Dell, Meet Darwin

One of the prime tenets of Dealing with Darwin is that established enterprises must pursuer a single vector of innovation so intently as to leave their competitors behind.  No company better exemplifies this strategy than Dell in the 90s and reaching into this decade.  Their vector was process innovation, and it stood in stark contrast to the strategies of product innovation that were being pursued by HP, Compaq, and IBM.  While these other firms labored to create innovations that garnered diminishing returns—in large part because they could not distance themselves from each other—Dell reengineered both the customer-facing and supplier-facing ends of their value chain, creating sustainable competitive advantage for the best part of a decade.

Alas, all things must come to an end.  While Dell has not extracted everything it can from process innovation, it does feel like they too now are reaching diminishing returns, in part because HP, Lenovo, and Gateway have innovated themselves to neutralize Dell’s advantages, in part because there is only so much gold to mine from any vein.  The signals we see today—the two quarters of sub-guidance performance, the challenges in China with the direct model, the reported concerns about customer satisfaction—all point not to a catastrophe but rather to a wearing down.

Now what?  Oh, and by the way, this question is not just for Dell.  As John Donne wrote when hearing the funeral bell, “Ask not for whom the bell tolls—it tolls for thee.”  This is a fate that even the best innovator must eventually face.   What are we supposed to do?

The answer is not pretty.  Undertaking a new vector of innovation during a decline in your traditional vector’s performance exposes companies to something we call “the nasty bit.”  Basically, the old engine runs out of steam faster than anticipated, and the new engine is slower to ramp up, and so you steal a bit from the future to prop up the present, and then you still a bit more, and then a lot more, all to prop up an increasingly precarious present.  And eventually you miss, and miss by a mile, and blame Wall Street’s quarterly performance orientation for the fall.

That’s the bad outcome.  The good one is not a lot better.  It says take your miss early, suck it up, and get through the nasty bit as fast as you possibly can. Pick the new vector, commit like crazy to meeting its new demands, and align them with your legacy wherever possible for additional force.  But make no mistake, you are going to take a hit, and the best you can do is explain it properly to the constituencies that care the most about you—your customers and your employees.  As for shareholders, don’t kid yourself.  There are no more long-term shareholders.  Your stock will tank.  If it really tanks, and you can swing it, buy back in, especially if you have strong faith in your path forward.

This is all Darwin at work.  Nobody ever said he was nice.  But as they also say, whatever doesn’t kill you makes you stronger. 

Comments

[Tom Kosnik]

Part of Dell's lack of success in China may be that many Chinese customers are first time PC buyers. Dell's business model has been based on a repeat customer who knows what (s)he needs, and who trusts that a computer can be configured and purchased over the phone or internet. Can Dell afford to wait until Chinese customers are on their second PC purchase? Not likely, because the price points offered by both global and local competitors will undermine Dell's offer of "acceptable quality at a lower price."

Using the innovation models from Dealing with Darwin, it seems that Dell has to "pick a minor" from four types innovations in the customer intimacy zone to augment its "major" of process innovation. The options are: Line extension innovation; enhancement innovation; markeing innovation; and experiential innovation. For Dell to crack the China market, given the competitors already there, which of these four offers the greatest promise of differentiation?

[Geoff Moore]

I think this is a very interesting line of thought and would suggest that 3 of the 4 types can be eliminated. Line extensions are easily copied by Dell's competitors in China, as are enhancement innovations. Experiential innovation is a virtual impossibility given the lack of sites to host the experience, not to mention unfamiliarity with another culture. That leaves marketing innovation, which is what Dell started with fifteen years ago in the U.S. He just has to solve for a different problem this time.

[used computer]

DELL makes its customers as repeated costumers because it may perform a good work speed may be it give the customers expectations.