Due Diligence: Dell and the Deep Blue Sea

By Eric Nee  |  Posted 01-17-2003 Print Email
Dell Computer is extending its low-cost model into just about every computer box business around, writes Eric Nee. Is there any way to compete? No one's come up with one yet.

Every so often, industries undergo jarring upheavals as innovators forge breakthroughs in technology and new ways of doing business. Companies that once towered comfortably over their rivals are toppled, and new ones rise up to take their place. That's exactly what's happening in computers as Dell Computer continues to turn the hardware business inside out. Yet the scary thing for Dell's competitors is that the turmoil has just begun.

The results are already clear in PCs, the business Michael Dell tackled first when he started the company in 1984. Today, Dell ranks number one, with 15.8 percent of the world market in the third quarter of 2002, just ahead of the newly merged Hewlett-Packard, which held 15.7 percent, according to Gartner Dataquest. Even more telling, Dell's shipments in the same quarter grew 20.7 percent over last year, while HP's shrank 3.1 percent.

Dell is also having success selling servers, a business it began going after seriously in 1996. Dell has a solid hold on second place, with 19.2 percent of the world's server market in the third quarter, compared with HP's 30 percent. But again, Dell's unit shipments in the quarter were up 18.1 percent over last year, while HP's slumped 4.8 percent, and IBM's were off 1.3 percent.

Dell has no plans to stop with PCs and servers. It is marching through the rest of the hardware business as well. The company began selling external storage systems in 1998 and introduced a line of networking switches in 2001. In November, Dell introduced its first handheld computer, and just recently the company announced plans to start selling its first line of printers by the middle of 2003.

Dell is not a technology pioneer. It shakes things up by doing business differently from the rest. Dell waits until a market has gotten large enough and settled on technology standards before it joins the fray. This allows the company to rely on such partners as Intel and Microsoft to supply the technology. While Dell spent just 1 percent of revenues on R&D in its most recent quarter, Sun Microsystems, a technology pioneer, spent 16 percent in hopes of developing something new.

Once Dell has identified a new market, it uses the same highly efficient manufacturing system it developed for PCs to make its new products. By selling directly to customers instead of through retailers and other third parties, Dell cuts costs and maintains close contact with its customers.

As Dell brings this model to such markets as storage, communication gear and printers, buyers of technology stand to benefit. But traditional computer firms are left scrambling. The question companies like IBM, HP and Sun face: Can they compete with Dell in hardware markets where standards are already determined? Or should they move entirely into specialized hardware, software and services where Dell's unique approach doesn't have much leverage?



 

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