Perspective on Organizational Transformation - Dell - Essay Example

30-06-2006 Perspective on organizational transformation Organisation: Dell (formerly Dell computers) had emerged as one of the leading players in the personal computers (PC) industry through its direct selling model. Founded in 1984 by Michael Dell, the longest tenured executive to lead a company in the computer industry. Dell could best understand customer's needs and efficiently provide the most retailers that add unnecessary time and cost, or can diminish Dell understanding of customers expectations. Dell's build-to-order format got a big boost with the arrival of the Internet. The company maintained momentum in a rapidly commoditizing industry, where most of the players were struggling. Current situation: Dell's growth had been phenomenal. Its sales crossed $1 billion in 1992, $ 10 billion in 1997 and $ 25 billion in 2004. In 2004, Dell made a profit of $2645 million on revenues of $41440 million. During the period 1997-2002, Dell's global market share of PC's went up from 5% to 15%. In the US, Dell had a market share of 27%. (Forbes, 28 october2002). The clear cost leader in the industry, Dell had concentrated on activities where it could add most value and on market segments where profits were highest. Dell had taken care to ensure that customer service was not diluted in the process of cutting costs. For example, the industry average downtime for a PC was 16 hours, but only 8 hours for a Dell PC (Kasturi& Bell,2002). For servers, the industry average downtime was 5 hours compared to 1 hour for a Dell server. A March-2001 fortune and trilogy survey of senior officers of fortune 1000 companies ranked Dell first in managing customer relations. Dell believed it could achieve a turnover of $60 billion, a target beyond the wildest imagination of most other players in the industry by 2006. Change: Change is a necessary way of life. We are perhaps aware of the axiom that the certainty in the world is that these will be change. If an organization is to survive, grow and remain prosperous, it must ad aft to the demands of the environment, since these demands are constantly changing, organizations must also change. The pace of change is now so fast that business face constant market change and must respond very rapidly if they are to survive. Many don't make it. Evidence suggests that the average corporate life styles may be shrinking because of a mobility to change and adopt fast enough. For this reason managing change has now become a crucial part of competitive edge (Clarke, 2002). Newstrom and Davis (1997) have explained the impact of a change in any part of the organization of the total organization. They have illustrated it by comparing an organization to an air filled balloon. They have concluded that the whole organisation tends to be affected by the change in any part of it (Newstrom & Davis, 1997). Factors in Organizational Change : Organizational changes are required to maintain equilibrium between various external and internal forces to achieve Organizational goals. Therefore, various factors/triggers, which may be important for necessitating Organizational changes, may be grouped into two categories external & internal. External Factors: Changes affected by external factors i.e. social, political, economic, technological and legal, which force the Organizations to change themselves. Such changes may result change in major functions, nature of competition, economic constrains, organization methods etc. In order to survive in the changing environment, organization must change. Internal Factors: Change occurs because of two internal factors i.e. Change in managerial personnel and deficiency in existing organization. Initially Dell bought stripped down computers, added disk drivers and memory, upgraded and sold them. In 1989, Dell suffered its first major setback. To meet the growing demand Dell bought more microprocessors than it actually needed at the peak of a cyclical market. Then, prices plunged and microprocessor of higher capacity (1 megabyte up from 256 kb) came into the market. Dell had to make a distress sale of its outdated microprocessors. To compensate for these losses Dell raised the price of its products, but this only slowed growth. So due to rapid technological change and large inventory Dell suffered. Shortly thereafter Dell realized the importance of involving customer's at an early stage of the product development processes. Dell launched a family of products code name 'Olympic' covering the desktop, workstation and server markets. The product were technically superior with advance features such as graphics, unfortunately, for Dell, customers did not find these features very useful and rejected the product. Due to customers unpredictable behaviour Dell suffered loss. In 1993, Dell incurred an operating loss for the first time in its history due to customer's priority and liking, which had not been adhered to its needs and requirement. Dell also faced problem with its notebook computers. While desktops typically had 30-35 parts, an average notebook computer had twice as many. The development process took more time than expected and Dell added several features and the product became over designed. The company had to cancel several products around this time; Dell faces a serious cash crunch. The company had barely enough cash to pay its vendors and employees. This was the result of the Company's rapid expansion from one or two market into a much broader business that featured many product lines, channels and geographic regions. The company was consuming huge cash with inventory and account receivables