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.
Showing posts with label Dell. Show all posts
Showing posts with label Dell. Show all posts
Monday, August 16, 2010
Tuesday, June 8, 2010
Can a High End Guy Hit the Mass Market?
Starbucks is a high-end competitor in the fast food industry. We call these high-end competitors Performance Leaders (see “Audio Tip #82: Performance Leader Products and Companies” on StrategyStreet.com). As individuals, these Performance Leaders almost always have small market shares. Starbucks has 4% of the U.S. market for brewed coffee. As a group, Performance Leader market shares usually fall below 15% of a total market. Sometimes these Performance Leaders, following the allure of the volume in the mass market, create products to enter the mass market. We call the competitors who serve the mass market as their primary function Standard Leaders. Standard Leaders control the majority of most markets.
Starbucks has decided to enter the Standard Leader product category with its Seattle’s Best coffee. This coffee brand, and its coffee beans, sell today in Border’s Book Stores and many supermarkets. Starbucks wants to sell the product in fast food outlets, coffee houses and even in vending machines. By expanding the Seattle’s Best Coffee franchise, Starbucks hopes to land a blow to slow the invasion of McDonalds and Dunkin’ Donuts into the specialty coffee market. These latter firms are Standard Leaders who offer espresso-based coffee drinks at lower prices than Starbucks.
It is very common for a Standard Leader to enter the high-end Performance Leader product category with its own brand, as McDonalds and Dunkin’ Donuts has done. (See “Audio Tip #60: Customer Segmentation by Needs” on StrategyStreet.com.) The list of Standard Leaders who enter the Performance Leader product category is almost as long as the list of Standard Leaders. Think of Toyota and Lexus, Dell and Alienware Computers, Marriott and the Ritz Hotel chain, Gap and Banana Republic, among others. Many Standard Leaders discover, as their industries mature, that they must offer Performance Leader products, and sometimes low-end, Price Leader, products in order to offer a full line of products for their end users or channels of distribution.
It is much less common for a Performance Leader company to enter the Standard Leader product category, as Starbucks plans. This is a much tougher initiative. The Standard Leader category sells to much different consumers with different value propositions and significantly higher demands for economies of scale. Apple tried this Standard Leader entry several years ago and backed off in the face of withering competition from Windows-based computer makers. Some Performance Leaders have succeeded, at least to some extent. Harley-Davison offers the Buell motorcycle. Pella offers windows through large hardware and lumber stores. American Express has succeeded in offering a credit card. Years ago, Marriott, while still a Performance Leader, entered the Standard Leader price point with Courtyard and the Price Leader price point with Fairfield Inn.
It can be done, but it is a daunting task. Most Performance Leaders stay strictly Performance Leaders. For example, one company with some similarity to Starbucks is Samuel Adams. That company has yet to offer a Samuel Adams Standard Leader product.
Starbucks has decided to enter the Standard Leader product category with its Seattle’s Best coffee. This coffee brand, and its coffee beans, sell today in Border’s Book Stores and many supermarkets. Starbucks wants to sell the product in fast food outlets, coffee houses and even in vending machines. By expanding the Seattle’s Best Coffee franchise, Starbucks hopes to land a blow to slow the invasion of McDonalds and Dunkin’ Donuts into the specialty coffee market. These latter firms are Standard Leaders who offer espresso-based coffee drinks at lower prices than Starbucks.
It is very common for a Standard Leader to enter the high-end Performance Leader product category with its own brand, as McDonalds and Dunkin’ Donuts has done. (See “Audio Tip #60: Customer Segmentation by Needs” on StrategyStreet.com.) The list of Standard Leaders who enter the Performance Leader product category is almost as long as the list of Standard Leaders. Think of Toyota and Lexus, Dell and Alienware Computers, Marriott and the Ritz Hotel chain, Gap and Banana Republic, among others. Many Standard Leaders discover, as their industries mature, that they must offer Performance Leader products, and sometimes low-end, Price Leader, products in order to offer a full line of products for their end users or channels of distribution.
It is much less common for a Performance Leader company to enter the Standard Leader product category, as Starbucks plans. This is a much tougher initiative. The Standard Leader category sells to much different consumers with different value propositions and significantly higher demands for economies of scale. Apple tried this Standard Leader entry several years ago and backed off in the face of withering competition from Windows-based computer makers. Some Performance Leaders have succeeded, at least to some extent. Harley-Davison offers the Buell motorcycle. Pella offers windows through large hardware and lumber stores. American Express has succeeded in offering a credit card. Years ago, Marriott, while still a Performance Leader, entered the Standard Leader price point with Courtyard and the Price Leader price point with Fairfield Inn.
