I’d never have bet that the US Security and Exchange Commission, the team fooled needlessly by Ponzi-scheme artist Madoff and others, would become the brave kid in the crowd to scream, “The Emperor is naked!”
In accusing Dell and its CEO of negligence-based fraud, the reality of Dell’s broken business model becomes clear to all. Apparently Dell’s profits were significantly enhanced by rebates from Intel, so much so that Dell would have otherwise reported a loss in at least one year.
Investors should have been told about the role of rebates in Dell’s financial performance. The information reveals much about the financial risks Dell faced. The information also casts a spot light on a poorly-conceived business model that left Dell’s products competing as commodities.
I’ve criticized Dell before. Owner/leader Michael Dell failed to evolve a once-unique business model in ways that retained a compelling, hard-to-copy value promise. Dell was the first personal computer company to sell directly to businesses, bypassing traditional channels of distribution. Rather than capitalize on this advantage and build advantages that differentiated its offerings to business users, Dell chased dollars by entering the retail market without any advantages.
Today, Dell finds itself caught between a rock and a hard place. Dell’s a distant follower behind IBM and HP in building a strong service-focused B2B offering. In retail markets, Dell lacks any benefit or cost advantage. (In a brilliant move, IBM exited the PC business and tied Dell’s socks in knots by selling IBM’s PC Group to Lenovo.) Price is, as a result, Dell’s competitive weapon of choice and profits reflect this.
Dell leaders should have spent more time thinking strategically and less time negotiating exclusive contracts with Intel whose rebates enabled leaders to report better numbers.
If you want better financial numbers, build a unique business model anchored in hard-to-copy advantages.
What short-term financial moves are keeping you from feeling the performance pain that points leaders towards business model innovation?
For insight on business model strategy, read my recently released book, Beyond Price.