Dell Slips at High End

Two years ago, Dell bought Alienware, the leader of the game-oriented personal computer business. Game-oriented PCs are the high-end of the market. They usually sell for several times the price of the average PC. A game-oriented PC is a Performance Leader product (see “Why Do Leaders Lead?” in the Tools/Perspectives section of StrategyStreet.com). In the computer hardware business, the differentiator at the high end of the market is Functionality. This Functionality includes both design and computing capability. If you have these two functional benefits, you can generate word-of-mouth among buyers and become a hot product.

Dell has slipped in this market. The Alienware products had to compete inside Dell with Dell’s original high-end line, called the XPS. The market has not been impressed.

There is not much surprise in this development. If a Standard Leader takes over a Performance Leader product, normally it adds value by maintaining good Functionality while reducing the Price. The Standard Leader creates a good Performance Leader value proposition by using its economies of scale to offer more Convenience at a lower Price, with Functions “good enough” to appeal to most of the Performance Leader customers. As an example, see Toyota’s Lexus product in the early 90s.

Most of the time the Standard Leader’s high-end (i.e., Performance Leader) product competes against smaller Performance Leader specialists, who offer somewhat more Functionality but at a much higher Price to make up for their higher unit costs. Often, they fail to thrive under the onslaught of the “good enough” Performance Leader products from the bigger Standard Leaders.

Dell was not able to maintain a high level of Functionality and did not put price pressure on the other, much smaller, high-end competitors. Where was its value in the market?