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Dell succeeds by breaking Silicon Valley rulesTo Silicon Valley, Innovation is what goes on in laboratories, where bunny-suited Scientists manipulate molecules to create the latest advances in nanotechnology. Innovation is a multibillion-dollar fabrication plant turning out the world’s fastest computer chips. Or software that powers the Internet.
In Round Rock, Texas, home of Dell, innovation comes in the form of a pop-up window that appears on a computer screen when your printer runs low on ink.
Just click on a button and a new Dell ink cartridge lands on your front porch within 24 hours. It’s not exactly cutting-edge technology, but it is a smart, consumer-friendly feature sure to please customers who dread trekking down to Office Depot with a spent cartridge in hand. This is the way Dell — a company that sent shock waves through the personal computer industry with its price-slashing, direct-sales model — is gaining a foothold in new markets, including the $25 billion U.S. printer ink and toner business.
It also helps explain why Silicon Valley has decidedly mixed feelings about Dell, an outsider that challenges the valley’s almost religious belief in the power and profit of technological innovation.
As the tech industry recovers from the dot-com bust and gears up for the next technological wave, can Dell’s way of running a business — selling low-cost products for the masses — co-exist with Silicon Valley’s mindset of creating technology that will change the world?
Michael Dell, who founded his Fortune 500 company out of his University of Texas dorm room in 1984, doesn’t mince words when the topic of innovation comes up.
“If you invent something that no one wants to buy, I don’t care,” he told Mercury News editors during a recent visit to Silicon Valley.
Dell doesn’t mind slapping his own brand on other people’s products. In fact, roughly 60 percent of Dell’s offerings are made by someone else, he said.
The company’s printers, for instance, come from Lexmark. Dell’s online music store is a rebranded version of the Musicmatch service. And the Dell Axim handheld computer is manufactured by a Taiwanese company named Wistron.
“We didn’t grow to be a $40 billion company in 19 years by trying to do everything ourselves,” said Dell’s 38-year-old chairman and chief executive. “I don’t want to reinvent things I can get from someone else.”
That’s practically heresy in Silicon Valley. And there are those here who question whether Dell can sustain long-term success in an industry where PCs, printers, DVD players and digital cameras quickly become just another cut-price commodity at the local Wal-Mart.
Dell nemesis Hewlett-Packard, for example, spends about $1 billion a year — more than a quarter of the Palo Alto company’s total research-and-development budget — studying ink chemistries and working to develop new, superior printing products.
Dell, by comparison, spends less than 2 percent of its total revenue on R&D — or about $455 million last year.
“If you stand back and look at the bigger picture in tech, Dell gets all the pieces it needs from others,” said Dick Lampman, Hewlett-Packard’s senior vice president of research and director of HP Labs. “From my view, that’s definitely a limiter in opportunities to grow. Dell has tried to enter the printer market by using other people’s products. It’s a clear limitation on their financial model because they have to share their profits. That limits their success in that market.”
Perhaps. But Michael Dell is quick to point out that he sold more than 1 million of his Dell-branded printers in fewer than eight months. And he did it without spending billions of dollars on research and development.
“Not all R&D is necessarily good,” Dell said. “Companies spend a high percentage of their revenues on R&D. Those aren’t necessarily the most successful companies.”
Rather, he said, his company gains more R&D insight by listening to customers and giving them what they want, when they want it and how they want it.
“Dell doesn’t risk on unproven technologies, not until the customer wants it in hand, until the customer says, ‘Why don’t we have this?”‘ said Richard Dougherty, an analyst with the Envisioneering Group in New York.
That’s a dangerous way of thinking in Silicon Valley, where new ideas and new technologies are born every day, waiting for a device and manufacturer to give them a home.
If an innovative company — that is, a Silicon Valley-like company — wants to do business with Dell, it might be a long time before it can catch Michael Dell’s attention.
Dell — a company that manufactures an estimated 150,000 computers a day — brings more than just buyers to the table. Its tightly run manufacturing and distribution model not only keeps costs down but also has potential to dominate other markets.
That’s attractive to any tech company looking to dig its way out of a sluggish economy. But getting Dell to bite is the hard part.
“The attitude from executives who work with him is that he’s difficult to approach, difficult to woo,” said Dougherty. “I’ve known companies that have pitched him and then go on to do business with someone else. It’s hard to get his attention.”
What’s especially tough is waiting for the call from Dell, especially if an HP or Sony might be interested now. “Hesitation is the cancer of Silicon Valley,” said Dougherty. “The longer you wait for Dell to make up its mind, the longer you’ll wait to work with other companies that someday may challenge Dell.”
Dell welcomes the challenge from Silicon Valley but is quick to flip questions about crushing his competitors.
“I don’t want to kill competitors, I only want to offer more value to customers,” he said.
It’s a nice-guy answer, and in an industry of oversize egos Michael Dell comes across as a nice guy. He talks percentages, not trash. And he prefers to focus on customers instead of competitors — even when competitors disparage him.
At a Santa Clara dinner hosted by the Churchill Club recently, Dell was asked to respond to statements made by HP CEO Carly Fiorina, in which she called Dell’s company a “one-trick pony.”
Dell’s response: “She got it half-right. We’re a two-trick pony. We’ve managed to save customers a lot of money and make a profit, too.”
On the business side, Dell is moving forward — even in this sluggish economy.
The company is on track to reach $40 billion in revenue this year and has set a goal of hitting the $60 billion mark by 2006 — which means sales must grow by 15 percent annually for the next three years.
It’s moving fast into overseas markets. Dell said business grew by about 60 percent in China in the first nine months of the year. Whether Dell is a friend or foe of Silicon Valley’s tradition of technological innovation depends on the company you’re asking.
Santa Clara-based Sun Microsystems, for example, might be feeling threatened now that Dell has moved into low-end servers.
Larry Singer, senior vice president of global market strategies for Sun, said the next wave of technology has room for a Dell business model. And while Dell is a competitor in low-end servers, they’re also a partner in distributing technology, such as Sun’s Java software.
“I think the issue is that you have to pay attention to them,” Singer said. “The issue for Silicon Valley is how do you differentiate what you have so that the distributor’s low-cost, direct model doesn’t displace your value-add. You have to have a value-add. Ours in innovation.”
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