Price leadership: An obsolete strategy?

Price wars are no fun for any of the players in a given market, just ask the airline_41647652_walmart203get_1
industry. But reading this article on BusinessWeek today, "Dell: Burned by a fire sale" gives rise to an interesting conundrum – who exactly is Dell competing with in their push to discount their boxes? Surely not their own customers?

According to the analysis, Dell has three key issues hampering it’s continued growth –

  1. Eroding market share, both globally and in the US, apparently the first time in memory of the analysts (but we won’t go there).
  2. Spending to increase customer support facilities undermining the revenues from deeply discounted sales
  3. Lack of differentation in their physical product – i.e. their design sucks and has no appeal

Interestingly enough, HP and Acer have been pointed out as increasing market share in the same time period. This seems reminiscent to me of the four year dip that Hoover showed in vacuum cleaner sales that mirrored Dyson’s rise in the same timeframe. Particularly when I know that the Acer I bought this past christmas just leapt out at me visually in the store.

It would be interesting to observe again in a year’s time where Dell is at, against HP and Acer, if the two continue their strides in incorporating design as a strategic tool. Just in the past few months, Acer has won numerous Red Dot design awards for a range of it’s products and HP’s launched a design driven marketing and branding initiative – "The Computer is Personal again".

It’s the second point that makes me wonder about a) Dell’s cost leadership strategy and b) the vicious cycle they seem to find themselves in. To quote the BW article,

Additionally, Dell is spending heavily to bulk up its technical-support and customer-service operations. For instance, it’s hiring more workers at call centers. While that spending may help attract and retain customers over the long run, it’s also eating into Dell’s bottom line.

Dell says the pricing strategy will help boost future revenue growth. During the quarter, "we continued to execute on our strategy to reinvigorate growth by making investments in our support infrastructure and product quality and by accelerating pricing adjustments," Dell CEO Kevin Rollins said in a statement.
[…]
The trouble for Dell is that unit volumes aren’t compensating for price reductions. Besides hurting Dell’s sales and profit, sluggish unit growth is also eroding market share, another key measure of overall health.

It was noted that Dell doesn’t have cost leadership anymore either, competitively, as Acer and HP among others, are noted to have been able to compete on value as well. So, why the continued push on discounting? Is it the GM way to success and increased revenue? Obviously not, and neither are the other players joining in to lead on price alone, each of them focusing on increasing topline growth through offering better designed products better suited to their customers.

I’ve written earlier about strategy and operational effectiveness, particularly about Apple’s choice of releasing new and fresh designs every so often. Design, in and of itself, of a product, is also an element of operational effectiveness. The key difference however, is that design adds value, even when pursued as a tactic within an overarching corporate strategy. Cutting your prices doesn’t. Carlos Ghosn’s famous keynote speech at the NYC Auto Show reiterated this for the automobile industry, perhaps it’s time for Dell to listen.

Ironically, they purchased Alienware, for their designcentric high end gaming machines, but allowed that pr opportunity to lapse. If at that point, they’d made a noise about integrating design, something that analysts were expecting at that time,

Rebecca Runkle of Morgan Stanley said the Alienware deal was evidence that Dell was making "the right investments".

"Industrial
design and hip branding are two important factors in the high-end
consumer and gaming PC segments and, quite frankly, Dell lacks in both
these areas," she said.

perhaps the news media would be willing to give them the time to recoup and reorganize in order to respond to changes in the market instead of predicting doom and gloom as they seem to be doing so.

It also makes me wonder whether we’ve reached the point of being unable to compete on price alone for a range of products. Whether there is a trend in a product’s lifecycle to undergo being a commodity before being branded once more? After all, even the number one cost leadership player is looking at stores that encourage higher margin purchases.

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11 Responses to Price leadership: An obsolete strategy?

  1. Perhaps the “lowest price” strategy still works in the b-to-b world, but I think you’ve hit it square on, Niti: in the b-to-c markets, it’s moribund.

  2. niti bhan says:

    Yes! I was wondering on how to differentiate the segments, but even in b2b, there can be competitive differentiation by design. Unless it’s commodity versus brand – for example, water, which is undifferentiated unless branded, then it commands some riduculous premium. Because even in b2b it’s people making the decisions.

