Understanding Capabilities and the Dell Tragedy

Birmingham, England’s second largest city is falling behind. Some 14% of the population is unemployed and in some of the inner city areas the figure is higher than 30%. Two-fifths of Birmingham’s population lives in areas classified as in the 10% most deprived parts of England. Birmingham has become an example of poor management and over-centralisation, which has demonstrated itself in an outdrawn search of identity.

In 1971, Birmingham or “the city of a thousand trades” had become a British Detroit, employing tens of thousands of car workers. When international competition, militant unions and incompetent management destroyed the auto industry, Birmingham was in for the fire.

During recent years Birmingham has tried to reinvent itself as a business and tourism hub. For that reason, they have built a convention centre, an opera house and a spectacular shopping mall. The pleasantness of the city might have improved, but it has done nothing for the lost manufacturing jobs. That has made the city a more pleasant place to live, but it has not significantly reduced unemployment.

The development at Birmingham Science Park Aston is a sign of hope for the city, as the science park with its energetic CEO David Hardman is expanding and contributing new jobs in the knowledge economy sector. The science park had its 30^th birthday last week and is aiming for a strong period of growth in the years ahead.

However the overall state of Birmingham is not just a tragic tale of a lost city, it is an example of the importance of knowing your capabilities build a differentiated offering to investors and talents upon them and finding the strategic sweet spot where you become attractive for the market and gain a competitive advantage – whether you represent a city or a company, like the example with Dell…

The tragedy of Dell

When Fortune magazine listed the multinational computer company Dell as one of the 500 largest companies (making Michael Dell the youngest CEO to get on the list), it had become known as one of the most innovative computer companies on the market.

Behind the success were three key factors: Firstly, Dell had introduced a disruptive business model with simple, entry-level computers at a low cost as they were sold over the Web or mail. Secondly, the products were modular allowing customers to choose the components they wanted and get customized computers to fit their need. After the customers had assembled the computers on the Web, Dell then shipped the items within 48 hours. Thirdly, Dell used its capital efficiently with more sales and profits per dollar of its assets.

Another factor, or rather player, behind the success was the Taiwan based company, Asus. Asus enabled Dell to pull their business model off as Asus provided simple, reliable circuits for Dell at a lower price than what Dell could do by its own manufacturing.

However, Asus did not stop there; one day Asus came to Dell proposing that they would also do the motherboard at a 20 % lower cost, “making motherboards isn’t your competence, it’s ours”.

After some analyzing Dell came to the conclusion that allowing Asus to do the motherboards would lower the cost and remove all the assets related to manufacturing of this component from the balance sheet.

When all the arrangements were done; Asus once more came back to Dell saying the same thing but this time aiming for the assembling of the computers. “Assembling the computers isn’t what made you successful”. This meant that Asus would take all assets off Dell’s balance sheet – at a 20 % lower cost!

  The story continued with Dell also outsourcing the supply chain management and the design. By the end, everything except the brand was outsourced to Asus. By doing this, Asus had taken everything it had learnt from Dell and applied it for itself. What Dell managed to accomplish was to continue outsourcing the lowest value-adding in its business as Asus added a higher value-adding in its business.

So in 2005, when Asus announced that they could launch their own computer brand, Dell had gone from being one of the most promising computer brands to just being a company, which allows a Taiwanese company put the Dell name on their computers.

Understanding capabilities

Both Dell and Birmingham are two good examples of the importance of knowing both your present and future capabilities.

Capabilities determines what a company can and cannot do, they are the company’s resources, processes and priorities. The resources of a company are its people, equipment, technology, brand, cash, network, partners, and customers and so on. The processes are how the resources interact and create value. Priorities are the set of factors that defines how a company makes decisions. All Employees makes prioritised decisions every day. It is important that these decisions are in alignment with the strategy and the business model of the company.

Understanding the company’s capabilities, present and future help determine what to outsource and what should not be outsourced. It also help determine you strategic sweet spot and finding the way in which your value offer meets the needs of your customer, visitors or be it residents, and you competitors cannot match.

Source: Clayton. M Christensen; “How will you measure your life?”