It can be done, but it is a daunting task. Most Performance Leaders stay strictly Performance Leaders. For example, one company with some similarity to Starbucks is Samuel Adams. That company has yet to offer a Samuel Adams Standard Leader product.
Thursday, December 10, 2009
Paying Attention to Low-End Competitors
When do we have to pay attention to low-end competitors? The cell phone operating system business gives us an indication.
There are a number of cell phone operating systems from which to choose. The major suppliers include Microsoft, Google, Apple, Nokia and Research in Motion. Google is the newest entry here, and is beginning to make waves with its free Android operating system. (See “Audio Tip #33: Strong vs. Weak Competitors” on StrategyStreet.com.)
There are two separate sets of customers for these operating systems. The first, and most important, are the carriers. The four major carriers include AT&T, Verizon, Sprint and TMobile. A secondary set of customers are the handset makers. These companies are secondary because they conform to the demands of the carriers in the U.S. These handset makers include Samsung, LG, Sony Ericsson, Kyocera, Dell, HTC and Apple.
In the cell phone operating system market, Nokia is the leader with its Symbian operating system. Research In Motion, with its operating system for its BlackBerrys, is also strong. The key growth market today is the smart phone market, where Apple has 13% of the market. Apple is gaining market share, at the expense of Windows Mobile, which has managed to hold on to 9% of the market. Google’s Android operating system is on only 2% of the world-wide smart phones. So should the operating system competitors fear Google’s Android? The answer is yes, for a couple of reasons.
The first, and most important, reason is that the largest carriers, all four of them, have agreed to offer Android phones. (See “Audio Tip #29: Positive vs. Negative Volatility” on StrategyStreet.com.) Whenever the largest customers in the market agree to carry a product, that product has to be taken seriously by other competitors. The adoption of Android systems by the top four carriers argues that Android is a serious competitor.
The next reason is that most of the phone set makers have also adopted an Android operating system for some of their phones. Motorola eliminated Windows Mobile in favor of Android. HTC plans for half of its phones to run on Android this year. And Dell is using Android for its market entry. Most of the other competitors, including Samsung, LG, Kyocera and Sony Ericsson are also making Android devices. Apple will not offer an Android phone. So, the secondary customers have also spoken and affirmed that Android is serious.
Once the major customers have endorsed a low-end competitor, that competitor’s impact on the market will be pervasive. Android will not be a low-end competitor for long. Google will use its growth in the market to fund product innovations which will bring its operating system up to the standards of the better players in the market. Further, the growth of the Android system, which is free, will inevitably reduce the volume of sales or the price, and probably both, of the higher end operating systems. A low-end competitor who continues offering low prices while, at the same time, improving its product’s performance will reduce the margins of all other competitors in the industry. Its performance for price proposition will focus customers’ attention on the marginal differences that the higher end operating systems offer for their marginal prices, depressing either sales or prices. (See “Audio Tip #80: Measuring Customer Cost Savings” on StrategyStreet.com.)
There are a number of cell phone operating systems from which to choose. The major suppliers include Microsoft, Google, Apple, Nokia and Research in Motion. Google is the newest entry here, and is beginning to make waves with its free Android operating system. (See “Audio Tip #33: Strong vs. Weak Competitors” on StrategyStreet.com.)
There are two separate sets of customers for these operating systems. The first, and most important, are the carriers. The four major carriers include AT&T, Verizon, Sprint and TMobile. A secondary set of customers are the handset makers. These companies are secondary because they conform to the demands of the carriers in the U.S. These handset makers include Samsung, LG, Sony Ericsson, Kyocera, Dell, HTC and Apple.
In the cell phone operating system market, Nokia is the leader with its Symbian operating system. Research In Motion, with its operating system for its BlackBerrys, is also strong. The key growth market today is the smart phone market, where Apple has 13% of the market. Apple is gaining market share, at the expense of Windows Mobile, which has managed to hold on to 9% of the market. Google’s Android operating system is on only 2% of the world-wide smart phones. So should the operating system competitors fear Google’s Android? The answer is yes, for a couple of reasons.
The first, and most important, reason is that the largest carriers, all four of them, have agreed to offer Android phones. (See “Audio Tip #29: Positive vs. Negative Volatility” on StrategyStreet.com.) Whenever the largest customers in the market agree to carry a product, that product has to be taken seriously by other competitors. The adoption of Android systems by the top four carriers argues that Android is a serious competitor.
The next reason is that most of the phone set makers have also adopted an Android operating system for some of their phones. Motorola eliminated Windows Mobile in favor of Android. HTC plans for half of its phones to run on Android this year. And Dell is using Android for its market entry. Most of the other competitors, including Samsung, LG, Kyocera and Sony Ericsson are also making Android devices. Apple will not offer an Android phone. So, the secondary customers have also spoken and affirmed that Android is serious.
