Fundamentals of Management 6th Edition by Ricky Griffin

Exercise 9

Dell Does Damage Control
Michael Dell, says Harvard's David Yoffie, "broke the paradigm about how to run a computer business." By now, the litany of innovations at Dell, one of the world's top suppliers of personal computers, is pretty familiar: direct selling to customers to avoid retail markups, flexible manufacturing for low-cost customization, and just-in-time inventory to hold down carrying costs. The nature of such innovations makes it clear that Dell's phenomenal success over the last 25 years owes much to tightly disciplined operations and vigorously applied controls.
The success of Dell's "valuepriced" business model, for example, reflects effective efforts to control costs. Dell's North Carolina plant, which opened in October 2005, can produce PCs 40 percent faster and with 30 percent less downtime than its facilities in Texas and Tennessee. Unlike older factories, which must retool equipment for different types of computers, the plant in Winston-Salem can build any of Dell's 40 models at any time. "Other factories have a processdriven flow," explains factory designer Richard Komm. "[This plant] is focused on one thing: How do we get [a computer] to the customer in the shortest amount of time?"
Excellent quality control also holds down costs. At Dell, teams of three workers typically collaborate on the assembly of a PC. Because each individual is assigned a specialized set of tasks, training is simpler and quicker, assembly time is faster, and errors are less common. Each team includes a tester who performs a quick check to ensure that every completed machine is correctly wired and boots properly. Finished machines must also pass inspection and then undergo even more extensive testing, but the purpose of the quick test is to allow the assembly team to catch gross defects as early as possible. The principle, explains Komm, is quite simple: "The faster you get feedback to the operator, the fewer defects." Dell now catches most defects in 4 minutes (rather than 60, as in the past), and the overall defect rate is 30 percent lower.
On the other hand, although earnings grew by 52 percent in 2005, customer complaints doubled. During the next year, Dell acknowledged problems with customer service call transfers and wait times, promising on its corporate blog that "we're spending more than $100 million-and a lot of blood, sweat and tears of talented people-to fix this." For the year, spending on customer service reached $150 million.
In addition, competitive conditions in the PC market were a lot different in 2005 than they had been during Dell's glory days-mainly the decade from 1991 to 2001, when annual sales soared from $546 million to $32 billion. For the third quarter of fiscal 2006, Dell's growth of 3.6 percent paled against Hewlett-Packard's 15 percent, and the fourth quarter produced even more disappointing numbers: Sales had tumbled by 51 percent from the previous year, and PC shipments had declined by 8.9 percent while HP boasted an increase of 23.9 percent. (It was a dismal quarter all around: Dell also had to recall 4.1 million laptops because the batteries threatened to ignite, and the SEC announced an investigation into the company's accounting practices.) By the end of the year, industry analysts estimated that HP had overtaken Dell in worldwide market share, 17.4 percent to 13.9 percent.
With revenues of $56 billion (good for No. 25 among the Fortune 500), Dell was in no immediate danger of going out of business, but obviously there were some problems. Ironically, it was becoming increasingly clear that Dell's troubles could be traced back to the innovative, low-cost, no-nonsense business model on which the company had prospered. For one thing, although Dell had eliminated the early competitors who'd failed to imitate its business model and meet its low prices, by 2006 it was facing a new set of rivals, particularly HP and the Chinese company Lenovo, both of which had emerged as formidable competitors by making themselves remarkably efficient.
In addition, it was clear by 2006 that the computer industry had outgrown the era of the generic box. The stylish iMac had been on the market for nearly 10 years, and HP's MediaSmart TV, which functioned as either a TV or a wireless PC monitor that could stream videos and music, had come out early in the year. Meanwhile, Dell, according to a senior editor at Fortune , remained "the ultimate provider of white-bread (well, gray plastic) PCs." A veteran industry consultant put it a little more bluntly: "Dell," he suggested, "is down there with food and shelter in the hierarchy of human needs."
