Who Wants to be the Next Dell?

cybercomm writes "Tom's Hardware has a very interesting column regarding the future of beige-box manufacturers, such as Dell, gateway, Compaq, et all. I found this article really thought provoking, since the author has raised some really interesting issues, especially concerning the fact that the writer of the column compares reviewers to the lowest ring of the ladder, and asks one simple question: Instead of whining, why not do it? Why should you learn all the specs on the latest processor and slam the competition just because you may happen to own a P4? Why not start the same way that the Dell, Apple, Gateway, and other founders took by forming your own store, getting in touch with Asian suppliers who "are more than willing" to give you discounts, just so that they can get their foot in the lucrative N. American and European markets. Very interesting reading, that raises another what-if scenario (what if you succed and your business is based on Chinas' dragon CPU, XGI card, open-source OS...)."

Comments

Margin

[codepunk]

You see the problem with hardware is all about margin. Unless you are moving a huge amount of goods you will loose your ass. Software on the other hand is all margin, big profit ratio's. Why do you think so many restarants go out of business? Small margins, same goes for grocery stores.

Re:Margin

[Tyten]

that's exactly right. at our store, we only make approx $100~$200 on a PC we sell. service is our big profit maker, at $50 an hour. Software and power supplies we're able to sell at %200 cost.

Re:beige boxes?

[jkinz]

In consumer computer products, a beige box is a generic personal computer -- thus, an Intel PC as opposed to a video game console, a Macintosh, or a Unix workstation. The term is also sometimes used to distinguish generic "clone" PCs from name-brand models such as Dell and Hewlett-Packard. Most generic PC cases are in fact beige in color.

Bulk purchasing clout is needed...

[bc90021]

...and while it is tempting to get into the whitebox market, it requires a significant amount of capital. Why? Bulk purchasing (ie for processors) is only really worth it pricewise if you do it in the thousands. Dell et al. do that easily now, but for "the next Dell", unless he/she/them are able to take advantage of those discounts by purchasing parts in huge multiples, it will always be cheaper for the end user to buy from current whitebox manufacturers, even if "the next Dell" provides better quality. The vast majority of people are willing to save a buck, and unless "the next Dell" can compete on price as well as everything else, it is unlikely that there would be "another Dell".

Re:Bulk purchasing clout is needed...

[bc90021]

I never said it was the only competitive advantage, I said it was the main one. And it's a barrier to entry for anyone who wants to become a white box seller.

When I lived in California, I worked for a small computer store that sold computers that were custom built. Building computers (while I was there) went from being barely profitable to a loss section of the store. Why? Because people stopped buying better custom built computers, and started buying HPs at the Best Buy that opened 30 miles away. People were driving an hour (round trip) to save $200 on a computer. From what I've heard, the store no longer sells custom built PCs - they can't compete with that.

However, their tech support division is making record cash fixing HPs. ;)

Re:Bulk purchasing clout is needed...

[akuma(x86)]

In a commodity based business, the lowest cost producer wins.

A commodity is something that is NOT unique. It is easily replaceable and has almost no differentiation from one producer compared to another.

Given that all of these PC makers are basically selling the same machine (commodity), the one with the lowest cost structure will have the highest profit.

Dell wins hands down. They have literally only about 2 hours of inventory (meaning that a computer will live in a warehouse for about 2 hours on average). This is an amazing feat for a company of this size.

The size of Dell also works to it's advantage. It's called economies of scale - the larger you are - the cheaper it is for you to produce your goods.

With Dell being so large, they can act like Walmart and squeeze their suppliers (Intel, Taiwanese mobo makers, Korean/Chinese DRAM makers etc...) for sweetheart deals on components.

Let's say you have the same machine from Dell, HP and Gateway and Dell offers the lowest price, what do you think the majority of consumers will buy?

PCs are commodities - there is very little that can differentiate one producer from another. The minute one producer offers an advantage on their PC, 3 nanoseconds later all of their competitors have copied them and offer the same thing. The only way to differntiate youself is through price. Cheaper wins.

Wrong thinking...

[Svartalf]

They DO have stores (They've got Dell Direct sales kiosks in the mall- where you get to see something of what you're ordering through the system) and the online sales system for Dell (Whether it be by phone or by web) is also a store.

It's just that they didn't have brick and mortar storefronts until very recently- and these don't keep inventory, they're solely there to show off the wares so people can see what they're buying.

One tip...

[tcdk]

Make sure to get enough venture capital, when you start you new hardware store, that you can hire somebody else to take care of customer-support.

But seriously, it's all about volumn. You have to buy a lot of parts to be able to compete - the margin on hardware is small. Your fortune isn't made just because you can sell a thousand boxes and make 10 or 20 bucks each. Now you have to be read, when half of them calls you and tell you that they can't figure how to connect that 56k modem to their adsl line or that the cup holder is broken.

Good luck...

Common

[brejc8]

This is nothing new. I have funded my drinking habbit for years by making people computers. There is no need to have a store to do it. Most people don't realise how easy it is and they usually want something special. This is how the Dell bloke goty started anyway. For the office I make all the machnes now, we wouldn't even consider buying machines ready made (unfortunately except for Sun machiness)
The dragon CPU is not supported very well (or at all) currently and does not bring a huge advantage yet. Its hard enough to convince someone to use a non windows/x86 machine when you are a huge company nevermind when you are a singly guy knocking them out of your garage.

Off the mark...

