Change Management: Dell Inc Essay

Change Management: Dell Inc Essay

Dell Inc is one of the leading computer makers in the world. Headquartered in Round Rock, Texas; its business involves designing, developing and manufacturing computer and computer systems, computer peripherals, storage systems, servers and networking equipment, and sales of third party software, among many others. Started in 1984 by Michael Dell, Dell Inc offers its products to several market segments. These market segments include: the large corporate segment, the small and medium businesses segment, the educational segment, individuals, governments, and the healthcare segment (Yahoo Finance, 1).

I am a key member of the company’s senior management team, working as the Senior Vice President in charge of business development and strategy. My job description includes formulating and overseeing the implementation of the company’s strategic direction. Since our competitive strategy is underpinned by efficiencies in the supply chain (we have one of the most optimized supply chains in the industry), quality and continuous improvement are central to my work. We take more than a cursory interest in quality, with our lean manufacturing model characterized by low inventory levels and quality standards such as the Six Sigma process that seeks to reduce defects to the bare minimum. Without that, the basis of our low cost leadership model would be eroded and Dell would not be able to compete.

  1. Identify a change that is required:

Since its establishment by Michael Dell in 1984, Dell Inc has grown from strength to strength. By 2001, it had dethroned established industry names such as IBM and Hewlett Packard to become the best selling computer manufacturer. With burgeoning sales, the company has been known for consistently posting market share increases, huge growth in profitability and for exceeding Wall Street expectations (Serwer, 1).

With the heady performance of the company, Serwer (1) also reports that its shareholders have had a field day, with the company’s stock said to have a risen a massive 28,000% by 2005 since its listing in 1988. By 2005, Dell still maintained its clear market leadership position in the sale of desktops and notebooks, with a global market share estimated to be approximately 18% and with estimated annual revenues of $50 billion (Kathawala and Aich, 1).

This success has largely derived from the unique business model that Dell has traditionally pursued. Of the three generic strategies identified by Porter (7), Dell has traditionally pursued an overall low cost leadership strategy, which involves attaining the least cost structure in the industry, and either passing this advantage to the customers in the form of lower than average industry prices in order to gain market share or offering the products at the normal market rates in order to enjoy higher margins relative to competitors.

A least cost structure that enables firms to enjoy relative advantages can be attained through various means, which include having relative advantages in cost efficiency, access to a unique source of raw materials or factor inputs, through optimizing its outsourcing decisions, or vertical integration (Porter, 9). In the case of Dell, its relative cost advantage from which it has derived a sustainable competitive advantage has been as a result of various factors. First and foremost, Dell has traditionally followed a direct sales channel, which has helped cut out the middleman and his associated intermediation costs, and thereby helped attain lower overall costs (“Competitive Advantage”, 1). According to “Competitive Advantage” (1), the main direct sales channel that Dell has used is the internet, which it adopted in 1996. Customers could choose custom configuration options for their desired computers in the Dell site, get the prices for the computers, order and pay for them online, and track the status of their orders online. They could also receive support for their systems online. According to “Competitive Advantage” (1), in just a year after the direct sales channel was adopted by Dell, the company reported daily sales of up to $1 million, with eight out of every ten PC sales being made through this channel. In addition to helping cut out intermediation costs, this also helped the firm to increase its sales volumes drastically without the need of increasing staff.

Apart from its direct-to-customer sales model, Dell also has traditionally pursued a customized made-to-order system that has seen it achieve the most efficient supply chain in the global PC industry, and with it a low cost structure from which it has derived its sustainable competitive advantage. This has facilitated a lean and low inventory system, and with less capital tied up in inventory, the firm’s return on equity has been stupendous. With its system of each computer being built to each customer’s specifications and on order, Dell has managed to eliminate inventory and the huge costs (and wastes) associated with inventory such as inventory carrying costs and obsolescence costs (Coates, 1). In addition to a low cost structure attained through an optimized supply chain and direct selling, Dell’s relative cost advantages also stemmed from its aggressive cost-cutting measures which have included laying off employees and downsizing some of its operations (Michelman, 18). For example, Michelman (1) states that Dell has an ambitious goal of cutting expenses by as much as $3 billion within only three years, and that in line with this; it has laid off a total of 3,200 employees in its ongoing plans to retrench 9,000 employees. Additionally, it has closed down some of its manufacturing facilities such as the one in Texas.

