One test of a corporate strategy is to see how well it performs in bad times. By that measure, Dell's direct distribution model has proved itself to be a solid success. In the recession that gripped the computer industry in the early 2000s, Dell continued to grow at a healthy rate. Despite industry retrenchment and consolidation, Dell continued to enjoy—in Michael Dell's phrase—"hefty profits." Why?
It goes back to the structural cost advantage, which is very much at the root of our business model in terms of having a more efficient distribution. Eliminating dealers, middlemen, inventories; the Internet; all the efficiencies that we have been working so hard to drive have kind of kicked in the afterburners in the last 12 months.
Additional evidence that this was a successful strategy is not hard to find. During the technology bust of 2001, for example, Dell cut the prices of its computers. This prompted at least one competitor to criticize Dell for allegedly igniting a price war, which this competitor described as a "dumb" move. Michael Dell shrugged off the salvo, responding, "If you don't have the real ability to differentiate, a price war is dumb." According to Dell, that was exactly the position his competitor was in—and it was no surprise, he added, that his rival was in the process of making a "very substantial exit" from that market.
Nor did Michael Dell express much concern about "the most rapid market consolidation ever" in his relatively young industry. Rather than threatening Dell's competitive position, all that consolidation and market churning actually enhanced Dell's competitive position:
Essentially we have now taken on the number one share position on a worldwide basis. We have seen about a seven-point swing in market share in the United States on a year-by-year basis. So officially [rapid market consolidation] has accelerated in about four quarters what it normally has taken us about nine or ten quarters to do, in terms of a shift in market share.
When consumers—companies and individuals alike—begin tightening their belts, the odds go up that the best product at the best price will win the day. So the company's countercyclical increase in market share during hard times grew directly out of its ability to gauge demand, produce a superior product, and ultimately deliver better value than its rivals.
The real takeaway from this episode is probably self-evident. The pieces of the puzzle have to fit together in a mutually reinforcing way. Unless your firm is able to achieve genuine differentiation—through quality of product, a better price, superior service, ease of use, etc.—then price wars alone are unlikely to address your firm's competitive woes. On the other hand, if you are able to truly differentiate your product or service and then deliver it at a lower (and profitable) price, you can sustain a genuine competitive advantage.