?" Should Dell be surprised that
years of tricking customers into paying a higher price so they
subsidize another class of customers buying the same
equipment has caught up to them?

Now that he's back at the helm, Dell should sell the company
and return the money to shareholders.

[Dachi]

This is true

Another example of this is if you order a PC without an OS.

The default configuration is slightly cheaper, but the costs of upgrading some of the components like the monitor costs more.

So when you are done configuring the PC there was no costs savings to not getting Windows.

Also, another interesting quirk is the "As Advertised" option in the "Desktops" dropdown.

You can browse deals they have run on TV, newspapers etc.

Even if you know your exact configuration sometimes it is cheaper to start with a high end preconfigured system and downgrade it, sometimes it is cheaper to find one and upgrade it.

In can take hours to find the cheapest place on the website to build your PC even if you know the exact model and specifications you need.

Additionally, some of the prices fluctuate on a day to day basis (like the stock market) so you might end up configuring a specific system from 5 different places on the site every day for a week before you decide to eventually lock in your price.

[jeroneanderson]

very true...

inconsistent pricing and short lived sales have eroded customer satisfaction and belief that they are getting a good price on what they buy.... and how can anyone make long term buying decisions on a Dell when only on a one day sale does the price seem fair?

[mampoerdrinker]

Dell's Service Shocker

I just ordered a Dell laptop this past week. What a nightmare! The reason I ordered a Dell laptop is because I wanted a Turion 64bit CPU. I can't get them anywhere else, and so I went with Dell. From my order being cancelled to their attempt to force Vista on me (I ordered the laptop on Sunday) to their rude sales staff in India (who could not undestand me) to problems with their finance department (I bought on credit for a particular reason). I can only say that Dell is getting what they deserve!

[jayhawk73]

Like the article says -- HP is everything Dell is (and sometimes better)

I'm typing this on my HP Pavillion DV8000 notebook with an AMD Turion64 processor. You may want to research a little more before you say Dell is the only one with that capability.

This notebook has been the best one I've owned. It was $1200 last year while a comparable Dell 17" widescreen was close to $3000. I have 2 Inspirons collecting dust in a closet now because of this one.

I've lost all faith in Dell's ability to deliver a quality product at a competitive price. I'll shop places like tigerdirect.com and buy HPs for way less than Dell.....

[billmosby]

Entertaining...

Liked the description of management consultants. Was Apple No. 1
in 1990, or was it 1980? And those price comparisons last year
between Macs and Dells, which showed comparable Dell models to
be equally or slightly higher priced, now ring a bit hollow. Still like
Macs better than Dells, though, and I've used both.

[adlyb1]

Great article

Very insightful.

As both a consumer and business customer of Dell, I can agree with every component of this article.

For years, I kept our company away from Dell because they just didn't get business needs and tried to hock consumer equipment in a large business environment. But, they finally figured it out and we have embraced them all the way to the Data Center.

But, it has come at a price, which is a disconnect from their consumer roots. They have got to find their way back there without disconnecting from business to be able to continue to grow.

HP rediscovered their consumer roots, but have damaged their business side in the process ((hence my company's move to Dell).

It's all about agility and they both are struggling which is creating opportunity for Apple, which isn't necessarily a bad thing, but good price points have never been Apple's forte, so I'm hoping they regain their footing to keep a strong price pressure on the market.

[Dachi]

That and Rollins sucked

I could tell from the first interview he gave (here) after accepting his job as CEO that he was the wrong guy for the job.

I am pretty sure I commented on it in that article too.

[dcvchigago]

It's the customer, Stupid!

I bought my last Dell in 1997. It came loaded with crapware, and it was buggy and unstable. I finally wiped the entire hard drive and reinstalled from a Windows OEM disk. The sleep and hibernate features never did work correctly.

Customers have long memories. Inexpensive is good, but cheap is bad.

[winstein2000]

Credibility and Facts...

The author would get more credibility if he get the facts straight with better research...

Apple was only "number one" in the 1990's as a personal computer brand and unit sales, it never has large business market share in the 1990's. IBM beat Apple in the 1980's

Compaq did not beat IBM with Taiwanese contract manufacturers, Compaq beat IBM by using generic parts and teaming up with Microsoft. Plus, Compaq did not spend a dime on developing operating system like IBM's OS/2.

But I do agree with the author: Consultants have their place, but they are not good at taking over and running a company in the long term.

[Hawkr]

IBM vs Compaq

Kind of funny. Both Brands used Taiwan contract manufacture for their product lines. Until recently IBM used Acer and I beleive that Compaq was using FIC (could be wrong on the Compaq). Both players were in bed with Microsoft. Compaq beat IBM in the consumer space by using their strong business lines to carry the price points needed in the consumer space until IBM screamed uncle.