  3. Niti,
    All designers have a knee-jerk reaction to every problem, and their voices are unanimous in their clamor – “Better design! Better design is the solution to all problems!”. (How many designers do you know who advise against jumping into design?)
    A charming view, which is so many times accurate and inaccurate at the same time.
    Lets stand here and look at the situation from a different angle –
    Why did people buy Dell till now? I’d think “Reliable, yet low price” was up there on the list of reasons – do correct me if I am wrong.
    Ergo, Dell’s consumer has never purchased dell for the sake of great design.
    (It makes sense to believe that dell is not even geared up to handle good-design, in terms of its organizational structures.
    None of its decision-makers are bound be people who have a predilection for good looking products – they will be people who put price above looks. I could bet you that Dell’s top-management would qualify to be called style-barbarians, and I am not being derogatory when I say this. Why should the makers of a functional product be needed to be design savvy? If I were Michael Dell, I would specifically avoid employing those who could potentially be hypnotized by looks)
    Now, lets look at the current implications of buying a Dell on the social standing of a consumer – his snob value.
    When I sport a Dell, I am telling people that I am someone who doesnt mind buying a cost-effective product (read “Cheap”). This is a known fact.
    My question to you then is –
    Would I buy a good looking Dell, even though people still would believe that I bought a cheap product, since its a Dell?
    (The Indian consumer mentality that “if it is expensive, it must be apparently so” is probably more universal than we imagine)
    How many people would pay to buy a good looking product that is unequivocally and simultaneously perceived as a “cheap” product by others, when they could buy another equally good looking product that is NOT perceived as a cheap product by others?
    Aren’t our gizmos and their brands also very clearly fashion statements at some level, with appropriate snob values?
    And can Dell rid itself of its label as a cheap brand only by doing good design? Only theoretically, and then too, not as a quick fix. The path must be carefully chalked out for this.
    If Dell wants to adopt good design, it will need to first create a sub-brand that does NOT fall under the popular perception of a “cheap” brand. This brand must be then leveraged to break the global perception that Dell is only about cheap computers.
    To do a design number on Dell, under its existing image of “cheap”, would be counter-productive.
    (I am sorry to use the C word so blatantly in place of the politically correct “cost-effective”, but I believe the word exudes the flavor of my PoV a lot better.)
    Another point – I believe that a company like Dell needs to “ease” into “good design” in a gradual and phased manner. If they rush into it, they may fall flat on their face, and may lose their existing ability to operate on razor-thin margins.
    If you are expecting the psyche of the entity called Dell to change, then it makes sense that this psyche does not instantly abandon what their leadership was based on, especially in a market that is facing cash-depletion in its present and more so in its future.
    We need a change, not a revolution.
    A revolutionary change is unpredictable in its outcome – the forces in a rapid change are quite non-linear, and sometimes completely ignore the desires of the person who initiates the change.
    Hence, the only way of reducing the non-linearity to a predictable linear curve is to go slow, go careful.

  4. Cheap Beauty

    Niti Bhan raised an interesting question (a common phenomenon) yesterday on her Perspective blog: Price Leadership: An obsolete strategy? In the post, Niti uses Dell as an example, perhaps the present day icon, of competing on price. She then character…

  5. niti bhan says:

    atrakasya, I must encourage you to read Tom’s response to the question you pose in his post linked above. I think he gives a good description of it. I have a few thoughts on what you’ve said, but let me compose them and write again.

  6. Niti,
    Thanks for directing me to Tom’s post. In continuation of this discussion, kindly read my response to Tom’s post on his site.

  7. Alok Jain says:

    Dell in my belief has grown not just on price differentiation but also on customer service differentiation. Forrester Research has consistently found that experience differentiation sits much above Technology, Price/Quality, Product and Customer Service based differentiation.
    HP I believe has started (or is starting) a new campaign to differentiate itself in PC market. The focus is on bringing “Personal back to computers” I think it’s a powerful approach towards experience differentiation.. lets see how it turns out
    – Alok Jain

  8. niti bhan says:

    A quick google of the blogosphere will demonstrate that Dell has indeed differentiated itself by it’s customer service – as one of the worst around.

  9. Price wars are a death spiral… So much so that they sometimes end in negotiation (price collusion not implied here). If you are strong enough to survive price wars in a meaningful way (e.g. WalMart via significant cost leadership), you will probably never be subject to one, because your competitors won’t dare fight you. Both Dell and its competitors should beware.

  10. Cheap Beauty

    Niti Bhan raised an interesting question (a common phenomenon) yesterday on her Perspective blog: Price Leadership: An obsolete strategy? In the post, Niti uses Dell as an example, perhaps the present day icon, of competing on price. She then character…

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