In recent times however, Dell’s explosive growth has slowed down to single digit levels, with the company losing its market leadership position to Hewlett Packard and market share to new aggressive challengers such as Lenovo and Acer. 2009 quarter one sales statistics released by Gartner (1) show that HP consolidated its market leadership position of the PC industry, accounting for approximately 20% of all global PC sales, with Dell and Acer being tied in second position with market shares of 13%. Other significant players were Lenovo with 6.6% market share and Toshiba with a 5.5% market share. In the US market, HP still regained market leadership position for the first since 2001, with Dell falling to second place followed by Acer, Apple and Toshiba in that order (Gartner, 1). In 2009, Dell’s profits fell 17% (Flynn, 1).

The loss in market share to rivals, accompanied by a declining rate of growth can be attributed to the loss of competitive advantage by Dell. In line with the VRIO criteria, for a company’s competitive advantage to be sustainable, it has to be valuable, rare, inimitable, and the organization must be capable of exploiting it. While Dell’s low cost leadership model deriving from the use of direct sales channels and optimization of the supply chain gave it an edge over rivals such as HP, Acer, Lenovo, Toshiba and Apple, such competitive advantages have been eroded because the basis of the competitive advantage has become imitable, that is, all its rivals have in recent times showed that they can utilize direct to customer sales channels as well as optimize their supply chains (Porter, 13).

As an example, Dell has traditionally topped the “Supply Chain Top 25” ranking, indicating its unsurpassed advantages as relates to supply chain efficiencies, which has been the basic underpinning of its low cost leadership model. In 2008 however, Apple (which had a distinct reputation for poor supply chain performance) surpassed Dell, topping the list and making it the computer firm with the most optimized supply chain (Wailgum, 1). That Apple, whose core strength is in innovation, could beat Dell in its strongest area of supply chain optimization shows that the basis for Dell’s competitive advantage is no longer inimitable, and therefore the advantage has become unsustainable.

As mentioned earlier, Apple also derived advantages from its made to order model, which ensured that every computer was customized to its individual buyer’s requirements, in line with the marketing orientation philosophy. However, this is something that any PC maker can imitate. Customizing system specifications such as the size of the hard disk, the RAM, processor speed or monitor size comes as easy as pie to any serious computer manufacturer. As a matter of fact, custom-built computers are so commonplace in today’s market that the custom-built model offers no distinctive attribute to Dell (Jaded Consumer, 1).

Without a distinctive differentiating point (such as Apple’s innovativeness), Dell’s product is basically commoditized, and the basis of its competition is chiefly price-based. However, competition on the basis of price has the undesirable effect of triggering off price wars and depressing margins to the bare-bone minimum, especially considering that the manufacture and sale of computers is a low-margin commodity business (Jaded Consumer, 1; Serwer, 2). As Coates (1) reports, the cost of computers have been on a virtual free-fall, with rivals such as HP retrenching thousands of employees, rationalizing their supply chain management, and shutting down some plants; the effect of which has enabled them to compete on the same keel with Dell in the low-cost computers segment. This has pushed prices even further south. Gartner (1) projects that industry revenues for the global and US PC markets will decline as average selling prices (ASP in industry lingo) decline. This implies that Dell should expect declining sales revenues growth going into the future.

Additionally, Dell has begun placing its products in retail outlets, a move that is bound to raise costs and strain its traditional cost advantages even further. With the impatience of the “gotta have it now” customers who frequent malls, Dell may be forced to reconsider its model of maintaining no inventories, which may also raise costs (Coates, 2). Given these considerations, Dell needs to establish a new source of competitive advantage, if it is to drive up sales and profitability and to regain the market leadership position and market share that it has surrendered to its rivals such as HP and Acer. This will involve a paradigm shift from the generic strategy of overall low cost leadership to the generic strategy of differentiation. It will involve the cultivation of new competencies such as innovation, which will be the basic underpinning of the new competitive advantage, and which will enable it shift from price-based competition to non-price based competition, with the unique selling point of its products commanding premium prices. To achieve this, Dell will need to do the following:

  • Set up mechanisms that focus on constant environmental scanning in order to identify new opportunities in the market that offer the potential for innovation. This will be achieved through creating an ideation department (a new product development team) which will be charged with innovation.

