Dell's Lost Vision by Gary North

Michael Dell’s story has become a case study of entrepreneurship. It is a business school textbook example of how to get rich. I am convinced that his company’s story will eventually be in the textbooks as an example of how the free market brings low what it previously had raised up. Dell Computer will become a case study of death by sclerosis and lost vision. In short: "Nothing fails like success."

Successful businessmen tend to forget that the consumer is relentless in his pursuit of his own self-interest. The buyer keeps asking the seller: "What have you done for me lately?" The answer had better be: "I have always delivered above-average quality for your money." If he is in mail-order, he had better add: "With a no-questions-asked money-back guarantee."

MICHAEL DELL’S ORIGINAL VISION

As a freshman in college in 1984, Michael Dell began assembling customized desktop computers. His half of his dorm room was stacked high with motherboards and hardware.

He had spotted an opportunity. IBM was selling its desktops for $3,000. The parts cost $700. He made it on the spread. He quit school after his freshman year – just as Bill Gates had four years earlier. He went into producing computers full-time.

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It was the right decision. He is now a multi-billionaire.

He made his money with a vision of what the small-business world needed in 1984: cheap computer prices, fast delivery, custom features, and good service. He could not match a local computer store’s instant delivery, but he could come close, and he could beat it with a much lower price.

As for service, that was a toss-up. The buyer didn’t know for sure. He was not dealing face-to-face with a seller. This is why a direct-response, mail-order company must offer a money-back guarantee. This alone will overcome the buyer’s distrust – not completely, but enough to get the first sale, which is crucial.

Service remains a toss-up for Dell. But today, Dell Computer faces a much bigger problem: profit margins per sale are paper-thin. Dell will sell you a computer for as little as $600, but Microsoft gets the lion’s share for licensing Windows XP. Economically speaking, Michael Dell is today working as Bill Gates’ operating system salesman. Dell gets rich. Gates gets richer.

No small business needs a desktop computer that costs more than $1,200, with bells and whistles installed. The price spread has disappeared. The free market has done its work. It has turned a unique tool into a common commodity, priced accordingly: cheap. There is nothing special about a desktop computer anymore, unless it doesn’t work properly.

A COMPANY’S USP

If you ever start a business, you had better decide early what your business’s USP is – its unique selling proposition. What is it that your company brings to the competitive marketplace that sets it apart from your main rivals? What is the supreme benefit that it delivers to a customer? You should design every aspect of your business to deliver your USP to the buyer.

You must not attempt to be all things to all people. For example, you cannot successfully position your company simultaneously as a discount seller and a premium, top-of-the line retailer. The confused signals will paralyze buyers. You won’t get their money.

First, you must target your market: the initial market and your follow-up market after your company grows. Michael Dell targeted his market: small businessmen who wanted to buy their first desktop computer, which they knew they really had to own. The desire to buy was already there. IBM and Compaq had already persuaded buyers of their need to own a desktop computer. That hard selling was over. Now a buyer had only to decide on a seller.

Second, you must decide what is the hottest hot button of the typical member of your initial targeted audience. Michael Dell identified this early: low price.

He had a great USP for his company in 1984: a very low price for a small-business product. He also added the following as back-up benefits: customized assembly, reasonably fast delivery, and good service. But it was the low price that drove his sales. Dell could beat IBM on price. Dell could also beat Compaq on price.

The #1 risk with any USP is that market conditions can change. When you position your entire product line one way in order to meet the demand of one segment of the market, and your targeted audience decides that it wants something else, you will hit a brick wall if you stick with your original USP.

Dell Computer has finally hit this wall. With price competition driving PC profit margins to the level of minuscule, Dell’s original USP is dead. We can see this in the company’s stock price: down.

In the October 16, 2000, printed edition, Fortune ran a long story on Dell’s problems. Here is an example of business journalism at its best. If I owned stock in Dell Computer, I would read all of it twice, even though it’s old news, because Michael Dell has yet to solve the problems that the authors discussed. Here was Dell’s problem in late 2000.

Though Dell has moved aggressively into new markets, desktops and portables still accounted for 83% of its revenues in the fiscal year that ended Jan. 28. Its stock, which grew at an average annual rate of 97% during the ‘90s, now looks more like Maytag’s – no, worse. Dell shares have been trading in the low-$30 range, almost 45% below their high of nearly $60 in March. Maytag, in the low-$30 range, has fallen 38% from its 52-week high.

