Why Process Improvement Isn’t Enough: The Case for a Learning Organization Culture

Lest anyone think I am a PIG (Process Improvement biGot), let me say right now that I do not believe process improvement and efficient production are enough to sustain competitive advantage. We need only look as far as Dell. Here’s a company, one of my favorites at one time, that ruthlessly drove costs out of its production and delivery system. A volume operations company, Dell took the concept of productivity beyond the routine and turned it into an incredible competitive advantage; an advantage that relied on its competition for research and development. While Dell has never been known to be innovative, it does (or did) do what it does/did better than anyone else. Unfortunately for Dell, the laser focus on operational efficiency came at the expense of market sensitivity and innovation.

Dell’s innovation is limited to its lean sales model. This was mastered through the user-friendly web site which offered low introductory PCs with the option to upgrade. Now, though, others have figured that out. Further, computers available in the stores generally have sufficient power for most users (Business Week 9/4/06). There has been a significant shift toward notebook PCs which Dell wasn’t properly positioned to exploit. Since most notebook computers are made by the same companies for a variety of different brands, Dell had no particular advantage in this niche. Dell is also a victim of Apple’s recent popularity and the evolving relationship between Apple and Intel. In response (retaliation?) Dell is now looking to “AMD for its processors. But all of these are merely symptoms of a greater illness underlying Dell’s performance.

Business Week (9/4/06) says that Dell’s rigid focus on operational excellence has created a culture that is “not inspirational or aspirational” and goes on to say that “being a hero at Dell means saving money”. Michael Porter says that a competitive strategy based solely on cost will lead to “predictably disastrous results” (“Competitive Advantage”,1998). We see this cost-exclusive focus in its choice to outsource customer service. Ouch!

Unfortunately, Dell is not able to adjust its strategic vision to accommodate the market dynamic. Their culture inhibits, impedes and even discourages innovative ideas that do not fit the current strategic vision. They have failed to establish the elements of a learning organization that would be sensitive to a changing market and which would adjust the future state, the vision, in response.

While conquering the market for low-cost PCs and servers, Dell ignored several key principles:
1. Michael Porter’s Competitive Forces model which clearly illustrates the sources of competition and the potential for diluting the current strategic competitive advantage. All competitive forces were at risk and, while Dell’s model kept them at bay for a while, changes in the capabilities of other entrants and substitute products were moving in on the space Dell had carved out. The barrier to entry was high but not so much so that a competitor such as HP couldn’t overcome it. While competitors were modeling the efficiencies pioneered by Dell, suppliers were working with Dell’s competitors and the buyer gained greater leverage in the marketplace.
2. Dell’s rigid and unwavering operations-focused culture discouraged internal innovation that might have found ways to sustain its competitive advantage.
3. Dell failed to implement indicators that would be sensitive to the erosion in their current value proposition. Thus, they were not able to anticipate what was happening in the market. It’s almost as if they had blinders on thinking that what worked for them in the past would continue to work in the future regardless of competitive forces (Michael Porter), technology lifecycle (Geoffrey Moore) and strategic indicators (Kaplan, Norton).

Michel Robert provides sufficient caution to staking your future exclusively on cost reduction. He says that “…adding value to each component of your chain may…give you [just] temporary advantage” (Strategy Pure & Simple, 1993).