Dell's lack of competitive advantage - YouTube

Believe it or not, Dell is a company with nonexistent competitive advantage.

Still, Dell somehow manages to keep generating its revenues.

On this graph you can compare Dell’s revenue growth over the last 10 years

with two of its main competitors, HP and Apple.

This graph might force you to think that Dell isn’t doing so bad

but now compare the previous graph to this one showing the stock price of three companies

over the last 10 years. While Apple has been enjoying a sky rocketing growth,

Dell and HP’s stocks have stagnated in two sad flat lines.

Today’s Apple’s stock is 420 points, while Dell’s and HP’s stocks are around 20 point each.

In fact, if you were to look at stock price graphs for almost all other Dell’s competitors,

they don’t look much different. Apple is the only exception.

Dell and most of its competitors appear to be missing a key ingredient of Apple’s success.

The key reason for it is that most of these companies have almost no competitive advantage over each other.

We would like to figure out why it is so specifically for Dell,

because this analysis will help us understand how Dell manages to survive in a sea of competition.

Professor Stephen Tallman of the University of Richmond says that

“Successful firm is one that demonstrates long-term advantage over its competition”.

Rich Horwath in his “Deep Dive” book defines “competitive advantage” as

“an offering of superior value based on differences in capabilities and activities”.

What are Dell’s capabilities? Well, there are two types of capabilities: Distinctive and Reproducible.

Distinctive capabilities cannot be emulated by competitors, and

Reproducible capabilities are those that can be successfully replicated.

A fundamental component of sustainable competitive advantage is to have distinctive capabilities.

Dell is a commodity vendor. Their offerings includes servers, PCs, monitors, laptops, printers and

they are pretty much identical to those offered by HP, IBM, and many others.

Dell has the same resources as its competition. They buy the same parts from the same hardware vendors,

put them together into the same final product, and sell them to their customers.

Dell operates in equal market with its competition. Nobody has any special market manipulation capabilities.

Customers can easily substitute Dell’s products for HP’s, Lenovo’s and others

because they are all pretty much the same, especially since they are all running

the same Windows operating system by Microsoft.

It’s clear that Dell has no distinctive capabilities over its competition.

If you examine Dell’s 2010 10K report, Dell doesn’t mention any distinctive capabilities.

Again, how do they survive then?

Well, the second part of our competitive advantage definition was about activities.

Activities are where capabilities merge with resource allocation decisions to be transformed into the offerings.

Individual activities fall into categories, such as supply chain management, operations,

marketing, distribution, and services.

In its 10K report Dell talks about its “highly efficient global supply chain management and operations”.

They also talk about their direct business model, which allows them

to refine their products and marketing programs for specific customer groups.

In its 10K report, Dell touts its strong distribution channels including retail,

system integrators, value-added resellers, and distributors.

Dell’s activities become especially evident after examining their business strategy section in the 10K report.

They talk a lot about cost savings, supply-chain and logistics improvements,

striving for higher margin and recurring revenue offerings, and improving profitability.

The reason for such business strategy can be seen in one more graph comparing

Dell’s, HP’s and Apple’s profit margins over the last 10 years.

While Apple’s profit margins have reached 25%, Dell’s and HP’s profit margins sit near 5%.

This actually makes sense, because, as I’ve mentioned before,

Dell sells commodities, and when you are selling commodities,

you have no choice but to simply bid down your competition in the fight for sales

and to choke off your competitors margins, essentially reducing your own profit margins.

Going back to our definition of competitive advantage, I would like to summarize by saying that

while Dell might have perfected its activities,

it has absolutely no competitive advantage over its competition

because it lacks distinctive capabilities.

The question is…. How much longer can they survive like this?