Strategies: Run like Dell
To date, all of Dell?s attempts to enter the server market have flopped ? but that could change with the advent of the SME. Sean Hallahan reports
When Dell arrived in the UK in 1987 it challenged the distribution pattern that had been laid down by IBM and Compaq four years earlier.
All the main PC hardware manufacturers, led by IBM, had come to the conclusion that the best route to market for the PC was through a chain of authorised dealers. A few smaller firms, such as Elonex, had bucked the trend by eschewing the channel and selling direct, either through telesales or off-the-page advertisements. But it was the entry of Dell that really shook things up.
Founded by youthful chairman and CEO Michael Dell, the company had been a startling success in the US and planned to repeat that success in the UK. Initially the channel expressed little concern at Dell?s entrance to the market. Orders for PCs were running at an all-time high and there was plenty of room for everyone.
In addition, the main dealers had already lined up the leading corporate customers with the assistance of IBM and Compaq. Other companies such as Hewlett Packard, Olivetti and ICL which also sold through the channel could rely on their installed accounts to buy their products. Smaller dealers were able to take advantage of their geography to sell to local firms, while others concentrated on niche markets and adding value.
For a few years Dell did extremely well against the likes of Compaq, IBM and others, although it was never as strong a player. On the face of it, the company is still doing well ? according to its share price, turnover and profit. But these figures belie a serious malaise in some critical areas.
The key area of focus for all the major suppliers is the server market, and it is in this sector that Dell is seriously struggling, according to one former senior manager. Dell?s history as a server provider has never been a happy one. About three years ago it introduced a range of servers which failed disastrously and had to be withdrawn. It reintroduced a server line, but while the machines performed better than their predecessors, Dell failed to make a significant impact on the market.
In what looked like a desperate measure in June 1996, Dell slashed the price of its server offerings by 45 per cent. Dell?s official line was that Compaq and other fims had been reducing server prices for a number of months, and the 45 per cent cut was just designed to bring Dell into line with other suppliers. In reality it was a panic move with the hidden agenda of putting pressure on the likes of Compaq to follow suit.
Compaq and the others refused to take the bait ? hardly surprising since Dell was only shipping 25 to 100 servers a day across the whole of Europe. Such a low level of shipment was deemed unworthy of Compaq?s notice ? certainly it felt no pressure to slash its prices to fall in line with a firm that it did not consider a serious threat.
It is not that such a tactic has failed to work in the past. Microsoft launched its Access database in the UK at #99, forcing its rival, Borland, to cut the price of Paradox by two-thirds. Lotus, now a part of IBM, carried out a similar manoeuvre with Notes, dropping the original price to $1,000 over a period of three years. But both Lotus and Microsoft were far more powerful than Dell, and their moves were initiated from a position of market dominance. To attack from a position of strength is far different from attacking from a position of weakness.
One former Dell manager believes the company made a number of mistakes in the server market which badly affected its sales. First, it failed to sign agreements with software firms like SAP and Oracle which could have helped its server sales. Second, it has a poor track record in pre-sales support, a prerequisite in selling server systems. Third, it had a hostile attitude to the systems integrators and regarded them as rivals rather than natural allies.
None of this is to say that Dell is not a powerful and profitable company. It is still the vendor of choice for many customers looking for desktop systems and portable machines. Nor does the fact that it has had product glitches in the past with servers and a previous generation of notebook products mean that it is exceptional.
There is scarcely a company in the industry that has not had its share of failures. In the mid 80s, IBM attempted to crack the US home market with the PCjr and failed. Digital had a series of failures with its desktop ranges, the Rainbow, Professional and Vaxmate and Apple?s attempts to market the Newton flopped.
The difference between these failures and that of Dell?s in the server market are important. For IBM, Digital and Apple the failures were embarrassing but not strategically critical. Dell?s failure to make any headway in the server market beyond a toe in the water is more serious.
The server market takes a supplier into the heart of an enterprise, be it a large conglomerate or a small to medium business. Dell has long been aware that it has problems in the server area. At a European conference in September 1995, Michael Dell admitted that servers accounted for only three per cent of sales in the past two quarters and that servers were an underused opportunity for the company.
The situation has improved ? but not much. According to Mark McCarthy, sales manager for Dell partners, the figure has risen to four per cent, and he is confident that it will rise to five per cent fairly shortly.
