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ATPM 14.06
June 2008



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Segments: Slices from the Macintosh Life

by Eric Blair,

Apple Versus Dell, or Why Technology Isn’t Just About the Technology

The Secret Diary of Steve Jobs:

As for the question, “So who knows?” the answer to that last question is, I do. I know. Let me explain. What people overlook is that the advantages that allowed Dell to prosper for about a decade were all fleeting advantages. Dell was for a while an innovative company, but its innovations did not involve product design. They involved manufacturing and distribution efficiencies.

This quote comes from another great post from Daniel Lyons in his Fake Steve Jobs persona. When people try to analyze Apple or compare it to other computer companies, they typically make at least one of two mistakes. One, they think every company that makes computers has the same business model. And two, they assume that technology is the only thing that matters.

When you try to compare Dell and Apple as businesses, all you can really compare are their relative financial positions. The manner in which the companies go about their business are so disparate that you can no more say “Dell should be more like Apple” than you could say “Apple should be more like Dell” ten years ago.

(That’s not to say that the companies haven’t employed similar strategies over the years. Apple’s push toward online sales and reducing on-hand inventory both come to mind. While the latter was most likely influenced by Dell’s success with low inventories and the costs incurred by Apple’s larger on-hand inventories, the former was pretty much inevitable, as many companies were moving toward the Internet for direct sales efforts.)

The Apple and Dell business models are completely different; while Apple has been innovating in a user-facing manner, Dell has been squeezing every last bit of efficiency out of its business and manufacturing processes. The problem for Dell is that there’s only so much fat to trim from business and manufacturing—eventually, you start cutting away the muscle. When you innovate in a user-facing manner, there are far more opportunities for improvement.

The downside of attempting user-facing innovations is that they can be more difficult to achieve. Every attempt will not be successful. It’s also harder to quantify the value of user-facing innovations. With a back-end improvement, you may be able to say “Doing X will decrease the time to completion by three seconds per unit, which leads to a time-saving of Y each year.” When you try something new in the end-user space, however, you can’t really say “Doing A will increase product sexiness by 12%, increasing revenues by a factor of B.” Michael Dell simply can’t walk into work on Monday morning and say, “Today, we’re innovating.” (As an aside, I always get a kick out of those innovation ads from IBM because I know there are companies that basically use the same scenarios that IBM is mocking.)

Over the past few years, Apple has put together a strong track record of reading the market and releasing innovative products, but not even Apple has been perfect. Expecting a company that has little to no experience with user-facing innovation to suddenly turn on a dime and replicate Apple’s success is just folly.

When people look at computer companies, they are often blinded by the technology. They forget that these companies are run by people and, through these people, the companies have developed a culture. Changing the culture of a company is difficult and time consuming, if it is even possible. In The Perfect Thing, Steven Levy has a great comment from Sony CEO Howard Stringer regarding its efforts to launch a music store prior to the iTunes Music Store launch:

“We were well ahead,” he moaned, “but we tried to write the perfect legitimate download experience and got bogged down.”

I’m pretty sure I heard more about this story elsewhere, either from another section of The Perfect Thing or from some other source, but I’m pretty sure the “bogging down” came from Sony’s music label (and from the context of Stringer’s quote, it seemed that “perfect legitimate download experience” was code for “unbreakable DRM”). In discussions about the dominance of the iPod, numerous people have thrown Sony at me as a company that could develop a viable iPod competitor—it has all the individual pieces. What people either don’t know or choose to ignore is that Sony’s internal politics and distribution of power have often hamstrung efforts by one division to release products that may impact other divisions, regardless of the benefits to Sony as a whole.

From a culture standpoint, Dell is in a very similar position to Sony. Not so much that Dell has internal divisions bickering over one another’s products, but that the employees, from management on down, are conditioned to follow the Dell Way. At Dell, if a project isn’t seen as having a direct economic benefit, the project dies. As I mentioned earlier, though, it can be more difficult to quantify the economic benefit of many end-user innovations. I think the combination of these factors leads to more conservative thinking. A conservative approach may lead to a higher percentage of successful projects, but taking risks on less certain projects can lead to larger successes—there are times when it’s fine to string together a few singles, but sometimes you have to swing for the fences, strikeout be damned.

Who knows? Dell may turn it around. Dell may reinvent itself and aggressively attack new markets as opposed to cutting costs in existing markets. Anything is possible. But simply basing your theory on the premise that “Apple did it, so why the heck not” just doesn’t cut it.

Also in This Series

Reader Comments (14)

Robert Leitao (ATPM Staff) · May 31, 2008 - 19:16 EST #1
Dell is becoming a tragic story of management by bottom line versus management by top line. By that I mean Apple's approach is build the best products possible and believe success will follow.

Focusing only on the bottom line has led Dell to cut costs, eliminate virtually all product R&D relative to sales volume and the poor decision to exhaust shareholder assets by buying back its own share in an effort to increase reported earnings per share that can not be achieved organically by selling commodity-grade PCs.

Over the past several years Dell's management has used $25 billion dollars to buy back its own stock rather than invest in product development and innovation.

