The Decline of an Industry Leader

In a tough, highly competitive market place, the avoidance of Failure and a company’s reputation for Reliability are critical to long term success. (See “Video #14: Definition of Reliability” on StrategyStreet.com.) Dell is an example.

For years, Dell was the paragon for the personal computer industry. It had good computers with a build-to-order business model that took in cash before the company had to pay suppliers. Its low-cost business model involved maintenance of low inventories and tight control of its suppliers. Then the wheels came off.

From 2003 to 2007, Dell shipped a number of its mainline personal computers with serious flaws. The facts have come out recently in court documents in a suit filed by a customer against Dell claiming that these faulty computers cost the customer a good deal of money. It seems this customer was not alone.

Dell’s problems showed up because a supplier shipped it bad capacitors. An Asian company, Nichicon, produced bad capacitors, which Dell included in its motherboards on nearly 12 million computers shipped to customers from May 2003 to July 2005. A study of these computers suggested that these capacitors would cause problems in Dell computers 97% of the time, if the computer were used over a three year period.

Dell did not handle this situation well. It placed cost control ahead of customer welfare. (See the Perspective, “Cutting the Right Cost” on StrategyStreet.com.) In some cases, it replaced bad motherboards with other bad motherboards. In other cases, customer service and sales employees went out of their way to conceal these problems. Dell told some of its customers that the customers were at fault for the failing computers because they had over taxed the machines. Nor did Dell recall the faulty computers. Instead, it left it up to the customer to make a complaint before it took action. In the meantime, customers suffered the costs of losing information when their computers failed to function properly. Dell failed its customers and ravaged its Reliability reputation.

Dell is no longer the paragon of the personal computer industry. That mantle now rests on the shoulders of HP and, perhaps, Acer. Dell’s market share has fallen off. In a tough marketplace, the Failure of an incumbent supplier is the cause of most market share shifts in the industry. If an incumbent Fails the customer by refusing to do something that other people can and will do, it will lose market share. Another critical aspect of a company operating in a very tough market is Reliability. The customer has to trust that the company’s products will work, and if they do not work, they will be fixed promptly. Dell at one time had a good Reliability reputation. It gained share on the back of that good reputation. The company has badly frayed that reputation and its failures have caused its loss of market share. (See “Audio Tip #36: The Importance of Customer Retention in Hostility” on StrategyStreet.com.) These failures account, in part, for the share gained of Hewlett Packard.