Dell’s Third Horizon: The Innovation Imperative by Heather Anne Simmons Submitted to OCAD University in partial fulfillment of the requirements for the degree of Master of Arts in Digital Futures Toronto, Ontario, Canada, April 2015 ©Heather Simmons, 2015 Dell’s Third Horizon: The Innovation Imperative Heather Simmons This page intentionally left blank. ii Dell’s Third Horizon: The Innovation Imperative Heather Simmons Author’s Declaration I hereby declare that I am the sole author of this thesis. This is a true copy of the thesis, including any required final revisions, as accepted by my examiners. I authorize OCAD University to lend this thesis to other institutions or individuals for the purpose of scholarly research. I understand that my thesis may be made electronically available to the public. I further authorize OCAD University to reproduce this thesis by photocopying or by other means, in total or in part, at the request of other institutions or individuals for the purpose of scholarly research. iii Heather Simmons Dell’s Third Horizon: Master of Arts The Innovation Imperative OCAD University 2015 Abstract To the disrupters go the spoils. Those who disrupt industries can change consumer behavior, alter economics, and transform lives. What caused the once-disruptive Dell’s growth rate and stock price to decline in the mid-2000s, and how might Dell thrive again? What are the lessons for other companies? This study analyzes how innovative cultures are created, lost, and reborn in large companies through the lens of a long-term case study, namely my 13 years at Dell. The research fuses Innovation and Foresight frameworks, principally Curry & Hodgson’s Three Horizons framework and Hill’s Willing and Able framework, and shows that Dell lost its innovation edge when a cultural shift and the pressures of Wall Street crushed risk-taking. It posits that large companies should adopt an “intelligent gambler’s” approach to innovation – namely investing in other companies in order to effectively leverage their significant capital to take intelligent risks in a fast-changing world. iv Dell’s Third Horizon: The Innovation Imperative Heather Simmons For TT. So glad you stuck your head over the top of the cube. v Dell’s Third Horizon: The Innovation Imperative Heather Simmons Table of Contents List of Figures viii Chapter One – Introduction 1 Experience and Motivation 3 Summary of the Research Question 5 Scope of the Study 5 Chapter Two – Background 6 Financial Performance 7 The Direct Business Model 10 Chapter Three – Literature Review 15 Defining Disruptive Innovation 16 Exponential Acceleration 18 Frameworks For Innovation Success 21 Innovation Failures 29 From Economics to Ecosystem – Role of the Leader 31 Curry & Hodgson’s Three Horizons Framework 33 Chapter Four – Research Question and Methods 36 Where Does Innovation Go to Die? 37 Economic Importance of Innovation 38 Large Corporations and Propensity to Innovate 42 Can Dell Come Back to Innovate Again? 46 Research Methods 47 Chapter Five – Interview Results and Analysis 50 The First Horizon - Four Advantages 52 The Second Horizon – Business Model, Culture Shift, and Wall Street 68 The Third Horizon – Changes in Culture, Structure, and Products 102 Summary and Additional Recommendations 128 Chapter Six – Conclusions and Future Research 134 Conclusions 135 Future Research 140 vi Dell’s Third Horizon: The Innovation Imperative Heather Simmons Sources Cited 141 Bibliography 157 Appendix A – Research Ethics Board Approval Documents 158 Appendix B – Sample Interview Guide 159 Appendix C – Interview Participants 161 Appendix D – Detailed Five Forces Analysis 162 Appendix E – Acquisition Detail 164 Appendix F – Public vs. Private Scenarios Supporting Detail 166 vii Dell’s Third Horizon: The Innovation Imperative Heather Simmons List of Figures Fig. 1: Dell’s stock market valuation, 1988-2012 3 Fig. 2: Competitor stock price performance, 1991-2012 4 Fig. 3: Dell revenues, 1991-2012 7 Fig. 4: Dell net income, 1991-2012 8 Fig. 5: Dell unit growth rates relative to market, 1992-2014 9 Fig. 6: Indirect business model 10 Fig. 7: Direct business model 10 Fig. 8: Dell ad: Pentium chip leadership 11 Fig. 9: Revenue by major PC competitor, 1991-2000 12 Fig. 10: Net income by major PC competitor, 1991-2000 13 Fig. 11: Net income percentage by competitor, 1991-2000 13 Fig. 12: Moore’s Law applied to retirement savings 19 Fig. 13: Hill et al’s Willing and Able to innovate framework 23 Fig. 14: Basadur’s CPSP framework 25 Fig. 15: Curry & Hodgson’s Three Horizons framework 34 Fig. 16: “Mal-employment” rates by age cohort 41 Fig. 17: U.S. venture capital investments by year, 1998-2014 43 viii Dell’s Third Horizon: The Innovation Imperative Heather Simmons Fig. 18: Card sort 48 Fig. 19: Direct sales as a percentage