Business Forum: I Want to Be Like Mike (Dell)

By Isaac Cheifetz
Published June 17, 2001

A recent article in the Economist -- "A Revolution of One," April 12 -- poses the question: "Michael Dell invented a business model that all the world wanted to copy. Yet after all these years, almost nobody has. Why?"

The article concludes "Mr. Dell may be an inspiration, but he is too unique to be the paint-by-numbers role model the world had hoped to make him."

Dell's relevance to Minnesota companies may seem distant -- there aren't many PC firms left in Minnesota. But Dell isn't really a computer manufacturer -- as much as anything, it is a supply-chain innovator -- the Federal Express of the PC world.

It's an example of a firm that is immensely profitable and maintains a world-class brand in an industry where commodification has driven down profit margins for most competitors.

Declining Margins

Virtually every industry is being battered by a wave of commodification, and the wave keeps growing larger, attacking industries higher up the value chain.

What began as a trend in raw materials (agriculture and steel), and spread to the manufacturing sector (consumer electronics, computer chips, PCs) is now threatening the service economy (retailers, financial institutions, software companies, and media companies).

This is a long-term trend, which has been accelerated by the Internet. Yet, even in those industries most ravaged by commodification , there are companies that have thrived.

The personal computer became a commodity about 10 years ago, with PC manufacturers essentially no more than assemblers of Intel's chips and Microsoft's software. In addition, price wars and rapid obsolescence of PCs led to inventory and finished product in the sales channel losing value on a daily basis.

Dell leveraged its origin as a mail-order house (with no partner sales channel) to replace the rigid, "mass manufacturing" that is common in the PC industry (with its high inventory costs for parts and finished machines) with flexible, "lean manufacturing."

A PC is built only after a customer has ordered it, and the parts for that PC are purchased from suppliers on a "just-in-time" basis, cutting out the depreciation of parts and PCs that plague the rest of the industry.

The success factors for companies that succeed in the face of commodification vary by industry. But the examples of Dell and others point to several universal principles that should guide a company.

I call them the four rules of reinventing mature markets:

·  Extend long-range vision up and down the supply chain.

Dealing with the speed of change and managing the flow of information about those changes are the principal challenges facing businesses today. A nimble company will attempt to monitor its inventory, operational and sales processes, even when suppliers, partners or customers are performing those processes.

·  Pick your battles carefully. Not all problems deserve solutions, and not all markets can be salvaged. Focus resources and capital on those markets that you know best but that also provide the highest return to shareholders, rather than those with historical and emotional ties to the firm.

·  Technology magnifies the strength (or weakness) of your business model. Dell often is described as an Internet success story because of the billions of dollars of orders placed through its Web site. But Dell succeeded with its direct-sales model for years using an 800 number. In other words, the Internet simply added value to an already-successful business model.

·  Improve incrementally, and aggressively. Process improvement methodologies such as Six Sigma, made famous by General Electric, can save money and add value to customers. GE uses Six Sigma as an aggressive weapon. But a company with a culture of resisting change is more likely to turn Six Sigma into another level of bureaucracy.

Minnesota Mikes

Are any Minnesota companies pursuing this strategy successfully? Actually, a lot are. Two of the higher-profile ones are Target and U.S. Bancorp.

Target Stores is a leader in retailing, an industry working off very low margins. Target's chief competitive advantage is its leveraging information about inventory and marketing. Target even allows its suppliers to access its inventory management system to analyze their relationship with Target -- to the mutual benefit of both companies.

U.S. Bancorp's Powertrack division analyzed the freight industry several years ago and discovered that shipping bills cost up to hundreds of dollars to process and sometimes take months to pay. The costs of these inefficient billing processes and of working capital suspended in accounts receivable were borne by suppliers (in the form of lower profit margins) and customers (in the form of higher prices). 

U.S. Bank built a Web-based Automated Payment Clearinghouse. The system allows shippers to greatly reduce their payment turnaround from two to three months to two to three days, eliminating the need for reconciling bills and invoices. Customers include all major shipping companies and an exclusive contract with the federal government.

The system also enables instant access to billing data for suppliers and customers, utilizing real-time and analytical reporting tools for better logistics management decisions.