‘Dude, You Need a CEO’: The Return of Michael Dell

It’s a common occurrence in Corporate America: An entrepreneurial founder starts a successful business, builds it to a certain size and hands it over to a CEO to run. But then, when things don’t go well, the founder steps back in to take direct control of the organization. That, essentially, is what happened last week when Michael Dell returned to become the CEO of Dell, replacing Kevin Rollins. What will it take to turn Dell around? Wharton management professor Peter Cappelli is the director of the school’s Center for Human Resources. He spoke with Knowledge at Wharton about these issues.

Knowledge at Wharton: Let me start out by asking you a question about a founder coming back to take the CEO job at a company as Michael Dell did. What is the track record of success in such cases?

Cappelli: I think the record is mixed. And I think that it probably helps to step back a little and ask ourselves something about the context of this. Generally, there’s a sense that organizations need different skills at different times. And so, the people who have founded organizations and have the entrepreneurial zeal and the ideas and such often aren’t the people who can take the organization to the next phase.

Sometimes you need more administrative skills, more management skills. Sometimes leadership and zeal isn’t enough. On the other hand, the founders have a symbolism that becomes very important when they step back in — in terms of the sense that they give the employees or their ability to sell ideas to the outside audience at different points in time. 

I think this is really the punch line: Organizations need different things, and you could imagine them changing leaders as a way to try to make that happen. 

Knowledge at Wharton: One of the first things that Dell had done after taking charge [again] was to send out this memo that we just heard about, saying that there would be no bonuses for 2006. He described the year as one in which there had been great efforts, but not great results. Do you think that doing away with bonuses is a good idea? 

Cappelli: Well, I think that with all management changes like this, there is the distinction between the symbolism and the substance. With respect to this particular case, the end of bonuses — particularly articulated by not only the founder, but the guy who has the biggest financial stake in the company — is really kind of a powerful message. 

And, it’s a powerful message that comes from the owners … that something has got to change. So it certainly is on the symbolism ground, an important statement to shake people up. I think it’s also a statement to the investment community and to outsiders, too, that we’re taking this seriously. Does it de-motivate people? Yes. Are there some down sides to that? The answer is yes, probably. 

I think one of the questions you ask yourself is: What is the purpose of this? And I think a lot of the purpose is the symbolism and the messages to not just insiders, but to outsiders.

Knowledge at Wharton: Another key point in Dell’s memo was his attack on bureaucracy, which he says has slowed down the company. Is this surprising for a company that built its reputation on the speed with which its supply chain could make customized computers for customers? And, how does bureaucracy creep into an entrepreneurial organization?  

Cappelli: Well, maybe I’ll just take a step back on this question and make what may be sort of an unusual observation. I think to a large extent these companies don’t know what they’re doing. They don’t know what they’re doing in the sense that they are facing different environments and they need to respond to them and they’re not sure how.

So in this case, for example, Dell was the darling of many people in the business world because they had this model that seemed to work just incredibly well, and lots of people were copying it, and then the environment changed. It’s not that they got bad at executing their model. At least I don’t think that’s the complaint. It is that the environment changed. They got different competitors who came in with different ideas and the playing field changed.

Now the question is, how do you respond to that? I was looking over the press releases and the analysts’ comments on the transition at Dell. They almost all universally praise the idea that Michael Dell is coming back. They almost all universally have nothing to say about what it is that he’ll actually do. Some of them are honest enough to say, “Well, the problems don’t change with him coming back” and “it’s not clear what he’s going to do.” 

The other thing that I thought was interesting about that comment from Dell is that one of the things that Kevin Rollins was seen as good at, was being particularly tough, particularly cost focused — which is exactly what a lot of the analysts say Dell has to do to go forward. In fact, he seemed to be pretty good at the kinds of things that most of the analysts say they ought to be doing. 

I think this suggests something general about what’s going on in the business world now with leadership ranks — that leaders are a substitute for strategy. Companies really rarely have a clear sense about the direction that they need to go in when something like this happens — that is, the environment around them changes. They substitute new leadership for new strategy. 

Whenever there is a change in the direction of a company, it always involves new leaders. I think that this is partly a signal to the investment community, frankly, that they’re going to do something different, but what it is, we don’t know yet. I think as a result the leadership gets churned much more often than it would have in generations previous, and much more often than it actually deserves to be churned.

As far as I can tell, what Dell says it wants to do [is] exactly the kind of stuff that Kevin Rollins was good at. And it just wasn’t working well enough. Changing leadership is just a signal to the business community that “we’re taking this seriously and we’re going to try something maybe even a little different going forward”. 

Knowledge at Wharton: Speaking of Kevin Rollins, what do you think was his biggest mistake? Or, is he just a victim of the company needing to send a signal to the investment community that a change is in the offering? 

