You’re the CEO of a once-great company that’s been hit hard by competition and rapid industry shifts. What does it take to regain control?
Since resuming leadership of the computer firm he co-founded in 1984, Michael Dell has asked himself this question since 2007. And last year, he determined that the best course of action would be to take the company private and away from the prying eyes of the stock market. But even if he successfully persuades shareholders to allow him to purchase his company back, he still faces significant obstacles.
Fortunately for Dell, there are lessons to be learned from other companies’ attempts to turn themselves around.
Dell: A Brief Overview
Professor Jan Rivkin of Harvard Business School wrote a detailed case study on Dell’s rise and fall from a 1984 dorm room startup to the leading PC producer in 2005 to a dramatic stock drop the following year. Anyone thinking about investing in the company’s future should read the whole article, and we’ll summarise its history once again for convenience.
Dell’s “direct model” has been crucial to the company’s success. At a time when the cost of computers was still high enough to demand major tradeoffs, Dell sold directly to its consumers while competitors like Compaq and IBM sold PCs through stores, distributors, and resellers. Large customers valued Dell’s capacity to personalise many PCs; in addition, Dell provided these organisations with branded portals via which employees could directly purchase one of several pre-approved PC models.
This straightforward approach produced spectacular results. Two of Dell’s main competitors, IBM and Compaq, trailed behind in inventory management and had difficulty navigating the politics of managing their numerous channel partners. When other PC manufacturers attempted to follow Apple’s lead and go direct to consumers, their channel partners pushed back out of concern for their bottom lines.
The majority of Dell’s rivals had disappeared by the middle of the millennium. In 2007, many companies merged (HP and Compaq) or sold off parts or all of their PC divisions to overseas rivals (IBM to Lenovo; Gateway to Acer).
Michael Dell left the company in 2004, and Kevin Rollins, a former Bain consultant who had joined the firm in 1996, took over as CEO. Rollins only served as CEO for 2.5 years, but during that time, the company went into a rapid fall due to several factors (including poor customer service, low-quality batteries, and questionable accounting procedures). In 2007, Dell assumed his former position as CEO once again.
When advancing a company’s technology, do buyouts pay off?
Over the past six years, Dell’s fortunes have not improved, partly because of the recession but more fundamentally because of the fall of the PC market. In light of this situation, Michael Dell and Silver Lake Partners, a private equity group, devised a strategy to take the company private last year.
In other words, do you think it will work? To get the right response, you must first ask if tech buyouts are effective. Evidence shows that they do, and not simply generate, profits for private equity firms. A team of academics from Harvard Business School, Columbia University, and the University of Chicago published an article in 2011 analysing 472 tech acquisitions and their subsequent success in terms of patents. Their goal was to determine if the acquired company became more or less inventive after the acquisition. HBS’s Josh Lerner summarises their findings as follows: “businesses that are owned or managed by PE firms tend to pursue more promising innovations,” and these innovations are typically implemented in areas “that reflect the firm’s historical core strengths.“
When it comes to public companies like Dell that are taken private in a deal like this, Lerner has another report that examines the stock price performance of buyout companies after their IPO. The only time these equities underperform the market is when the acquired company is “flipped,” or brought public, within a year of the takeover, a finding he shares with his co-authors.
Considered as a whole, the findings from this investigation raise the prospect that Dell might make a comeback. In an interview, Lerner summarised the situation: “There looked to be a reasonably solid track record in technological businesses after buyouts.”
In the Matter of IBM
While technology buyouts have been successful in the past, it doesn’t mean they will be for Dell. As Rivkin puts it, “the gold standard for turnarounds in the computer sector,” IBM’s success in the 1990s is a model that Michael Dell and Silver Lake should follow. An HBS case study by Lynda Applegate, Robert Austin, and Elizabeth Collins examines IBM’s turnaround under CEO Lou Gerstner. It gives Dell some pointers for the future, 20 years later.
Rivkin informed me in a recent interview that there are two main strategies for achieving a turnaround. The corporation must find assets it can sell for a profit to strengthen its cash flow in the short term. The next step is to strategically reinvest in key areas that will drive the company’s growth over the long run. In the example of Gerstner and IBM, we can see both approaches at work.
According to the case study’s authors, IBM was “the world’s dominating player in the burgeoning IT industry” in 1990, making it the second most lucrative corporation globally. However, it started losing money the next year because it was too dependent on the mainframe computer industry and had a poorly managed cost structure.
Even though Gerstner’s reforms since taking office in 1993 are difficult, to sum up, there were a few noteworthy choices. Gerstner’s “One IBM” strategy shifted resources to IBM’s rapidly expanding consulting and services industry even as it cut costs aggressively.
However, there was a price to pay for the better financial situation. “the concentration on flawless execution and short-term outcomes [had] intensified under the relentless cost-cutting necessary to survive the 1990s,” which meant that long-term investments were being put on the back burner. So, Gerstner began rebuilding the company in 1999 to find “emerging business possibilities” that may grow into $1 billion enterprises. Eighteen sectors were chosen, with life sciences, corporate transformation services, Linux, and pervasive computing all expected to reach $1 billion in sales within the next few years.
The IT industry has seen turnarounds before, so there is reason to be optimistic about Dell’s future, but what that future holds is still up in the air. With the PC industry declining, Dell must diversify its revenue streams to boost its bottom line and future fund growth. The markets they have discussed openly already have “pretty darn good” established players, as Rivkin put it to me. “Dell is not going to suddenly overtake IBM in services,” the author says. Similarly, there is a lot of competition in the tablet market.
Throughout its history, Dell’s greatest accomplishment was undoubtedly coming up with a novel strategy for beating the competition. According to Rivkin, one of the most important takeaways from the direct model was that “to be great, you first have to be different.” However, I’m not sure I’d want to put money on Michael Dell, the guy. If you were to compile a list of persons who could succeed despite overwhelming odds, Michael Dell would undoubtedly be towards the top.