Once the major customers have endorsed a low-end competitor, that competitor’s impact on the market will be pervasive. Android will not be a low-end competitor for long. Google will use its growth in the market to fund product innovations which will bring its operating system up to the standards of the better players in the market. Further, the growth of the Android system, which is free, will inevitably reduce the volume of sales or the price, and probably both, of the higher end operating systems. A low-end competitor who continues offering low prices while, at the same time, improving its product’s performance will reduce the margins of all other competitors in the industry. Its performance for price proposition will focus customers’ attention on the marginal differences that the higher end operating systems offer for their marginal prices, depressing either sales or prices. (See “Audio Tip #80: Measuring Customer Cost Savings” on StrategyStreet.com.)
Thursday, July 9, 2009
Microsoft Gets Price Warnings from its Customers
Microsoft is introducing Windows 7 to replace its unpopular Vista operating system. The company is at logger heads with its PC manufacturing customers over pricing for the new software.
Here are two of the problems. First, Microsoft intends to charge $50 for an entry level version of the operating system, called Windows 7 Starter Edition, which is triple the price the company gets for the cheapest version of Windows out now. Microsoft charges between $60 and $150 for Vista today, but the PC manufacturers can use the older Windows XP for roughly $15 for netbooks, the only growing sector of the PC market. If Microsoft raises the price for the cheapest operating system to $50, the PC makers have to raise their prices or lose all the profits they have on the netbooks. Second, Microsoft plans to charge an additional $200 for the Windows 7 Home Premium edition. This additional cost would increase the price of a mid-range PC by 50%, from around $400 to about $600.
The PC customers have seen significant changes in their market. Competition has increased and prices have fallen. The average notebook, the source of most profits in previous years, has seen a price decline of about $800 from $1400 in 2004. The average notebook now costs less than the average desktop.
These PC manufacturer customers have an important message for Microsoft. (See Video #1: The Two Best Consultants in the World on StrategyStreet.com.) They are Microsoft’s key channel of distribution. The customers are telling Microsoft that, if the company charges these prices, sales volumes will fall for both the PC manufacturers and for Microsoft. Microsoft would be well advised to listen to these customers since Microsoft makes a lot more on the average PC than does the PC manufacturer. Microsoft can not, for long, operate at cross purposes with these PC manufacturing customers. High prices to these customers push them to alternative software suppliers. (See Video #7: Constraints on the Ability of Competition to Expand on StrategyStreet.com.)
Here are two of the problems. First, Microsoft intends to charge $50 for an entry level version of the operating system, called Windows 7 Starter Edition, which is triple the price the company gets for the cheapest version of Windows out now. Microsoft charges between $60 and $150 for Vista today, but the PC manufacturers can use the older Windows XP for roughly $15 for netbooks, the only growing sector of the PC market. If Microsoft raises the price for the cheapest operating system to $50, the PC makers have to raise their prices or lose all the profits they have on the netbooks. Second, Microsoft plans to charge an additional $200 for the Windows 7 Home Premium edition. This additional cost would increase the price of a mid-range PC by 50%, from around $400 to about $600.
The PC customers have seen significant changes in their market. Competition has increased and prices have fallen. The average notebook, the source of most profits in previous years, has seen a price decline of about $800 from $1400 in 2004. The average notebook now costs less than the average desktop.
These PC manufacturer customers have an important message for Microsoft. (See Video #1: The Two Best Consultants in the World on StrategyStreet.com.) They are Microsoft’s key channel of distribution. The customers are telling Microsoft that, if the company charges these prices, sales volumes will fall for both the PC manufacturers and for Microsoft. Microsoft would be well advised to listen to these customers since Microsoft makes a lot more on the average PC than does the PC manufacturer. Microsoft can not, for long, operate at cross purposes with these PC manufacturing customers. High prices to these customers push them to alternative software suppliers. (See Video #7: Constraints on the Ability of Competition to Expand on StrategyStreet.com.)
Monday, April 6, 2009
Pricing Against a High-End Product
In StrategyStreet terminology, a Standard Leader is a company who sells the majority of its products at the most common industry price point. The most common product we call the Standard Leader product. At the high end of the market are those companies who offer products with extra features and services for prices starting about 10% higher than the Standard Leader product. We call those companies, and their products, Performance Leaders. In the personal computer industry, Apple is a Performance Leader; Dell and Hewlett Packard are Standard Leaders.
Apple introduced its Mac-Book Air laptop early in 2008. This was an ultra-thin machine that appealed to customers who wanted light weight and high style in their personal computer.
