Google Chrome--a Strategic Platform or just another Browser?

Google's new Chrome Browser came out a few weeks ago to quite a bit of attention. It's big news 1) because it's from Google and 2) it brings back memories of the "browser wars", and seems like it could potentially signal the next big battleground in the intense rivalry between Google and Microsoft.

I've downloaded Chrome and played with it a bit, but this isn't intended to be a technical review of Chrome's merits. It seems reasonably snappy, and has Google's typical minimalist design philosophy, including a single box for multiple functions (search, address bar, etc.). Your personal preferences will decide whether you like that or not. It has some nice features such as tabbed browsing, which theoretically should prevent one bad browser window from crashing all open browser windows--much like when Windows became multi-threaded. Nice stuff, but doesn't really fundamentally change the browser game. But technically it's still a beta anyway (of course just about everything is with Google), and it will evolve over time--so it's not really time to judge it from a technical perspective anyway.

What I want to do is to examine Chrome as a strategic move by Google with respect to the software and online worlds--what does it really mean, where will it take the market, and what are its chances for success?

Let's take a look at some of the potential ways that Chrome could affect the marketplace:

A Better Browser
Of course, PR propaganda always will say that this is the "real" reason for bringing out a new product such as this. When I was at HP we used to call this "making a contribution to the market". Google in particular often gets sanctimonious about this type of thing, with all their "do no evil" and saving the world stuff. Does the world really need another, better browser? Not sure. Firefox and Safari, to name two, are already probably technically superior to IE, and while they've made some inroads in the marketplace, they still trail Microsoft by a wide margin. But history tells us that competition is a good thing, and a step forward on major platform like a browser can certainly be thought of as a gateway to allow software innovation to develop faster. Having a company like Google enter the fray should increase rate of innovation that's possible in the online market.

An Application Development Platform
This is the position that many pundits suspect may be the major impact of Google's move. In their introduction, Google talked quite a bit about "remaking" the browser for Web 3.0, if you will. And a fresh approach does make sense, given that Internet Explorer was conceived long before serious online applications were envisioned for the Web. With SaaS and Web 2-3-4.0 currently all the rage, having a browser platform designed from the bottom up to accommodate online software applications should be a good thing. If it's all it's cracked up to be, this could conceivably be a game-changer and a real threat to Microsoft. The key here is how much of the talk about re-architecting the Browser is real, and how much is hype. This will become more apparent over time as Chrome is further developed, and application developers take a look to see if there truly are features they can take advantage of to build better online apps for users.

An Additional Way To Track User Behavior
This is one of the more cynical viewpoints as to the major motivation behind Google's introduction of Chrome. The thinking is that this is one more insidious move by Google to "big brother" your online activity. It's no secret that Google uses web activity data they collect by various means (such as Google Analytics) to fine-tune their advertising business. Certainly owning browser could be seen as the "holy grail" towards creating a complete characterization of online activity. What else might they use this data for, in addition to fine tuning their advertising platform? That's the question and concern.

A Way To Drive More Search Traffic And Adwords Revenue
Along the same lines as the bullet point directly above, owning the browser could be seen as the ultimate in terms of driving web traffic toward Google's Adwords online advertising. The first thing you see upon downloading Chrome is the opportunity to switch to Google as your default search engine. How much will they do in this regard, either subtly or in a straightforward manner? As stated above, at a minimum, it gives them the opportunity to make Google the default search engine, which is critical to their base business. Only time will tell how much of a factor this is in Google's Chrome strategy.


A "Real" Competitor Aimed At Microsoft IE To Make Them Defend Their Turf
Of all the bullet points I'm raising, this is the one I'm most sure of. Google and Microsoft are locked in one of those classic death matches for online software supremacy, and don't miss an opportunity to tweak their arch-rival and make them sweat a bit. Going back to the application development argument above, there is a feeling that Chrome could serve as the basis for a suite of online Google apps to threaten obsolescence for Microsoft's desktop software business. I don't doubt that Google may try to do this. But even if from a technical and marketing perspective Chrome is only a modest success, it almost certainly will get Microsoft's attention and cause them to expend resources and management attention on browser technology, to an extent they may not have preferred.


SUMMARY
Chrome is intriguing, but it's too early to tell for sure what the major reason is for this Google initiative. They may not even know for sure themselves at this point. But the product, and more importantly the move itself, will likely make Microsoft react. The ensuing competition should be all good for the user and developer communities, as long as it doesn't take us toward another tiresome and market-paralyzing "platform API" war. I'll be following the future development of Chrome closely to see where it takes us--how about you?

