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How Dell got soul

When growth slowed in Y2K, the computer maker?s leaders realized they needed to redesign their win-at-all-costs culture.

How Dell got soul
By strategy+business
Special to CNET News.com
September 18, 2004, 6:00 AM PDT

It was late 2000, and Dell was hurting--badly. A favorite of personal computer buyers since its founding in 1984 and a darling of investors since its initial public offering in 1988, Dell, renowned for the supply chain expertise that allowed it to customize and deliver PCs for every purse and purpose, had stalled.

With the bursting of the Internet bubble, the company's growth stopped. It announced its first layoffs, and proceeded to fall short of Wall Street estimates and internal earnings estimates for five consecutive quarters. The company's share price tumbled from the high $50s to $17.

Kevin Rollins had been at the company for seven years. Then the senior vice president for strategy, he had come to Dell on a consulting assignment in the midst of another crisis, in October 1993, when the company recalled an entire line of new notebook computers because of design flaws.

As he observed the reactions of employees lamenting as their stock options and dreams went underwater, Rollins recognized that the new problem was worse.

"I realized that we had created a culture of stock price, a culture of financial performance, and a culture of 'what's in it for me?' throughout our employee base," says Rollins, who this year became Dell's chief executive officer. "There had to be something more in this institution that we loved and enjoyed than just making money or just having a stock price that went up."

Today, by nearly any measure--market share, return on invested capital, or simple revenue growth--Dell is among the most successful companies created in the last 50 years. This year, its 20th anniversary, the company expects to reach nearly $50 billion in revenue, and to grow more, in dollar terms if not by percentage, than in any previous year in its history.

When growth slowed in Y2K, the computer maker's leaders realized they needed to redesign their win-at-all-costs culture.

It's easy to forget that Dell's success was not foreordained. Indeed, the company's resurgence and sustained growth during the past several years owes much to its leaders' insight that something fundamental--at least as essential as its supply chain, and perhaps even more so--needed to be reformed: Dell's soul.

As he and other senior managers led the company through two painful rounds of layoffs, which further damaged morale, Rollins began to examine seriously Dell's corporate culture--the institutional values and belief systems that influence Dell's behavior as an organization and the behaviors of each employee. He wondered if these not easily understood facets of corporate culture were adversely affecting near-term financial performance, as well as Dell's long-term health and strength.

Rollins had been thinking about the role of culture in civil societies and organizations for some time. But the confluence of the market downturn of 2000 and the terrorist attacks of Sept. 11, 2001, prompted him to reflect more intensely about what Dell stood for, and why he was there. He concluded that underpinning traditional business performance benchmarks are new measures for how to succeed in business: Speed, integrity, adaptability and resilience are becoming the true tests of whether a company is built to last.

How Rollins, together with company founder Michael Dell and other leaders, put Dell back on track makes a powerful case for the role corporate culture plays in enduring business performance. Their story also strongly suggests that, over the long run, the healthiest and wealthiest companies are those that define their strategies and management systems with a purpose beyond merely increasing returns to shareholders.

"What great companies have always done is to find ways to appeal to another side of human nature, wanting to be associated with something that's great," says John P. Kotter, an expert in leadership and culture and a retired Harvard Business School professor. "You want to find the nature of what you're making exciting and believe that this product or service does something useful for humanity. Great companies institutionalize that, and you can't fake it.

"It's not just in your business model," Kotter says. "It's in people's hearts."

Cultural influences
The notion that corporate culture influences and is a key to understanding business performance is commonly accepted today. However, it was only a bit more than 20 years ago that academics introduced the term corporate culture to the business vocabulary. It is even more recently that practicing executives have started to appreciate its significance.

Corporate culture is still a somewhat squishy way to describe all the things that lie beneath the rational and measurable surface of an organization. But most management theorists agree on some variation of this basic definition: Corporate culture is manifest in distinctive patterns of human behavior based on core values, beliefs and traditions. Culture is made tangible by corporate lore, ceremonies, celebrations of achievement and institutional comportment, as well as through a company's goals, strategies, management processes, structure, and methods of allocating resources.

Yet even as management scholars draw attention to the linkages between company culture and business performance, they also argue that deliberate culture change--if it is even possible--does not occur because top management commands it to happen through a written statement of values, a high-profile change program, or a combination of initiatives.

It's easy to forget that Dell's success was not foreordained.

Typically, it takes a dramatic shock--an economic crisis, a scandal--to move an organization's people to be reflective enough to address flaws in the corporate culture, or to strengthen positive attributes. Whatever the circumstances, striving to make deep changes in culture is a difficult and painful process.

