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Title: Execution Without Excuses. Authors: Stewart, Thomas A.OBrien, Louise Source: Harvard Business Review; Mar2005, Vol. 83 Issue 3, p102, 10p, 2c Document Type: InterviewDells sustained competitive advantage is due to more than its famous business model. Consistent execution requires real-time P&L management, an emphasis on ingenuity rather than on investment, and a culture of accountability. MICHAEL DELL FOUNDED the computer company that bears his name in 1984. Eight years later, at the age of 27, Dell became the youngest CEO in the Fortune 500. Soon the business world was abuzz with talk about the Dell business model, which allows the company to bypass middlemen, sell directly to customers, and achieve superior management of information and working capital. The Power of Virtual Integration, HBR called it in a 1998 interview with Michael Dell. Since then, the company has continued to gain market share while delivering better shareholder returns than any of its competitors. Initially capitalized with $1,000, Dell is now worth more than $100 billion.The secret of Dells success goes beyond its famous business model. High expectations and disciplined, consistent execution are embedded in the companys DNA. Dell is more than an efficient factory - its an organization that can turn on a dime and that has demonstrated impeccable timing in entering new markets. The company now employs 53,000 people and operates in more than 80 countries. Last month, its founder and chairman reached the ripe old age of 40. Kevin Rollins, a former Bain & Company consultant who began working with Dell back in 1993 and joined the company in 1996, was appointed CEO last year. Chairman and CEO work in adjoining offices. The wall between them is glass, and it has a large door in the middle that is never closed.While providing extraordinary rewards to its shareholders, Dell has created a culture that expects great performance from its people. In order to double its revenues over a five-year period, the company has had to adapt its execution-obsessed culture to new demands, as Rollins and Dell reveal. To discuss how the company has sustained its advantage over two decades, Thomas A. Stewart, the editor of HBR, and Louise OBrien, an HBR consulting editor who served as Dells VP of strategy from 1999 to 2002, met with Rollins and Dell at the companys headquarters in Round Rock, Texas. In this edited interview, the two describe how theyve worked together to refine Dells business model, management-development structure, and culture.The elements of the Dell business model are no secret: going direct, information over inventory, world-class manufacturing, and superior customer information. Everybody knows these, so why havent other companies been able to copy your model or beat you at your own game? Rollins: The same reason why Kmart cant imitate Wal-Mart. What Wal-Mart does isnt rocket science - its retailing. Why cant everybody be Wal-Mart or JetBlue or Samsung or whatever the best company in their industry is? Because it takes more than strategy. It takes years of consistent execution for a company to achieve sustainable competitive advantage. So while Dell does have a superior business model, the key to our success is years and years of DNA development within our teams that is not replicable outside the company. Other companies just cant execute as well as we do.Dell: Culture plays a huge role. As our industry transitioned to a standards-based model from a proprietary model, with its 40% gross margins, protected franchises, and tiered distribution, a whole new set of business disciplines became important. Things like customer-centricity, supply chain logistics, and cash flow management had been completely off the industrys radar screen. Dell changed the game.Rollins: We started talking about return on invested capital (ROIC), which focuses you on high returns at very low asset intensity. Before that, the market believed heavier asset intensity was better because you could charge huge margins for a proprietary product. We said, No, thats not the way the world works. Asset reduction, inventory reduction, speed and time consolidation - these became more important than how much you spend on R&D. High R&D spending, when you do it to create proprietary products, leads you into a niche strategy, not a broad-based strategy. Yet many companies continue to argue that the winner will be the biggest R&D spender.Dell: That paradigm belongs in the Smithsonian with the dinosaurs.Rollins: Dell changed the strategic success factor for our industry from R&D spending to being the lowest-cost producer of standard technology. No company in the history of mankind thats been a low-cost provider has been a loser. But staying low cost is tough, especially when you have to keep improving your product.Dell: Proprietary, vertically oriented technology companies believe that youre not a real company if you dont make your own chips and disk drives. Although weve proven our virtual model time and time again, we still see the same skepticism every time we enter new businesses. Were in the printer business now, and people are saying Dell wont get access to printer technology. Well, it turns out theres an abundance of technology available.Rollins: Our competitors cant beat Dell while also spending a ton of money on R&D and trying to be invent companies. Those two goals are mutually exclusive.So Dell is not an invent company? Dell: We invent quite a bit but have a different approach. Our business model reflects what customers truly believe is important. We were the first in our industry to really embrace the Internet and to identify the role that standards would play in the server and storage markets. We leverage partners where it makes sense, rather than trying to reinvent things that have already been invented. But weve undersold our R&D model. In fact, if you look at the products that still represent most of the industrys revenues - PCs and Intel servers - were actually doing more R&D than our competitors. We have 4,000 people and we spend $600 million a year on R&D. Thats a significant investment, and weve figured out where R&D spending will generate the best return.For every dollar we put into R&D, we get about six dollars back in profit. When Samsung puts in a dollar, it gets three or four dollars back. Those are both pretty healthy ratios. Microsoft earns about $18 billion in operating income on about $7.7 billion in R&D spending. But Sony invests $1 billion and gets back only $200 million in profits. Sony is overinventing. They invest in things that might be exciting but that arent valued by customers. So they cant generate good returns.Rollins: The true test of a companys innovation is whether the customer is willing to pay for it. Struggling companies have a ratio of R&D profits to R&D spending thats less than 1:1. OK companies are about 1:1, and successful companies exceed 1:1.Dell: Our R&D strategy is shareholder focused. We dont reinvent and we dont do defensive R&D. A lot of the spending by proprietary companies is really to defend against attacks by other companies. They put features in Thomas A. Stewart is HBRs editor; Louise OBrien is a consulting editor at HBR. their products so that the customer cant use them with other companies products. For example, we have a competitor thats investing a lot of money to make sure customers cant save money by refilling used-up ink cartridges. Inventions like this might benefit shareholders in the short term, but they certainly dont benefit customers.We dont waste money building moats and walls. We tell potential component suppliers which product features are important to our customers. If the suppliers designs include those features, theyll have a better chance of getting our business. And, by the way, we hope theyre successful in selling their components to as many companies as possible, because that drives costs down for everyone and we know well win our fair share of the market. This is how Dell defines standards. We think standards should be set in the marketplace, not in the patent office. Given our customer relationships and worldwide market share, its pretty hard to set a standard without Dells involvement.How did Dells DNA become so different from others in your industry? Dell: I founded the company over 20 years ago with $1,000 in starting capital. By contrast, Compaq had been launched two years earlier in Texas with $100 million in capital. Thats an unbelievable difference. Dell bubbled up through a kind of Darwinian evolution, finding holes in the way the industry was working. We didnt become asset-light just because it was a brilliant strategy. We didnt have any choice.Rollins: History was the starting point for our culture. But by the mid-1990s, we had plenty of money. The issue was no longer necessity; wed just found a better way to run a business. But we needed to articulate the strategic principles of our business model for customers, employees, and investors.So we defined a complete set of management principles, with metrics, to the nth degree. Things that had been necessities at Dell became virtues. Although we didnt have much in the way of assets, we decided we should have even less. We knew that poor quality costs money. We knew that too much time in the cycle from order to delivery costs money. No inventory is better than any. With the steep depreciation curve for components in our business-theyre like fish or vegetables-the value goes away the minute you buy them. Everyone at Dell came to understand these principles. We began to rigorously measure DSI (days of sales in inventory) and stamp it on the forehead of anybody who had anything to do with development, purchasing, or manufacturing.Dell: In our industry, with all the permutations, combinations, and transitions, its impossible to forecast. By getting rid of inventory, we created a pull rather than a push system and eliminated the need for a crystal ball.How did you implant the Dell DNA throughout the company? Rollins: We drummed into our peoples heads, through presentation after presentation, whats good performance and whats bad performance. They saw data on inventory every day. They got rewarded when inventory came down and punished when inventory went up.Dell: By the way, the reward and punishment didnt come from us, it came from our people seeing for themselves how much better their businesses worked when they didnt have inventory.Rollins: Another lesson we implanted was how to contain operating expenses while increasing margins and growth. That sounds pretty basic, but most companies cant do both. Many companies like to talk about investing for the future. We say the future is today and tonight. Good execution requires a sense of urgency. The notion of investing for the future can become a trap.Dell: Of course, there are times when we have to make investments that take a few years to fully pay back. But to Kevins point, we dont tolerate businesses that dont make money. We used to hear all sorts of excuses for why a business didnt make money, but to us they all sounded like The dog ate my homework. We just dont accept that. Our shareholders dont pay us to sit around and lose money.If youre a Dell manager and your product or sales region falls off track and starts losing money, what happens to you? Rollins: You become a pariah.Dell: It hasnt happened recently.Rollins: Weve had a no-excuses culture from the beginning. Whenever we hear that a business might have to lose money for a while, we challenge the GM to figure out how to run the business better than anyone ever has and not lose money.Dell: If you start accepting the idea that a business doesnt have to make money - for reasons that you might convince yourself are real - then thats what happens. The opposite is also true. If you say, No, were going to make this business profitable, good things happen. Of course, the first kind of culture is easier to live in than the second.Rollins: Im not saying were the only real men in the world, but we set expectations very high.Isnt there more to creating a high-performance culture than setting high expectations? Rollins: It requires discipline and consistency. We know, down to our toenails, that our model works. When Dell fails to execute, its either because the GM is applying the model wrong or hes not the right GM. In either case, Michael and I are to blame.Over time, weve steadily improved the managerial talent at Dell. Our team of general managers is now very strong. Theyve learned the discipline, they have what it takes, they understand the model. So when they miss, its just a failure to execute. And were pretty hard on people who miss-not just the two of us but the whole company. When you fail to execute, our culture says, Fix it. Find whats wrong, and fix it. Or ask for help.Dell: We all make mistakes. Its not as though at any given time, Dell doesnt have some part of the business thats not working for us as it should. But we have a culture of continuous improvement. We train employees to constantly ask themselves: How