What happened to Dell?

I was thinking recently that innovation should be a continuous process, helping to evolve a firm over time. News about Dell struck me as a potential example of a firm that innovated spectacularly once, and rested on those laurels for quite some time.

Dell, which has been the darling of the financial world, has missed its earnings projections the last five quarters in a row. It has seen its profit margins shrink, it's position as the largest manufacturer of PCs lost to H-P, and most importantly, it is now seen as having poor customer service and not using the "latest" components from AMD and other suppliers. This is a dramatic turn of events from just a year or so ago, when every newspaper and magazine trumpted Dell as the dominant leader in the PC market.

Dell gained a huge advantage by disrupting the PC market, eliminating the "middle man" and selling good quality PCs direct to individuals. Over time, Dell opened a market to sell to corporations, and that's where one of their first issues was created. Having sold to individuals, they understood the consumer market, but I think even today they struggle to understand the corporate market and its infrastructure needs. Secondly, Dell pioneered the assemble to order model and pushed inventory back on its suppliers, so it received payment for the hardware before it paid for the parts. I suspect that Dell's pressure on its suppliers and its choice to remain very loyal to Intel has cost it as well, as suppliers will only extend so much effort to mollify a customer that constantly beats down on price.

But Dell's problems are significant in another way. Here's a firm that many, many people viewed as a real innovator that disrupted a market and took a leadership position. Dell's innovations were powerful and they did lead to the opportunity to change the PC market, basically forcing IBM out of the PC market and forcing the merger of Compaq and H-P. However, as the market consolidated and got smart to some of Dell's innovations, Dell has not modified its operations - it has failed to innovate new products or services. In fact Dell has become a "me too" operation. It has opened stores, created lower cost copies of MP-3 players and flat screen televisions. This is not the brash upstart that changed the market - this is a firm seeking to tweak the edges of the market and the operations a little bit.

So, can a large firm which owns a leadership position in a market return to its innovation roots? Is Dell willing to dramatically change itself and its market to regain a leadership position? Or are all firms doomed to become satisfied and protective of their market once a certain level of success is achieved? Michael Dell and his team dramatically changed the PC industry once. Can they do it again and revive Dell, or will we simply see them slug it out with H-P for market share points?