I agree - thanks!
Once you start outsourcing your core work, you will be killed by margins. This is the HIDDEN rule of business.
I'd say only if you're in a commodity market. I do quite a bit of factory automation work, and while I outsource some of what I do, it doesn't affect my margins at all - each job is so unique and requires on-site design and service that outsourcing the actual controller programming/design isn't an issue. In fact, I leverage commodity controllers...;)
So for some industries it does have an impact, especially industries where the product or service becomes so ubiquitous that it is commodity. For the rest, it doesn't.
I say we're seeing that now with the iPhone and Apple; they're starting to lose marketshare in smartphones, and are starting to compete on price already (witness the emergence of free iPhone 3GS units and bigger discounts on the iPhone 4). The first person in a new market can charge premium costs, but as the market comes around to commodity status - like smartphones - everyone's margins get squeezed.
The fault lies solely in Dell’s decision to give up ALL internal component manufacturing.
But what was the downside for Dell? Their profit margin has been pretty consistent (an occasional hiccup, like in 2001 and 2009) at around 5%. Their revenue has grown pretty consistently, however.
Cutting costs to offer lower prices is a key to bumping market share and total revenue, and if you can keep the margin the same - then you gain, ultimately, more dollars.
Great reply!
So, your post in many ways goes to my point about margins.
You talk about commoditization. You are absolutely correct that every product gets commoditized. PCs were commoditized back in 1983 when COMPAQ started building clones.
So, in a commodity business, what can then help you? Certainly the answer is NOT buying every SINGLE part of your product from a bulk commodity manufacturer.
If Dell buys every single item (Case, Electrical, Fan, Motherboard, RAM, HDD, Processor, OS, Optical Drive) from others then in the end, is Dell even Dell?
What hope will Dell then have left? Look at HP. That great business is dying because that is exactly what they did and now they are spinning off their entire PC business.
As I mentioned earlier, when you buy parts from someone, that other person is making margin. He has to, otherwise why would he be in business. So, if you paid an extra $5 for each major component, soon you have paid an extra $100 for all of them.
In an era where a PC sells for $500, $100 is life and death.
Now, one can meaningfully say, “hey.. one cannot build everything inhouse”.. and you would be correct.
As I mentioned in my previous post, certainly I would not expect Dell to make screws, because even if they use 100 million screws a year, there are manufacturers out there that make 1 BILLION screws a year and they have economies of scale that Dell can NEVER match. That certainly qualifies as not being Dell’s core business
But when it comes to Motherboards, Dell uses MORE motherboards than ANY other PC manufacturer on the planet. They are number one.
So, if you are the worlds number one user of a sub-component (which happens to be a value added component too!) why would you not build it in-house.
If Dell started making MBs in-house they would be the world’d LARGEST MB maker and they would have economies of scale that no one could touch.
Secondly, they could then start building exclusive features to their MB (like on board flash memory) that do NOT have to be shared with other competitors.
Part of the problem with buying from an out-sourcer is that you are NEVER ahead of the competition. Whatever you have, they have.
The guys who are putting in the research money and developing in-house knowledge are the guys who will win in the end.
This concept of running a virtual company like HP and Dell tried is a failure. And we all know it. Some stupid Harvard MBA decided that you could outsource every single thing and one CEO and one CFO could run Dell worldwide with no real employees.
Well that is baloney. Because if you talk about virtual companies that make NO product themselves, then keep in mind, it is very easy to get competition.
If I find an assembler in Thailand who makes me an ENTIRE PC box and ships it to me in the US for $400 and my business model is to ship it to the end consumer for $500 (which is literally the EXACT model Dell has today), please keep in mind, that there is always a competitor around, that will ALSO go to the Thai assembler, and order the SAME PC for $400 but sell it for $420 in Best Buy.
Since that competitor does not have a huge overhead or is not publically listed company in NASDAQ he is more than happy with low margins.
Mark my words, Dell will get out of the PC business in less than 3 years. They have no other choice.
Bear in mind, Apple is losing marketshare with 1.5 and 2 yr old products - but they are estimating 50 Million iPhone 5's by the end of the year.
Don't forget, a lot of Dell's profit came from Intel kickbacks, but it was covered up. There was a big scandal over it a while back, major $$$ paid in fines.