The direct model does not lend itself to the sort of co-operative partnerships that are required to penetrate the corporate market where big money is to be made. While the large corporates have their internal IT staff that can carry out systems integration projects, many medium-sized companies have to rely on their reseller or other third-party suppliers to provide the expertise.
One of Dell?s supposed strengths is that it will build machines to order, but if the customer does not know precisely what he wants then he is at the mercy of the supplier.
Dell has recently come under fire in the IT press for the poor quality of its service. Several customers have complained to the press about Dell?s spare parts policy. Other customers have complained of the company?s inability to deliver its server products on time.
One customer reported that he had recently purchased Compaq file servers because ?Dell has been unable to respond to our requests for quotations for several weeks.?
After extensive discussion with Dell, including conference calls, the customer, Stuart Moore, group information services managing director of Mott-MacDonald, is now satisfied that Dell is able to provide the service he requires.
?Dell has been very active and it has left me feeling very confident,? he says. Moore believes that Dell has good technical people on the low-end server side, but that ?like a lot of technical people they are not very good at organisation?.
To be fair to Dell, Mott-Macdonald has experienced problems with other suppliers of high-end servers which largely mirror the experience it had with Dell. The company originally bought its servers from Memorex-Telex ? they failed to work. It then switched to Dell and finally to Compaq.
?We bought four high-end servers from Compaq and one of them failed to work. Compaq took ages to change the machine and I think the dealer had to go out and buy another from Compaq. That machine also does not work. These are high-end servers and when you are spending #30,000 to #40,000 on a machine, you expect it to work,? says Moore.
Compaq?s success in the high-end server market has been largely dependent on the strength and skills of its resellers. In direct conflict with the original Dell philosophy of direct marketing, the company also began building a reseller channel. But last year it decided to cull its partners, reducing the number from 500 to 70.
?The reason we did it was to rationalise the number of resellers. Many of them were not doing the right level of business and there was conflict in the channel,? McCarthy says.
McCarthy sees little difference between a desktop client and a server machine and argues that, in essence, both are commodity products. ?Where does commoditisation start and finish? As far as Michael Dell is concerned, and I have to agree with him, any machine is just a piece of tin until you add the operating system and applications,? he says.
He argues that customers can now order their servers direct from Dell secure in the knowledge that the company will give them a free on-site setup service, three-year warranty and a maintenance service, which is provided by Digital.
McCarthy also believes that, far from Dell adopting the Compaq model of selling servers through resellers, the trend is actually moving in the other direction. Although Compaq has been reported in the press as denying that it is to sell direct, there have been rumours circulating for months that the company has every intention of adopting a direct marketing strategy. According to McCarthy, Compaq is already selling products direct in Australia, and is piloting a similar scheme in the US.
The success or failure of selling server products direct depends very much on the cus- tomer purchasing the system. The large corporate accounts have an army of IT staff capable of installing and maintaining systems. For them, buying a server or any product direct causes no problems. But for the small to medium enterprises (SMEs), buying direct is another issue. They do not generally have IT staff to watch over their installations, and require a great deal of hand holding.
There is no doubt that many of the big manufacturers are looking to the SME market as the next area of growth for the IT industry. A survey carried out by Compaq last year found that only 25 per cent of small firms have PCs, and the company responded by introducing low-cost file and print servers to remedy the situation. IBM has also recognised that SMEs represent a major opportunity and has turned its sights on the sector.
While the SME market requires more backup and support than the corporate sector, it is also more price conscious. In the past, the fact that the cost of the system played such an important part in the purchasing system would have been a natural advantage to Dell.
One of its major strengths was that, because it did not have massive overheads and manufactured to order, it could deliver systems more cheaply than it rivals. But Compaq, IBM and others have struck back by producing low-cost systems or reducing the price of existing boxes. Dell?s price advantage has been eroded.
According to Dell, the company is now growing faster in the server market than its competitors, and has moved from the number six position in the league table a year ago to number three. ?We are growing quicker than the two firms above us,? says McCarthy.
Nobody can disagree that Dell is a formidable player in the PC market. Nor is there any question that it will continue to battle for a share of the server market. The real question is whether it can capture a significant share of the high-end server market, especially in the SME market, where Compaq and IBM are pushing their products. The coming year will see a major struggle for control in this sector.