Alien territory

In buying Alienware, Dell has formally abandoned three tenets of its traditional and, until recently, highly successful strategy:

1. We sell commodities.

2. We grow organically, not through acquisitions.

3. We only use Intel chips.

That’s a remarkable shift, and it underscores the broader changes in the PC market, particularly the home PC market. At the low end, Dell appears to have lost much of its cost advantage as the most efficient producer – its margins are under pressure from a retooled HP and a hungry Lenovo. At the high end, where the profits remain relatively rich, the market is fragmenting, as PCs morph into a variety of information appliances. Dell’s Model-Ts have had to compete against Alienware’s tricked-out, tail-finned jalopies as well as Voodoo PCs, Apple iMacs and a bunch of other distinctive models. The market’s moving from “mass” to “mass class,” as General Motors’ legendary president Alfred Sloan once put it.

For the past year, Dell has tried to move up-market on its own, introducing a line of what it called “Lexus” models. That effort culminated in the rollout of its flaming Alien-killer, the XPS 600 Renegade, at the Consumer Electronics Show in January. As Engadget reported, “It’s very Voodoo PC or Alienware, not at all your father’s Dell computer.” But the Dell models haven’t exactly set the gaming world on fire; the organic-growth route wasn’t working in this case. Hence the Alienware acquisition.

The core of Dell’s strategy – and traditional financial success – remains its direct sales channel. As it abandons other parts of its old strategy, will it also need to branch out into traditional retail channels to better reach consumers? That remains to be seen. But with the Alienware buy, Dell has shown that it’s willing to question the old assumptions.

UPDATE: Espen Andersen offers a different view, arguing that Dell is simply looking to commoditize the gaming market: “in my book, this is Dell taking their business model to the gaming market, which still wants to maximize performance for a given budget (which Dell is masterful at) and still demands customizability (as opposed to more and more of the business or private PC market, where any machine off the shelf is pretty near good enough.)”

3 thoughts on “Alien territory

  1. Khalid

    I *was* surprised to see yesterday a large Dell booth with a widely ranging display of laptops, desktops, and LCDs in our local shopping mall. Maybe they’ve done this before, or maybe it’s a first step towards a broader retail strategy as your say.

  2. Arnie McKinnis

    I still believe there is value in staying true to your core business tenets – and this is true for Dell also. Dell’s power base (IMHO) is the business market, not the fickle consumer market, yet they continue to pursue this it – I really believe it will be their undoing.

    As far as alternate channels go, the route to the consumer market is via retail – either your own store (i.e. The Apple Store) or chains (Best Buy, CompUSA, Circuit City, etc.). To make a real impact, most consumers need to get their hands on something (it’s a very tactile market). Once again, this is completely different from the Business market, that requires a few standard configuration that can be purchased within an IDIQ (indefinite demand, indefinite quantity) model.

    Dell is fighting too many battles on too many fronts – and thus a loss of focus within their business.

  3. Simon

    In the face of market forces – so does company philosphy fall!

    They were taking a bath at the high-end (read juicy margin) part of the business – and could use cash to buy it outright.

    Just look at Google’s “Don’t be evil”. Censoring China search results? Pretty evil in my book!

    To my mind, smart companies are those that do not waste time on publishing “Vision Statements” and “Corporate Values” and just do the business they should be focussed on.


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