Today, Dell stock now sells in the mid-20’s. Dell’s investors would have been wise in October, 2000, to take the article’s warning seriously. They should have sold their shares and bought T-bills. They have lost money by remaining owners of the company.

Here was their conclusion:

Nothing lasts forever. Michael Dell’s biggest challenge will be to have the discipline to know when and how to change what has worked so well up to now. If he does not, it will be just a matter of time before another company does a Dell on Dell.

Dell’s biggest problem is not that another company will do a "Dell on Dell." Its biggest problem is far worse: the entire product line is no longer more than marginally profitable. PC’s have become a mass-market commodity. They all work pretty much the same. The features are the same. They are all dirt cheap. There is no significant profit in selling one at a time.

When one PC is as good as another, and when they will all be made obsolete within a year, one PC company is as good as another, if all it sells is PC’s.

So, Dell’s original USP – low, low prices for a crucial small-business tool – is doomed. The steady progress of the free market has killed Dell’s USP. Now what?

RELIABILITY IS NOW THE PREFERRED USP

"The day you get delivery of a new computer, it’s obsolete." They said this in 1985. It was true. It’s even more true today. No one believes the "act now!" marketing slogan, which is an important tool in direct-response marketing. Computer buyers know that if they wait a month, they’ll get a better deal. But the money they save won’t be worth it, if the computer is necessary for their productivity. In any case, a PC is so fast that they won’t be able to perceive any difference in the new one’s performance a month from now. Therefore, buying pressure stems from the primary use that the computer will be put to, not from its price. "Act now!" has little to do with the computer; it is governed by the buyer’s expected use for the computer – a factor not under the control of the seller.

A computer’s price today is essentially irrelevant as a way to distinguish one brand from another. The price difference is almost irrelevant to the buyer.

What worries a business user most is down-time. He can lose far more money during down time than the retail cost of the computer. This is why computers had better be reliable. It is usually cheaper to buy a new computer than it is to fix it. The down-time – transit time – is what scares the businessman.

Dell and other computer companies sell extended warranties. This is where they make a big chunk of their profit per sale. But if it ever looks as though a computer firm is stiffing the user, despite the warranty, that firm will lose market share. "Stiffing the business computer user" means "eating up his time." He doesn’t care most about money. He cares most about down time and time spent on call-waiting.

High reliability is different from good service. Good service means this: "We fix it fast for free." Reliability means this: "You won’t need our terrific service."

Maytag made a USP out of this user benefit. This USP had a symbol: the lonely Maytag repairman. (He was played by Jesse White, who never seemed to grow old on-screen, from "Harvey" until the year he died. He was perfect for Maytag: "No repairs needed" on him, either.) Maytag’s USP was accurate. We still own a Maytag washer that my wife bought, used, in 1976. We did have to replace a belt about 15 years ago.

Computer service policies are changing fast. Today, large American companies are hiring Indians to do service by phone. The cost of long-distance phone lines is low. These foreign workers are happy to earn $250 a month. Some of them speak American-sounding English. Others – the technicians – don’t have to. Everyone expects a computer technician to be either Indian or Chinese. If he sounds like an American, the caller might think he is less competent.

A businessman wants fast service. But far more important to him is product reliability. If word gets out that users are suffering from reliability problems, it’s the kiss of death.

THE BLUE SCREEN OF DEATH

I bought a Dell laptop three months ago. It has never worked properly. It produces a blue screen every few minutes. Then it shuts down.

I did not initially try to send it back. I was not using it yet. I had bought it to take on a trip to China, but the trip fell through. So, I waited for my son to come home for Christmas. He is a full-time microcomputer repairman. He knows his stuff. He goes on-site to fix really messed-up systems.

He tried to get the unit to work. He spent hours. He told me that the blue-screen problem is a familiar affliction of Windows. It’s called the blue screen of death. It is so common that it has an acronym: BSOD. I searched Google for "blue screen of death." Here are a couple of reports. This one is old.

The blue screen of death is a rather terrifying display image containing white text on a blue background that is generated by Windows operating systems when the system has suddenly terminated with an error. The system is locked up and must be restarted. The blue screen may include some hexadecimal values from a core dump that may help determine what caused the crash.

