From The Zoo:
Dell's generals should remember: winnin
by: goldteck 11/17/01 11:03 am
Msg: 261703 of 261704
Dell's generals should remember: winning isn't everything
By MATHEW INGRAM16:17
EST Friday, November 16, 2001
It's called a pyrrhic victory — a war that is won, but at great cost to the victor. It's named after Pyrrhus, warrior king of Epirus, who said after winning the last in a series of wars with the Romans in the 3rd century B.C.: "Another such victory and I shall be ruined." It may be hard to imagine now, but that's a position technology superstar Dell Computer could find itself in, if it isn't careful. It appears to be winning the personal computer war — but is it paying too great a price to do so?Dell launched its price war earlier this year, after it became obvious that the PC market was looking at a slowdown in sales unlike any in the industry's history — in fact, PC sales in the United States fell year over year in the second quarter for the first time since computers were small enough to even fit on a desk. Dell president Jim Vanderslice said in May that the company planned to take advantage of its just-in-time production strategy to try and take market share away from its competitors such as Compaq."This is going to be Bosnia," he told analysts in a corporate briefing. "Our game is to go play hardball. Why not?" Since the price of many key computer components — such as random access memory (RAM) and microprocessors from Intel — continued to drop, he said, Dell could continue to make money even as it lowered prices. "This is not a price war — it's a cost war," said the Dell executive. "Who knows what the endgame is, but when you're grabbing up market share... it's the chance of a lifetime."
There's no question that in such a battle, Dell has the perfect weaponry for the job: Even though it assembles and ships computers worth more than $30-billion (U.S.) every year, the company has virtually no inventory to speak of — it only brings together enough parts to put together a computer when it has already sold that computer. Dell moves its products out the door in an average of three days, while some other companies take as long as 60 days. Less inventory reduces the company's costs, and selling direct also keeps its cost base lower than most of its competitors.Meanwhile, Dell has been assisted by trends in the component industry, with Intel pushing the price of its chips down at a faster rate than at any time in its history — since it is engaged in its own price war with its competitor, Advanced Micro Devices.
The price of RAM has also been coming down, although it continues to be fairly volatile, and the cost of CD drives and storage memory (that is, a computer's hard drive) have fallen to the point where consumers can buy CD "burners" for less than what a CD player cost two years ago, and hard drives cost one-tenth what they used to.All that aside, however, the problem for Dell remains the same: As Intel is discovering in its battle with AMD, a price war to gain market share takes a toll on the balance sheet on both sides. Dell's just-in-time manufacturing process gives it some breathing room, but cutting prices still has a very real effect on profit margins, and since it was a commodity manufacturer selling primarily on price to begin with, Dell didn't have much headroom built into its margins even before it started the war.After the market closed on Thursday, Dell announced earnings that met Wall Street analysts' expectations — but only because the company managed to cut its expenses. At 17.6 per cent, the company's gross profit margin was up slightly from the previous quarter, but still down by more than 3.5 percentage points from the 21-per-cent level of last year. The company made $429-million on sales of $7.5-billion in the most recent quarter, compared with a profit of $674-million on sales of $8.3-billion in the same quarter a year earlier. The company's sales were off by 36 per cent.
Sure, the company has $10-billion or so in cash and short-term investments. No one is worried about it running out of money, price war or no price war. But there's a larger question, which is: What does Dell wind up with once it wins? Assume Gateway goes under and Compaq merges with Hewlett-Packard and proceeds to de-emphasize its PC business, as IBM has done. Can Dell automatically start to crank up prices, or has it conditioned consumers to expect bargains? If that's the case, then Dell has a larger share of a market that has smaller margins — and so has really won nothing.At the same time, of course, the PC market not only isn't growing as fast as it once was, it doesn't appear to be growing at all. What good is it to win a larger share of a market that is getting smaller by the day? As Lehman Brothers analyst Dan Niles put it, Dell is "killing their competitors in every product category and every region, but the problem here is you're gaining market share in a shrinking market." And then there's the small matter of valuations. Dell's stock is trading at close to 40 times earnings estimates for next year, despite lower revenue and thin profit margins.Everybody loves a winner — unless, of course, winning means you're making even less money than you did before you "won." |
