SCDigest editorial staff

The News: Dell again announced it expected financial results below expectations, sending its stock down to the lowest level since the tech market crash of 2001.

The Impact: While Dell is still a great company, its current situation shows how difficult it is to sustain competitive advantage, and the need for continuous product and supply chain innovation.

The Story: Last week, Dell warned that sales and profits would be lower than analysts expected for its second quarter, sending the stock price down 10%, to its lowest level since 2001, after a similar “miss” in the first quarter and others in 2005.

In the first quarter, for the first time in 10 years, Dell grew more slowly than the overall PC market. Analysts believe Dell was flat with the market in the most recent quarter.

So what’s going on? The PC market continues to be a brutal one in terms of pricing, which Dell cited as one of the causes for its financial shortfall.

Interestingly, as the global market becomes more consumer rather than business oriented of late, some believe Dell’s direct model has some weaknesses, as consumers often prefer to buy PCs at a retail store where they can see the machine and easily compare models. Businesses in emerging markets globally sometimes show similar preferences.

Indeed, earlier this year Dell announced in would sell some PCs through the Costco warehouse club chain.

SCDigest also believes that the continued reduction in overall PC and component prices also has an impact. At higher pricing levels, the advantages Dell receives through lower inventory levels using its build-to-order model, both in inventory holding costs and reduce risk of price decreases in key components, becomes more muted.

Competitors such as HP and Lenovo/IBM have also put much more effort into streamlining their own supply chains, cutting into Dell’s advantages in cost and responsiveness to market changes. Dell has also come under some criticism for customer service issues, and is hiring thousands of new customer support representatives, based in the U.S. instead of India.

The lessons? First, everything commoditizes over time, now more rapidly than ever. Dell’s supply chain advantages simply could not be sustained indefinitely without another shot of innovation. Second, companies can often get “stuck” on a model even as market conditions change. For example, does Dell need to build an innovative supply chain that work for retail? Their own in-mall kiosks have apparently been successful – do they need to implement a similar model at Comp USA?