The Quagmire of Low Price

A tech giant has just made a huge U-turn.

About a week ago, Dell announced plans to spend hundreds of millions of dollars on a new global advertising campaign.  What makes this new push radical -- for Dell -- is its stated intention to move away from price-focused, transactional advertising to a strategy that is more focused on the brand.

I wonder if it's too late.

Dell became the #1 PC company in the world on the back of its 'direct' model: a revolutionary, 'just-in-time' manufacturing process that dramatically lowered inventory costs, cut out the middle man, and served up huge profits in an industry infamous for its razor-thin margins. The pace of obsolescence in the PC industry is unforgiving -- so inventory management is critical. While other players typically struggled with weeks of supply (WoS), Dell counted its inventory in terms of hours. (At its brutal best, it even boasted 'negative' inventory -- it collected your money before it started to configure your purchase; and stretched out rebate payments.) For the longest time, no one could touch its supply chain efficiency.

Then the competition wised up. HP and other contenders got their act together and reduced their WoS -- but they also offered consumers the choice of buying from the retail channel, the sensory experience of physically interacting with the product (and bonding with the brand) before buying it.

Dell's competitive advantage was no longer so.  The only other residual impression it had registered, was low price.

Source: www.tonystone.com

But price is not a strategy.  It is the quicksand of a brand -- drop your price, and you will almost never be able to claw your way back to a firmer footing.  It is indefensible (sooner or later, someone is going to drop prices lower than you can afford to), and the only connotation that keeps it company is the wrong one -- poor quality.

Dell has finally wised up, too.  But it has a mountain to climb.

Paul-Henri Ferrand, its Chief Marketing Officer, has acknowledged that they "need to invigorate the brand".  It's about time.  But when he says that "there's a real space for us to become the most-loved PC company in the industry", my skeptic antenna starts twitching.

The campaign theme says, "You can tell it's a Dell."  With due respect to its creators, I believe it's the worst possible thing Dell can tell.  If all you've got is a much-eroded competitive advantage, and the double-whammy impression of low price / poor quality, don't wave a red flag in front of a bull. Remember the concept of 'credibility snap'. You need to work your butt off to prove you're a different company, then let your audience ascribe to you that compliment. In other words, don't say it. Just earn it.

I hope Mr Ferrand has deep pockets.  He's going to need them.

What Price Do You Put On A Reputation?

If you're in the market for a car or currently drive a Toyota, you'd have to be blind or deaf not to be aware of the problems the car-maker has been grappling with these past few months.

When a few isolated accidents involving Toyota vehicles caused by accelerator pedals 'sticking' to the floorboard increased to a statistically significant number, Toyota swung in action, issuing a series of vehicle recalls from November last year.

In the latest installment of this unfolding saga, Toyota announced on Wednesday this week that it would immediately stop building and selling the Camry, Corolla and Avalon sedans, Matrix wagon, RAV4 crossover, Tundra opickup, and Highlander and Sequoia SUVs. Beyond the USA and Canada, the recall will be extended to China and Europe (though it is currently unclear which models will be affected).

The accidents, and the deaths and injuries they have caused, are truly tragic. The root cause, whether it's a broken accelerator pedal or floor mat interference (as documented in this YouTube video clip: http://youtube.com/watch?v=VTOxYFt1yT8VTOxYFt1yT8), needs to be fixed, and quickly. Toyota is doing all in its power to address the swiftly situation and stem the body blows to its vaunted reputation for product quality. (See http://pressroom.toyota.com/pr/tms/toyota/toyota-consumer-safety-advisory-102572.aspx for details.)

According to some detractors, the Toyota brand is now in tatters, and the business will never recover from this, the largest product recall in its history. The vehicles being recalled account for 57% of the company's US sales; and it is estimated that Toyota will haemorrhage some US$400 million a week due to suspended production and sales. I note with a trace of distaste, however, some telling observations:

1. All the eight affected models in this recall exercise are assembled at five plants in the USA and Canada, with what I must assume to be a predominantly local workforce.

2. In its bid to become the world's #1 car-maker, Toyota moved away from some of the business practices that had served it well for the longest time. One example is its decision to buy parts from companies around the world, rather than from a small group of Japanese suppliers that had been long-time partners. The accelerator pedals in the vehicles affected by the recall come from a supplier's Canadian plant.

3. US Transportation Department officials have taken pains to point out that they had advised Toyota to act quickly. "The reason Toyota decided to do the recall and stop manufacturing is that we asked them to," said Raymond LaHood, the Transportation Secretary. "We were the ones that met with Toyota, our department, our safety folks, and told them, you've got to do the recall." (Ouch.)

4. Journalists say Toyota is almost certain to face lawsuits soon not just from people who claim injuries from the defects, but also -- get this -- class-action suits on behalf of consumers who will claim the crisis has damaged the value of their cars. (Only in America.)

Is it just me, or do some of these news tidbits merely reinforce the quality of Japanese engineering vis-a-viz the rest of the world? Toyota is a savvy organization. Not by accident (pun unintended) is it ranked amongst the world's most admired companies and the world's most respected brands. Granted, the company has skated close to the edge by risking its core brand attribute -- quality -- in its fixation on growth. Toyota now has to reconsider the wisdom of some of the operational decisions taken in its quest for global leadership in the automobile industry. But it would have executed these recalls, LaHood or no hood.

This crisis will likely cost them untold billions of dollars; but a principle isn't a principle until it costs you something.

Chin up, Toyota. You're doing the right thing.

[Disclosure: I have never owned a Toyota, nor shares in the company. But that doesn't stop me from respecting the brand.]