Dell is (again) restructuring its top management, and altering its strategy in an effort to rekindle growth. Sometimes, there is value at looking at history through a different lens to gain insights into what made a company great.
In Dell’s case, the company started by selling a product directly to consumers. What were the characteristics of that product (and the business model) that made the company even possible, much less successful?
Six factors:
- It used commodity components, meaning that there were multiple suppliers and (perhaps more importantly) no research and development was required.
- There was value added in the assembly (however minor) by the company.
- Supplier terms were favorable to Dell, especially later. Multiple suppliers of each component meant competition kept prices low. The exception was the CPU, where paradoxically the Intel monopoly kept prices low because there was always the threat of going to AMD.
- Mass customization of the end product was possible through mixing and matching a virtually infinite number of different component configurations.
- Massive inventory turns enabled by the direct-to-customer model meant that Dell could collect the price of the machine before they had to pay for the parts.
- A brand name that stood for quality.
This is ideal for a desktop computer. It could be built in a dorm room (or a garage, or pretty much anywhere, which ultimately gave birth to the “white box” built in the so-called “screwdriver shops”, so named because anyone with a screwdriver could build a PC.) It is also ideal for a PC-based server.
Notebook computers, on the other hand, remove four or five of these sources of competitive advantage.
- Assembly is not done by Dell, but by contract manufacturers, removing that value add.
- Supplier terms aren’t as favorable, because there are fewer contract manufacturers, and they aren’t able to be played off against one and other like, say, power supply suppliers could be.
- Mass customization was much more difficult, because there were a relatively low number of fixed configurations in notebooks.
- All the above three factors combined to produce much lower inventory turns.
As Dell grew, they diversified their product line to include more and more peripherals (printers, for instance) and other electronics (flat screen TV’s, for instance). These items moved even further away from the six core principles that made Dell successful -- where was the ability to differentiate? Why was a printer or TV purchased from Dell any better than one from Best Buy?
So what does this mean for the future? For one possible answer, let’s ask the question a different way: What products of the next 5 - 20 years share the six characteristics of the original PC?
Perhaps those products are in the PC business, like blade servers, or even parallel supercomputers. On the other hand, the answer might be in completely different industries. NOTHING about the “Six Success Factors of Dell” say anything about personal computing or even electronics. The next industry to be transformed might be something like transportation, where the six competencies described above can provide some competitive advantage in an emerging and/or high growth market.
As for transportation: We can compare the not-as-Big Three of today to the IBM and Digital Equipment of the 80’s. Who would have thought that the lowly PC (a “toy”, in some early reviews) would transform one of those business so completely, and eliminate the other one?
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