[y2lprawn]

Terrible support

The reasons I left dell for my purchasing needs are the bloated windows installs , the sporadic bad drivers, terrible support. I am still waiting on a replacement battery for the Inspiron 9100 and they ring me every day demanding the old one back. The upgrade paths to the GPU i was promised were unavailable when I tried to get them. i keep getting sent from department to department for an answer. All in all a very poor experience for me.
I got a HP laptop recently, business machine, much better. Poor website design on HP behalf is my only complaint.
So there is no way I can recommend dell. So they are getting what they deserve. I do think though they are big enough and bold enough to re-invent themselves. So best of luck to them there.

[y2lprawn]

Yep

Exactly the same issue I had with mine, I was very annoyed, driver updated made no difference.

[wmanning]

Dell's neglect

I was with a large school system outside of Atlanta and Dell was our major source of equipment. About 6 years ago I moved to Tennessee and ordered a high-end Axim, a $4,000.00 desktop and accessories ? the Axim went to the wrong address three times and then my new desk top didn't last but about 3 years ? the article is correct ? they "don't care" anymore; so making new technical contacts in Tennessee ? Dell is now out of the picture ? for me and any of my clients.

[jeroneanderson]

Slipping Quality Scares Customers...

As the author says, Dell has never been the price leader... instead it has a tradition of making decent computers. As Dell cut prices in recent years the build quality and reliability of Dell laptops in particular has declined and as other companies respond by cutting prices on their hardware they do so more effectively and more profitably than Dell. An Apple laptop of equivalent performance to a Dell has a far better build quality, costs about the same as a Dell and runs Windows and Mac OS X natively...and has more profit margin for Apple in it. Among the PC laptp vendors IBM has filled in for quality where Dell has removed it and many professionals who traditionally had Dells now have IBM laptops. Add the poor Dell support to the picture and it becomes clear that quality and support are major issues for Dell to address... but this will be hard since they are now behind the eight ball and don't have cushy profit margins to cut into to improve their quality and the investors will not want to see profits suffer as Dell attempts to improve.

[mampoerdrinker]

No Laptops sold without an OS

One thing I forgot to mention: Dell pointblank refuse to sell laptops without an OS. The sales person from India told me that I could write to Michael Dell and complain about the fact that they would not sell me a laptop sans Windows! Also the salesperson mentioned that Windows OS is a freebie! What a joke...

[Fred_Demara]

Not true

Dell sells millions of systems - desktops and notebook computers without operating systems - worldwide. Ask them for an "n-series" computer. "N" means no OS.

[_eclectic_]

Whats wrong at Dell?

I have two Dell servers, several Dell desktops, and several Dell notebooks. Originally, these were good value/good build with good service machines. Here is what I have run into:
1.) India service - while well-meaning, these folks read a script. If you are outside the script, or know anything about PC's, you are in big trouble and will become frustrated if not downright angry. If you outsource, don't think you can get folks that know less to get by;
2.) Build quality - little things are failing on the last notebook I bought (2 years ago) including screws falling out, feet falling off, wear from palms, cracking cases, etc. It is off, and that is where Dell was supposed to be good;
3.) NO STYLE - bland, bland, bland. I just bought a notebook for my daughter from HP, it is white (like an Apple!) and very attractive styling, has well thought out multimedia, good size keys, good value (only problem is a HUGE batter that lifts the notebook into the air, stupid mistake). Given the same price and the same components, style wins;
4.)Management - I cannot agree more with the "Management Consultant" syndrome. Make the numbers look good in the short term, take your bonuses, when the repurcussions come in 18-36 months, bail and go to another company with your resume showing how you improved profits 25% (of course, no note about the long-term impact as we are now seeing).
5.)Pricing - what confusion! Like products at the grocery store, too much differentiation is a bad thing, too much choice confuses. I don't mean configuration; custom configuration has always been a Dell strength. I mean price.
6.)Investment (Research) -how about research/investment into design/style?

I have another 3 notebook purchases coming up, Dell will have to change quickly for my money to go there.

[beaujohn]

Shame On Cnet News For Pop-Ups

I was reading this article and a pop-up screen appeared over the article...it was trying to sell me something, some kind of survey I think, I had to close it to keep reading the article.

Shame on Cnet News!

[Jay_in_FL]

Arrogance and Greed at CNet, Also

Arrogance and Greed at CNet, Also

Jay

[gw188397]

Use FireFox 2.0

It has great pop-up blocking. You can also block images from advertising networks like googlesyndication.com, doubleclick.net, etc.

[batavier]

Google Toolbar

prevents pop-ups - I did not get any.

[siriusproductions]

Insensitive (at best), Racist (at worst)

"It looked like a peasant woman from Uzbekistan."

Would Kanellos say that about a native woman from Kenya? What about a woman from a kibbutz in Israel? Or Greece? Or Ohio?

This is not about political correctness, it's about showing respect for people -- something the author failed to do.

[michael kanellos]

you are right

I should have used Greece. I'm greek myself and can testify honestly about the hairy, lumpy people of my background. Being a member does make things more palatable.

[bdonohue1]

Why there are editors

I agree with siriusproductions' observation about the "peasant
woman remark." It's out of line and should have been caught by
an attentive editor and slashed. Why, then, you may ask, have
there been no complaints from friends of the Greyhound Bus Co.?
Because, no matter what the American legal system may think, a
corporation is NOT a person. A person is a person.

The lesson of this is for C-Net editors more than any individual
writer: do your jobs. Read every article carefully and critically, no
matter how famous or popular the writer may be. I'm a writer,
and I know that we make mistakes all the time--sometimes
egregious ones. That's why there are editors.

[john262]

Give Me a Break

Give me a break. We can't even say something like that without being accused of racism? Aren't we allowed to have at least a little bit of humor, or do we have to be so politically correct that we can't even make an innocent comment like that?

[SamoUmer]

"a peasant jew"

Good article, sadly the author cannot help himself from being
american. Once you can't speak the truth abouth the nigro and the
kike, you can always fall back on the drka-drkastani or some other
"minority" that still does not have the power to kick you out of your
job.

[timomy]

Get a life...

...and quit worrying about political correctness!!!

[michael kanellos]

facts

Actually, Apple was number one in 1990-a year- before getting knocked out and at the time the idea was to build in the business arena. the idea faded but that was the idea. THey just got bowled over by big numbers. I forgot to mention too that Apple had notoriously bad forecasting, similar to Compaq.

Compaq used generic parts but that was part of the taiwanese expansion. they were the first to really embrace them over there. os/2, I think, was budgeted in a different department.

[realistic1]

Uh oh, now you've done it.

You brought up OS/2! That talk-bot will be all over us soon.

[johnqpope]

Energized

As a Dell employee I and many of my co-workers were energized by the enthusiasm Michael showed yesterday in a companywide webcast. He promised a number of strategic and tactical changes in the coming days and weeks, all aimed to restore our customer experience leadership. As Dell 2.0 unfolds, we're confident it'll have the makings of a story entitled "Where Dell Went Right."

[solmajeur]

Excellent...

Does this mean that Dell is going to move customer service to an English-speaking country? Like many Dell customers I've had very frustrating experiences with Dell customer service.

[rrrgroup]

Dell is not as bad as all that

Four desktops, one laptop, printers, etc. and customer service has been efficient and fast; even the battery replacement.

Prices have been excellent.

We've become a nation of spoiled whiners, looking for a golden egg but not willing to pay the price.

[i_made_this]

Dell's Gone Wrong the Same Place That...

...their competitors have. The difference between an HP or an IBM/Lenovo and a Dell business strategy is that the former two firms have solid profit-making non-commodity basic product lines to support their sales of what has increasingly become a commodity product - the PC. To break with the trend toward commoditization of the PC will take some outside-of-the-box strategizing which we don't see any of the three major boxmakers doing quite yet. A bold new approach is required to regain market confidence in selecting an optimal boxmaker. One interesting idea I've heard proposed starts with the basics of product presentation - perhaps for example, the market is ready to embrace the first of the three major boxmakers to take their chances by omitting the header "[We] Recommend VISTA" on each and everyone of all of the firm's online and physical catalogs. It'll cost them some promotional money from Microsoft, but perhaps the market maybe prepared to pay such an edgy approach back in spades.

[wookielookin]

First thing to do

The first thing to do is get Dell customer service out of India,
Pakistan, the PI or where-ever the hell it is. This past spring I
had a hell of a time getting anyone over there to even recognize
that my two month old - broken - 20" plasma monitor was even
under warranty. After two weeks of phone hassles, starting at
tech support ground zero each time, I had to call Dallas and
personally ask for Mr. Dell before I got any attention.

Thank god it was a work computer and monitor. My Macs dont
give me anywhere near the aggravation.

Tom

[vm019302]

Does anyone here have a positive anecdote...

about Dell support over the past few years? My experience has been horrendous, and that's true for everybody else I know who's contacted Dell support. I don't personally know of a single person who would describe Dell support as anything better than 'abysmal'.

[john.morris41]

I wish my bank would bring customer service back home too!

It's not just Dell that has moved to Indian call centers, it's all the big monolithic companies. My bank (HSBC)calls me on my cell phone to tell me I've missed a payment. To start with, I can't hear them, and when I can hear them I can't understand them!
Unfortunately the quick-fix culture (such as overseas call centers) is dominant at these monolithic corporations, largely because Wall Street likes quick fixes, and Wall Street owns them!