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Steve Jobs, the iPhone and Apple Strategy - have we seen this story before?

Apple computer and its red-hot iPhone have dominated the business news recently. By all accounts, with good reason. I haven't had the opportunity to play around with an iPhone yet, but the early reviews have been very positive. Initial interest demand has been high, especially given the usual amount of mystery and intrigue woven by Mr. Jobs and the folks at Apple.

For a first-time entry in to a large, competitive business such as cell phones--you've got to be impressed. Yet I've got this vague feeling of familiarity when it comes to this story--I somehow feel that I've seen it and heard it all before….

THE RETURN OF JOBS

Apple Computer since the return of Steve Jobs from the hinterlands has felt a lot like the Apple from Jobs initial run at Apple. He's restored the company's attitude, and dominates publicity, product direction and what feels like nearly every little detail about the company. Not bad for what is roughly a $20B company. It speaks to how strong and impressive Mr. Jobs' personality and skill set really is. He has done a tremendous job bringing Apple back from the brink, and it appears that they may be headed to heights that weren't even approach in his first tenure at the company.

There are many reasons that Apple and Steve Jobs, over a long period of time, have proved to be an interesting story. There are the breakthrough products, invention of new categories, tremendous highs and lows in financial results, strong, eccentric personalities, and boardroom intrigue--all multiplied when Jobs is factored in.

But the thing that I've always found most interesting about Apple has been its corporate strategy.

APPLE CORPORATE STRATEGY

Lets first give Steve Jobs and his strategies their due; he's done a whole bunch of things right. It's hard to imagine where this company would be if they hadn't brought him back for his second tour. But like most strong personalities, along with his myriad strengths--he's got a few quirks as well. Some might argue these quirks are actually weaknesses. I've always thought that his biggest weakness was being a "control freak". Some might argue that this is actually reflective of strength, indicative of a strong leader who is forcing a change in the status quo to his vision. At times it appears so.

For example, the original Mac was a great triumph at first. It set a new standard for PC usability and industrial design, and was a huge seller in the beginning. But in creating the Mac, Apple also:

1) Didn't use standard (Intel) chips, but more expensive ones from weaker competitors
2) Was a relatively "closed" system
3) Couldn't be upgraded much at all
4) Kept Prices and margins high, unsustainably so with hindsight

A SUSPECT BUSINESS MODEL?

Maybe most interesting of all from a strategic perspective, is Apple's choice of a business model. Apple has always been an innovator in software, with most of its differentiation coming in this area. (At least this is true since the Mac was introduced--the original Apple hit product, the Apple II, was pure hardward innovation.) Yet the company has always tried to make its margin selling hardware devices, bundling in its software with its hardware, mostly for free. I believe that this closed, single vendor, hardware/software bundled system approach can be the right strategy in creating a new market. It allows a pioneer to control the user experience, while realizing larger margins and profits in the short run to support innovation. But as markets grow big, that approach which works so well in the beginning often becomes an albatross as other players enter a larger market, and figure out how to take cost out of the system. These strategic choices (flaws?) were some of reasons that ultimately led the Mac platform to be a distant also-ran in the PC races (although one with a rabid core following), even though it had a large advantage in technology and a healthy market share initially.

iTUNES AND THE iPOD

Interestingly, Jobs followed a similar basic strategy with iTunes and the iPod. He innovated with cool, hip industrial design, a classically simple but elegant user interface, and (maybe most importantly) broke the logjam with the Record labels on downloadable songs--for the first time creating a site with a truly wide selection of mainstream songs, downloadable without hassle. He once again has kept this a pretty closed system, not allowing other devices to download to iTunes, or other music sites to feed the iPod--although he has shown signs of opening this up recently. Once again, pricing is pretty high, relative to competitive "systems". Apple has so far been able to keep a comfortable lead in the online music space--but using a timeline which is required to measure markets of this scope--one must remember, it is still very early in the game.

