Ask me which company is at the top of my personal "most admired" list, and I'll tell you without
hesitation - Dell.
So when a friend recently sent me a Harvard Business Review interview with Michael Dell, now Dell's chairman, and Kevin Rollins, Dell's CEO, entitled " Execution
Without Excuses ", I expected to gain further insights into Dell's success. What I didn't expect was to come away thinking how valuable the lessons of Dell's story are for companies in today's video value chain (cable programmers, service providers, producers, advertisers, etc) whose businesses are being impacted by the proliferation of broadband connectivity.
Dell's success in growing organically into a $50 billion/year business is a case study in innovative yet disciplined strategic thinking, enlightened management practices and "no exceptions" execution. If you believe, as I do, that broadband will cause a transformation in the video value chain on a par with, if not greater than the transformation that has occurred in the PC industry, the applicable lessons from Dell's experience include:
1. It's All About Culture
Dell's winning ways begin and end with its culture. Dell has created a disciplined culture that relentlessly focuses on optimizing its operational model, responding to its customers' needs and sustaining a self-motivated workforce. Rollins points out that
"it takes years of consistent execution for a company to achieve sustainable competitive advantage..the key to our success is years and years of DNA development within our teams that is not replicable outside the company" . Simply put, Dell's executives understand the key drivers of its business model and then strive to keep 53,000 employees highly focused on them.
Companies in the video value chain have cultures that are tied, for logical reasons, to their traditional business models. But those models are rapidly changing. These companies' executives' challenge is to quickly figure out their future success factors and mobilize their organizations accordingly. Companies often awkwardly try to cling to tradition, even more so when faced with ambiguous new opportunities. When
these opportunities seem to simultaneously complement existing businesses
and threaten them, this often leads to ad-hoc decision-making which in
turn undermines attempts to keep teams of people highly focused. Decisions about which products to favor are neither easy nor clear-cut, but they are necessary.
Lesson #1: Companies with disciplined, focused cultures will win the competitive race in broadband video.
2. Information is a Powerful Strategic Weapon
Information is king at Dell - it is widely distributed, analyzed and acted upon. People know where they and their business units stand at any time. According to Dell:
"If the folks in our consumer business notice it's 10am and they're not getting enough phone calls, they know they have to do something: run a promotion on the web starting at 10:15, or change their pricing or run more ads. They
can't wait 30 days after the end of the quarter to figure it out." Rollins adds:
"Everybody sees everybody else's numbers and gets to help with suggestions about their businesses..Openness
and sharing are part of success at Dell." Dell has made a serious investment in understanding its customers' activity in real time and then uses this information to constructively build its business and its winning culture.
Companies that rely on distributors for information about how end-customers use their products are at a severe disadvantage. So cable programmers accustomed to anonymous audience measurements from third party sources and/or periodic updates from their affiliates must learn to get information directly from their viewers. There are many tools available to them such as their own web sites or blogs.
Similarly, service providers need to mine billing data to build stronger customer relationships. For
instance, I subscribe to a digital tier with 15 incremental channels. My
service provider should know which of those 15 channels is watched 99%
of the time in my home (hint, I have two kids under age 5). I'd be willing to tell them if they provided me with the right incentive. Then, once they knew this, they'd have countless opportunities to upsell me on services or offer me benefits (discounts on "Nemo on Ice" tickets, for example) that would strengthen their relationship with me, in turn deterring me from accepting a competitor's offer.
Lesson #2: Investing in real-time information systems and initiatives is critical - companies that are closest to their customers have invaluable insights and market advantages.
3. Being the Low-Cost Provider Creates Flexibility and Market Advantage
Michael Dell started the company with just $1,000. According to Dell:
"Dell bubbled up through a kind of Darwinian evolution, finding holes in the way the industry was working." But even when the company had become successful and no longer needed to be low-cost, it decided that path still made the most sense. As Rollins says:
"No company in the history of mankind that's been a low-cost provider has been a loser." Ostensibly, Dell's decision to go the low-cost route had to do with its distaste for carrying highly perishable component inventory. But when probed deeper, Dell says:
"In our industry, with all the permutations, combinations, and transitions, it's impossible to forecast. By getting rid of inventory, we..eliminated the need for a crystal ball."
