Friday, May 25, 2007

Dell to Rely Less on Direct Sales
Wal-Mart Will Offer PCsAs Computer Maker SeeksA Broader Retail Reach

The type of postings we focus on are: an occasional tutorial (the two on competitive separation)when we feel it will impact your thinking on growth; summary articles (such as from HBR) on topics that we feel are important; and most importantly, real time business situations that can impact how we all think about growth and innovation.

This posting is an incredible example of the importance of innovating across the whole business design rather than just product innovation. The most important quote in the article is Dell’s comment on their current model of direct sales: "The Direct Model has been a revolution, but is not a religion." Compare this to Ballmer's struggle from Microsoft (2/03/07 posting) in looking at new business designs. This article also highlights the critical role leadership must play in driving innovation.

See my comments in parentheses.

Dell Inc. will sell its personal computers through Wal-Mart Stores Inc., breaking from the direct-sales model that previously helped it become the world's largest PC company but which missed out on a recent consumer boom as more people started to buy computers in retail stores. Dell said the move was part of a broad global push into retail and that more retail announcements are coming.

To be sure, a majority of Dell's sales will come through direct sales. However, the company will offer two desktop PCs, priced under $700, in more than 3,500 Wal-Mart and Sam's Club stores in the U.S., Canada and Puerto Rico starting June 10, Wal-Mart said.

"Our customers are asking us for additional ways to purchase our products and we plan on delivering on a global level," ( a driver for change) said Dell spokesman Bob Pearson in a statement. He declined to make Dell executives available for comment or give further details.

The Wal-Mart distribution deal is the biggest move by Chief Executive Michael Dell since the Dell founder took back the reins of the Round Rock, Texas, company from then-CEO Kevin Rollins in January (this type of innovation must be driven by leadership) . Dell has sold PCs over the phone and the Internet for years, allowing it to convert inventory into cash much faster than its competition. The efficiency allowed Dell to underprice its rivals (key driver for their earlier successes).

But the model began to lose steam in 2005 as rivals such as Hewlett-Packard Co. became more efficient themselves. (those bloody competitors just do not stand still) What's more, Dell became boxed in by its direct-sales strategy as PC-buying behavior began to change. Consumers -- the growth engine of the U.S. PC market -- have started gravitating to stores to buy portable notebook computers. (the market always changes/evolves) Dell, which had focused on selling desktop PCs to corporate customers, was largely unable to participate.

Dell's sales and profits have since slowed and its executive ranks have turned over. Last year, the company lost the No. 1 spot in the PC industry to H-P, (the usual result of change) which sells PCs through 110,000 retail outlets world-wide and has undergone revitalization under CEO Mark Hurd. Over the last year, H-P's stock has risen 42%, while Dell's is up 9%. Yesterday, Dell shares were down 37 cents, or 1.4%, to $25.89 in 4 p.m. composite trading on the Nasdaq Stock Market.

Todd Bradley, executive vice president of H-P's PC group, said Dell will need more to compete against H-P than a deal with Wal-Mart. "At the end of the day, it boils down to a lot more than just one trial in a retail channel," said Mr. Bradley.

It is unclear if Dell plans to match H-P's presence in retail stores. Since 2002, Dell has populated shopping malls with kiosks that sell its PCs. Last year, it opened its own store in a Dallas mall, and it has tried in the past opening stores-within-a-store at retailers such as Sears Holdings Corp. But all of these retail efforts have used the direct-sales model, meaning that while customers can peruse merchandise at the kiosks and stores, they have to order the PC online, over the phone at home or in the store, and have the PC delivered.

Best Buy Co. declined to comment on whether it has been in talks to distribute Dell PCs. A Circuit City Stores Inc. spokeswoman said the company didn't have any announcements to make "at this time" about Dell. Dell held distribution talks with retailer CompUSA Inc. in 2004, according to a person familiar with the situation, but the discussions ultimately broke down over the size of the margins CompUSA would get. CompUSA representatives weren't available to comment.