My feeling about this "closed system approach" that Jobs favors, is that in consumer electronics and computing, it often works very well for a while--but then backfires as the market grows and matures. Technology commoditizes, and markets eventually lean toward openness--which provides greater choice and lower costs to users. Jobs waited way too long with the Mac, and retreated on the strategy when Apple belately tried to open up the platform, just as he returned for his second run with the company. Apple may be headed toward open PC computing again with the new MacTel platform, but in my opinion, that ship has likely sailed long ago. It would be a long hard pull for the Mac to once again compete as a mainstream PC platform. Of course Steve Jobs is nothing if not audacious, so I wouldn't put it past him to try.

iPHONE STRATEGY - GOOD & BAD

This brings us to the iPhone. Apple has been up and down during it's corporate life, more often than a cat with nine lives. Right now, Apple is definitely riding on a high. When you take a look at this iPhone recent introduction, there is a whole bunch of familiar Apple/Jobs strategy going on. You see the innovation pointed at a major market that is populated by major players, but a relatively poor user experience. In this case it's the poor user experience of the cell phone industry, just like PCs and downloadable music, which were frustrating to consumers when Apple innovated in those markets. The innovation is out of the old Apple playbook: led by cool industrial design, and a breakthrough, simple but elegant user interface. All of this, along with typically brilliant Apple PR, has led to the iPhone "mania" that is reminiscent of past Apple introductions. The iPhone sure looks like a big hit at this point, and no doubt will be in the short run.

But will Apple and Jobs be able to sustain the iPhone momentum, like they have with the iPod/iTunes to date, or will the initial success fade like it did with the Mac? While Jobs is now a more seasoned, and even more successful electronics industry icon, I would argue that there still may be a few of the old flaws in his game. The price point Apple introduced the iPhone at is very high, relative to most cell phones with a similar level of capabilities. The phone was introduced with a battery that can't be upgraded by the user, something that has been standard in the cell phone market (and most portable consumer electronics) for many years. iPhone owners will have to send the product away to get the battery changed--who can go days without their phone? This is an incomprehensible mistake in strategy, in my opinion.

And finally, and most importantly, Apple chose the most "closed system" approach of all--the iPhone with only be available on one Cell Phone network, AT&T, for at least 5 years. I find this part of the strategy astounding. First of all, it seems to me to be completely unnecessary and yielding few benefits to the company. It appears that Apple did this to have leverage in their cell phone partner negotiations, allowing them to retain control on some items, and keeping their prices high. I think Apple is being penny-wise and pound foolish here. The have a hot product; now is the time to establish the Apple brand as the preferred high end supplier of smart phones. But they can now accomplish this in only a segment of the huge cellular audience, for completely artificial reasons. Shutting out the bulk of the market in this fleeting time of major advantage, for bit higher margins and control on a few areas that most cell phone manufacturers do without? It's hardly worth in my opinion.

Also, the Cellular Network Operator partner they have chosen is very suspect. While AT&T is the biggest wireless operator in the US market and a fine company, they are behind in the game technologically in the wireless Internet part of the cellular market--the very aspect in which the iPhone shines as a mobile device. So the wonderful new features brought to wireless web access by the iPhone will slow to a crawl on the inferior AT&T data network. It may be like running a great graphical user interface over a dial up modem--frustrating. If all you do is sit and wait for the network, it won't matter much how slick or intuitive the device UI is.

FLAWS IN APPLE'S iPHONE GAMEPLAN?

My feeling is that there may again be some major flaws in this most recent Apple strategy. This may again cause the company to give up an early lead, in a market in which they've contributed true innovation. I'm not privy to all of the information that Apple management is, of course. And it's always easy to second-guess from a distance, after the fact. So it's quite possible that I'm just missing something, and dead wrong in my take. Plus, the whole picture of Apple's market entry hasn't been revealed yet. For example, I haven't seen or heard anything about Apple's partnering strategy with Cellular operators outside the US, but I am very interested to see how this compares to the US strategy. Will the strategy be similar or very different internationally?

Steve Jobs has contributed greatly to the development of the worldwide computer and electronics business. He has had many great successes, and also fallen a few times. He is an iconic figure who isn't afraid to take a stand. Apple has ridden Job's strategies to great heights several times; and also to great depths a time or two as well. Along the way Steve Jobs has provided a wealth of controversial material for columnists, writers, commentators and anyone else with an opinion. I am fascinated to watch as his strategy for this latest chapter, the iPhone, plays out in the marketplace.

So there you have it--that's my take. Post a comment and let me know what your own thoughts are on Mr. Jobs, Apple and the iPhone.