The result is that as of this writing Dell only has about $1 billion in net tangible assets remaining versus Apple that has over $17.5 billion in net tangible assets to invest in it business, its products and in developing new technologies and intellectual property.

The bottom line is Dell's bottom line isn't improving in a way that fosters long-term growth and the development of better, more attractive products.

While Dell's overall revenue is much higher than Apple's at the time of this writing, its balance sheet value is shrinking to near nothing.

Apple invests in developing new products, preparing the company for a bright future and in bringing innovative products to market.

Dell is fading into irrelevance while Apple is increasing its clout in each of the company's major product segments.

While Apple now has resources to spare to support its growth, Dell has little left to position the company for a turnaround.
ex-Deller · June 3, 2008 - 12:54 EST #2
The "Dell Way" is shorthand for execution, execution, execution. "Go do it" is another one of these Dell-isms that suffuse right through the organization.

The net result is that Dell will reward short-termism at the expense of an overall plan.

When Michael Dell came back to run the company, I remember scoffing at his statement of intent, which was, basically, to be better at what they were already doing. As you rightly say, you can only trim so much fat before hitting muscle 'n bone.

The number of times I heard references to the one good idea he had - way back, 20 years ago - suggests that he has no clue other than to keep doing what he knows: assemble commodity PC's.

In that sense, Dell is not in the same market as Apple, meaning they're not really competitors any longer.
Paul Greatbatch · June 3, 2008 - 14:16 EST #3
If you look at the past few years at Dell, how many people have they laid off annually to try to keep this business model alive?
jay@dell · June 3, 2008 - 15:43 EST #4
I am curious to learn the factual basis for this post and Robert Leitao's response, as last week's headlines about Dell's quarterly results forthrightly refute them.

Market share gains and record earnings while cutting costs are not typically considered symptoms of fatal flaws in a business model or organizational alignment.

Apple has had great success being Apple, and Dell has had great success being Dell. User-facing innovation drives them both, but in different ways. The implication that Apple has some sort of natural, inevitable, permanent monopoly on success or innovation just does not stand up to scrutiny.
James · June 3, 2008 - 19:12 EST #5
2-year charts:

5-year charts:

Take a look. I don't think jay@dell has many legs to stand on. Mentioning recent quarterly results as a long term indicator is a perfect example of short term thinking.

- James
Eric Blair (ATPM Staff) · June 3, 2008 - 19:39 EST #6

First off, I never said that Apple's innovations were always successful or that Apple had a monopoly on success and innovation. I plainly stated that they have not been perfect. The classic example of an Apple failure is the Cube. Their first approach to the Apple TV also proved less than successful. Furthermore, while I definitely prefer Apple's offering, I've also been satisfied with some of the HP system's I've used over the years.

In fact, my main point was that Apple and Dell are decidedly different. Journalists who ignore or fail to recognize this fact are doing their readers a disservice.

As for Robert's reply, he does provide numbers to support his assertions about the changes in Dell's financial standing over the recent years. Stock buy-backs can obviously keep the stock price afloat by reducing the supply of shares, but it does impact the company's balance sheet.
KenC · June 3, 2008 - 19:39 EST #7
Here's a question to jay@dell. One can we believe the quarterly results? Or do we have to wait for them to get restated? Second, can you tell me what the effect of starting inventory as the retail channel develops had upon shipments/sales?
Robert Leitao (ATPM Staff) · June 4, 2008 - 23:27 EST #8

Please indicate which of the statements I made in my post you consider to be factually suspect. If I am wrong, I will admit it.

Looking at Dell's balance sheet, there's little remaining in net tangible assets following the use of over $25 billion of shareholder dollars to buyback shares.

Dell has spent more on share buybacks than it has earned in cumulative profits since the day the company went public. That's indicated by the comparison of treasury stock to retained earnings on the balance sheet.

Still, despite the massive reduction in outstanding shares, the share price is trading at a level below that of five years ago. That's indicated on the five-year chart posted above by James.

If I understand Dell's quarterly performance, domestic PC shipments were flat, meaning there's no PC sales growth in the US market, previously Dell's stronghold.

Dell, from my understanding of the quarterly results, saw growth in previously under served markets, providing substantially for the increase in unit sales.

I will have to review Dell's SEC filings, but I'm curious as to how much channel inventory exists in those new markets (units declared as sold upon shipment, but yet to be sold through to consumers).

I give Dell credit for strength in the enterprise server market. The company is a leader in that sector. I also give Dell credit for bringing the PC industry to a new level of efficiency back in the 1990s.

However, I see very little R&D relative to revenue and unit sales and I don't see growth in the PC markets where Dell competes directly with HP and Apple.

If Dell's means to a "turnaround" is exploiting under served markets where it can compete for market share with white box makers through expansive and more efficient retail distribution, I don't see success lasting for long.

The reasons include growth in highly price-sensitive markets (this means Dell has little pricing control to improve margins) will not bring about the type of long-term success to justify a market cap of close to $50 billion in my opinion.

Continued weakness in the domestic PC market will keep pressure on prices. Apple's own distribution channels and especially its retail stores are setting domestic sales records for the company.