pilling up. Due to these external and internal factors Dell had to change accordingly. Dell appointed a consultant Kevin Rollins as change agent in 1993 that later became CEO of the company. Dell decided to exit from retail distribution in 1994 after realizing it was unprofitable and constituted only a small percentage of the company's sale. The moment Dell offered a new model, through its direct channel, older computers on shop shelves lost much of their values, forcing Dell to compensate retailers. This made a big impact on Dell's profit. Dell also realized that the retail channel did not allow it to execute its build-to-order strategy. Resistance to change: Certainly resistance to change from certain quarters emerged. At that time, the conventional wisdom was that direct sales were only a niche market. Personalized services to the customers and built-to-order were almost new to the market and most of the employees have apprehensions about these revolutionary changes. Rollins launched the "Soul of Dell" campaign to reorient the company's culture. He also brought in on Managers from GE, IBM and Pepsi to strengthen the HR functions. Dell is a non-unionist organisation therefore it may not be collective resistance but adopting new ways of functioning must have certain resistance. Environmental turbulence: Technological development work their way to commercialization, they will yet again ratchet up the speed and power of computers. Moore's law the well-known standard that computer power doubles while halving in price every two years is being extended even further into the future. Environment of the computer industry with reference to technological changes may be unpredictable because any day certain technology comes up which may change the entire picture of the industry. Cost and time are the predictable and forecast able factors as well as threats to that organization, which are not prepared for change but become an opportunity to those organizations, which are prepared for change. Evolutionary vs. Revolutionary changes: Evolutionary changes in the organisation have to be done by setting direction, allocating responsibility and establishing reasonable timelines to achieve goals. Whereas revolutionary changes are market driven, rapid, urgent, abrupt and disruptive. It creates impatient organizational culture and high-tension environment. Initially Dell started with revolutionary changes by adopting new consultant who later on became CEO of the company. He changed the management team and started with new ideas of marketing and customer services. The process of unfreezing started by opening up for new CEO and executives. Thereafter change has taken place and finally freezing started with consolidation. Presently Dell is passing through evolutionary changes. Impact of change: The company announced that it would provide customers with a new level of personalized services and product offerings over the Internet. Dell was also aggressively expanding its presence in new lines of business such as storage gear, networking equipment, handheld devices, printer and cartridges. Many of Dell's major facilities were highly automated. On an average the entire process from order receipt to product shipping required about 36 hours. Dell outsourced most components from various suppliers and assembled them as per the customer's specifications. The company had tied up with major suppliers like Microsoft for windows, Windows NT operating system and office application software, Intel for microprocessors, Maxtor for hard drivers, Sony for monitors and Selectron for Motherboards. As Dell out sourced most of its component the company selected suppliers having expertise, experience and the ability to deliver quality. The company evaluated suppliers on the basis of cost, delivery, availability of technology, velocity of inventory and the ways in which they did business with Dell over the Internet. At one point of time, Dell had been using more than 140 different suppliers of component parts but in 1999, Dell had about 25 suppliers providing almost 85% of its parts requirements. Dell believed its excellent communication and the close relationship with suppliers enabled it to cut inventory to incredibly low levels. Dell just continue to shrink the time and space and distance between customers, suppliers and make that efficient. Dell persisted with its efforts to streamline its operations. By late 2003, Dell had won 550 business process patents. Dell configured each PC system it sold to match customers needs through its build-to-order model. This model, besides customizing products helped the company in various other ways. Dell knew exactly what its customers wanted before manufacturing the product. Competitors have to maintain high levels of inventory to support the reseller and retail channels. Dell on the other hand could reduce inventory. In all major market Dell used its direct model. Dell began its global expansion in Europe, Middle East, Africa, and Asia Pacific Japan including China, Australia, and India. Dell preferred to recruit people with an inquisitive nature and a willingness to learn. The company looked for people who had a healthy blend of experience and intellect; people who were not afraid of making mistakes while attempting to innovate and who had the capability to look at problems from various angles and come up with solutions. Dell checked whether job applicants would be compatible with its values and beliefs. Dell recruited people who had self-confidence and at the same time preferred people who did not mind if someone disagreed with them in public or were corrected when they were wrong. Dell encouraged