  • Change the organizational culture from one whose focus is on cost efficiency to one that focuses on creativity, innovation, and thinking out of the box. This may call for the adoption of a new structure where employees are empowered rather than controlled and for the abolition of standard operating procedures, and excessive supervision.

  • Training the employees to acquire the new competencies required by the paradigm shift, and where possible, recruiting new employees who possess the skills and competencies that we are after.

By adopting this strategy, Dell will be able to enjoy higher margins for its products (as opposed to now when margins are depressed), which will translate into improved sales revenues and higher profitability.

  1. Planning and monitoring the change:

The objectives of the strategic change, in their order of importance, are as follows:

  • To establish a clear, distinctive and sustainable basis of competitive advantage which shall set the company apart from its rivals and enable it ward off competition from rebounding rivals such as HP, Acer and Lenovo. In this regard, we seek to regain the market leadership position that Dell has lost to HP. In particular, we seek to attain a 30% market share of the US PC market and a 25% market share of the global PC market within the next two years.

  • To increase the company’s margins which have in recent times been depressed as a result of price-based competition.

  • To increase the sales revenues, sales revenue growth, and profitability of the company

To implement the aforementioned changes that will lead to the attainment of the objectives as outlined above, we shall use the following action plan:

Task

Objective

Responsibility

Duration

Change in organizational culture from one that focuses on cost efficiency to one that focuses on creativity

Shift the organizational mindset from cost containment to new value creation

Change management team involving all departments and appointed by the Human Resource Director.

One year

Creation of an ideation department

Integrate and structure the process of innovation within the organization and entrench innovation as a core competence and a basis of differentiation

The human resource department, marketing manager, and the operations manager

Six months

Training of employees to acquire the new competencies, as well as recruitment of new employees who possess the require competencies

Entrench innovation as a core organizational competence.

Human Resource Department

Six months

To ensure that the established objectives are actually achieved, we shall monitor the performance of the tasks identified above. Actual performance will be evaluated against expected performance on the basis of certain key quantitative and qualitative metrics, after which corrective action will betaken in the event that deviations between the two occur.

Key objective

Metric

Target

Timeline

Attain sustainable competitive advantage based on innovation

Number of new to the market products introduced per year

Two products every year

Increase market share and attain market leadership position

Market share (% held by Dell vis-à-vis total market)

25% global market share and 30% domestic market share

Two years

Increase profit margins

Dollar value of net profits

10 % premium on cost (from the current 3.46%)

Two years

Increase sales revenues, sales revenue growth and profitability

Dollar values of sales revenues and profits, and % increase in sales revenue growth

Revenues: $80 billion (from the current $57.37 billion).

Net profit: $ 1.5 billion (from the current $616 million)

Revenue growth: 20%, from the current 11%

Two years

RASCI chart

ROLES

CEO

FINANCE

STRATEGY DIRECTOR

HUMAN RESOURCE

MARKETING

TASK/DEADLINE

31/1/2009: Establish vision for the change and communicate the change

AS

S

R

C

C

30/4/2009: Build support for the change and create a change management team

I

S

R

S

S

31/10/2009: Train employees on new skills and retrench those made redundant

IA

 S

I

R

S

31/10/2009: recruit new employees with the desired skills

A

 S

I

R

 I

31/12/09 restructure the organization

A

S

R

R

S

31/12/09 introduce and entrench new culture

A

S

R

R

 S

31/10/09 Create the new product development team

A

S

I

R

SR

31/12/09: Monitor and evaluate results and take corrective action

A

S

R

R

I

  1. Implications of the change

The change is going to have certain ramifications on key organizational stakeholders, the most important of whom are the employees. Since it will require the creation of new competencies, those without the required skills will either have to be retrained or their positions taken up by new employees with the desired competencies and skills. In the case of the managers and supervisors, they are likely to experience diminished levels of influence and authority as controls are brought down in line with the desired culture that seeks to empower rather than control.

Various forms of resistance will be encountered. Since the change demands new competencies and skills, employees who don’t have such skills will feel threatened that they may lose their jobs and will thus resist the change. Managers and supervisors are also likely to resist the change since it threatens to diminish their influence and authority (Kotter and Schlesinger, 2).

