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Distress Signals From Dell

Posted by Bob Warfield on September 5, 2008

All successful companies have a distinctive competency.  Dell’s has been their ability to sell more cheaply than the competition based on a variety of advantages they developed over the year.  They eliminated the need to pay a costly sales channel for starters by selling direct.  But another big advantage had been their ability to really shave the pennies when it came to manufacturing and just-in-time inventory.

Today I read from Stacey Higginbotham that they’re moving towards outsourced manufacturing.  The scoop came from the WSJ, which reports sources saying Dell is approaching contract manufacturers all over the world to see if they’d like to buy Dell’s plants.

I see this as a distress signal because the company is moving to abandon one of the fundamental competitive advantages that made it great.  It’s not that I think they’re making a mistake–I suspect any company as close to the numbers as Dell is must know exactly what it’s doing, and therein lies the rub.  For Dell to sell the manufacturing plants must indicate they have concluded there is no longer a competitive advantage to owning them.  The contract manufacturing industry can evidently build PC’s just as cheaply as Dell, and hence the market has eliminated one of Dell’s big advantages. 

It’s always tough when markets take away competitive advantage, but in many ways, it is inevitable.  The question is what does Dell do next?  What will be the next major source of competitive advantage?  Having to come up with new advantages late in the game and after some of the old ones have gone dead is always very challenging.

For the time being I have to bet on Hewlett Packard over Dell until I can clearly see Dell’s new playbook.  HP is more diversified, and has other competitive advantages that are working well.  They don’t have to stop and reinvent.

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Larry Dignan has a similar take.

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