its employees to be result oriented and self-reliant. Dell practiced 360-degree performance appraisal, which involved collecting input from everyone an employee worked with superiors, peers and subordinates. Dell laid emphasis on teamwork. People worked in team of two to receive, manufacture and pack an order for delivery to customer. Profit sharing incentives encouraged them to maximize productivity. The team members openly shared views with each other. Dell held meetings regularly to discuss how the Company was doing, what its strategies were, what the company was planning to do and what was expected of employees. During meetings employees were encouraged to questions the fundamental assumptions. The company believed such questions would generate new ideas. Experience sharing with other companies makes them aware of best practices around the world. Michael Dell, the chairman of the company, believed in an entrepreneurial style of management. (Direct from Dell, Harper Business, 1999). He encouraged employees to take risks even if they made mistakes. He took decisions, which were backed by adequate data rather then mere intuition. He explained, "In leadership, its important to be intuitive, but not at the expense of the facts." Michael hand held computer kept him informed about what was happening with regard to production, sales and competitors. He believed status quo was never acceptable. As he explained in his philosophy "Celebrate for a nano second, then move on." Michael has demonstrated his willingness to take feedback and change suitably. He vowed to forge tighter bonds with his team. Hardheaded realism characterized Michael's leadership. He believed in disciplined approach to management. He constantly monitored sales information, production data and competitors. Organizational responses: Under the leadership of Michael Dell and Rollins, Dell achieved new heights in the business. Company is recognized as best direct customer service provider, 25th in Forbes 500 best companies list. Frame-Breaking Change Change at DELL New Executives New CEO and most of the top executives Reformed Mission and Core Values Added core strategies focusing on global market: direct marketing, built-to-order, customer personalized services, cost advantage, common goal, invest in mutual long- term goals, cultivate a commitment to personal growth and get involved Altered Power and Status Funding going to cost cutting and customers personalized services. Reorganization Recruitment of senior managers from other organizations in HR showing additional importance placed on HR Revised Interaction Patterns No changes as of yet Evaluation of change: Major changes in Dell started in 1993 by appointing an external consultant who later on became CEO of the company. This was the wise step taken by Dell to minimize the resistance to change because the fellow had a clear vision about the direction of change. It had been proved later on when company has performed excellently. Dell is primarily a U.S. company because its major revenue (64%) comes from U.S. market. It has approx. 70,000 employees, majority are from U.S. So Dell policy of direct marketing had proved successful in developed market such as Europe and U.S.A. but cannot have much more success in developing markets which are now the main target of any company to achieve success. Direct model runs out of steam when people expect a direct relationship with supplier but due to cultural difference it fails. Off shoring and sharing of data had also been resisted. Due to language and cultural barriers, proximity to the customers and their requirements could not be fulfilled. Presently the computer market in developed nations became almost stagnate and the major growth markets are the developing nations such as China and India. So due to hiring policy of Dell, predominantly U.S. based creates cultural and language barriers, which ultimately affects the direct model and customers personalized services.Dells cost advantage against competitors had been diminished. Competitors like H.P., Lenovo, and Acer had eaten away the Dells cost advantage. With the expansion of customer base it is not easy to maintain direct relationship with customers for their daily requirement and it needs cost also. Built-to-order policy that may be right at the initial level but due to product variations and multi services requirements Dell products are not proving prudent enough for customers. Dell does not have any premium brand name product such as IBM's Thinkpad. This results Dell to exert more efforts in marketing its product. Conclusion: Though the company performance had been excellent in the past but right now company's sales growth is slowing down. Company is experiencing flat period where revenue and stock prices is lowering. Erosion in cost advantage, stiff competition from other companies and lowering in customer services ranking etc. are the challenges ahead for Dell. Near saturation in developed market and growth in other developing market is also forcing Dell to change its strategy accordingly and timely otherwise it may face turbulent time ahead. References: 1. Clarke, Liz (2002). The Essence of Change, 1994 prentice hall, Indian reprint. 2. Newstrom, John W. and Keith Davis (1997). Organisational Behaviour: Human Behaviour at Work. New York: MC Graw Hills. 3. Forbes, 28 october2002. 4.Kasturi, Rangan V. and Bell, Marie, Dell-New Horizon, Harvard Business school case.9-502-022, October, 2002. 5.Direct from Dell: Strategies that revolutionized an industry, Harper Business, 1999. 6. < http://www.dell.com > accessed on 01-07- 2006. *********************************************** Read More