do we grow faster? How do we lower our cost structure? How do we improve service for customers?Is it as tough as it sounds to be a general manager at Dell? Rollins: Its really tough. To succeed as a GM here, you have to be smart and you have to be tough. You have to be a team player, and you have to understand the P&L. Youre in trouble if you dont understand the P&L.Sometimes our managers think that what weve asked them to do is irrational. But the fact of the matter is our general managers have succeeded time and time again. When we hold somewhat irrational expectations and convince them they can do it, they come up with fantastic breakthroughs. We challenge our people to substitute ingenuity for investment.Dell: In the late 1990s, we were growing really fast and bringing lots of new talent on board. We used to just throw people in the deep end and see if theyd sink or swim. If they couldnt swim, wed get someone else.Rollins: Now we believe we owe our managers more than that. Part of the problem was we were hiring the wrong people - people who werent going to be able to swim at Dell. I think weve gotten better at picking people. Weve also gotten better at developing them.Five years ago, we werent spending much senior-manager time on people development. That has changed dramatically. Our promotions to VP and director have shifted from about 75% outside hires and 25% promotes from within to about 30% outside and 70% within. We now understand this yields better results. Theres less risk than in hiring random executives from outside. Youve seen your own people. You know what they can do. And you know theyve already got the DNA.So we now give lots of swimming lessons. But if you still cant swim after the lessons, then this is going to feel like a tough place to work.Are you managing by fear? Or by truth telling? Rollins: Weve tried to create a culture where openness and honesty are encouraged.I think there was a time when people were afraid, but even then, the fear of not telling the bad news was greater than the fear of telling.Dell: The worst thing you can do as a leader at Dell is to be in denial - to try to convince people that a problems not there or play charades. A manager is far better off coming forward and saying, Hey, things arent working, heres what we think is wrong, heres what were going to do about it. Or, even, Hey, I need some help. Will you help me? That manager wont have a problem. The manager who covers up and says its really not as bad as it looks - hell have a big problem.Rollins: Our culture has evolved from a fear of the consequences of not telling, to where you just know you have to tell. Its the way we all operate. Everybody sees everybody elses numbers and gets to help with suggestions about their businesses. Here you cant tell your boss or your peers, Stay out of my business. Openness and sharing are part of success at Dell.Dell: We also have a huge number of people inside the company with incredibly accurate and detailed information about a whole range of things. That level of transparency makes it difficult to hide a problem.Rollins: Like many companies, were organized in a matrix of sales regions and product groups. Then we break each of those groups down to a pretty fine level of subproducts and sales subsegments. Dell has more P&L managers, and smaller business units, than most companies its size. This not only increases accountability to the customer, it helps train general managers by moving them from smaller to larger businesses as their skills develop.Our matrix organization has a third level - our business councils. For example, we have a small-business sales group in each country, along with product development people who become very familiar with what small-business customers buy. In addition, we have a worldwide small-business council made up of all our small-business GMs and product managers. Everyone in these councils sees everyone elses P&L, so it provides another set of checks and balances.Dell: Our performance metrics are the same around the world, which allows us to identify the best practices on any given dimension: generating leads, increasing margins, capturing new customers. If a council sees that Japan has figured out a great strategy for selling more servers, its job is to learn how Japan is doing that and transfer the lessons to other countries.Information is our most important management tool. Our salespeople know the margin on a sale while theyre on the phone with the customer. This financial data is in real time, so our people know if theres a problem. If the folks in our consumer business notice its 10 AM and theyre not getting enough phone calls, they know they have to do something: run a promotion on the Web, starting at 10:15, or change their pricing or run more ads. They cant wait until 30 days after the end of the quarter to figure it out.Rollins: And they dont need to call us for permission. If they dont change something now, they cant come to us at the end of the quarter and say, I guess we should have taken action in the middle of the quarter when we knew something was wrong.Dell operates with a lot of data, and analyzing data takes certain skills. Is there a Dell decision-making model? Rollins: There is, but its not perfectly articulated. The first rule is: Make your decision fast - even if you dont have complete data. Get the best data you can, because making a decision with no data is a sin. But delaying a decision while you overanalyze the data is not good.Dell: We dont have a lot of layers. Extra layers, approvals, and meetings just slow things down. Our organization is flat so that information can flow freely and quickly.Rollins: We have a strong bias toward action and a strong bias toward data.Dell: Any Dell presentation - it doesnt matter what part of the company its from - will have lots of data. Thats just the way we manage. Our number-to-word ratio is really high.Rollins: Many companies believe in massive delegation - which has some advantages but also a lot of negatives. Michael and I like to roll up our sleeves. Our years of experience with the model allow us to spot trends that others in the organization might miss. Michael and I probably know a lot more and make more decisions than many CEOs do, but we also have a lot more people involved in decision making at Dell than you might find at other companies, because a lot of people here own P&Ls.How do your decision-making styles differ? Dell: Were pretty complementary. Weve learned over time that
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