Somewhat later in the year, Hewlett Packard introduced its high end Voodoo Envy laptop. This is an example of a Standard Leader company introducing a Performance Leader product in competition with a Performance Leader company. (See the Symptom and Implication, “Customers are taking on more suppliers because shortages have appeared” on StrategyStreet.com.) This happens in most industries. Recently, Dell has announced its Adamo high-end personal computer. Dell claims the Adamo is the thinnest and the most stylish in the market. These three Performance Leader computers sell strictly on style. Their technical specs are not much different from other laptops, or from one another.
There is something interesting, though, in the way the computer industry Standard Leaders have priced their products against the Apple computer. The Apple Mac-Book Air sells for about $1800; Hewlett Packard’s Voodoo Envy sells for $1900; and Dell’s Adamo sells for $2000. The Standard Leader products carry prices above the price of the Mac-Book Air, the leading Performance Leader product.
This is an unusual approach to pricing. The Standard Leaders would like to take market share from Apple but they have given up one of their most powerful advantages, their low costs due to Economies of Scale and, potentially, lower prices. (See the Symptom and Implication, “The larger companies are squeezing out the smaller” on StrategyStreet.com.) A more robust approach is for the Standard Leader to use its superior economies of scale and distribution power to introduce a product somewhat below the price of the Performance Leader product. This enables the Standard Leader to introduce a product that will take share from the Performance Leader, slowing its growth and reducing its margins. Consider these examples of that pricing strategy.
* Toyota introduced the Lexus brand against Mercedes Benz at a price point of $39,000 compared to an average $50,000 Mercedes Benz price.
* MSN priced its broadband product at $39.95 to compete against AOL’s broadband at $44.95.
* The Palm PDAs competed against PDAs using Microsoft’s Pocket PC operating system at prices 20% or more below the pocket PC-driven machines from Compaq and Hewlett Packard. Then, smartphones undercut PDAs.
* Schwab’s 2% cash back credit cards carried no annual fees in competition with fee-bearing airline miles credit cards.
* McDonalds and Dunkin Donuts introduced high-end coffee drinks at prices nearly 50% below those of an equivalent drink at Starbucks.
* Kraft’s DiGiorno high-end frozen pizza came out at a price of $5.59 to compete against home delivery pizza at around $7.00.
My guess is that neither the Hewlett Packard nor the Dell high-end computer will have any impact at all on Apple and its Mac-Book Air.
Apple introduced its Mac-Book Air laptop early in 2008. This was an ultra-thin machine that appealed to customers who wanted light weight and high style in their personal computer.
Somewhat later in the year, Hewlett Packard introduced its high end Voodoo Envy laptop. This is an example of a Standard Leader company introducing a Performance Leader product in competition with a Performance Leader company. (See the Symptom and Implication, “Customers are taking on more suppliers because shortages have appeared” on StrategyStreet.com.) This happens in most industries. Recently, Dell has announced its Adamo high-end personal computer. Dell claims the Adamo is the thinnest and the most stylish in the market. These three Performance Leader computers sell strictly on style. Their technical specs are not much different from other laptops, or from one another.
There is something interesting, though, in the way the computer industry Standard Leaders have priced their products against the Apple computer. The Apple Mac-Book Air sells for about $1800; Hewlett Packard’s Voodoo Envy sells for $1900; and Dell’s Adamo sells for $2000. The Standard Leader products carry prices above the price of the Mac-Book Air, the leading Performance Leader product.
This is an unusual approach to pricing. The Standard Leaders would like to take market share from Apple but they have given up one of their most powerful advantages, their low costs due to Economies of Scale and, potentially, lower prices. (See the Symptom and Implication, “The larger companies are squeezing out the smaller” on StrategyStreet.com.) A more robust approach is for the Standard Leader to use its superior economies of scale and distribution power to introduce a product somewhat below the price of the Performance Leader product. This enables the Standard Leader to introduce a product that will take share from the Performance Leader, slowing its growth and reducing its margins. Consider these examples of that pricing strategy.
* Toyota introduced the Lexus brand against Mercedes Benz at a price point of $39,000 compared to an average $50,000 Mercedes Benz price.
* MSN priced its broadband product at $39.95 to compete against AOL’s broadband at $44.95.
* The Palm PDAs competed against PDAs using Microsoft’s Pocket PC operating system at prices 20% or more below the pocket PC-driven machines from Compaq and Hewlett Packard. Then, smartphones undercut PDAs.
* Schwab’s 2% cash back credit cards carried no annual fees in competition with fee-bearing airline miles credit cards.
* McDonalds and Dunkin Donuts introduced high-end coffee drinks at prices nearly 50% below those of an equivalent drink at Starbucks.
* Kraft’s DiGiorno high-end frozen pizza came out at a price of $5.59 to compete against home delivery pizza at around $7.00.
My guess is that neither the Hewlett Packard nor the Dell high-end computer will have any impact at all on Apple and its Mac-Book Air.
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