GUILLERMO WECHSLER

January 24, 2007

On Dell: The American Company Able to Emulate TPS...and Beyond?

Michael Dell founded his company in 1984, after following a natural path that started with an innocuous practice of upgrading and enhancing his own computer and - more often - his friends' computers. Soon after that techno-social activity, and almost without noticing it, he was receiving requests from friends-of-their-friends. Even more interesting, he was pricing his upgrading services with good margins, and subcontracting other hackers to deliver his services. Thousands of guys like him were doing the same thing in high schools and university campuses all over America. Many had the intuition that scaling the business was worthwhile. But only Dell built Dell.

I. The Relevance of Spotting Emerging Practices

In the middle of dealing with the practicality of satisfying his customers, Michael Dell conceived of an original Business Model for his industry, and persevered in designing and adjusting the Operating Model to make it increasingly valuable: Building Products to Order, Selling Directly to Customers, and Enhancing Customer Experience. Almost 14 years later, he had a $12 billion company. Today, he has a $50 billion revenue company, valued in $100 billion.

At the time he was starting, in 1984, the PCs were in the market for more than ten years. The Internet was thriving - although circumscribed to a few universities - out of the talent and vigor of governmental and academic communities. The core of the Information Technology centered around connectivity, LANs, proprietary systems, and communication. California was plagued with Toyota cars, and many companies were asking “just-in-what?”. The “Reengineering Process” business fashion, announced by Hammer & Champy's book, “Reengineering the Corporation: A Manifesto for Business Revolution” was not even imagined; it was preceded by Dell's practices by at least a decade.

II. Conceiving the Space for Design

Dell was familiarized enough with the historical inadequacies of his overly vertically integrated industry - and maybe with the Toyota Production System (TPS) - to be intolerant of coordination waste or inventories. He was also aware enough with IT -networks to be opened to add layers of intermediaries in his supply chain. Consequently, he conceived of his Virtual Integration business model.

Michael Dell's articulation was powerful and simple. It was something like this: "I am thriving in a young industry in which early generation of companies - IBM, DEC, Compaq - were obliged to produce a wide variety of the components of their own products. That is not the case any more. Today, there are dozens of innovative and efficient suppliers of any component required to build a high quality/high value-to-customer PC. What should I do? Compete with them? Or work with them?" The answer to these questions came later in a HBR interview: “We concluded that we are better off leveraging the investments others have made and focusing on delivering solutions and systems to customers.” Beyond that, he spotted a debilitating inertia in his early-generation competitors. He called them “engineering-centric” companies, leaning heavily toward the “we-have-to-develop-every-thing” culture/mentality.

Human beings - as experienced industrial designers claim- relate with artifacts in four ways: they conceive, design, produce, and use objects. The Virtual Integration business model of Dell is powerfully anchored to each phase of this product life cycle.

The structural relation between Supplier-Manufacturer-Customer is supported by a robust architecture of Data Linkages that increases coordination speed, monitors critical value measures, and allows early warnings in quality issues or market opportunities. Virtual Integration produces less variability, less inventory, lower cost, and lower risks. In terms of scalability and growth, the model is appealingly more efficient than the traditional vertically integrated competitors.

III. Design Principles

Kevin Rollins, Dell's CEO, has played a key role in furthering the company's developments and implementing a solid Operating Model. In a certain way, he has been the guy thinking and articulating what Michael Dell is about, and transforming the sensitivities of an individual into sensitivities embodied in a vast and rich network of business practices. He credits Dell's achievements in years of obsessive care for impeccable execution in delivering value to customers, plus some strategic and management principles. Among them are:

• Do not invest in Defensive R&D.


• Do not set standards in patent offices, but in the marketplace.


• Not delivering promised value to customer is bad; Not saying that you are failing and not asking help is very bad; Hiding your problems is unforgivable.


• Use technology to leverage collaboration and allow people to work together.


• Build as few partnerships as you can, and keep them as long as they are leading their markets.


• Focus only on what delivers real value to customer experience.

Simple and powerful. They “hammer” these principles into their peoples' heads. However, they don't take these questions lightly, they are already thinking about what “hammering” is about, and how it is connected with human phenomenon. In other words, how they can improve the speed at which they affect their vendors' and suppliers' mindsets, and how they can increase the speed at which they are affected by others.

Very cool company. In its 2005 fiscal report to the board, Michael Dell said, “We're proud of both what we're accomplishing and how it's being done.” Not only that, they are active in shaping what they call “global citizenship”. Very ambitious guys, putting themselves in the middle of historically crucial problems.