[djupedal]

...getting in touch with Asian suppliers who "are more than willing" to give you discounts, just so that they can get their foot in the lucrative N. American and European markets.

So much wrong with this kind of statement. China doesn't need those markets. It does need the western style of pragmatic project management, etc, but the market is now inside China/Asia, and much larger than Europe and North America. This statement only serves to show why the west is being left further and further behind.

Keep in mind

[autopr0n]

That a TiVo is a general purpose computer running Linux. It's not hard to make a general purpose machine 'just work' for what you buy it for. The problem comes when people add in new software and drivers. If you buy a new dell, it'll 'just work' as long as you like as long as you never upgrade the hardware or software (assuming you don't connect it to the internet, or that no security patches break the system... )

Re:No next, please.

[djupedal]

I just finished working 4 years for a Korean firm that makes Dell branded equipment. We lost money dealing with Dell, but we did it to keep them from going to our competitor. No one wanted to handle the Dell account. They are cold and single minded.

Dell always came out as the worst to deal with, compared to IBM, Sun, HP/Compaq. Dell would negotiate for a certain number of units at a certain price, then order 25% of the original quantity, while demanding the original unit price. Sounds like smart business? When they break their original commitment, and then bully their way on, it's bad business.

The end result is their suppliers keep waiting for the 'big' contract that never comes along. They lose money and go out of business. Dell moves to another supplier and doesn't look back. That is one less supplier for the other buyers. Another carcass on the fire. It's called 'hollowing out', and most companies know better than to go down that road.

If you do business with me, you expect a certain percentage of every dollar we handle. Under ideal circumstances, I get 60 and you get 40. This proportion lets us both survive. Dell seeks 70/30...this helps Dell grow, of course, but the 30 means slow death for the other side. Most businesses honor the 60/40 balance, knowing that anything more will be abusive...Dell has long ago decided to cross that line.

The hope is to take the market, and then go back to 60/40...but with no suppliers left willing to take the abuse, Dell will be alone and cutting their own throat.

Dell really doesn't have inventory

[RadioheadKid]

Dell uses just-in-time inventory and has the component makers store the parts until Dell needs them. Basically the parts aren't Dell's until they are in the system.

Re:Dell really doesn't have inventory

[Cyphertube]

That's the same strategy used by a lot of JIT companies. I do believe that Toyota functions that way, at least in their Japanese factories, and I know that Nokia works like that.

With Nokia, the idea is that that they can push on both quality and price, because if you, Mr. Supplier, can't meet what they need, someone else will, and they can also upgrade parts immediately if necessary. (At least that's how one parts supplier explained it to me.)

Re:Dell really doesn't have inventory

[TheLink]

The picture is even better for Dell:

Dell gets order from the customer first.
Dell gets confirmation that customer's money is good from Card Company. +$$$
Dell then gets the parts from their suppliers.
Dell sticks em together and ships the stuff to customer.
Dell pays the suppliers sometime later. -$$
-
whereas for the other companies with stores and stock, the -$$ comes way before the +$$$.

Given that computer parts tend to go down in price as time goes by and you'd see why that makes an even bigger difference.

Re:What if people realized...

[Anonymous Coward]

Traditionally, the money for clone shops was in networking, not computers.

A couple years ago, I talked to a guy who basically sold desktops at cost. However, for a "server" with MS Small Biz software, he could charge a huge markup. People who would quibble over $50 on a desktop would have no problem dropping $5K for a server. He also marked up DSL service, routers, etc.

I know another guy who bought a house based on the Novell business he had years ago. Even back in the early 90s, the hardware margins were so thin that he gave up on desktops.

Don't overlook the inefficiency of big business

[utahjazz]

I've worked at a lot of companies big and small (120,000 employess down to 20 employess)

I've learned that big companies are doomed to becomming appalingly inefficient. I mean, words just can't describe how inefficient they are. The worst part is, most people at big companies started there, and have always worked there, or at another big company so they have no idea what the other world is like.

Honestly there are things that take a month at a big company that take 5 minutes at a small one. (Not because of cutting corners on needed process, but just plain inefficent stupidity).

So how do big companies survive? Just what eveyone's been posting, margin and big-company bullying. This is what balances things out.

But don't assume you can't beat Dell because you don't have their margins. You also don't have their inertia.

Incidentally, one exception is Microsoft (yah I worked there too, probalby should post AC). MS operates like a small company with 20,000 employees. My group consisted of 31 people: 30 engineers, and 1 admin. That would be unheard of at any other big company. They feel much better with like 5 working engineers, 5 people with engineer titles that do nothing, and 20 people that make spreadsheets that track what day today is, and what day tomorrow will be etc...

More like...

[Kjella]

Just-in-time assembly. I imagine they're not stocking parts in a just-in-time fashion, at least not all of them.

In a purely JIT shop, everything would be obtained as it is needed (purely pull, no forecasts, no stock in principle). The primary downside is lag - you can't deliver until the slowest part has arrived/been produced and assembled.

The point is to use JIT where it's needed, on parts that drop fast in value / become obsolete very quick.. I'm sure they have lots of stock in Dell casings, ATA cables and Dell stickers (or companies which are basicly Dell inventory holders, if not), and very little of *the* fastest CPU/GFX card at any given moment.

JIT isn't a wonder cure, it needs to be applied with some sense. Computer assembly is a something of a star example though - well defined interfaces (PCI, AGP, CPU sockets) and modularity. It's no doubt it's the most important factor in Dell's success.

Kjella