"It's hard enough to train a dog, let alone a human being, let alone an organization, to behave in a certain way," says James O'Toole, a research professor in the Center for Effective Organizations at the University of Southern California, himself an author of dozens of books on leadership and culture change. "It's hard to do because you're asking people to look at themselves and be able to accurately understand what they value and how they're behaving. You can say, 'We want the following 10 behaviors and we're going to reward them.' You can measure the extent to which people are doing that and reward them. But you can't see the values, and the values are the hidden part of the culture that drives the behavior."

Soul searching
In an interview earlier this year, Dell described this time in Dell's history as a period of "soul searching." "We had this incredible boom in the '90s, and a lot of people had made a lot of money, which in some ways hides a lot of problems," he said. "The dark side of the boom we pondered was the possibility that we had attracted a lot of people who thought they would get rich. And, if they all of a sudden thought they wouldn't get rich, then they'd wonder what they're doing here."

To help get beneath the surface of Dell's culture, and to learn more about the breadth of its values, Rollins turned to Paul McKinnon, an old friend and former academic specializing in organizational behavior, whom he had recruited in 1997 to head human resources. From the start, they understood the goal was not to create a new or different culture for Dell, but to adapt and enhance its positive elements.

"It's not that we didn't have a culture with the qualities that drive business success: We were performance-driven, cost-driven, built on speed, very low on politics," recalls McKinnon. "We just aspired to do better. Kevin started to revisit those old questions: What kind of company do we want to be? What is our aspiration? What would a new winning culture look like here at Dell?"

Of this line of questioning, the godfather of corporate culture, MIT's Ed Schein, observes that Dell's experience had more to do with maturation than with cultural change. "The question about Dell is, Was culture involved at all?" Professor Schein asks. "Changing 'purpose' or 'goals' does not necessarily involve culture. In fact, it may be the Dell culture itself that enabled the company to make the changes it has made in how it operates."

Whatever one labels its journey, Dell had an advantage over other companies that have embarked on similar efforts to understand and change their institutional behavior. Whereas a performance crisis is often the wake-up call that forces a company to attempt bold change, in 2000 Dell had not experienced a catastrophe. Although not achieving all of its business plan goals, the company was still more profitable than its major competitors, including Compaq, Hewlett-Packard, Sun Microsystems and the relevant portions of IBM. Moreover, it gained market share in 2000 and 2001. Still, the slowing of Dell's historically rapid growth rate allowed the company the opportunity to step back and reflect on what its culture represented and what it really wanted to be.

In contrast to large industrial-age companies that struggle to adapt to the demands of today's competitive environment, Dell was naturally lean, fast and entrepreneurial. These were the desired attributes of a large high-performance company in a high-speed and unpredictable business world. This spared Dell the pain and disruption of a major downsizing and restructuring as it dealt with change in its corporate culture.

These qualities are also exemplified in the behavior of the company's founder. At 38, Dell is still a young man; in person, his affable and informal manner makes him seem younger yet, and more approachable than other leaders of multibillion-dollar concerns. Leading by example, he shows how much he personally values collaborative management and communication styles. Dell has historically shared the executive suite with a strong second-in-command. Before Rollins, there was Mort Topfer, who applied his experience building Motorola's cell phone business to help refine Dell's direct sales model in the 1990s; and before Mr. Topfer, Lee Walker, an East Coast entrepreneur, helped run Dell and take the company public in 1988.

Even after two decades, Dell has retained its informality and the energy to execute like a start-up company. Dell is a prototypical flat organization. From the factory floor to corporate communications, decisions are made quickly and without the burden of superfluous hierarchy. If a supervisor on the factory floor sees ways to reduce component inventories, he simply does it, without going up the chain of command for approval. Dell's internal communications have stayed efficient, so that decisions that don't require the attention of senior management get made without them.

Corporate culture is still a somewhat squishy way to describe all the things that lie beneath the rational and measurable surface of an organization.

In April 2001, "When one of our major competitors announced they had missed their quarter at 4 p.m., by 2 a.m. the next morning we had a press release out that we were going to cut prices," says Lynn Tyson, Dell's vice president for investor relations. "Kevin and Michael said this is an opportunity, and Dell executed. That could not have happened with bureaucracy in the middle."

The accessibility of management, from Dell on down, has made junior employees believe their ideas are welcome and heard. "You have freedom of communication to anybody," says Matt Borgstrand, a product engineer in the enterprise computing group. Borgstrand designed a software diagnostic tool now used throughout the company, even though writing software is not part of his job. "There's an openness here. I had an idea, walked into a vice president's office, and he said, 'Go do it.' I didn?t have to go through layers of management,? he says.

