After more than 30 years in technology and 20+ of those years in General Management or CEO roles I am the first to tell you I have made plenty of mistakes. I firmly believe you learn more from mistakes than you do successes. I was fortunate to participate in the growth of the personal computing industry and witness the evolution of the industry’s players, the channels of distribution, and the rapid changes in technology. More recently, I was the President of Segway and will share the interesting parallels of the two industries. With my first hand insight, I can give you a comparison of Dell versus Segway: their strategies, the results of those strategies, and most importantly what can be learned from ‘Protecting the Flank’!
Birth of the Personal Computer Industry
On August 12, 1981 IBM announced the IBM Personal Computer. This was IBM’s entry into the personal computer space and in doing so legitimized the market. As a result, the market grew quickly and consumers and companies began integrating these products into their businesses and personal lives. More software developers began writing applications and the market grew even faster. Prior to IBM’s announcement the personal computer industry consisted of Atari, Commodore, Apple, Sharp, North Star, Tandy and Zenith to name a few. Like all new industries the market was fragmented and there was no dominant shareholder. As competition increased the stronger players forced consolidation and the weaker companies either merged or were forced out. We witnessed this during the 80’s and 90’s when companies like AT&T, Texas Instruments, Digital Equipment Corporation (DEC), Compaq, Hewlett-Packard, and IBM either left the market or merged with their competitors.
In the early 80’s when Dell Computer Corporation, formerly PC’s Ltd., started Michael Dell was only 19 years old and building personal computers in his dorm room at the University of Texas. His strategy was to build a quality product and sell it directly to consumers and businesses, thus eliminating the cost of a reseller. As Mr. Dell’s business grew he saw the internet phenomena take shape and was successful in leveraging the lower cost of selling and marketing via the web. Because Mr. Dell was so young when he started he quickly realized he did not have the experience to sustain Dell’s growth. Hiring the best and brightest talent was paramount. Dell was able to take advantage of the growing high-tech market in Austin as well as pull from the top graduates from the University of Texas. Most importantly, there was a constant focus on improving customer satisfaction and operational efficiency.
In the early 90’s Dell began to grow faster than any company in the history of America business surpassing $2B in sales in 1993 after generating less than $1B in sales the year before. In the late 1990’s Dell grew more than $14B in one year excluding acquisitions. This organic growth was the equivalent in size of Anheuser-Busch. During this hyper-growth Dell did not have the infrastructure to support the growth and many employees were stretched beyond their capabilities. In these cases, employees left or were replaced. Only top performers remained! As a result Dell reached $65B in revenue shortly after the millennium. Dell realized this was not sustainable and moved quickly to match the infrastructure required to support the growth targets. Dell was able to accomplish this because of superior talent, a more efficient operating model, and a focus on continuous improvement. Today Michael Dell is the most tenured CEO among all computer company’s CEO’s. This can be attributed to a continuous focus on customer satisfaction, execution of an efficient operating model, superior talent, and a clear understanding by all employees of Dell’s vision, mission, values, and purpose.
Figure 1.1 illustrates Dell’s model as it relates to pursuing Commercial and Consumer markets. It is the basis for Dell’s meteoric growth in the 1990’s as well as why Dell has been able to sustain its business while others have either merged or left the market altogether.
It can be reasonably assumed Dell generates most of its margin from the sale of commercial products. This is a reasonable assumption because commercial products are used in more complex and mission critical environments, thus the price elasticity is far less. For example, it is reasonable to believe the price a business owner is willing to pay to ensure his network runs without interruption is significantly more than the price he would pay for his home network. It is because of this why many companies pursue the higher margin commercial business and choose to ignore the lower margin consumer businesses. Dell on the other hand chose to enter both markets for 3 primary reasons:
- Provides access to a new and very large market
- The incremental volumes of common components across consumer and commercial products provides greater buying power with suppliers
- “Protects their flank” from other companies that enter the consumer market with plans to move up-market to participate in commercial market margins
A company’s failure to “protect their flank” is an invitation to other companies to enter the consumer market, prove success, and leverage a more efficient operating model to take market share in the more lucrative commercial markets. Usually, by the time a company realizes this it is too late and they either merge, sell, or in some cases go out of business.
In 1997 the famous inventor Dean Kamen launched iBot, the world’s first self-balancing wheelchair. During iBot’s development Dean Kamen and his team of engineers had the idea to build a short-distance electric personal transporter based on the technology from iBot. Mr. Kamen founded Segway in July 1999 and launched his first Segway Personal Transporter on Good Morning America in December 2001. Steve Jobs said it would be bigger than the PC. Venture capitalist John Doerr (who backed Netscape and Amazon) said it would bigger than the Internet. The belief that cities would transform their layouts and consumers would flock to purchase this product to address urban congestion simply proved to be a very wrong assumption.