The blue screen of death can strike anywhere. At the Comdex trade show, Microsoft Chairman Bill Gates encountered the blue screen during a demonstration of Windows 98. (He had a spare computer standing by.)

Now, in a lighter vein, or as Mad Magazine originally put it, "humor in a jugular vein," we read. . . .

Are you tired of the same old blue screen of death? Well say good-bye blue screen and hello to green screen, or purple screen, or black screen of death! Just download this simple little utility called BSOD Properties and select your favorite color.

This program makes use of some old Windows 3.1 options in the system.ini file that have been long forgotten, but are still present in Windows 95, 98, and ME. Unfortunately this program has no effect on Windows NT 3.x, 4, 2000, or XP.

I had paid good money ($1,500) for the laptop. I now want an exchange, or at least a factory repair. I do not trust software-hardware problems, for each seller blames the other. (Gateway last year used a TV dramatization of this problem to promote its computer-sales stores in preference to phone ordering – a very persuasive ad.)

I called Dell service. It took a long time to get through. The phone line sounded like it was going through several switching systems. I finally got a very polite Indian on the line. He spoke that wonderful, lilting Sanskrit-derived version of English. Problem: he had a script, and he stuck to that script.

"This is an operating system problem." I suspected this. I explained that I wanted to send the unit back and get a machine that didn’t have the problem. "Do you have your machine in front of you?" No; it’s at my home. "Please get your machine in front of you." But it is at my home. "Please get your machine in front of you." But I just want to send it back for an exchange or to get the factory to repair it. My son couldn’t, and he makes his living repairing computers. "This is an operating system problem. Do you have your machine in front of you?"

I suspect that hell is administered by Indian bureaucrats. Pakistanis back them up with force. This is their one area of cultural solidarity.

I decided that this was a dead end. So, I sent Dell’s Customer Division a letter explaining my situation. I described my son’s time spent in trying to repair the unit. I also took care to mention that I have a subscriber base of 50,000 readers, and that I have previously recommended Dell products.

A week later, I got a call from N. N. is female. She sounded about 24 years old. She asked if I had contacted technical support. I told her about my experience with the Indian with the script. I told her that I assumed that Dell was now using service people in India. She did not correct me or indicate otherwise. I reminded her about my son’s failure. "What procedures did he go through?" Not surprisingly, I didn’t know. "You must contact technical support." I explained that I would do this if she would give me a phone number that does not take 15 minutes to get through to someone. She offered none. She reiterated that I had to go to technical support.

Here is N., earning maybe $9 an hour, talking with an unhappy customer with 50,000 subscribers. Did this statistic register on her thinking? Of course not. Her job is to direct calls back to India. She does her job efficiently. Future sales? Not her department. Goodwill? Not her department. Helping to move Dell’s USP from low price to high reliability? Not her department.

Here is what she was really saying:

"You paid for a warranty. Boy, were you dumb! You expected our technical support staff to repair your computer on-site. Are you nuts? Why do you think we hired our support staff in India? They are paid $1.50 an hour to show you how to solve this problem, despite the fact that this particular problem is so entrenched that Microsoft hasn’t solved it since at least Windows 95, and despite the fact that your son was unable to solve it. The BSOD hits some computers, but not others. You bought one that is vulnerable. Tough bananas, Bozo. It’s your problem, not ours. Go through our "put these callers on hold" hoops, or else take the $1,500 hit. And, by the way, tell all 50,000 of the losers on your mailing list that I said so. If they want a new computer, they can either do it Dell’s way or buy it from Gateway. I, for one, couldn’t care less. I get my $9 an hour either way."

I understand that large companies need procedures. But someone in every chain of command had better be given the authority to bypass standard routines. This means that someone beneath him/her has to recognize situations that cry out, "Pass this request up to someone making $15 an hour." It was clear to me that N. saw her job as passing responsibility back to someone in India making about $1.50 an hour.

NEW GUYS ON THE BLOCK

Dell Computer is now facing the same problem that IBM’s Boca Raton PC plant was facing when Michael Dell was a freshman: an inability to respond effectively to new market conditions. IBM in 1984 had procedures in place. It had scripts. But IBM has not been a major player in the PC market since about 1988.

