re "Copying DELL's model"
Stock Bull, you are obviously very knowledgeable about the market. Nevertheless, I must respectfully disagree with you again.
I cited DELL's hundreds of patents as a potential obstacle to entry into direct competition with them. You said, These patents are on various designs involving product, assembly, testing, etc. They are not on a "Business Model". I suggest that you brush up on patents, and what a Business Model is and is not.
The following URL gives some info on patents:
expresssearch.com
I did not say that DELL's JIT or BTO models are patented, nor did I mean to imply that. And I certainly am not qualified to judge whether their patents are utility or design. But I suspect that DELLs production efficiency is in part due to ideas, whether utility or design, which have been patented. As such, any company trying to emulate them will need to do an extensive patent search -- and DELL may well hold patents, without access to which a competitor may not be able to produce as effectively.
I understand that CPQ, HWP and IBM are and have been trying to implement some form of DELL's direct sales model--and have been doing so for at least a year now. The problem that I see, and which Chuzzlewit so ably sketched, is that they have thus far been unable or unwilling to jettison the channel. Thus, they face a very nice dilemma: on the one hand they must appear to continue to support the channel, while on the other hand they would like to eliminate the channel and sell direct. Their efforts are defined to be self-contradictory--with associated waste of time and effort--while DELL can execute its goals and market strategy with a singular determination and goal. Furthermore, I think that the first half of this year has shown us something about the 'disruption' in their earnings. Would you care to hazard a guess as to how long Mr. Pfeiffer will continue to hold the reins if CPQ does not return to profitability?
From these comments, should I conclude that you think Dell is invincible, and the only other possible threat is GTW?
No, I do not think that DELL is invincible. I do believe that DELL belongs to a fairly exclusive club, and the cover charge for entrance is a lot steeper than is generally believed. One of the requirements is to discard the channel almost completely. I think that is a higher price than the management of any of these companies is willing to pay: among other things, it would make their existing customer base vulnerable to their other competitors. So that their only real hope of emulating DELL is through acquisition of a company already in the direct sales arena. Alternatively, they could implement direct sales through another entity, such as Ingram Micro... but that merely replaces the channel with a different middleman, does it not?
And, as I posted earlier,
exchange2000.com
I don't think it is economically viable for a new competitor to appear on the scene and start building computers directly.
Let Company 'X' be a 'newcomer' planning to enter the computer business to compete with DELL. 'X' has to
a) have a plan for creating a competitive JIT / BTO company. A key word here is competitive. If 'x' can't build and sell their boxes at least as cheaply, 'x' is unlikely to sell much product. Competitive also implies similar reliability. DELL has it. DELL has the reputation. 'X' has to develop that from scratch. So they need to overcome that deficit by advantages elsewhere, such as selling more cheaply than DELL.
b) decide on which segment(s) of the market 'X' wants to target. Does 'X' want to aim at low end, where they have to compete with CPQ, HWP, IBM, (and now ACER and others?), mid-range, high-end, or portables. Since your point is made in respect to competing with DELL, let us further assume that they are going to target DELL's market segments. DELL has over a 12-year head start in designing and building the machines and procedures. Some of DELL's knowledge 'X' can undoubtedly use. Some is proprietary. Some is institutional knowledge.
c) develop plans for building facilities. 'X' can probably capitalize in large measure on DELL's example. However, some things are certainly proprietary. 'X' needs to do a patent search, and may even end up having to pay DELL royalties, which won't make 'x' a lot more competitive.
d) develop a plan for hiring, training, and keeping personnel. Where does 'x' find the personnel. Perhaps in areas of large tech lay-offs. Who trains them, at what cost, and how long does it take? If they become trained and are good, they will command higher labor prices at the established companies.
e) establish a marketing plan. You need a plan which is going to convince existing customers of DELL and the channel providers that you have a better product -- that their total costs in buying from you are going to be less than dealing with any of the others, that your 'value added' is greater than DELL or IBM. And you have no historical record, no established reputation on which to base this. So you have to absolutely convince your potential customer that not only are you better, but also you must convince him that in 1 year, 2 years, and 5 years you will still be there to help him. Remember, the future of 'X's customer's company may well rest on his decision whether or not to buy your product. Your product argument must be compelling enough for him to risk the existence of his company.
f) come up with some major cash to get this far. Now 'x' really needs financing. Do you know a banker who is going to loan 'x' $100,000,000 to set up in business, considering the above uncertainties. If not, how much is he willing to loan to 'X'? And at what rate and terms? Prime + 1%? Or doesn't he evaluate risk when making a loan? Do you think that 'X', as a start-up company with no anticipated revenue for the next 6 months (very conservatively), can get a rate which will not further impede its competitiveness?
Assume that 'x' has been able to do all this and has started building production facilities. Say that it takes 'x' only 1 year for the whole process, 6 months for the planning stage and financing, and 6 months for the building and training phase. What have we forgotten? Oops, those falling ASPs and margins! Is 'X' still going to be able to service that debt load with 'boxes' selling at < $500? Is 'X' going to be able to pay his labor, creditors and suppliers when his margin has fallen by 50%? Speaking of which, I didn't even touch on the aspect of coordinating and ensuring component suppliers.
No, I don't think that DELL is invincible. Some of the Asian companies, particularly with government support, may be able to compete very successfully. (I didn't think Mohammed Ali was invincible either, but I sure didn't bet against him.)
My apologies for the length of this.
regards, have a celebratory Fourth, and Good Trading next week.
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