Dell and other executives also insist that Dell's direct "build-to-order" business model--bringing technology-rich products to market at a lower cost by eliminating the middleman and reducing costly stockpiles of inventory--benefits humanity by making those innovations more broadly affordable.

Finally, Dell is a company that does its best to make people feel comfortable expressing true feelings without fear, and with confidence that if they do speak their minds, they can make a positive difference for themselves and the company. For example, an anonymous, voluntary employee feedback survey that's conducted online every quarter, called "Tell Dell," encourages rank-and-file employees to let senior management know how they feel about the company and about specific leaders, and to flag problems in a non-confrontational way. The HR department compiles results, and specific leadership teams share those results with managers throughout the company. Leaders of different departments set improvement goals for their teams. Every manager's appraisal is based on improvements he or she makes on Tell Dell scores against the goal set for his or her team.

Tell Dell has also been integral to involving everyone in the company in the culture change process, and to measuring progress. Ninety percent of Dell's global work force participated in the most recent Tell Dell survey.

Intangible value
Dell operates in an unforgiving business environment, but the company remains determined to outgrow competitors and dominate in all its markets. Dell met its revenue and earnings forecasts for the quarter ending April 30, 2001, and has met or exceeded analysts' estimates in every quarter since. In the third quarter of fiscal 2004, quarterly income rose a healthy 22 percent, with the record growth in sales that Dell depends on.

Analysts in the third quarter closely questioned the company's rising inventory levels and higher costs for the dynamic random access memory chips it uses in its computers, which imposed an additional $10 per computer, which Dell could not pass on to the consumer without hurting sales. The average price for Dell PCs actually dropped by $50 from a year earlier, in response to more aggressive pricing by Hewlett-Packard. Simultaneously, Dell moved into third place for the first time in worldwide market share for corporate servers, according to Gartner DataQuest. Hewlett-Packard and IBM remain the leaders worldwide in this intensely competitive market, but Dell is, for now, neck and neck with Sun Microsystems.

No one is suggesting that Dell's continuing resilience or its return to its historic performance levels from 2000 was in any way contingent on creating "The Soul of Dell." Dell probably would have made its numbers with or without examining its soul. Senior management never discussed this effort with Wall Street.

Nevertheless, securities analysts who closely follow the company say its commitment to improving how it does business has made a major source of intangible value visible in ways that impress them. "Dell remains so constant on the outside in its personality that there would have to be something that is feeding that constancy and refreshing it," says Laura Conigliaro, an analyst with Goldman Sachs, which has also served as Dell's investment bank. "We?re always amazed by how Dell's persona remains so methodical and in touch. From anywhere in the world at virtually any time, send an e-mail to somebody and you don?t have to count the minutes until you get a return. That might seem simple, but it's so different from what we experience elsewhere. I have the sense that anything this company puts a great deal of effort into has to have some backbone to it, and not just be an exercise in corporate solidarity. They understand and appreciate that as companies get really large and you start to add new generations of employees who are more withdrawn from the top of the company and history, it becomes more important to have mechanisms to spread the culture."

Indeed, the most important role of "The soul of Dell" may be to evangelize new hires who never will ride an elevator with Dell or Rollins. Dell is again in a hypergrowth phase and hiring vast numbers of men and women. Although some long-term employees say nothing has changed for them personally, they still see a value in formally codifying the Dell culture, and infusing the values in the design of management systems.

"As new people come on board, there's certainly a large part of the population that's jaded and has a negative (impression) about working for corporations," says Paul Wicker, a computer programmer on one of the maintenance teams that support Dell's sales applications. "The soul of Dell" lets people know "Dell is a meritocracy. If you work hard and do a good job, you get rewarded for it. It also says that just getting the job done is not as important as how you do it, and the quality of the teamwork you do it with."

Although cultural change yields tangible results only over time, Dell has been able to track some immediate and meaningful improvements, as identified in the quarterly Tell Dell surveys. Employees say management is more inclined to support their efforts to achieve better work/life balance. Workers also see a clearer link between their jobs and Dell's corporate objectives. The percentage of people who would stay at Dell given a comparable offer elsewhere has risen, although at 57 percent, it is still not as high as management would like.

Has Dell changed its culture in any fundamental way? Maybe not. But it has clearly harnessed those positive aspects of the culture that allowed it to come so far so fast.

At 20, Dell still feels like a "scrappy start-up company," Dell says. But he won't be taking too much time to admire and relish the company's vigor or accomplishments. "Let's get better. I?m 38 years old now. I want to look back in 40 years and be proud."

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Copyright © 2004 Booz Allen Hamilton Inc.

Reprinted with permission from strategy+business, a quarterly management magazine published by Booz Allen Hamilton.

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