The Dell pickle: 10 reasons for the company's decline

Disclaimer: I am no one’s fanboy. I neither love nor hate Dell. My dad taught me not to love anything that can’t love me back, and I have no reason to hate. I live in Austin, TX, just down the road from the company. Dell is a big part of the local economy, and both the company and the Dell family are generous contributors to the local community. Plus, I know a lot of really good people who work there, or whose livelihoods are dependent on the business, as mine was for the better part of a decade.

As you probably already heard, Michael Dell and an investment group are trying to take Dell Computer private. This means the company would no longer sell stock on the Nasdaq stock market.

They are doing this because the company’s fortunes have fallen, and the value of their stock has fallen right along with it. To right the ship, they have to make long-term corrections. But the stock market hates long-term corrections, and they’ve been pummeling Dell’s stock as the company tries to turn things around. It’s hard for a company to right itself amidst a combination of slowing sales and declining market capitalization. The main rationale for going private is to free the company from the demands of the market, which, as we’ll see, is pretty ironic.

As an armchair business analyst, this makes me frustrated. I’m frustrated because smart people did dumb things when they should’ve known better. Here’s what I think they did wrong:

1. They commodified their product. Yes, this was Michael Dell’s original (and perhaps only) masterstroke. He realized, and convinced customers, that a PC was a PC was a PC. It’s a commodity(link is a PDF), just an assembly of standard parts. One is pretty much is good as the next. Consequently…

2. They trained customers to only care about price. Dell became a market disruptor by creating a way to build and sell cheaper PCs that were equivalent to the competition’s. They made it all about price. Period. The famous “Dell model” devalued value. If you convince your market that everyone’s product is equivalent and all that matters is price, they will believe you. You lower the perceived value of your product. Your value proposition is low cost. Cost is the only thing your customers care about. Meaning they’ll ditch you the second a better deal comes along.

3. They emphasized growth over sustainable profitability. For a long time, Dell’s low price model was fantastically successful. Once they went public, their stock price soared along with the company’s phenomenal growth, making lots of early Dell employees and investors very wealthy. The stock market values things like year-over-year growth and increasing market share more than sound long-term strategy and steady profits. Dell was happy to play along, because practically everyone in the company owned as much Dell stock as they possibly could. Executive compensation became more and more dependent on increasing the stock price. So naturally, executives focussed on that more than anything.

4. They catered to Wall Street’s whims. The old-fashioned way of stock investing was to buy stocks that would steadily increase in value AND steadily yield dividends (a portion of the company’ profits). Ever heard of Warren Buffett? That’s what he does. Works pretty well for him. Value investors like Buffett don’t care so much about short term stock prices. But the stock market, which generates money by constantly buying and selling, cares about little else. So Dell focussed their business more and more on doing whatever it took to keep the stock climbing. People don’t buy Dell stock to own it forever and pass it along it to their kids when they die. They buy it to sell it and make a profit. As we’ll see, this makes the stock price more volatile.

5. They bought their own bullshit. The thing is, all of this worked for a long time. Dell’s sales, market share and stock price kept rising. So they focussed on getting better at doing all the things that would keep that going. They hired Harvard MBAs by the score. So not only did they keep getting more successful, they kept getting smarter. Eventually, they believed their smartness created their success and guaranteed it would continue. Thus…

6. They wallowed in hubris, complacency and risk aversion. When you buy your own bullshit, you start getting cocky. After all, years of fantastic success prove that you’re smarter than everyone else, right? And if it ain’t broke, don’t innovate. For most of their history, Dell has spent far less on R&D than is typical for a technology company. Why innovate? Innovation costs money and incurs risk. That doesn’t boost your quarterly stock price.

7. Double down and ride the rocket into the ground. Why did the Dell model pay off so handsomely for so long? Because Dell caught the industry flat-footed. For a long time, no one could touch them. But then their competitors started catching on. This almost always happens to market disruptors. Their initial competitive advantage erodes as competitors adapt. Some market disruptors, like Amazon, use the size and strength they gain while their competition is catching up to find new ways to create value. Amazon started as a low cost online bookseller. But they didn’t sit around and wait for competitors to catch up to them. They innovated all over the place. Now, Amazon is not very profitable, but Wall Street loves them, because they’ve built their growth on more than endless price cutting. Instead of waiting for competitors to catch up, they found more areas to compete in, more markets to disrupt. Contrast that with Dell, the one-trick-pony: once competitors started to imitate Dell’s business model, Dell didn’t innovate. They used size and scale to keep doing more of what they were doing: sell more boxes for less. This is called a “race to the bottom.” It seems to have worked.

8. They lied to their most important customers. Dell got itself into a place where margins were so thin and market expectations were so high, they were left with very little room for error. Around the middle of last decade, an Asian electronics supplier sold millions of faulty capacitors that had a high probability of overheating. Every major PC manufacturer was affected, but Dell sold more PCs with faulty capacitors than anyone, by far. The Dell PCs most affected were in their corporate line. Business sales are Dell’s bread and butter, their core constituency. Facing a hit to their bottom line, Dell conspired to lie to these customers, to deny the problem and resist customer demands to make things right. That didn’t work so well.

9. They also lied to Wall Street. Because the company had focussed on the things that boosted their stock price to the exclusion of almost everything else, any business results the company announced had an outsized influence on its stock price. When they announced good news, the stock went up like crazy. But when they announced bad (or even less than great) news, the stock would get pummeled out of all proportion. So when they had less than great news to report, they lied about it. Both of these attempts to mislead not only wound up costing more money in the long run, they hammered Dell’s credibility. Their aura of invincibility disappeared.

10. They waited for the chickens to come home to roost. This happens in business time and time again. The people at Dell aren’t dummies. They saw the writing on the wall years ago. They have a huge pile of cash that they could’ve spent to fix things that were broken. And they’ve been trying in fits and starts. But they were locked into feeding Wall Street’s short-term cravings. They kept trying to squeeze more from their business model. After all, they had nothing left to fall back on. But you can only squeeze so long. And meanwhile, billions in market capitalization vaporized. The company is now worth less than half of what it was worth at its high in August, 2008. That’s the bad news.

The good news is, they can now be purchased for the low, low price of only $24 billion.