Phil Morettini
PJM Consulting
www.pjmconsult.com

Strategic Acquisitions for Software and Technology Companies

Acquiring new products or whole companies is a popular activity for many growth and market-share oriented companies. Is it a good idea?

Well, as I often say--it depends. I get involved in company or product acquisitions quite often in my consulting practice. There is nothing inherently good or bad about acquisitions in the technology business. However, there is nothing inherently bad about opening a restaurant, either. Nonetheless, a very high percentage of restaurants (I've seen figures as high as 90%) fail within 5 years. The failure rate for acquisitions may not be quite as high as for restaurant startups, but technology acquisitions are also judged to be failures at shockingly high rates. Caution should rule when approaching either of these very popular activities. As I'm fond of saying about success or failure in any complex business activity--the devil's in the details.

Common Motivations for Acquisition Activity

Let's examine the common reasons that acquisitions are considered in the first place:

1) It's exhilarating and "sexy" to buy another company
2) Growth for growth's sake (often pushed by investors)
3) The belief that buying a competitor is the ultimate "victory"
4) A consolidating market (often commoditizing) where there is only room for a few large players
5) Diversification
6) A great strategic fit where 1+1 truly equals 3

As you might have guessed, reasons 1-3 above aren't great justifications for such a risky activity. Number 4 can be a good justification, but often this is given as the rationale, when the actual market case doesn't truly support it. Number 5 can be a good or bad rationale, depending upon whether the business case really calls for diversification--or if focus would make more sense. Number 6 is by far the best reason to acquire a company, particularly if you aren't an industry giant, pitted in a death match with another titan of your marketplace.

So let's say you've actually thought it through, and have used sound analysis and judgment in deciding to pursue an acquisition. Congratulations for passing the first test--but there are still myriad things that can trip you up, on the way to acquisition success:

Great Ways to Fail

First acquisition done "on your own"--I strongly urge all first time acquirers, whether of the product or company variety, to seek assistance. Acquiring a company and even a product is very complex, with a lot of places to trip up. Retaining an experienced hand that has seen and gone through the mistakes before, can prevent you from the most expensive education of your life.
Bad cultural fit--In the excitement of an acquisition or a merger, people have a tendency to not look past the surface. It's much like dating an attractive potential mate, and proposing based upon infatuation, without establishing whether there is common ground in the way you live your lives. This is the business equivalent of marriage, folks. Compatibility in business philosophies and practices is crucial--and often overlooked, until after the fact, when everything is unraveling.
Poor organizational integration-- Even with an excellent evaluation of potential partners, a great many mergers fail based on the execution of integrating the organizations. That's because it is HARD. You are generally merging two organizations with disparate operating styles, as well as overlapping functions and people. Fear, uncertainty and doubt of the individuals involved can by ITSELF scuttle a potentially great fit. This area is often quoted as the reason most acquisitions fail.
Poor product integration--This is the reason a lot of acquisitions in software and high tech should be called off early in the process. It is often very difficult to rationalize how you are going to support two different code bases or technologies, aimed at the same market. The plan usually call for integrating them over time, but that often proves to be very difficult from a technical perspective. This is a real red flag when buying a direct competitor. Yet the price of the merger in high tech often assumes that the products can be integrated acceptably, without losing customers from either of the existing products. Unfortunately this is usually a very tall order
Paying too much--Price plays a big role in software and technology acquisitions. Due to high growth rates and the perceived need to move quickly in fast-growing, competitive technology markets, acquisitions are often priced in multiples of revenue. This is in contrast to the more conservative multiples of EBITDA in other less dynamic industries. Often the target isn't even profitable yet, but still commands a high price-to-revenue multiple, due to the "hot" nature of the market space, and perceived value of the acquired technology. This high price puts a severe strain on downstream execution of the merger to be "perfect", as discussed above.

So with all of the landmines out there in the acquisition arena, along with the high failure rate, is it simply nuts to consider acquisitions? Doesn't it make sense to just stay away from them? NOT NECESSARILY.