Dell, it seems, had fallen behind in two areas that weren't adequately addressed by a business model powered principally by operations and financial control: (1) product innovation and design, and (2) customer service and consumer brand preference. "Competitors," remarked an industry marketing expert, "are selling the use, the solution, but Dell's still selling products." In other words, Dell needed to build a business model driven as much by marketing management as by operations and financial management. Michael Dell, who'd stepped down as CEO in 2004 while staying on as chairman, agreed: "[We were] managing cost instead of managing service and quality," he admitted. "We had this historical structural advantage which manifested itself in lower price and better value for customers, and I think we overemphasized the price element and did not emphasize relationship and customer experience."
The first thing Dell did was reinstate himself as CEO, replacing Kevin B. Rollins in January 2007. The next thing he did (in April) was hire a chief marketing officer-a heretofore nonexistent position at the company. "We'll be seeing radical change at Dell over the next two years," promised Mark Jarvis, an ex-CMO at software giant Oracle, and by 2008, Dell had begun turning out a stream of innovative new products:
• The Area-51 m17x from Alienware, a Dell subsidiary specializing in desktops and laptops for games, is a futuristic-looking laptop. It comes with an optional HDTV tuner and HDMI port for displaying high-definition video.
• The Studio Hybrid PC, fashionably curved and available in six translucent colors, boasts a variety of special power-saving features. With an upgrade, it can read Bluray discs, and an optional tuner lets users watch TV.
• The Inspiron Mini 9 netbook is intended for a range of Internetcentric tasks for which users typically rely on PCs-surfing, chatting, blogging, watching videos, and listening to music.
• Weighing less than a pound, the M109S On-the-Go pocket-sized projector combines power output and connectors into a multi-input cable, thus cutting down on the number of peripherals that the user has to pack around. It's compatible with both U.S. and European TV standards, and it's HDTV capable.
• The luxury-priced Adamo netbook is designed to compete with Apple's MacBook Air. Featuring a high-definition display with Web camera and Bluetooth, it comes in a $2,000 model (the Admire) and a $2,700 model (the Desire).
So far, however, Dell's new product and marketing initiatives have failed to pull it out of a slump that began in mid-2005, and that has worsened with the global economic crisis and recession. The problem? Dell is trying to do two things at once-keep costs down and expand its business. Expansion-which involves introducing new products and increasing sales overseas and through retail outlets-is an expensive proposition, and the two goals are hardly compatible. During the fourth quarter of 2007 (ending February 1, 2008), income slipped 6.5 percent to 31 cents a share, continuing a slide in share price from $30 in November 2007 to $20.87 three months later. As for controlling costs, the company had cut 3,200 jobs over the previous eight months.
By the end of the second quarter of 2008, share price had hit an eight-year low of $18.24, and by December, at $11.13, it was at its lowest level since 1997. Michael Dell admitted that recent price-cutting measures had been "a bit too aggressive," but more importantly, analysts agreed that Dell's prospects for difficult economic times were dampened by its long-term failure to do what other big tech companies had done-get bigger by means of acquisitions. Dell, which had long boasted of its successful internal growth, had finally made a few strategic acquisitions, but observers pointed out that most of the prized assets had already been bought up.
As we've seen, Dell was also making heavy investments in design, and by the end of 2008, it had made moves to increase its activities in hardware and services for corporate offices and data centers. Analysts, however, remained skeptical that all of these measures would soon result in a well-rounded, well-managed company. Michael Dell tried to explain the company's efforts to rework its business model: "Here was a company," he said, "that was maniacally focused on an approach to its business which caused an enormous amount of success, and when it kind of realized that that wasn't working as well as it did in earlier periods, decided to make a number of changes.... It's okay," he added, "if everyone doesn't understand what we're doing."
For the first quarter of 2009 (ending on May 1), revenue dropped in all of Dell's major businesses, including declines of 34 percent and 20 percent in desktop and notebook PCs, respectively. Although share price had reached a 52-week high of $25.63 in August 2008, it had dipped as low as $8. For the quarter, income had plummeted 63 percent, to $290 million (15 cents a share) from $784 million (38 cents a share) a year earlier. Having earned 24 cents a share, Dell beat estimates by a penny, but revenues fell below forecasts, declining 23 percent from $16 billion to $12.3 billion.
Describe what you think would be an effective new business model for Dell, explaining the roles played in it by operations, financial, strategic, and structural levels of control. In what ways will your new approach to control be effective in the company's current environment?