DELL is Featured as One of the Most Digital Companies...
<<How Digital Is Your Company?
by Adrian Slywotzky
Illustrations by John Craig
first appeared: Fast Company issue 22 page 94
Forget about the e-hype. Going digital -- converting from atoms to bits -- gives your company a competitive edge, but only if you focus on the basics: money, talent, customers, and time.
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If there is one lesson that we can all learn from the continuing evolution of work and competition in the new economy, it's this: Change the question, and you change the game.
The last revolution in business thinking was spurred when innovative companies changed the question that they were asking themselves. The old question was, "What business are you in?" In the early 1990s, the question changed, prompted by the emergence of widespread entrepreneurial competitiveness and the blurring of boundaries between companies, industries, and countries. The new question became, "What is your business model?"
That change has defined competition for the past decade. New challengers using new business models have risen to take on almost every leading company in almost every industry. Compaq reinvented the business model for computer companies -- to the dismay of IBM. ( Then Dell reinvented the model again -- to the dismay of Compaq. ) Southwest Airlines reinvented the business model for air carriers -- to the dismay of American Airlines. Nucor reinvented the business model for steelmakers -- to the dismay of U.S. Steel. In almost every instance, the new business models produced cost advantages of 10% to 20% for the innovators.
But today competing on the basis of your business model is hardly cutting-edge thinking. And so the question is changing again. The question today is not, "What is your business model?" The new question -- the question that is the basis for the next great revolution in business thinking -- is, "How digital is your company?"
The question derives from Nicholas Negroponte's insight that the fundamental distinction in the new economy is between atoms and bits: What work do you do that involves atoms -- whether paper and pencil, people, or other tangible assets? And what work do you do that involves bits -- whether email, e-commerce, e-communication, or e-manufacturing? But this is not a question only about the e-hype of the moment. Neither is it about launching a Web site, nor is it about e-commerce. It is not, in short, a matter of embracing technology just for technology's sake.
Before you get caught up in the prevailing winds of e-hype, it's important to stop and consider some cautionary questions: What issues are fundamental to your business? Which of the many available digital technologies can help? And when is it the right time to make the investment to digitize your company? Intel is one company that has long had a keen appreciation of these questions. In 1986, following a $203 million loss, Intel decided to digitize its product-development process by investing roughly $300 million in computer-aided design and computer-aided manufacturing -- CAD/CAM. That investment wasn't a reflection of Intel getting caught up in the CAD/CAM hype. CAD/CAM was the digital answer to a purely competitive question: How could Intel create a two-year lead over its competitors? Becoming more digital in the design and production of chips was key to improving competitive performance. Wal-Mart made a similar investment at about the same time, digitizing its logistics system. By installing sophisticated communications and technology systems to provide real-time sales-and-ordering information, the company moved from atoms to bits. As a result, Wal-Mart outperformed its competitors by offering the right products at the right stores, by cutting costs, by integrating its operations with its suppliers, and by capturing valuable information about its customers. Fifteen years ago, Wal-Mart and Intel were already digitizing their way of doing business -- and winning.
As these examples show, there is a back-to-basics quality to the digital business revolution. Conceived correctly and done well, going digital can change the way your company communicates, sells, purchases, manufactures, develops products -- even how it holds meetings. But, most profoundly, asking "How digital is your company?" can offer revolutionary answers to the four fundamentals of any successful competitor: How do you finance the company and its growth? How do you attract and retain more than your fair share of the best talent? How do you segment and serve your customers in the best and most cost-effective way? And how do you make the most of the competitive advantages afforded by speed in all of your business operations?
In each case, asking a new question not only produces new answers -- it fundamentally reinvents the game. The result is a cost advantage that's not 10% better than your competitors -- but 10-times better. That alone makes "How digital is your company?" a question that everyone in business needs to ask.
How do you get your customers to finance your growth?
If there is one corporate function that would be voted "least likely to go digital," it would be finance. In most companies, finance is the oldest, stodgiest, most conservative department. There's a good reason why chief financial officers and their minions are known as "bean counters." But today the companies that are going digital are leading with finance. In radical fashion, these companies are essentially letting their customers finance their growth -- and multiply their stock price. In the process, they are forging whole new concepts in corporate finance: negative working capital and negative asset intensity. Each of these ideas overturns the conventional laws of corporate finance -- and neither would be possible without the digital revolution.
The old model of corporate finance took for granted three time-honored operating principles. First and foremost, companies must raise capital for physical assets. Second, companies could only operate with a reasonable stock of inventory -- components and parts, works in process, and finished but unsold goods. Third, companies need to raise large amounts of working capital to operate and grow. In fact, according to the old laws of finance, the faster companies have grown, the more they have needed working capital.
Doing business digitally absolutely junks those operating principles -- and reinvents the role of the CFO and the finance department. Digital finance lets you shrink asset intensity without any loss of control or quality. Outsourcing assets to suppliers shifts inventory from your books to theirs. The results: lower operating costs, a higher asset utilization, fewer assets required for every dollar of sales, and, ultimately, negative working capital.