This type of thinking really resonates in the broadband video world for two reasons. First, as everyone knows, demand forecasts strongly influence corporate budget and investment decisions. Since nobody can yet accurately predict broadband video usage or potential ROIs, new broadband initiatives can be easily deprived of needed capital. But if companies figure out how to produce and distribute content very, very inexpensively, then the bar to experiment gets a lot lower.
And second, since audiences are fragmenting, it's critical
to learn how to make money at lower price points and in smaller market
opportunities. A low-cost position enables this flexibility. Consider that Dell has learned how to make money on $400 PCs. As Rollins says: " We challenge our people to substitute ingenuity for investment."
Lesson #3: Becoming a low-cost video provider or distributor unlocks new market opportunities.
4. Product Development is Customer and Shareholder-Focused
Dell's approach to product development, R&D and working with its vendors is also instructive. While it has often been accused of not inventing a lot of its own technology, that's not how it measures its success. As Rollins says:
"The true test of a company's innovation is whether the customer is willing to pay for it" , and so Dell has gone on to develop a metric for ROI on R&D, which shows their return on each R&D dollar invested. Consider also how they look at their component vendors. Dell says
"We don't waste money building moats and walls. We tell potential component suppliers which product features are important to our customers. And, by the way, we hope they're successful in selling their components to as many companies as possible, because that drives costs down for everyone and we know we'll win our fair share of the market."
I'm not suggesting Dell has an altruistic attitude toward their vendors, nor that I'd like to sign up to negotiate prices against Dell any time soon. However, note Dell's confidence in competing on the strength of their operations and their products' merits. Because they have taken the time to identify and measure the kinds of R&D that help them differentiate their products, they are able to allocate capital offensively, not defensively.
This is a crucial distinction, particularly in fast-moving,
ambiguous markets where getting even a quarter's jump on competitors can
have huge upside. This approach rewards both customers and shareholders. Companies in the video value chain must similarly learn how to accurately measure the return on their initiatives and be willing to rely solely on the strength of their ideas and their execution.
Lesson #4: Learning to compete like Dell on operational excellence and customers' interests maximizes the returns on investments.
5. Boldly Challenging the Status Quo is the Path to Market Leadership
Twenty years ago, Dell entered a PC environment that was closed, vertically integrated, and based on proprietary technologies. Dell changed the strategic success factors in the PC industry by boldly challenging the status quo they encountered . Dell simply says:
"Dell changed the game." Instead of trying to incrementally improve on their competitors' models, Dell completely re-wrote the rules of competition by focusing on open standards, low-cost operations, customer-centricity, logistics, information and strict financial management.
Beyond Dell, history shows that the strategy of boldly challenging the status quo, when executed well, can reap huge returns.
It's hard to remember, but when Google was started, it entered an online search business dominated by a dozen well-established companies (including several with multi-billion dollar market caps at the time) that were aggressively pursuing "portal" strategies. Rather than copy them, Google launched a stripped-down user interface laser-focused on search and has gone on to become the global leader.
Apple, a company with no experience in music, launched
its iPod and iTunes combination into a market chock full of MP3 players,
but by focusing narrowly on user experience and low, a-la-carte pricing,
has blown away its competitors to become the market leader in digital music.
Fox News, at one time a start-up with no news operation,
went up against CNN, MSNBC and a host of entrenched broadcast news operations
and by taking a unique, if sometimes controversial approach, now leads cable
news programmers in ratings.
And the list goes on...
Today's video value chain shares the same characteristics of the old PC
industry. It is dominated by large service providers (cable and DBS),
running closed video networks that are vertically integrated with these
providers owning equity stakes in many of the companies whose content is
carried on their networks. These service providers use proprietary
conditional access technologies to manage set-top boxes that have little
interoperability with outside devices. Finally, their pricing and packaging
strategies have historically focused on optimizing their financial objectives.
There is a crossroads just ahead. With broadband's proliferation, it is now technically possible, for the first time in history, to deliver high-quality video directly to tens of millions of homes without a broadcast license, a cable or satellite carriage deal, or a bricks-and-mortar retail relationship. The strategic success factors are about to change.
The salient question is: Will companies already in the video value chain be willing and able to boldly challenge the status quo, or will a Dell-like competitor come out of nowhere, establish market leadership and change the game for everyone?
Lesson #5: Boldly challenging the status quo, when successfully executed, changes market dynamics.