Sound Approaches to Pursuing Mergers

Buying innovation--This often happens when companies reach a certain size; they simply lose their ability to innovate. Rather than innovate internally, they do so by acquiring small companies with market-changing technologies, which may not have the resources to fully exploit in the marketplace on their own. Even though multiples here tend to be high, risk is somewhat mitigated relative to internal Research and Development that might not "pan out", and the size of the acquisition is often very modest, relative to the resources of the acquirer. This is an example of a true 1+1=3 strategic fit. This strategy has been used with great success by Cisco, Microsoft, and many other large companies with successful acquisition programs.
Buying companies or products that truly fill a hole in your offering--While some companies tend to overuse this as justification, acquisition of a reasonably priced company or product at just the right time, can mean the difference between continued growth or inevitable stagnation.
Buying undervalued assets--This is harder to do in high tech than in other industries; high tech companies have a habit of overvaluing their businesses and technologies. But an executive team with a key eye for a bargain can often pick up a diamond in the rough, for example a division that has suffered because it isn't a good fit with the parent company's core business
Truly appropriate diversification--Sometime you run out of steam in your current market, and the amount of cash flow generated by your current business dictates that an investment in another growth area may be prudent. The key here is to pick a market segment adjacent to the existing business, or at least a business that the management team can easily adjust too. However, management teams often are over-confident and deceive themselves, and end up investing in an area where they really don't belong.


I could go on and talk more about acquisitions for a very long time. But instead of putting you all to sleep, let's begin a dialogue on this topic. Inform us of your own Merger and Acquisition stories, best practices, and cautionary tales.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Selling Through OEMS

I've recently discussed selling through VARs as a distribution channel strongly favored (maybe a bit too much!) by many early stage technology and software companies. In this article I'm going to look at another channel that is often misunderstood and misused: The OEM channel.

When a company goes about it the right way, OEM business can be an excellent additional revenue source for startups--and any high tech company, for that matter. Where I want to throw out a caution flag, is when a company decides they are going to rely on OEMs as its primary--or only--channel.

Now this can work, you might say. And you would be right. But in most cases, I believe, it isn't the best way to proceed. It can work, if you have the right type of product, and you've thought your strategy through very thoroughly. The problem is with most companies, this the usual scenario. What I find more prevalent is the old "let's make it, and we'll get someone else to sell it for us" approach. As I've discussed before, 'let someone else sell it' almost never works. This sentiment often occurs with a technology-driven senior team, without a good feel for marketing or sales. The natural tendency in these situations is to avoid the current weaknesses in this organization, and "let somebody else do it".

The problem here is that sales and marketing needs to be a core competency, in most situations, if a technology company to become as successful as possible.

So what are the "bad effects", when an early stage technology company pursues OEM relationships as their sole distribution strategy--or at least "too early" in their company development?

EFFECTS OF "BAD" OEM STRATEGY

No Leverage
If you approach potential partners with a brand and existing sales, there is no leverage in negotiating with the larger, more established OEM prospective partner. In addition, it's a much harder sale, because your company and product don't have a track record.

No development of internal sales & Marketing
Companies with OEM-only business models tend to have weak (or nonexistent!) sales and marketing departments. My belief is that sales and marketing is a core competency--making this a bad idea. While you can run a company this way, in most cases, the ultimate size and profitability will likely be a fraction of what your technology could have otherwise supported.

All push, no pull
Every sales and marketing activity works better if there are "pull" elements, in addition to "push". If selling to the OEM is almost solely a "push" activity, with no brand or your own market share to help pull--the process is much harder.

All the eggs in one basket
Even if you do well and gain OEM deals with premier partners--success is far from guaranteed. It isn't unusual for OEM deals, especially early ones, to yield actual revenues in the 10-15% range of forecasts. If this happens to you and you've built your company around these projections--you're basically screwed. You risk "crib death" or at least a difficult restart with your own brand, due to the disappointing sales from the OEM relationship(s).


Your OEMs swallow you whole
A very common scenario is a much larger OEM that starts treating its small, entrepreneurial partner like another department in its bureaucracy. The OEM stunts your overall company development by "tying up" the scarce resources of your smaller company in meetings, special projects, ever-changing product development requirements--and yes--more meetings.


Given the potential pitfalls, how do I recommend using OEMs?

THE "RIGHT WAY" TO INCORPORATE AN OEM STRATEGY

Develop your own brand/channel first
Pursue OEM business only AFTER you've established products under your own brand. It not only will provide you with a product that will be more attractive and stable to potential OEM partners, but you've got your own branded business to sustain you

Important--but secondary--revenue source
Treat OEM business as an important, but secondary revenue source relative to your own brand. This will keep things in perspective and prevent you from putting your company's future in someone else's control.

