Dell Versus Hewlett Packard - Computers Article

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By:Richard Stoyeck

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 fire 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 and 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

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Richard Stoyeck’s background includes being a limited partner at Bear Stearns, Senior VP at Lehman Brothers, Kuhn Loeb, Arthur Andersen, and KPMG. Educated at Pace University, NYU, and Harvard University, today he runs Rockefeller Capital Partners and StocksAtBottom.com www.stocksatbottom.com