of total sales 53 Fig. 20: Dell holiday party invitation, late 80s 55 Fig. 21: Front and back of desktop team’s t-shirt 56 Fig. 22: Tom Martin’s presentation to marketing group 60 Fig. 23: Dell’s ad in the Wall Street Journal, January 1995 65 Fig. 24: Dell consumer vs. enterprise mix 74 Fig. 25: Competitor stock price 2003-2012 75 Fig. 26: Intelligent Gambler© framework 97 Fig. 27: Dell’s acquisitions in 2008 99 Fig. 28: Dell’s acquisitions from 2008-2014 101 Fig. 29: Dell’s product showcase 107 Fig. 30: Dell’s Agile Product Portfolio 108 Fig. 31: Porter’s Five Forces analysis – end-to-end computing 110 Fig. 32: Dell’s product mix 113 Fig. 33: Wearables hardware and services revenue forecast 115 Fig 34: Dell’s 2023 revenues under “stay private”/ “go public” scenarios 121 Fig 35: Dell’s 2023 profit under “stay private”/ “go public” scenarios 122 ix Dell’s Third Horizon: The Innovation Imperative Heather Simmons Fig 36: Price of Dell debt issue, 2013-2015 124 Fig 37: Willing and Able framework revisited 128 Fig 38: Three Horizons framework revisited 129 All Figures and photographs are by the author unless indicated otherwise. x Dell’s Third Horizon: The Innovation Imperative Heather Simmons Chapter 1 Introduction Dell’s Third Horizon: The Innovation Imperative Heather Simmons Chapter One – Introduction To the disrupters go the spoils. Those who disrupt their industries change consumer behavior, alter economics, and transform lives. Companies can disrupt by creating revolutionary new technologies, as Corning Glassworks and Bell Labs did with the invention of fiber-optic cables in 1970 (Johnson 2014, 30), or via design, as Apple did with its various “i” products. Or, a company can disrupt with a revolutionary business model, as Dell did in the 1980s with the idea of selling $2,000+ computers over the phone. Nobody thought it would work. As Bill Sharpe, whose advertising agency, Sharpe Blackmore, held the Dell Canada account from 1996-2006, says, “I had a business partner in California, who said, we have a client, Dell. They sell computers over the phone, and ship it to you. I said, ‘There’s no way, who’s gonna buy a computer over the phone? They’re complicated.’” In 1992, the year I joined the company, Dell had a 3.5% share of global personal computer (“PC”) revenues, to IBM’s dominant 12.4% (Harte 2014, 126). The internet was used by almost no one outside of nerdy academic circles, e-commerce was 5 years away, and eventual Amazon founder Jeff Bezos was still working at financial firm D.E. Shaw. But work it did, and spectacularly. Until it didn’t. And therein lies the tale. 2 Dell’s Third Horizon: The Innovation Imperative Heather Simmons Experience and Motivation When I graduated from Harvard Business School, one of my professors, the late Louis “By” Barnes, asked why I didn’t stay to get my PhD in Organizational Behavior (“OB”). OB??? No way! Not the soft stuff. I was $40,000 in debt and needed to make money. Besides, weren’t people interchangeable, as long as the numbers were there? Thus demonstrating (and not for the first or last time) that 27-year olds do not, in fact, know everything. I worked at Dell from 1992-2005. Dell’s success was driven by its innovative business model, but also by the “soft stuff” – culture and employee commitment. A $10,000 investment in Dell at its 1988 initial public offering (“IPO”) would have yielded a fortune of ~$6 million at the stock’s peak, Dell’s valuation having risen by $100 billion in that time. Figure 1 - Dell's stock market valuation, 1988-2012. Excludes debt. Note: Dell's fiscal year ends January 31. Therefore, the 1998 valuation of $125 billion represents shares outstanding multiplied by stock price as of January 31, 1999, and so on. Source: Annual reports, (“Dell closing costs,” 2015). 3 Dell’s Third Horizon: The Innovation Imperative Heather Simmons In 1990, at the age of 24, Michael Dell was named the “Entrepreneur of the Year” by Inc magazine (Richman, 1990). In 2005, Dell topped Fortune’s list of America’s Most Admired Companies (“Dell tops Fortune magazine’s list of most admired companies - Greensboro - Triad Business Journal,” 2005). However, by 2008, Dell had lost $100 billion in stock market value, Amazon was king of the direct distribution business, Apple had launched a slew of innovative consumer products including the iPhone, and Dell’s low cost advantage was under attack by Asian competitors. In 2013, Michael Dell and Silver Lake Partners took the company private for $24.9 billion, the 11th largest leveraged buyout (“LBO” – typically a go-private transaction financed by significant debt) in the world’s history (Hester 2013, par. 5). Figure 2 - Dell's stock price performance relative to competitors, 1991-2012. 1991 stock price used as base and set to 100% for all competitors.