The long way down

There's a great story here from Forbes about what happens when big, bold company such as Dell follows the rules of the game, all of the way to the end. When reading it, I was wondering how many businesses were going the same way, unaware that the rules were taking them in the wrong direction.

“Cash cows” succumbed to strategic anorexia

In this confusing world, milking the cash cow with a “more of the same” strategy often seemed the safest course of action and is still celebrated in management journals.

But even here strategic dangers lay in wait. Take the story of Dell Computer and its Taiwanese electronics manufacturer. The story is told in the brilliant book by Clayton Christensen, Jerome Grossman and Jason Hwang, The Innovator’s Prescription:

“ASUSTeK started out making the simple circuit boards within a Dell computer. Then ASUSTeK came to Dell with an interesting value proposition: ‘We’ve been doing a good job making these little boards. Why don’t you let us make the motherboard for you? Circuit manufacturing isn’t your core competence anyway and we could do it for 20% less.’”

Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. On successive occasions, ASUSTeK came back and took over the motherboard, the assembly of the computer, the management of the supply chain and the design of the computer. In each case Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. However the next time, ASUSTeK came back, it wasn’t to talk to Dell. It was to talk to Best Buy and other retailers to tell them that they could offer them their own brand or any brand PC for 20% lower cost. As The Innovator’s Prescription concludes:

“Bingo. One company gone, another has taken its place. There’s no stupidity in the story. The managers in both companies did exactly what business school professors and the best management consultants would tell them to do—improve profitability by focuson on those activities that are profitable and by getting out of activities that are less profitable.”[i]