Dell versus Hewlett Packard
Richard C.
Stoyeck
StocksAtBottom.com
August 15, 2006 There is a war shaping up that involves two giant
companies facing off, and soon there will be three. The war is between
Dell Computer, and Hewlett Packard for supremacy in the personal
computer world. The first battles have been fought, and clearly Dell
has been the winner for years. The next battle seems to be shaping up
as we write this, and Dell seems to be victimizing itself with
recalls, and lackluster customer service at best.
For more than a decade Dell has eaten Hewlett Packard for lunch in
the world of personal computers. Any analyst will tell you that
Hewlett Packard makes a disproportionate share of its bottom line from
selling ink for their printers. They sell the printer probably at a
lost just to get the ink resupply business. If you buy a HWP machine,
they don’t even include a printer cable in the box. They would
like to because it only cost a dollar or two. What happens instead is
that stores like Best Buy, Circuit City, and others demand that the
cable not be included. These stores sell the cable as a separate item
for $20 to $30 depending on length. Not a bad markup, pay a dollar or
two, and sell it for $30. The stores make more money on the printer
cable, than they make on the printer.
Carly Fiorina, the former Chairwoman of Hewlett Packard developed a
corporate strategy that was working. The Board simply got tired of
her. Today the current Board is implementing her strategy and it’s
working.
Dell meanwhile has had a tremendous fall from grace. Dell really
doesn’t manufacture anything. They are an assembler and a
shipper. All manufacturing is done overseas in an attempt to remain
the low cost producer. Through the years, Dell was so superior at this
that some of their financial metrics were meaningless. As an example,
one of the things that analysts like to know is how long it takes you
to pay your bills. Dell turned the whole concept over on its head.
Let’s look at an example. You order a computer from Dell, and
pay for it immediately by credit card. They have your cash. Dell’s
suppliers ship the components for that machine before there is any
money due them by Dell. This means Dell gets your cash, and may not
have to spend that cash for months. The usable float amounts to
billions of dollars. So why has Dell fallen from grace. It comes down
to this. When you play by the edge of the table, sometimes you fall
off.
Dell’s customer telephone service centers in India are failing
the American consumer miserably. They may speak English, but they do
not understand our culture, and they do not get the job done, as far
as consumer satisfaction is concerned. In the end, consumer
satisfaction is everything. People vote with their feet and the
consumer is voting to buy somebody else’s machines, namely
Hewlett Packard is the main beneficiary.
The consumer is now becoming aware that certain Sony manufactured
notebook batteries sold by Dell from April 2004, until July 2006 are
capable of exploding and causing a fire. A Dell recall is now in
effect involving 4 million PC batteries on a world-wide basis, of
which 2.7 million are in the United States.
Recently the Wall Street Journal carried an article about a laptop
computer smoking on an airplane while on the runway. The crew was able
to open the door and throw the machine out onto a conveyer before it
erupted into flames. We now have over 4 million machines capable of
this on a world-wide basis. Several weeks ago, a Dell computer was
shown to be on first in a movie that circulated by the bloggers on the
Internet. Dell tried to downplay the story unsuccessfully. Great
management teams confront their problems and deal with them, that’s
not what’s happening at Dell.
What is happening with Dell is that they at the very least seem to
be losing their edge which they have had since the beginning of the PC
revolution. There comes a time in every company’s growth cycle
when the company gets “Tired” for want of a better word. PC’s
have become as easy to build as toasters. There really are no brand
differences between competing companies, other than advertising.
What Dell needs to do to get back in the game is re-energize
itself. This is no longer the company that was the subject of several
Harvard Business School case studies. They must get their suppliers to
conform to what use to be very high standards, and pull their customer
service act together.
If former “also ran” Hewlett Packard can pull it off,
then so can Dell. HPQ has successfully merged giant Compaq Computer
into its operations. The post integration savings have been achieved,
and it now appears that the merger was done seamlessly, and
restructuring savings are still being achieved.
What’s coming next will be China’s Lenovo which took
possession of IBM personal computer division will be making its move
against both Dell, and Hewlett Packard. Both of the American based
companies have heavy manufacturing done in China. Lenovo will do
whatever it has to do in an attempt to garner market share for its
personal computer manufacturing segment. Over the next two years there
will be a 3 way war. The argument will be since Dell and HPQ are
selling China manufactured products already, why not buy China direct.
It will be interesting to see how the winners sort themselves out,
what will be Wal-Mart’s roll, since 70% of all products sold by
the giant chain come from China. Wal-Mart really is China’s
distribution arm.
Goodbye and good luck
Richard Stoyeck