Cappelli: I don’t see that he made any obvious mistakes. I met him a few years ago. He seems to be a very articulate guy, a good spokesperson for the company, and apparently he was focused on the kinds of things that the company always saw as their strengths and competitive advantage. 

Now, you hear things about his management style — that he was overbearing, or too tough a taskmaster, and all that sort of stuff. Of course, that’s exactly what the analysts are saying the company needs now, right? I think he was in the wrong place at the wrong time, and I think that happens to a lot of executives now. And, I think it’s more a function of the way business works now. 

Knowledge at Wharton: Will this move make it harder for Dell to start grooming a successor — given what happened to Rollins, and the fact that Michael Dell himself was only 41 and could always step back in and take the reigns again?

Cappelli: Well, I think the answer to the second point — that it’s hard to put somebody in this job because the founder is always breathing over your shoulder — there’s probably something to that, although it’s true in any organization. The average life of a CEO now is about 3 years or so. Any time a company gets in trouble now, the CEO gets dumped.

So, I don’t think anybody [probably] is going into these jobs with a sense that they’re necessarily going to have a long run. And, I think that this is maybe a big problem for U.S. corporations. They are so focused, even the leadership of the companies, on short-term performance that the CEO’s recognize that if things go bad in the company, they’re going to get tossed out — it makes their focus on short-term performance even stronger.

I think, frankly, companies aren’t thinking about grooming successors these days, anyway. They talk about it sometimes. They may for a while have somebody in the pipeline who looks like a successor. But then the environment changes and that guy’s kicked out, and somebody new is brought in from the outside. You know the talk and the reality are so different on these things, that at some point the talk doesn’t even make sense.

Knowledge at Wharton:  Before it got into its recent troubles, Dell seemed to be highly successful in the PC business, but less so in other consumer electronics products. Are there any lessons here for companies that don’t stick to their knitting? 

Cappelli: Well, I suppose that certainly is the one lesson that people would begin to point to, and that is to stick to what you’re good at. Dell’s computer market was good not just because of its marketing, but because of the way it was able to assemble the computers in the first place, the modular assembly processes that lay behind that. I guess the extent to which you can keep the whole model together is crucial — that it’s not just the way you sell things, but it’s the way you build them and all of these things fit together. And, if you start branching out away from that, you could have some problems.

Knowledge at Wharton:  In contrast to Dell, Apple’s had tremendous success with its foray into consumer electronics with the iPod, and it wants to build further on that success with the iPhone. Are there any lessons that Dell could learn from Apple? 

Cappelli:  Well, we have some ideas about why Apple has worked well. Apple is a company that is making its money in a completely different way. Apple is making its money by innovation. Dell was making its money by selling the same stuff, more or less, that everybody else was selling, selling it cheaper, and selling it in a customized way. 

You could see why the return of the founder at Apple might be a bigger deal than the return of the founder at Dell. Apple is a company that is really trying to go directly to the consumer and persuade them that something is new and novel. And you bring back the founder, who was famous for doing something new and novel. Maybe it helped energize Apple to do this, but it certainly helped to sell it.

At Dell, it’s not so obvious that they’ve got the same market and the same problem and that the same solution would work there. So, I think the short answer is that there are not a lot of lessons [really] for Dell from Apple. I think that this is probably also something that we should just confess to: In this modern business environment, where things are changing so quickly, strategies are so ad-hoc and so volatile.  

Companies really don’t have good ideas about what they’re doing. They’re changing all the time in response to the business environment. We don’t mean to suggest this is because they are not smart enough or not capable enough. It’s just an incredibly hard problem they’ve got — not just to make money, but to figure out how to make money when the markets are changing or your competitors are changing around you, and new products come in all of a sudden that you didn’t anticipate. 

And how you respond to this is very tricky. [Companies] really don’t know; they are fishing and it’s understandable why they are fishing. But I think the big lesson from this Dell experience is that when companies get into trouble, they change their executives, whether it makes sense in terms of a new direction or not. They change their executives because people expect that a changed executive will mean a change in policy.

Maybe it’s easier to change policy with a new executive, too. That might be true. But I think a lot of this is symbolism. And it’s not because the company has got a clear, new agenda, a new direction, and they necessarily need different people with different competencies to do it, and that they know how to put all of that stuff together. 

Knowledge at Wharton: One last question: If Michael Dell were sitting in this room with us right now, what advice would you give him?

Cappelli:  I’m not sure that we have any clear advice to give him. I think that it would be interesting to hear how he’s thinking about the problem. And I think the very best thing that one could hope, that executives do in situations like this, is to think carefully and objectively about what the problem is, what their capabilities are and how they can respond to these situations.

The quality of thinking is probably the best that you can hope for in these contexts. The other thing that you can probably be sure of is that, in a year or two, whatever they thought today is going to be irrelevant and they’ll be on to something else.