PC companies and sticking to your knitting
For my many non-native English speakers/readers, the phrase "sticking to your knitting" essentially means you should do what you're good at, not what you don't know. In management circles, it is one of watchwords of Tom Peters in his book In Search of Excellence (1985), where companies are told to focus on what they did best, ignoring passing trends. (I'll just mention the disastrous AOL Time-Warner fiasco.)
For some companies, it seems every attempt to grow by breaking out of the narrow focus they are best at gets mercilessly slapped down. One area where that is notably true is in the PC industry. Dell, Hewlett-Packard, and Gateway have all been trying to break out of the narrow confines of supplying increasingly less expensive and over-powerful PCs at low markups. Differentiation is difficult, the market is maturing, and while constant technological improvement requires ongoing investment, most users now have perfectly adequate machines and upgrade slowly.
Of course, these companies have been glad to supply servers, printers, monitors, and other peripheral equipment, but these are add-ons to the existing business, for Dell and HP significant ones.
But the three companies all decided also to move into the $125 billion market for home electronics. After all, as TV's resemble computers more and more, and vice versa, that move is a no-brainer, right. All three companies over the past few years have dived deep into the market, offering an array of flat-screen TVs, digital camera, music players and other media equipment.
But these companies are now retreating from their move. According to a Wall Street Journal article, ("PC Makers Facing a Flop In Home Entertainment", 11/2/2005), "The personal-computer industry's march into the living room is proving to be a slog."
As the article explains, the big three PC makers "planned to exploit PC-style economics -- based on off-the-shelf components, low markups and high turnover -- to give consumers new choices and offer the big electronics retailers a lesson in low-cost selling."
Dell recently announced it would drop its US consumer arm. Gateway has closed its consumer division, and HP is also cutting back, including dropping its agreement to resell Apple iPods. The problem has been stronger than expected competition by those who already were in place, the big box electronics retail chains, like BestBuy and Circuit City. And the big Japanese and Korean manufacturers were ready to match prices and features as they struggle for market share.
The big retail companies were not standing flatfooted when the PC giants entered the arena. As the article says:
Gary Balter, a Credit Suisse First Boston retailing analyst, says Best Buy and Circuit City Stores Inc. altered their strategies to go beyond price as soon as the PC competitors moved into the field. The two chains are revamping stores to sell more products in bundles, adding higher-end products and services, and tightening coordination between their online and store sales operations.
Dell is still a big moneymaker, HP is back on the road to solid profits, though Gateway, (even after its merger with eMachines in 2004) is losing money. But frustrating for all three companies is that they are being trapped in a mature segment with no escape. (HP has seen its hopes of becoming a major seller of IT managed services fizzle as well.)
In market where customers are generally happy to buy low-end, low-profit models, the prospects for future growth are limited. PCs now sell at amazingly low prices. These companies got clobbered in a market they were not suited for or ready to succeed in, that of home electronics. Sticking to your knitting is hard to do when the price of sweaters keeps dropping.