Look at the leading company in almost any industry, and you'll find the same pattern of asset disassociation: Marriott sells its hotels -- and opts for management contracts. Chrysler rids itself of component plants -- and increases its sourcing from suppliers. Disney sets up EuroDisney -- and owns the management contract, not the tangible asset. In each case, the company that releases tangible assets does so without sacrificing operational control -- thanks to the digitization of information.
Chrysler, for example, has shifted the responsibility for the asset to its suppliers and now relies on electronic-data interchange to access real-time information about the quality, delivery, and even the redesign of parts and components. Marriott and Disney have given up assets but have retained contractual rights to digital information -- such as how many customers they have in a given time period, how much each customer spends, what each customer establishes as a utilization pattern.
In fact, digitization lets you accomplish two important goals with respect to assets. First, it lets you assign your company's assets to wherever they can best be managed -- which frequently is with your suppliers. Second, "going digital" lets you substitute good information for excess assets. In the old model, redundant assets of all types -- inventory, manufacturing capacity, even accounts receivable -- were simply every company's way of compensating for poor information. The first breakthrough of digital finance: It improves the management of assets and eliminates waste from the system.
The second breakthrough of digital finance is the invention of negative working capital. The preeminent example of a company that is pioneering digital finance is Dell Computer Corp. By now, most businesspeople are familiar with the rough outlines of the Dell story: the tale of how Michael Dell started the company in 1983, selling computers out of his dormitory room at the University of Texas; how the company has since ridden its business model -- direct-to-the-customer selling -- to become a $12 billion business, with profits of nearly $1 billion.
Less well known but just as important are the details of Dell's digital design. The company prefers to do business over the Web, and it currently registers $10 million in revenue a day over its Web site -- more than $3.5 billion per year. And by the end of the year 2000, Dell hopes to generate 50% of its sales online.
Dell's digital business design allows the company to rewrite the rules of asset ownership and management. Rather than having an inventory of products in stock for shipment to resellers, Dell typically assembles and ships each computer within five days of a customer's placing an order.
The company buys off-the-shelf components -- motherboards, processors, software -- on a just-in-time basis and stores them by the truckload within 50 feet of its assembly line. With only one week of parts on hand, Dell turns its inventory 52 times per year -- a big advantage over both Compaq and IBM, which turn their inventories 13.5 and 9.8 times per year, respectively.
Moreover, the revolutionary dimension of Dell's digital way of doing business shows up in its consumer accounts. Because Dell receives payment from its customers immediately -- through credit cards, either online or over the phone -- the company has cash-in-hand roughly eight days before it has to pay its suppliers. Thus in one stroke the company has been able to flip the traditional manufacturing-finance model.
In the old system, manufacturers pay suppliers for components and raw material long before their products are finished -- much less shipped to market, bought by a customer, and paid for. Because of its digitalized system, Dell can operate with negative working capital: Its liabilities are always higher than its assets -- which means Dell actually increases its liquidity as its sales grow.
Here's how negative working capital looks on Dell's balance sheet for the 1997 fiscal year: Under assets the company lists accounts receivable, inventory, and other, totaling $1.7 billion. Under liabilities the company lists accounts payable, accrued, and other, totaling $2.7 billion. The $1 billion difference represents the company's negative working capital -- Dell's digital design has, in effect, eliminated the need for the company to raise capital.
The third breakthrough of digital finance -- and the companion to Dell's invention of negative working capital -- is Microsoft's creation of negative asset intensity, a financing feat that, in part, accounts for the company's remarkable stock-market valuation. Asset intensity is a measure of the dollars of assets or capital that a company needs to support a dollar of sales. If a typical manufacturing company is growing at 20% per year, and it requires $1 of assets to achieve $1 of sales, then it will need to raise a considerable amount of money to support its growth. Most software companies need roughly 20 cents of assets to generate $1 of sales. Remarkably -- almost miraculously -- Microsoft has achieved negative asset intensity: It needs minus 5 cents to generate $1 of sales!
Here's what negative asset intensity looks like on Microsoft's balance sheet for fiscal year 1997: Under assets the company lists property, plant and equipment, accounts receivable, and other, totaling $2.9 billion. Under liabilities the company lists accounts payable, accrued compensation, income taxes payable, unearned revenue, and other, totaling $3.6 billion. The difference -- minus $700 million -- represents Microsoft's ability to grow its sales with negative asset intensity. To Wall Street and investors, this capability is a stunning competitive advantage: Microsoft, in effect, can grow at 50% per year without having to raise extra cash or add assets. With both Dell and Microsoft the lesson is simple -- and powerful: Digital finance lets you substitute information for assets. The result is a financial model in which your customers fund your growth, and Wall Street and your investors multiply your market value -- all because you've demonstrated your genius by switching from atoms to bits....>>
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