Bundle rather than integrate
Once way to take advantage of large OEMs without the downside of losing your own identity is to seek bundling deals, rather than private label deals. By doing this you are essentially co-branding, building the power of the partner brand through affinity with the bigger company. This leaves you with greater marketing, selling and support requirements, but may lead to a larger, more profitable company in the long run.

Address a vertical out of your reach
A good way to utilize OEMs is to fill a key vertical where your technology has a market. This occurs when you decide that you can't address this vertical well with your own brand, because you don't have a presence, and have decided that it doesn't make sense strategically to expend resources to develop one.

Final harvest
Another smart way to use OEMs is to "harvest" a volume product which is now in decline, and is a product which you don't intend to continue major investments. If you can get such a deal, it can be great way to maximize end-of-life revenue with minimum incremental investment.

Offer another price point
A strategy that can be used successfully in some cases (but is a bit dangerous) is to use an OEM to offer another price point in the market, one that you choose not to address with your own brand. More often you would do this with your own alternative brand or sub-brand. But there are instances where this investment might not make sense. Special care should be taken if the OEM is to fill a lower price point--care needs to be taken so that your own brands share isn't eroded significantly.

Integration with complementary products
There are some instances in the marketplace where 1+1 does indeed equal 3. In these cases it may make sense to team with an OEM, to gain the advantages of product integration with a key product in your market, offering them as a single, integrated solution.

Leverage your IP into a new market
There are also cases where you main technology base can be easily used to create an entirely different type of product, which is intended to serve an entirely different market, relative to what you are selling under your own brand. In these cases it may make sense to team with an OEM in this disparate segment, to market this spin-off product from your main technology.

Summary
The bottom line is that OEM marketing is very important in the software and technology business. I strongly recommend that most everyone pursue this type of business; however, do it as part of a balanced, overall revenue strategy. Tread carefully and wisely and this may be the distribution channel that makes a break-even, or modestly-profitable business, into a profitable winner. It's easy to say you want OEM revenue, but like most things in business, doing it right is hard--the devil's in the details.

That's my thoughts about how OEM strategy best fits into a typical high tech business. Post a comment and let us know how YOU approach OEM relationships--I look forward to your opinions.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Dell Computer

Dell has been in the news recently, and like many big companies that have had a glitch in their performance, not in a good way.

Slowing revenue growth, accounting scandals and customer service issues--you've heard it all before. By the way, where was the seminar that all big company managements attended, encouraging them to cut corners on their financial reporting practices? It seems that the same pattern has been replicated to an astounding degree across a broad array of large corporations. There has to be some root cause of this; too much smoke in this area to be a coincidence. And of course, the "Professional CEO" relieved of his duties--and replaced by the company founder, returning on a white horse to his original role to refocus the company.

These things have been so common in corporate America. Business writers may have been able to perform an automated "search and replace" in their word processor and write a new, yet the same, story for each additional corporation unfortunate enough to make the headlines. So what's the deal with Dell--the details always tell the real story--and what happens from here?


ENORMOUS SUCCESS OVER TIME

First off, I want to give Dell Computer and Michael Dell their just due. This is one of the great success stories in corporate history. Started in a dorm room, Mr. Dell built the company into the dominant PC maker of its time, with a long history of exceptional growth and profitability. The company used the direct model at the time when it was counter-intuitive that this would allow a long run of success--which it did. The story of Dell is much more about what has been done right--than wrong. I had some limited contact with Mr. Dell years after Dell was already a large company. He was courteous and thoughtful and very impressive. I have nothing but great respect for the company and its founder.

Probably the strongest endorsement I can make of my opinion of the company, is that the last 3 computers that I've purchased have been Dells--even though I am a proud alumnus of HP.


THE FATE OF ALL BIG COMPANIES

But Dell has definitely hit a major pothole, and has had its reputation tarnished on many levels. As I've written before, these things inevitably happen to all successful large companies. Nothing great lasts forever--and it should be pointed out that at Dell, it's lasted a very long time.

Growth has leveled off, and they are no longer the darling of Wall Street's growth followers. Accounting scandals always reduce a company in the eyes of the public, and firing your CEO, who you've been raving about for a while, doesn't exactly induce confidence in your future. But I think the biggest issue for Dell, is that they've taken their eye off of the ball when it comes to quality--and even more importantly--customer service.

