Dell 's Alien Strategy

I've puzzled over the recent announcement by Dell Computer that it was acquiring Alienware, a maker of very high performance personal computers prized by gamers and other power users. In an industry characterized by commodity products, why not just use Dell's logistics expertise to put the exact same parts that Alienware uses into a Dell-branded box? Two reasons: first, the Alienware brand is very strong in this segment and Dell's is not. ("Alienware has tremendous brand appeal with consumers and creative business professionals," said Michael Dell, chairman.) This allows the company to have significantly higher profit margins than Dell -- perhaps as much as 10 times higher -- on an average selling price (ASP) that is about 3 to 4 times higher than Dell's. Second, Dell's operational prowess applied to Alienware's business is far more profitable than to the same components in a beige box from Dell. Alienware is only a tiny fraction of Dell's $60 billion size, so it is reasonable to expect that they aren't getting the same terms and conditions on components as Dell is. A reasonable assumption for their inventory turnover is 10-20 times per year. Dell turns inventory 100+ times per year. The key formula is that total profit is the product of profit margin and inventory turns. Now it makes sense. Alienware's great brand will bring great margins, and Dell's operations will dramatically increase turns. That drops a lot of money straight to the bottom line. Factor in Dell's marketing muscle, and the growth prospects are even brighter for Alienware products. Caveat: Alienware will have to work hard to maintain its brand reputation and not let Dell's recent image woes tarnish it. A brand is a reputation -- hard to build and easy to destroy. Alienware will have to consistently produce products with amazing performance, unique design, and superb support to keep their core audience loyal.