Dog,
Read a little more carefully. I am simply posting some highly thoughtful comments made to me about your R&D post.......
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"You are showing ignorance of the dynamics of the high end market. Why is CPQ spending nearly $2B annually on R&D while Dell is about $100M?
This is not a slam on Dell - I happen to think their R&D percentage is about right for their business model. But the difference in spending is entirely related to providing additional value at the high end of the food chain, and it is paid for by server margins."
Here is the reply.....
Well I guess my email tweaked Rudedog! I still think he is missing the point. Dell leverages Intel and Microsoft R&D. CPQ leads the market, identifying market segments before Intel or Microsoft have developed standards for the segment. This has been CPQs strategy from the beginning. First the Luggables, then portables, then workstations running UNIX, etc. CPQ gains entry and seeks to set standards in the segment. This has made them the largest PC vendor. It also adds to their costs. As INTC and MSFT create industry standards, CPQ is forced to adopt these standards, losing their proprietary and differentiating advantages. The are left with higher costs and a large position in the market to defend. CPQ attempts to add value throughout the entire food chain.
CPQ generally designs its own motherboards, graphics, I/O boards, system and drive packaging and system design. It has always followed the strategy of attempting to create value added and customer lock-ins by design modifications. For example, it is not possible to upgrade the memory or disk drive at Fry's or anywhere except through CPQ. The package design prevents either option. CPQ's R&D has enabled CPQ to enter markets early and to provide differentiating software and packaging features. Some of their R&D addresses the high end. They have for example been offering an 8X server for some time. This is not standard Intel/Misrosoft technology. Their new Xeon based servers are virtually identical with Dell's. Where is the R & D advantage here? The industry standard technology out-performs the CPQ proprietary technology. A Xeon 4X server at AOL is outperforms an 8X CPQ proprietary server. The other Xeon suppliers do equally well. No advantage to the CPQ R&D remains. Some advantage still remains in the non-stop area where the Tandem R&D was focused. This is likely to disappear by by 2001 now that Intel and Miscrosoft are focusing internal efforts there as well.
Dell, on the other hand , leverages Intel and Microsoft and sells "industry standard" technology and focuses theri R& D more narrowly on adding value in the integration and test, software and package design. This prevents Dell from entering markets as early as CPQ (even if their smaller size did not prevent them). However it gives them several advantages: lower cost, industry standard design and technology, ease of maintainability. Better quality and performance for the dollar. Better customer acceptance. Design differentiation has always been a useful way to provide competitive advantage. If widely accepted it sometimes becomes a standard that locks out competition.
CPQ was able to cause the collapse of most of the early PC vendors when it was able to define the meaning of "IBM Compatible" to mean runs "Flight Simulator and Lotus" (and about a dozen other software and hardware add-ons). CPQ had worked with those vendors to support CPQs proprietary graphics standard which was better than IBMs. Other new IBM copycats had not gotten as far. They died. CPQ became the leader.
CPQ has always worked to create competitive advantages through R&D. I assume the will continue to do so. They have failed to create lock-outs, except on the maintenance and service side of the business. This however creates a problem for sophisticated customers, who prefer flexibility and multi-sourcing on the service side, not high cost lock-ins. Unless there is a significant price-performance advantage, different and proprietary is not better. CPQ's early strategy was not wrong, particularly considering that CPQ pioneered the market segments that Intel and Microsoft are now targeting in their advanced architecture development groups.
CPQ's large R & D will have to be redirected if it is to provide any significant customer advantage or time to market advantage now that Intel and MSFT are providing the core technology. The large CPQ R&D budget is not a barrier to entry in any of the markets Dell is targeting including high end servers and workstations, nor does it provide any time-to-market advantage for CPQ now that Intel and Microsoft have targeted these areas. Rather CPQ is having to drop proprietary technologies and adopt the Intel/Microsoft offering. Witness Xeon servers and workstations. What we are seeing is the standardization of enterprise solutions.
I think we can assume that one of the reasons CPQ bought DEC was the need to move upstream where they can continue to have some competitive advantage through differentiation. R&D for the remaining segments will probably fail to match Dell's. Already we see CPQ moving to outsource more, implying purchase of industry standard technology, rather that using R&D to differentiate. Dell will win the battles they choose. CPQ will seek new ground where they can lead through differentiation in order to maintain the margins necessary to support their business model.
Doug
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