Dell: The Problems Began In China

So Kevin Rollins quit. And the unpopular guy takes the fall for the mistakes of the real boss.

Regardless of what the Wall Street Journal says, this is not a matter of internal dissatisfaction with Mr. Rollins.

The problem is that Dell is road kill, and that is the fault of Michael Dell, as well as Kevin Rollins, the board, and everyone else in Round Rock and the far-flung outposts of the empire who bought into the idea that what they were doing was somehow right, special, and not replicable.

The core of Dell's problem is in the way they think about their business. Back when Michael was selling cheap PCs out of his dorm room, he came up with strategy to make computers as cheap as possible by squeezing all of the inefficiencies out of the supply chain. Dell's efficient supply chain and the way they squeezed those costs out is what people began referring to as Dell's unique business model.

That's not a model, any more than Henry Ford's creative application of the assembly line approach to the manufacture of the motor car was a model. The efficient supply chain was a competitive advantage that was non-proprietary, replicatable, and therefore was doomed to be copied.

Never having actually come to grips with that fact meant that Michael and Kevin never stopped, looked at each other, and said "hey, we've got to go find another strategy, because if we don't we're screwed."

All the signs were there. Or, I should say, they were here. In China.

Because here is where the trouble began.

Somebody does it better

The Dell strategy depends on three implicit assumptions:

1. Dell will be able to squeeze inefficiencies out of the supply chain (including the manufacturing process) indefinitely, and do so faster than their competitors;

2. Dell will be able to transfer its approach to the computer supply chain to other allied products, allowing the company to disrupt the entire industry one product at a time;

3. The computer (notebooks, desktops, and servers) and peripherals will become increasingly commoditized over time.

Each of those assumptions died an ignominious death in China first.

The first assumption, which is arguably the most important, died on 16 August 2004, or two years, five months, and 15 days before Rollins' denouement.

On that day, Dell announced that it was retreating from the consumer PC space in China.

As Simon Ye and Annie Chung at Gartner Research called it four days later, Dell - the low cost leader in most of the world - was run out of the market by companies willing and able to produce computers at a much lower price. Although Dell was manufacturing in China alongside its competitors, it had lost the race. Even with its network of retail stores around China, Lenovo was able to sell an entry level computer for 25% less than Dell.

Observers wrote off Dell's failure to market conditions that were specific to China. That was the easy answer, and it was short-sighted. The point was that it was cheaper for Dell's competitors to get product to customers than it was for Dell. The competition had managed to work more inefficiencies out of their system. The Dell model was not invincible, it had been replicated (or bettered) and it had failed in the second-largest and fastest-growing computer market in the world.

It never crossed anyone's mind to ask "does this have broader implications for Dell elsewhere?" Everybody knew that "China is different," so it would be a waste of time trying to learn any lessons from doing business in China that could be applied elsewhere.

Strike one.

Of course, Dell never even tried to sell anything else in China. Since their supply chain had failed to deliver the most competitive price in computers, they didn't bother to try it on anything else. So much for assumption number two.

It's nothing business. Strictly personal.

Having thus abandoned the low-end computer market in China, Dell was left to compete at the mid-range and high end. The problem was, it wasn't equipped to do so. Dell was equipped to manufacture commodity computers.

But from the moment we pull a new computer out of the box and turn on the power switch, that computer ceases to be a commodity. It begins the process of becoming a mechanical reflection - if not an extension - of who we are as people. We decorate our screens. We put dumb pictures on our desktop. We file our stuff in certain places. Software guys understand this: with each new version, Windows, OS X, and desktop distros of Linux offer more and more ways to personalize the computer through the OS.

Dell found out how personally Chinese take their computers last summer, when a scandal erupted around Dell shipping computers missing critical features that a knowledgeable customer knew to expect. The response from the Chinese user community was visceral. You would think Dell had shipped tainted baby formula.

Sure, part of that reaction was because a foreign company had ostensibly tried to pull a fast one on a Chinese consumer. But it went even deeper than that.

To Michael Dell, who manufactures millions of the things, or to an analyst at Jupiter or somewhere on Wall Street, computers may look like commodities. But ask the guy who is buying a computer, or the person at an office using a machine. To real people a computer is not a commodity. It is personal.

Dell didn't get it. To them, the whole issue was 100% a China-against-foreigner thing. So they missed the clue. Again, you can't learn anything from China, because China is a special case.

If the computer industry had ever started down the track of commoditization, it stopped somewhere on the road to the $399 Wal-Mart PC and turned right round and began heading back. Dell missed that.

Strike two.

Three-and-two the count on the burly Texan

As Kevin Rollins clears out the Round Rock office that adjoins Michael Dell's, he leaves behind one of the most efficient supply chains ever created, a thing of beauty to operations management specialists. He takes with him the cold realization that despite his deeply held beliefs and pronouncements to the contrary, in the end, that wasn't enough.

And now Michael Dell, perhaps not for the first time in his career but more than any time since he founded his company, faces the cold reality that he's going to have to find a way to compete in a world where his key assumptions no longer apply. And he will look at Rollins' now empty office and realize that he's on his own.

If there is any hope for Dell, it will be to innovate itself out of this mess. He's going to need every advantage he can - Apple, HP, and even Lenovo are way ahead of him.

The emperor needs a new groove. The situation calls for a ballsy play that can disrupt the industry.

Me? I think he should come to China. If he comes over here and looks carefully enough, I think he might come up with a few ideas.

Comments

[RichardatDELL:]

My comments were originally posted at David's original blog post. They are:

The Direct Model is Not Process. Its about Relationships and Customers.

Appreciate your interesting perspective and your focus on Dell's advantaged cost and efficiencies of the supply chain. However, you missed the point about what is and is not replicable and what is or is not a competitive advantage.

Dell's competitors are not free to act only in the customers’ interest because they must factor in value for their resellers and distributors. That means the customer is third in line. Not so at Dell.

Dell, its direct model and the competitive advantages that made us number one and a global competitor rest in more than simply efficient ordering and product production processes. The direct model is not about processes. It’s about relationships.

Dell 2.0 is about reinvigorating and extending the competitive and non-replicable direct 1:1 relationship with our customers to provide the best customer experience, build a strong global services business and ensure our products deliver the best long-term customer value.

In addition, while we are investing in our business for the long term, competitors have announced they will continue to eliminate costs to maintain their ability to compete with Dell; other competitors are not making much or any profit because they need to sell products at a loss. Perhaps they have a ways to go before we can suggest Dell is easily replicated?

With respect to China, based on our Q3 earnings, the Asia-Pacific and Japan region gained 1.5 share points year-over-year to further strengthen our #2 position. The region’s growth was led by 33 percent unit growth in China, where Dell was the fastest growing among the top five vendors in the region, growing at three times the growth rate of the industry.

Just some thoughts you might want to factor into your analysis

2007 Feb 02 04:15 PM