What did materialize was a market for Tour Operators to give tours in many cities around the world. Additionally, private security and law enforcement organizations began using Segway products to patrol airports, parking garages, mall parking lots, and a number of other commercial public safety applications. However, the pricing to purchase a Segway Personal Transporter was cost prohibitive for consumers. The places you could ride were limited, and if you did purchase a Segway product it required in-person training, thus eliminating the ability to sell or purchase via the internet. The limitation of only two commercial applications and no consumer offerings limited Segway’s growth and left Segway exposed if someone else could build a low-cost alternative. This is where ‘protecting the flank’ comes in.
From the company’s inception it was very engineering focused. This makes sense considering Segway’s technology and leadership came from Mr. Kamen’s company, DEKA Research, which is well known for technology development, but rarely takes any of its technology to market themselves. For the most part, all technology from DEKA Research is licensed to other companies for their sales, marketing, and distribution expertise.
During Segway’s first 14 years the company was sold a number of times. During these years it did little to expand its focus beyond Tour Operators and Public Safety. In other words, there was no focus to develop a product with consumer price points to “protect their flank.” The intellectual property in Segway’s products was well protected and Segway had no competition for the first 10 years. During this time if you were a Tour Operator or a Public Safety customer and wanted to purchase a Segway product there was only one source. This “bubble” allowed Segway to get complacent with little focus on cost improvements, best practices, or product portfolio expansion. It also created a culture of entitlement because many employees at Segway had either forgotten or never worked in a culture where competition was something you faced every day.
In 2012 a growing number of companies in Asia began illegally manufacturing Segway-like products and selling them throughout the world. The number of companies selling these products increased and they began recruiting distributors at the annual Consumer Electronics Show in Las Vegas. The products from these companies were priced approximately 60% less than Segway’s products and Tour Operators and Public Safety organizations around the world began purchasing them. Despite claims to Tour Operators and Public Safety organizations that these products were infringing on Segway’s patents many commercial customers and new consumer channels began purchasing these products anyway. It wasn’t until a complaint was filed with the International Trade Commission in Washington D.C. in 2014 that ultimately stopped the importation of these infringing products.
During the investigation by the International Trade Commission an agreement was reached between Segway and Ninebot Inc. of China. Ninebot was one of the companies named in the complaint filed by Segway with the ITC. Ninebot had only been in business three years, but was building products very similar to Segway at a 60% lower price. Ultimately, a decision was made by Segway’s ownership to sell the company to Ninebot, thus giving Ninebot the legal rights to all of Segway’s patents, licenses, and global distribution network.
What if Segway had “protected its flank” during the first 15 years? What if Segway had understood the risk in not doing so and developed consumer products, focused on implementing best practices, and changed its culture of entitlement to one of continuous improvement, AND embraced competition?
It’s hard to know for sure, but if Segway had “protected its flank” perhaps an established American brand would not have been bought by a Chinese company that’s only been in business for about 3 years.
Think about it like this: Dell Computer started as PC’s Ltd in a dorm room at the University of Texas in 1983. At the time, IBM, Hewlett-Packard, Digital Equipment Corporation, and Tandem Computers were all Fortune 500 companies. By 2001 Dell had reached nearly $32B in revenue and Tandem, Hewlett-Packard, Digital Equipment Corporation, and Compaq had all merged into one company. IBM sold its personal computer business in 2001 to Lenovo in China after losing billions. Not one of these companies had implemented a “protect the flank” strategy in time to recover from the loss of their commercial market share to Dell.
Ninebot, a 3 year-old company now has rights to the Segway brand, a strong patent portfolio, a global distribution network, and little competition. Companies like Google and Intel have recently invested in Ninebot in anticipation of the growth in the short-distance electric personal transportation space for consumers.
Wall Street icons like IBM, Compaq, DEC, and Hewlett-Packard were all forced to either leave the personal computer market or merge with one another while Dell continues to grow revenues and market share.
Hindsight is 20/20, but if Segway and most of the personal computer companies had focused on “protecting their flank” the market place for computers and short-distance electric personal transporters might look very different today!
Written by: Rod Keller, firstname.lastname@example.org, Partner in our Austin, Texas office, who leads the firm’s global technology practice. Rod is an accomplished C-level executive with significant experience in leading prestigious multi-national corporations around the world for over twenty-five years. Rod focuses his Search Practice on assignments for CEO’s, COO’s, CFO’s, Board Directors and other senior leadership roles for Technology and Growth companies.
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