Not all R&D created equal

As a UCI postdoctoral student in 2000, I was adapting parts of my dissertation to be an e-commerce study of Apple Computer. The idea was that the study (released as a working paper) would stand side-by-side with other PC industry e-commerce studies done by my colleagues on Dell and Gateway.

At the time, Dell was still riding high as the cost leader of the PC industry, earning record profits from relentlessly commoditizing the Wintel PC business. At best, Apple seemed to be demonstrating a dead cat bounce from the depths of its near-death experience in 1997.

One of the arguments I had with my colleague, Jason Dedrick, was whether Dell did more R&D than Apple. While Dell had low R&D intensity, at the time it was much bigger than Apple, so the reported cash R&D figure was higher than Apple’s. I argued that Apple was still doing more innovation, no matter how big Dell’s number looked, because we knew that Dell (unlike Apple) was not spending significant money on either developing software or on being the first to bring new technologies to the PC industry.

This week, Dell CEO Michael Dell was interviewed by Walt Mossberg of the WSJ at the newspaper’s annual “D” conference. I wasn’t there, but there’s a summary of the interview on the WSJ blog and the Barron’s blog, as well as some video highlights.

Dell confirmed the point I was making back in 2000-2001 when arguing with Jason. Here’s my transcription of the relevant portion of the taped interview:

Mossberg: The former Dell of CEO of Dell — Kevin Rollins — appeared at this conference a few years ago. And I'm paraphrasing here — it's not an exact quote — but he said something like “R&D was a waste of money.” Was that the Dell philosophy at the time and is it now the Dell philosophy?

Dell: No. (long pause … then video cut) We'll spend roughly $600 million year in R&D, so certainly not an insignificant committment to developing new technology and new products. I think it's also to remember that there's tens of billions of dollars of R&D spent in the industry

In other words

• most of our “R&D” is really just product development
• we don’t do much research
• we rely on the rest of the industry to create technological innovations for us.

Now there’s nothing wrong with using open innovation to support a generic cost leadership strategy: historically Dell lets component suppliers do the technology innovation, and then copies at lower costs the innovations of companies like Apple, HP or IBM (now Lenovo). I personally think that Michael Dell is silly to feel embarrassed about being a not-very-innovative company: solving key supply chain problems and being a relentless cost-cutter made him worth $16 billion. Much as I like innovation, I’d trade places in a heatbeat (even if it meant moving to Texas).

In fact, it would be stupid for him to try to make Dell into Apple. There’s only one Apple, and even Sony (with its brand and 50+ years of innovation) has been unable to match it in PCs and music players. If Dell tries to combine its traditional strategy of cost-cutting with bits and pieces of innovation, it will become “stuck in the middle” (as our old undergrad strategy textbook used to call it), neither fish nor fowl — in other words, like HP for much of the past decade.

The problem instead appears to be execution. When Dell comes out with products, then need to be good ones, even if they’re not first to market. As the news article in CNET made clear, the company needs to improve its product design:

[Dell] promised that the PC maker will not be a technology laggard going forward.

"We've tripled our resources in design and user experience," the company's founder and CEO said in an interview with technology journalist Walt Mossberg at the D6 conference here.

Business execs (like politicians and even judges) lose their way when they care about what other people think of them, rather than doing what they know is right. For Dell’s shareholders, let’s hope that Michael Dell returns to his winning formula, suitably updated to allow for today’s greater consumer expectations of product design and usability.