Apple achieved 51% unit sales gains last quarter while maintaining gross margins at or above 30%.

I see Dell trapped in low-margin sales in price-sensitive markets that will hamper gross margins, hamper the company's ability to raise prices and dealing through 3rd party retailers as the latest sales thrust, reduce the company's ability to develop long-term relationships with its customers. In other words, it's more challenging to build brand value.
jay@dell · June 5, 2008 - 01:28 EST #9

I actually found the bulk of Eric’s narrative in the original post interesting and insightful, but there were for me some less than successful excursions. For example, the knowing-sounding descriptions of Dell’s culture and decisionmaking processes sounded secondhand, relying on well-worn chestnuts. Characterizations of the current environment would require significant insider experience/access -- or omniscience –- to be credible and persuasive, and neither the original post nor the follow-on comments evince that level of authority. Likewise the admonition to “swing for the fences” once in a while isn’t particularly revelatory, and actually elides recent Dell clear hits like the XPS 1330, XPS 1530 and XPS One – which none other than Walt Mossberg lauded as a credible challenger to Apple’s design leadership in all-in-ones.

Indeed, Eric did not say that that Apple has a monopoly on success and innovation –- and showed admirable candor in acknowledging some clunkers. However, Robert’s first commentary had unmistakable overtones of triumphalism bordering on Old Testament eschatology ("Apple invests in developing new products, preparing the company for a bright future and in bringing innovative products to market. Dell is fading into irrelevance while Apple is increasing its clout in each of the company's major product segments.”). So, I’ll stand by my original observation.

Robert, Ken and James in different ways made the same valid points: one strong quarter does not a turnaround make, and there remain areas for improvement. However, a couple of balance sheet callouts, speculative lines about low-margin segments and truisms about stock buybacks don’t add up to a compelling argument for Dell’s inexorable demise, either. I wasn’t questioning the accuracy of the data points, but their selective use and the lack of a more rigorous critique.

Robert's follow-up helpfully expanded on his points about Dell and provided additional perspective. I still think there's too much conjecture and I certainly don't agree, but I can appreciate his line of argument better now.

I’ve enjoyed this exchange. Thanks for including me in the conversation.
Chris Dudar (ATPM Staff) · June 5, 2008 - 08:26 EST #10
I have a friend who is a longtime employee of Dell. She is so afraid of the aimless layoffs that she spent her entire vacation looking for other work, and landed another job.

According to her, Dell is hemorrhaging itself to death from the inside out.
Robert Leitao (ATPM Staff) · June 5, 2008 - 23:44 EST #11

I appreciate your follow-up. I’m not coming at my position necessarily from a platform bias. I have respect for what HP is accomplishing in the Windows PC space and the company’s continued commitment to allocating ample resources to research and product development. I buy HP products when directing or managing in a Windows PC environment.

I’m disappointed in Dell’s approach to the market. We’ve seen Gateway disappear and I don’t see Dell taking a much different path. Cost cutting will achieve short-term results but I don’t see an investment in brand value and efforts to differentiate its PC products from those of competitors. At retail, in my view, Dell has become a high volume, low-margin manufacturer. I’d like to know where you see Dell’s long-term upside and what efforts you think the company is making to create a satisfactory customer experience that will lead to long-term consumer sales success. High-volume in price sensitive markets may generate revenue, but I don’t see the practice leading to long-term results. Exclusively price-focused buyers will change brands when prices change on products.
Terry · July 2, 2009 - 21:13 EST #12
Dell is in a race to the bottom and they will most likely end up like Gateway...if they are lucky. As an II Architect who has consulted at many very large and well known companies I have seen many of them switch from Dell notebooks and desktops to HP because of terrible quality control and support issues from Dell. Dell servers are also not doing well and while you can slap new colors and specs on some plasticky piece of junk laptop or desktop and sell it as new you have to expend serious $$$ on R&D for servers, storage etc. You really should also have a robust corporate consulting and service arm and Dell has neither. There was a time when i happily recommended Dell products, especially servers, but this company is wandering without direction and I no longer take them seriously. It has been quite some time since I even considered Dell anything as an option and I routinely recommend and spec millions of dollars in hardware purchases. I know a whole lot of other people who are also very experienced architects who command top dollar for their services who feel the same way.
Terry · July 2, 2009 - 21:25 EST #13
Lots of comments about quality on the 1530 especially overheating. They have very poor fit and finish. These models are sold to consumers looking for a deal and given their low margin and repair issues i doubt they are exactly keeping Dell afloat. If you are thinking the XPS iMac copy will have any major financial impact you will be disappointed. Even though it is new there are already lots of complaints about parts quality and support issues.

Another thing I find really odd is that Dell has so many different models. It's really strange for a company that is supposedly so efficient. There is no apparent reason or relationship even within one family of one model to the other.
Jeffrey Ramsay · July 22, 2011 - 11:41 EST #14
The post and comments are about the last war. While everyone was busy heatedly arguing Macs vs PCs, Steve Jobs stole the universe. Dell and Apple are indeed in different businesses. I love computers and I love mobile devices. Good luck to both and to their shareholders (especially Apple, whose shares are making my retirement possible).

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