Dingly Dell
Dell announced a 47% drop in profits this morning. That's a neat indication to anyone who supports buying "growth companies" as an investment strategy that the important part of that strategy is to know when to get out.
But that wasn't the bit that interested me. After all, one of my contrary investing strategies, one which has done quite well, is to invest in companies for whom the growth story is over (so the stock has fallen out of favour) but the dividend story is very real. The trick is to recognize (and buy shares in) the companies with the common sense to change from growth to mature, and to avoid like the plague companies that keep trying for a "change in strategy" in an attempt to carry on growing.
The bit that interested me was dell's statement that it would focus less on retail customers and more on businesses. It would, in other words, move towards corporate accounts.
This strategy is tempting for the executive of little intelligence. After all, a $2m contract does not cost 1,000 times as much cash to obtain as does a $2,000 sale. It's also a "relationship" rather than a single sale. And Dell might have spotted that a large number of its retail customers had begun to go elsewhere. As is the way, they blamed "price competition" from the far east. In fact, I moved elsewhere not on grounds of cost, but on the grounds that Dell products weren't very good. If they'd made a better product, with fewer mandatory additions (all extra pennies for Dell, that included Norton), then they would have kept customers. But will the bloke who arranged the "add-on" get fired? Oh no. As far as Dell is concerned, he won a big contract. That he lost an indefinable sum through non-replacement will never go down on his CV.
But there is a downside to concentrating on the corporate. For a start, to do so only really makes sense if you are producing a non-commoditized bespoke (and therefore high-margin) product. The high margin comes from the bespoke and non-commoditized nature, not from the market. Shifting a commoditized product (such as the PC) to corporate focus is putting the cart before the horse.
What is "non-commoditized" is the customer service part. Inother words, what Dell is loking to sell corporate customers is not a fleet of PCs. It's a company-wide service product. It's an attempt to de-commoditize a commoditized product. It's an attempt to remain a growth company when you should be settling for being in a mature industry that you can gradually run down, while paying out oodles in dividends.
There's another error in ignoring the retail market while not absolutely quitting it. That is the common error (amongst the challenged of thought) that they are two separate markets.
I'm reminded of a famous weekend at the Royal Angus. The hotel's owners were basically focusing on higher-margin corporate customers in the week and were selling cheap rooms at the weekend to retail customers (such as Midcon attendees) because a room used is worth more than a room empty.
However, the staff one year basically treated the MidCon attendees like shit. Business customers mattered, the MidCon crowd didn't.
This strategy went awry when Walkerdine and others dryly informed the management in what might be termed "a robust exchange of views" that, just because these guys were in jeans and tee-shirts, that didn't mean that they didn't wear suits during the week. Indeed, the management was told by the committee, one of the guys was in control of a particularly lucrative account and the attitude of the hotel staff had just lost them that account to (insert name of well-known rival here).
If you start saying to individuals "you aren't worth our while" then, when those individuals have corporate power (as, statistically, at least some of them will do) they will remember that, and they will enjoy the moment when they say "I wasn't worth your while then; you aren't worth my while now".
Dell should remember that.
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But that wasn't the bit that interested me. After all, one of my contrary investing strategies, one which has done quite well, is to invest in companies for whom the growth story is over (so the stock has fallen out of favour) but the dividend story is very real. The trick is to recognize (and buy shares in) the companies with the common sense to change from growth to mature, and to avoid like the plague companies that keep trying for a "change in strategy" in an attempt to carry on growing.
The bit that interested me was dell's statement that it would focus less on retail customers and more on businesses. It would, in other words, move towards corporate accounts.
This strategy is tempting for the executive of little intelligence. After all, a $2m contract does not cost 1,000 times as much cash to obtain as does a $2,000 sale. It's also a "relationship" rather than a single sale. And Dell might have spotted that a large number of its retail customers had begun to go elsewhere. As is the way, they blamed "price competition" from the far east. In fact, I moved elsewhere not on grounds of cost, but on the grounds that Dell products weren't very good. If they'd made a better product, with fewer mandatory additions (all extra pennies for Dell, that included Norton), then they would have kept customers. But will the bloke who arranged the "add-on" get fired? Oh no. As far as Dell is concerned, he won a big contract. That he lost an indefinable sum through non-replacement will never go down on his CV.
But there is a downside to concentrating on the corporate. For a start, to do so only really makes sense if you are producing a non-commoditized bespoke (and therefore high-margin) product. The high margin comes from the bespoke and non-commoditized nature, not from the market. Shifting a commoditized product (such as the PC) to corporate focus is putting the cart before the horse.
What is "non-commoditized" is the customer service part. Inother words, what Dell is loking to sell corporate customers is not a fleet of PCs. It's a company-wide service product. It's an attempt to de-commoditize a commoditized product. It's an attempt to remain a growth company when you should be settling for being in a mature industry that you can gradually run down, while paying out oodles in dividends.
There's another error in ignoring the retail market while not absolutely quitting it. That is the common error (amongst the challenged of thought) that they are two separate markets.
I'm reminded of a famous weekend at the Royal Angus. The hotel's owners were basically focusing on higher-margin corporate customers in the week and were selling cheap rooms at the weekend to retail customers (such as Midcon attendees) because a room used is worth more than a room empty.
However, the staff one year basically treated the MidCon attendees like shit. Business customers mattered, the MidCon crowd didn't.
This strategy went awry when Walkerdine and others dryly informed the management in what might be termed "a robust exchange of views" that, just because these guys were in jeans and tee-shirts, that didn't mean that they didn't wear suits during the week. Indeed, the management was told by the committee, one of the guys was in control of a particularly lucrative account and the attitude of the hotel staff had just lost them that account to (insert name of well-known rival here).
If you start saying to individuals "you aren't worth our while" then, when those individuals have corporate power (as, statistically, at least some of them will do) they will remember that, and they will enjoy the moment when they say "I wasn't worth your while then; you aren't worth my while now".
Dell should remember that.
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