A teenage kid from Houston cost IBM Boca Raton whatever fortune was left over after Compaq, also from Houston, had creamed IBM by introducing the first 386-chip desktop. The mainframe division at Armonk had seen what was coming: desktops from Boca Raton’s plant would outperform IBM’s entry-level mini-computer, the System 36. So, they made sure that Boca Raton didn’t introduce new PC’s as fast as was technically possible. Anyway, that was the rumor at the time. Whatever the reason for the delay, the result was clear by 1988: Compaq, Dell, Gateway, and Hewlett-Packard had taken over the PC market.

The genius of the free market, from the consumer’s point of view, is that newcomers are usually nipping at the heels (or higher) of large, profitable, well-established firms. Microsoft appears to be immune from this law, but in China, open-source operating systems like Linux are being used widely. The price is right in a poor nation: free. The biggest market on earth will be lost for Microsoft. The only thing that may keep this from happening is Chinese piracy: stolen Microsoft software. Once there is an installed base of Microsoft products, Chinese users may become dependent on them. But, at least officially, Microsoft is fighting Asian piracy.

When open-source, Linux-based programs finally get icon-based interfaces, and when they can accurately import data from existing Microsoft files, Microsoft will go the way of Apple. Then Bill Gates, Steve Jobs, and Michael Dell can meet for lunch at the Innovation Retirement Center and talk about the good old days.

As I said before, Michael Dell is now working for Bill Gates. He sells Microsoft operating systems in his boxes. For all of his trouble, he now gets hit with the blue screen of death. Anyway, Dell computer owners get hit.

CHANGING THE USP

It is rare for a company to successfully exchange its USP for a new one, but Dell had better do it, and fast. When the price of any item falls so far that buyers can no longer distinguish one seller from another, sellers must find some other way to tell buyers, "Buy from me." Sellers must offer cogent reasons for buyers to buy.

Dell has to sell something else besides price. If it’s selling service, it’s selling service by way of India, which means phone time spent on hold. It means that businessmen must become unpaid computer repair co-workers. "Do you have your machine in front of you?"

Dell had better sell reliability. Because, when it comes to customer support, Dell has become, "Not my department."

Next time, I’ll buy from Gateway. I will then have a local store to return a blue-screen machine to, where I can say, "It’s under warranty. Fix it."

WE CAN SEE DELL’S PROBLEM IN DELL’S TV ADS

When Gateway ran that ad last fall with some helpless schmoe on the phone, caught between the hardware guy ("It’s a software problem") and the software lady ("It’s a hardware problem"), it was clear to me that Gateway’s ad agency had put Dell in its cross-hairs.

Take a close look at Dell’s latest TV ads. They are multimillion-dollar revelations of the extent of Michael Dell’s confused vision. They verify what Dell’s stock price indicates. The Christmas ad featured a Dell salesman in his very early 20’s. He was on the phone. He was talking to his father (or some adult), who is in a computer store. Gateway? Best Buy? Circuit City? The guy in the store is being pressured to buy . . . by a robot. The robot was handing him a candy cane. Message: "Buy from some kid on the phone. Don’t go into a local computer store, where you will be pressured by a salesman no smarter than a robot."

Here is another Dell ad. A small high school group comes to visit a Dell office. (Oh, boy! A field trip! A significant learning experience! We knew better by age 12, but Dell’s ad agency thinks this is powerful imagery of an educational experience.) The students see a guy not much older than they are. He sells computers on the phone. Wow, are they impressed! Even the tattle-tale girl, who represents all of the tattle-tale girls who ever ratted on us, is impressed by the end of the ad. With her "testimonial," I’m supposed to buy from Dell.

What on earth was the ad agency thinking of, and why did Dell approve the ad?

It never occurs to Michael Dell to locate a dozen business owners who have bought from Dell for 15 years and who have built their businesses with Dell computers. He then tells the ad agency to send in a camera crew and get testimonials. Then Dell runs one testimonial ad each month. Instead, Dell paid an ad agency to pay an actress to play a tattle-tale girl who finally accepts the fact that buying from Dell is OK. We’ll believe her!

Michael Dell has grown so rich that he has forgotten how he got rich. He didn’t get rich because of what he learned on a high school field trip.

These ads are not the worst ads I have ever seen. But they are the most revealing ads I have ever seen. They reveal a very rich man who has lost all sense of what his once-innovative company is all about in today’s market. They reveal a founder in search of a new USP for his company. Here is what those ads tell me: