Can Dell do an IBM?

Michael Dell, a 14 per cent shareholder in Dell Inc and his associates propose to buy out the company through a Leveraged Buy Out (LBO) transaction valued at $24 billion. Other investors such as Carl Icahn and Blackstone group also seem to be entering the fray.

Desktop and Personal Computing (PC) continues to be Dell’s mainstay (70 per cent of revenue), while the balance comes from software, services and networking.

The PC business has become highly competitive and mature due to the growing popularity of smart phones and tablet devices; Dell’s profits and share price have been steeply declining over the last few years. Lenovo and HP lead the global PC industry with 16 per cent market share each, followed by Dell at 10 per cent.

Today, data centres, servers, networks and software are extensively deployed by companies to support complex Web sites that constantly track valuable customer data and support mission critical systems and business processes.

Michael Dell intends to restructure Dell to be a substantial player in this space, moving away from the declining PC business. This transformation is a Herculean task, and at this stage, Michael Dell considers this achievable only if Dell Inc is free from stock market and institutional pressures; and hence this LBO.

Reactive Dell move

There is a fundamental strategic issue here; why is Dell attempting such a transformation now, especially by disrupting the ongoing operations, exposing the company and its customers to uncertainty? Dell’s strategy and LBO thus give a perception of being untimely and ‘reactive’ rather ‘proactive’; it is interesting to contrast Dell with IBM, in this context.

IBM, Dell and HP entered the PC business more or less at the same time. By 1983, IBM had established leadership while competitors quickly cloned its strategy. Dell innovatively carved a niche for itself, reengineering the ‘value chain’ and positioned itself as an efficient and low-cost producer, which IBM found extremely difficult to match.

From an average of 20 per cent per annum growth, between early 1980s and late 1990s, the global PC market slowed down to less than 5 per cent per annum, between 1998 and 2008.

PC prices dropped by 15 per cent between 1996 and 2004. Intel and Microsoft squeezed industry profits leaving very little for PC manufacturers, while production shifted to low-cost destinations; all of these demonstrating clear signs of a maturing PC market!

Way back in the mid 1990s, IBM figured out the writing on the wall, which Dell and HP missed out!

IBM charted out a focused strategic path to tread over the next twenty years that followed, developing capabilities that would help it enter and gain supremacy in the enterprise services segment, so much so that it sold the PC business to Lenovo in 2004, a move then seriously criticised by the analysts, industry and competitors. In fact, that was the time when HP acquired Compaq (in 2002) for $25 billion to gain scale and size. What a difference in perception between the leadership of IBM and HP!

IBM’s masterstroke

IBM’s $3.5-billion acquisition of Lotus Notes in 1995 set the strategic direction towards the services space. Tivoli acquisition in 1996 reinforced this strategic path.

Over the next few years IBM continued to steadily acquire software, services and integration capabilities (Object Technology in 1996, CrossWorlds in 2002, Micromouse in 2005, MRO Software and FileNet in 2006), database management capabilities (Informix in 2001), statistical analysis software (SPSS in 2009), data mobility and Web conferencing (Softek in 2007).

Entering ‘business strategy consulting’ space was a masterstroke that transformed IBM towards providing insightful and innovative solutions to solve customers’ business problems, rather than merely IT problems. Mainspring acquisition in 2001 set the tone in this direction.

Although IBM had the technology platform and expertise, it lacked capabilities in specific business strategy issues, where PWC’s consulting practice was a global leader. Acquiring it for $3.5 billion in 2002 and synergising this with its own IT infrastructure, technology and implementation capabilities, IBM established itself in business consulting practice.

Focused acquisitions in the areas of social business, big data, talent management, customer experience (Kenexa and TeaLeaf in 2012) and business process outsourcing (Daksh eServices in 2007) followed. IBM not only acquired these businesses, but also seamlessly integrated them, within its corporate umbrella.

Consolidation time

Looking back, it is truly amazing to see how long IBM’s strategic planning horizons extended.

Today IBM is the world’s largest technology company. How did the company manage this transformation? Probably because IBM comes with a pedigree which few other companies can boast of.

For decades, it has been effortlessly transforming itself; from vacuum tubes and transistors to integrated circuits and microprocessors, punch cards and accounting machines to supercomputers, IBM has seen it all. It has reinvented itself under most difficult circumstances, establishing itself in a number of growing computing and technology businesses, over and over. This definitely must have given IBM the edge.

Given the fact that the PC business had entered the final phase of its life cycle, ideally by 2005 there should have been large-scale consolidation, which did not happen.

Today, Dell, HP and Lenovo together with Acer and Asus still control close to 60 per cent of the PC market, which has virtually hit the ‘fag end’ of the road. Now is the time when one of them should initiate the industry consolidation, to survive in this closing phase.

Too little too late

Being in the PC business, Dell not only missed capitalising on tablet and smart phone devices segment, but also failed to effectively leverage its core strengths into the attractive enterprise services business during the 1990s.

Spending $3.9 billion for acquiring Perot Systems in 2009 is when Dell moved towards enterprise solutions, in a big way. In the last five years, it has spent close to $15 billion in services capability acquisitions. But is it ‘too little’, ‘too late’?

Further challenges are immense; Dell’s acquisitions are still standalone businesses, yet to be appropriately integrated within Dell’s corporate scope. Also, more acquisitions need to happen to fill a number of competency gaps in the services business.

A number of lessons can be learnt. The fundamental responsibility of corporate leadership is to constantly assess the evolution of one’s core business.

How attractive would the industry continue to be in the medium to long term? The timing of ‘related diversification’ becomes extremely critical, i.e., which related businesses should the company enter, where can it leverage its core strengths and create a competitive advantage in the entered business?

Successful companies don’t merely create great strategies; they continue to reinvent themselves, aggressively leveraging their core strengths as externalities dynamically keep changing. This is where IBM succeeded while Dell and HP are still miles away.

(The author is a Chennai based management consultant)

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