I've written about this in the past, and I think it has played a primary role in Dell's current problems. When I bought my first Dell computer, quality was almost unquestioned, and customer service and support was a real strength. Unlimited support was bundled in with the product, and it was great. Contrast that with the situation today: Now you are buying a product which is perceived as lower quality, and you almost can't talk to anyone about anything without a charge. If you are allowed to speak someone in support, it's hit or miss whether they are knowledgeable, or speak your language fluently. I really believe that the root of the problems has been what I'd call "too much of a good thing": The relentless drive to reduce costs. As the PC business matured, Dell was far and away the low cost producer, and used this fact to great advantage. I believe that they got carried away with this strategy, and took their eye off of the ball of what made the company great in the first place. Service/Support quality has become such an issue for Dell that they've acknowledged it publicly, and announced plans to make significant investments to fix customer service. But real damage to the Dell brand has already been done, in my opinion. I, along with many others, will be looking closely at HP and other competitors when it comes to future computer and related technology purchases.


SO WHERE DO THEY GO FROM HERE?

All great companies hit this point eventually, and with all the company has going for it, the problems are imminently fixable. Unlike most companies that hit a bump in the road at this point, it doesn't appear that it has happened because the company has become grossly "fat, dumb and happy", with a bloated bureaucracy. No doubt there is some bureaucracy with a company this size, but ironically, cutting in the wrong places has been the major problem. Michael Dell has announced that he will look at "new strategies" for the company in his return to the CEO role. I consider this a positive. Often founders want to "go back to the future", and return to what they know made them successful in the first place--I don't believe that this is the right answer here.


THE OBVIOUS ANSWERS

The first thing is to fix customer service and support, regardless of the cost. The brand will continue to suffer without this, and that would ultimately be deadly. Mr. Dell has announced that he plans to greatly reduce the number of direct reports to the CEO. If done for the right reasons, I applaud this directive.

Even in a famously lean company like Dell, a company at this size tends to become pretty bureaucratic. There tends to be a lot of people around with curious, abstract job titles, who only serve to slow down, and get in the way of progress. Personnel in companies this size often end up spending a lot of time in large internal meetings--talking to each other, instead of listening to the market. Getting ahead in a company at this mature stage often is dependent on bureaucratic skills, rather that creating actual marketplace value. It's usually important to cull the herd of extraneous roles, and simplify and focus business processes on only those things that create revenue and profit. This looks painful in the short run, but the company actually runs much more smoothly in the long run.

THE NOT SO OBVIOUS ANSWERS

A more difficult decision is whether to remain with a largely "direct-only" business model. This is particularly difficult for Dell, because it has always been what they've hung their hats on. In fact, years ago when I had a few discussions with senior managers at the company, the feeling among upper management was that they didn't know how to do other forms of distribution, and that they had failed in their few toe dips into indirect waters.

In hindsight, at that time, the decision to remain primarily direct-only was the right one. Enormous value has been created with that strategy--you can't question it in hindsight. But at this stage of the company's development, I believe that they really need to rethink this. There is evidence that they've run out of steam with a direct-only distribution model. In fact, Dell has been dealing with the channel in a very low key manner for years. But both sides have sort of looked at it like "dealing with the devil": do it because you have to, but be careful not to get burned.

In my opinion, while it may appear risky, it is time for Dell to look at becoming a company that wants to be a real business partner with the channel. Do they want to have a real chance to stay a growth company?(which I assume they do--this is where the high stock P/Es are). If so, there are few other choices other than indirect distribution, at their current size, that will enable the kind of growth opportunities required for real growth. As they've looked farther from their core computer offering, to find other things to push through their direct pipe, they've been much less successful--as generally is the case. They've not become a real player in consumer electronics, and while they were initially pretty good at giving away printers--they were not so good at selling them, or more importantly, the consumables which are the money maker in that business. The company should proceed carefully and thoughtfully in this regard. I'm sure that Mr. Dell has other initiatives that he is considering, but I'd be shocked if consideration of a major indirect distribution push isn't high on his list of possibilities.


SUMMARY

What happens from here? Your guess is as good as mine. It should be very interesting to watch what new strategy emerges, and if this company famous for execution can return to those ways--especially if the future includes a major strategy shift. Corporations that have been as successful as Dell for as long as it has usually have 9 lives (see Apple Computer), and Dell is only on its second, by my count. So I wouldn't bet against them.

That's my opinion--what's yours? Post a comment or send me an email.

Phil Morettini
PJM Consulting
www.pjmconsult.com