IT Strategy

Dell’s Game PC Turnaround Strategy

May 19, 2008 by Raj Sheelvant

Wall Street Journal (WSJ) article dated May 13, 2008 titled Dell Tries to Revive Its Game PCs (you need to subscribe to WSJ to read the article), talks about surprising steps Dell is taking to reinvigorate its business. It will phase out four gaming systems – its XPS line leaving Alienware line that it acquired in 2006 as its sole offering to big spending gamers.

Multiple SKUs (Stock Keeping Units) always creates customer confusion. Having a strategic product roadmap that continually challenges the executives to reduce the number of SKUs is very critical in streamlining product line. Also, a single SKU need to be clearly defined for a MSS (Market Segment Share) and that requires huge investment in marketing effort create ‘wide moat’ between the MSS. In Dell’s case, low end XPS product and high end Alienware products did not have clearly defined MSS. When the MSS is blurred, there is a tendency where the low end products (in this case XPS system) will begin to cannibalize high end products (Alienware). This was the reason, Dell rightly decided to get rid of low end XPS systems, leaving Alienware system as the sole gaming PC product.

Though this is the right move, I am not sure that Dell will be able to take back the market share from its competitors in gaming PC segment. Before being bought by Dell, Alienware gaming PCs had the premier brand image. It had dominated in its niche area of high end gaming PCs. After it was bought by Dell, its premier brand image got contaminated. Dell whose brand portrays ‘low cost’ image distorted Alienware’s brand image. Thus, it started to lose its market share to their competitors.

This is an important lesson from Merger and Acquisition (M&A) perspective. Most of the companies look at their portfolio of products. If there is a hole in an portfolio mix, they go shopping to find target company with the missing product for M&A activity. Due diligence is done from financial perspective. But, brand evaluation is also an important criteria for due diligence that the company needs to do before M&A. This is where Dell went wrong. I think Dell only focused on scale advantage when it decided to buy Alienware. It did not focus on dilution of brand this acquisition would create. It will be tricky for Alienware to regain MSS in the gaming PC segment.

(Also check out my blog article titled Dell’s Turnaround Strategy)

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