To overcome these barriers, we will undertake various measures which include involving everyone in the change process, and communicating with all the organizational members as to the nature of the change and why it is necessary. We will also offer facilitation and support, which shall include training all the employees to acquire the required skills and competencies. Where employees will have to be laid off, they will be offered life skills training, counselling, and attractive severance pay (Kotter and Schlesinger, 4).

  1. Communicating and implementing the change

Various organizational stakeholders will have to be appraised of the change. These include the employees, the shareholders, customers, and even suppliers. It is important to communicate the change to the employees. This is because when no communication is forthcoming, the stakeholders will rely on the grapevine, which is most likely to lead to misconceptions about what the change entails. This would in turn have the effect of increasing resistance to the change. However, when communication is effectively delivered, misconceptions are removed since the stakeholders get to clearly understand what it is all about as well as what it is not about. For each of these stakeholders (with the exception of the customers), the change will be articulated in personal face to face meetings. It will be consistent and frequent, and multiple channels will also be deployed, including the use of bulletin boards, personal face to face meetings, written messages such as newsletters, the use of focus groups, video and the internet (80% of the company’s sales are made online) (Kotter and Schlesinger, 5).

To ensure that employees are involved, each one of them will be assigned a role in the change process for which he / she shall be accountable. Each one of them will have his or her views about the change sought, and where practicable, such views will be incorporated into the change process. The change management team will also draw membership from all departments and functional area of Dell. The change will be reinforced and integrated through continuous training, and recruitment of employees who possess only he required skills demanded by the change process. Evaluation of the improvements would be done through employee assessments (e.g. through the use of the 360 degree feedback technique) to assess how well the skills and competencies desired are being attained.

References

Coates, Ta-Nehisi P. (2006). “Can Dell Mount a Comeback?” Time. 23 July 2006.1 July 2009 from http://www.time.com/time/magazine/article/0,9171,1218065,00.html

Competitive Advantage. (2009). 1 Jan 2009. 1 July 2009 from http://ecommerce.hostip.info/pages/236/Competitive-Advantage.html

Flynn, LJ. (2008). “Dell’s Profit Drop Surprises Investors.” New York Times. Retrieved on 1 July 2009 from http://www.nytimes.com/2008/08/29/technology/29dell.html?_r=1

Gartner. (2009). Gartner Says Worldwide PC Shipments Declined 6.5 Percent in First Quarter of 2009. April 2009. I July 2009. http://www.gartner.com/it/page.jsp?id=939015

Jaded Consumer. (2008). DELL: Where’s the Competitive Advantage? Aug 28 2008. 1 July 2009 http://jadedconsumer.blogspot.com/2008/08/dell-wheres-competitive-advantage.html

Kathawala Shahida, and Aich Vasudha. (2006). Dell Inc.: Facing Formidable Challenges in the US Consumer Market. April 2006. 1 July 2009 http://www.ibscdc.org/Case_Studies/Strategy/Competitive%20Strategies/COM0083B.htm

King Nigel and Anderson, Neil. (1995). Innovation and Change in organizations. Routledge. ISBN: 0415128811, 9780415128810.

Kotter, John P and Schlesinger, Leonard A. (2008). Choosing strategies for change. Harvard Business Review.

Michelman, Paul. (2008). Dell’s Cost Cutting Is Not a Growth Strategy. April 2 2008. 1 July 2009. http://blogs.harvardbusiness.org/cs/2008/04/dells_cost_cutting_is_not_a_gr.html

Porter, Michael E. (2008). On Competition. Harvard Business Press. ISBN:142212696X, 9781422126967.

Serwer, Andy. (2005). Dell’s Midlife Crisis. Fortune Magazine. Nov 28 2005. 2 July 2009. http://money.cnn.com/magazines/fortune/fortune_archive/2005/11/28/8361935/index.htm

Wailgum, Thomas. (2008). Study: Apple, Nokia, Dell Tops among Global Supply Chains. May 29 2008. 1 July 2009. http://www.cio.com/article/373563/Study_Apple_Nokia_Dell_Tops_Among_Global_Supply_Chains?contentId=373563&slug=&

Yahoo Finance. 2009. Dell Inc. I Jan 2009.1 June 2009 from http://finance.yahoo.com/q?s=DELL

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