Michael Dell invented a business model that all the world
wanted to copy. Yet after all these years, almost nobody
has. Why?
FOR all his success, Michael Dell has a lot
to answer for. Bookshelves groan under
the weight of books that discuss how
best to learn from Dell Computer’s nifty
model of selling directly to consumers and
making PCs to order. No e-business
conference is complete without a few
slides on Dell’s virtual supply chains and
enviably slender inventory. Executives
from traditional manufacturing giants,
such as Maytag and General Motors,
make pilgrimages to Austin, Texas, to
learn the Dell Way. After General
Electric’s Jack Welch, there is hardly a
more admired boss than Mr Dell, the man
who turned the commodity business of PC making into a goldmine
by doing things differently.
Now come the hard times, exactly what Mr Dell’s famous near-zero
inventory model was designed to weather best. And so far his
company has indeed held up well: on April 5th, Dell announced
that, unlike most of its peers, it would not be cutting its
(admittedly modest) profit forecast for the latest quarter. But
what of those companies that copied the Dell model? Have they
done as well? Hard to say: for the most part, they seem not to
exist.
Nearly 20 years after Mr Dell started his PC company, it remains in
a class of one. Others may have adopted a bit of his model here
and a bit there, but none has taken it far. Gateway, which began
life as a Dell clone, has since diverged with own-brand stores
complete with—gasp!—depreciating inventory. Dell’s biggest
competitor, Compaq, still sells most of its wares through indirect
distribution channels. And Cisco proved just how unlike Dell it is in
the most recent quarter, when its inventory spiked to nearly 40%
of sales. Dell’s is less than 6%, and falling (see chart).
Outside the technology
industry, the Dell-alikes get
even thinner. Mercer
Management’s Adrian
Slywotzky, author of one of
the books that lionises Dell,
can think of only two
examples, to his surprise:
Marshfield DoorSystems,
formerly Weyerhaeuser Door
(which makes customised
doors) and Herman Miller, a
maker of office furniture.
Mr Dell himself is less
surprised. Few industries,
he says, have all the
ingredients needed to copy the Dell business model properly. And
even in those that do, established companies are usually far too
wary of undermining their existing businesses and sales channels
to push direct buying particularly hard.
Dormitory days
When he started his business in 1984, Mr Dell had no great plans
to reinvent PC making. He simply wanted to assemble and sell
computers out of his university dormitory. This was possible
because a PC-clone industry had just emerged in the wake of
IBM’s first machine, complete with an explosion of suppliers.
Computer companies no longer needed their own research and
manufacturing operations; instead, they could focus on assembly
and marketing. Although Mr Dell did not know it at the time, the
new PC industry had several other traits that made it
ideal—perhaps uniquely ideal—for the streamlined direct-sales
operation that Dell now epitomises.
As Mr Dell lists those qualities, it becomes a little clearer why so
few other firms have followed in his footsteps. For a start, PCs are
made almost entirely from standard parts, available from many
sources; there is no need to order special components long in
advance. Consumers want to customise PCs, but within limits:
faster or slower processors, more or less memory, but not their
own colour or trim. Such limited customisation encourages a
build-to-order model, without the need for a supply chain drowned
by a huge number of parts. Moreover, the most expensive PC
components quickly become obsolete and thus lose value by the
day, so a PC maker’s profitability is determined largely by the size
of its inventory. This creates what Mr Dell calls “profit pools”: fat
margins for the taking, if a company can slim down its stock of
components by being more efficient than its competitors.
Are there many other industries that share these traits? Mr Dell
shrugs off the question. But all those visits from car companies
have given him some insight into one other candidate, at least.
American car makers put up with $80 billion worth of inventory a
year, of which $50 billion is built in anticipation of orders. That
satisfies the criterion of a high cost structure. Yet taking the car
industry very far into Dell territory would quickly run into problems.
Car companies have huge sales and distribution channels that fight
fiercely any attempt to circumvent them; in almost all American
states, it is illegal to sell cars any way but through a local dealer.
Might a big technology company such as Cisco stand a better
chance of becoming Dell-like? Cisco’s most expensive parts are
custom processors and other semiconductors that it designs and
commissions from chip makers. This violates Mr Dell’s rule of
industry-standard parts. Because Cisco asks its suppliers to make
unique components, it must order to forecast. When it gets the
forecast too high, it must take the components and watch them
lose their value in a warehouse; if the forecast is too low, it
cannot quickly find another supplier to make the parts. By
contrast, when Dell is gaining market share it can simply take parts
that were destined for its rivals; were it to lose share, it could
easily sell unwanted stock.
Might more businesses eventually take on the characteristics of PC
making? The lesson of the past decade is that it will take longer
than most guessed, if it happens at all. That could be good news
for Mr Dell, who gains market share when his competitors prove
unable to follow him, but it is bad news for the consulting industry
that fed off his success. 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.