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Nothing Wrong With Selling Commodities At Dell
from the it's-not-about-the-products,-but-what-you-do-with-them dept
While people in the tech industry keeping worrying about the commoditization of technology, folks at Dell are talking about why they embrace "commodity" products. They point out that the issue isn't the product itself, but how it's used that determines its true value. So, even if the technology itself is considered a "commodity", that doesn't mean companies will use the technology in the same way - and thus, they won't get the same things out of it. Meanwhile, by offering standardized, commoditized parts, the industry opens up more possibilities because customers aren't locked into proprietary solutions - and the more possibilities you unlock, the more opportunities there are to profit (if you can execute well yourself). All good points. What isn't mentioned in the article is the way Dell applies this very philosophy to their own business. They're selling "commodity" products, but they're making a ton of money doing so, because they've streamlined their own business and adopted business models that allow them to keep significantly higher margins on products that are supposedly commodities.
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And pity their poor suppliers
Dell is making money, but their suppliers by and large are not. Dell is benefiting from the overcapacity build up for all components during the late 90s and using their volume as a tool for extremely brutal price negotiations.
As a supplier, I can choose to either do business with Dell at or below costs and keep what capacity I have (leaving the rest idle), or I can walk away from the largest WW PC supplier and idle even more capacity. It isn't a pleasant choice, but running at 50% capacity slightly below cost is better than running at 25% at any price.
I don't begrudge Dell for what they are doing. It is a good short-term strategy for lowering costs, and although volume is picking up, there is a long way to go before capacity is filled (in my case, my WW volume this year is much higher than 2002, but my revenue is much lower due to monthly price drops).
The issue will be what will happen long term. If Dell is willing to switch suppliers for a penny a component, they will end up with no long-term, strategic relationships that help drive new technology. This means that Dell will never innovate, they will simply commoditize, which may be the right thing to do in what is now a maturing PC industry.
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Re: And pity their poor suppliers
Runing at 50% capacity and LOSEING MONEY = Profit
Runing at 25% capcity and making small money = NO Profit..
Yeah that makes sense.
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