Dell faces potentially significant challenges in retail, given the company will now have to hold onto PC inventory longer than under its direct model. Toni Sacconaghi, an analyst for Sanford C. Bernstein & Co., said more inventory will generate less cash for Dell to reinvest back into the business. He added that Wal-Mart is tough on suppliers, so Dell's margins from sales through the retailer may be lower than it is used to.(major change has a profound impact on the operation of a company)

Mr. Dell has recently signaled that Dell was open to moving beyond its direct-sales model. In an email sent to Dell employees last month, the CEO wrote that the company will pursue new models of distributing and manufacturing computers. "The Direct Model has been a revolution, but is not a religion," Mr. Dell wrote.

In an interview, Gary Severson, senior vice president, entertainment and electronics for Wal-Mart, of Bentonville, Ark., said the deal with Dell came about after "Michael Dell and I exchanged an email and it seemed like a mutually beneficial thing for both of our companies."

Tuesday, May 15, 2007

Finding Your Next Core Business
What if you’ve taken your core as far as it can go?
by Chris Zook

HBR April, 2007
Reprint: R0704D

There are some very powerful insights in this article and I suggest you order the reprint.
Welcome to the new members of our blog network – the new alumni of our Driving Organic Growth executive education program.

How do you know when your core needs to change? And how do you determine what should replace it? From an in-depth study of 25 companies, the author, a strategy consultant, has discovered that it’s possible to measure the vitality of a business’s core. If it needs reinvention, he says, the best course is to mine hidden assets.

Some of the 25 companies were in deep crisis when they began the process of redefining themselves. But, says Zook, management teams can learn to recognize early signs of erosion. He offers five diagnostic questions with which to evaluate the customers, key sources of differentiation, profit pools, capabilities, and organizational culture of your core business.

The next step is strategic regeneration. In four-fifths of the companies Zook examined, a hidden asset was the centerpiece of the new strategy. He provides a map for identifying the hidden assets in your midst, which tend to fall into three categories: undervalued business platforms, untapped insights into customers, and underexploited capabilities. The Swedish company Dometic, for example, was manufacturing small absorption refrigerators for boats and RVs when it discovered a hidden asset: its understanding of, and access to, customers in the RV market. The company took advantage of a boom in that market to refocus on complete systems for live-in vehicles. The Danish company Novozymes, which produced relatively low-tech commodity enzymes such as those used in detergents, realized that its underutilized biochemical capability in genetic and protein engineering was a hidden asset and successfully refocused on creating bioengineered specialty enzymes.

Your next core business is not likely to announce itself with fanfare. Use the author’s tools to conduct an internal audit of possibilities and pinpoint your new focus.

This is an example of his tools to test the strength of your existing core.

Monday, May 07, 2007

The Central Challenge of Global Strategy: Managing Differences With the globalization of production as well as markets, you need to evaluate your international strategy. Here’s a framework to help you think through your options. (HBR March, 2007)
Pankaj Ghemawat

Reprint: R0703C

This is a facinating article on global strategies. I highly recommend reading it or ordering the reprint from HBR.....

The main goal of any international strategy should be to manage the large differences that arise at the borders of markets. Yet executives often fail to exploit market and production discrepancies, focusing instead on the tensions between standardization and localization.
In this article, Pankaj Ghemawat presents a new framework that encompasses all three effective responses to the challenges of globalization.

He calls it the AAA Triangle. The A’s stand for the three distinct types of international strategy. Through adaptation (often characterized by companies that heavily advertise to create the local demand), companies seek to boost revenues and market share by maximizing their local relevance. Through aggregation (often characterized by companies with large fixed costs like R&D to leverage them as broadly as possible), they attempt to deliver economies of scale by creating regional, or sometimes global, operations. And through arbitrage, they exploit disparities between national or regional markets, often by locating different parts of the supply chain in different places—for instance, call centers in India, factories in China, and retail shops in Western Europe (often characterized by companies with relatively high labor costs).

Ghemawat draws on several examples that illustrate how organizations use and balance these strategies and describes the trade-offs they make as they do so.Because most enterprises should draw from all three A’s to some extent, the framework can be used to develop a summary scorecard indicating how well the company is globalizing. However, given the tensions among the strategies, it’s not enough simply to tick off the corresponding boxes. Strategic choice requires some degree of prioritization—and the framework can help with that as well. While it is possible to make progress on all three strategies, companies usually must focus on one or two when trying to build competitive advantage.

To spark your interest, here is a very interesting chart from the article: