Where Dell went wrong

CNET News.com's Michael Kanellos says the company was overthrown by competition, product commoditization and sheer arrogance.

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.

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