Clayton Christensen, in his book- ‘How will you measure your life’ explains how the computer manufacturing company, Dell dug its own grave by gradually outsourcing all of its operations to the then contract manufacturer, Asus. By outsourcing its core capabilities, Dell lost its customer base and market share to Asus. From Dell’s point of view, the case is a classic example of being mindful about what you outsource. When viewed from Asus’ point of view, it’s the perfect example of how negotiation and the grit to pursue can spell fortune. Below, you will find an excerpt from the book(all credits to the author) that explains the case of Dell and Asus, oh so beautifully.
Dell entered the foray in the early 1990s as a computer technology company. It started making simple entry level computers at an affordable cost. Customers could customize their own computers to their needs and preferences. It then moved up-market, making a sequence of higher- and higher-performing computers. Dell prided itself in delivering to the customer, within 48 hours of placing an order.
Taiwan based Asus made it possible for Dell to deliver within 48 hours. Asus started at the low end providing simple, reliable circuits for Dell — at a lower price than what Dell could do itself.
In that context, Asus came to Dell with an interesting proposition: “We’ve done a good job making these little circuits for you. Let us supply the motherboards for your computers, too. Making motherboards isn’t your competence — it’s ours. And we can make them for a 20 percent lower cost.” The Dell analysts realized that not only could Asus do it cheaper but it would also allow Dell to erase all the motherboard-related manufacturing assets from its balance sheet.
After it had reorganized to accommodate this arrangement, Asus came to Dell and said, “We’ve done a good job fabricating these motherboards for you. Why don’t you let us assemble the whole computer for you, too? Assembling those products is not what’s made you successful. We can take all the remaining manufacturing assets off your balance sheet, and we can do it all for 20 percent less.”
The Dell analysts realized that this, too, was a win-win. As Asus took on the additional activity, Asus’s RONA (Return on Net assets which is computed by dividing net income by total assets. This can be increased by either increasing net income or decreasing assets/inventory) increased as the numerator of the ratio — net income— got bigger. Shedding manufacturing processes also increased Dell’s RONA — it didn’t change the revenue line, but driving out those assets from its balance sheet improved the denominator of the ratio.
That process continued as Dell outsourced the management of its supply chain, and then the design of its computers themselves. Dell essentially outsourced everything inside its personal-computer business — everything except its brand — to Asus.
Then, in 2005, Asus announced the creation of its own brand of computers. In this Greek-tragedy tale, Asus had taken everything it had learned from Dell and applied it for itself. It started at the simplest of activities in the value chain, then, decision by decision, every time that Dell outsourced the next lowest-value-adding of the remaining activities in its business, Asus added a higher value-adding activity to its business.