Lessons for the Hedgehog
By Stephen A. Rutan

Dell Computer rewrote the book on making PC's, achieving financial results that certainly rank among the "great" companies profiled in Jim Collins' book Good to Great. Dell also managed to achieve these results with a single-mindedness that appears to have all of the elements of the Hedgehog Concept described in the same book. So what does the company's mediocre stock performance over the last five years teach us about the limitations of the Hedgehog Concept?

Before we discuss the lessons learned, let us first examine whether the Dell formula for success really qualifies as an example of the Good to Great Hedgehog concept. The checklist is simple enough:
  1. About what are you deeply passionate?
  2. At what can you be best in the world?
  3. What drives your economic engine?
Clearly, throughout most of their successful history, Dell qualifies on all three fronts. According to a recent BusinessWeek article, Where Dell Went Wrong (2/19/07), their simple formula for success was "to bypass the middleman and sell custom-built computers directly to the consumer". There is no reasonable argument against the facts that it was the passion of Michael Dell and his organization that made them the best in the world at this business model. Their single-minded pursuit of intimate supplier relationships and legendary logistics streamlining make a case for low-cost production as the basis for one suggestion for their economic engine: Maximum profit per PC or, perhaps, maximum profit per customer transaction.

A single share of Dell IPO stock sold for $8.50 in 1988. This share was worth over $4,000 in 1999 -- a compounded return of over 48,000 percent -- but their extraordinary shareholder returns have not been sustained. The stock price today is roughly the same as it was in 2002. Examination of their business case provides a clear lesson for the limitations of application of the Hedgehog Concept.
  1. Expectations for even the most effective application of the hedgehog concept must reflect the realities of market share, the state of competition and the scale of continued compounded growth.
  2. These expectations must be attuned to the scope and size of the market in which a company competes, making the lessons currently being learned by Dell applicable to companies in much smaller business environments.

Dell did become (for a time) the world's number 1 maker of PC's, but the diversity and complexity of the customer base made it impossible for a single company to achieve PC share similar to the dominance of Microsoft's position in the operating systems market. Likewise, the competitors for this business did not graciously concede the war for market share. Since the Dell model was launched, most other players in the market have been striving to reduce cost and find effective ways to appeal to customers' buying preferences -- a hotly contested mix of product commoditization amidst the need for continuous application of new technology and the incorporation of specialty features. For Dell, as for any growing company, the challenge to maintain growth trajectory increases every year. With a paradigm-shattering, single-formula business model, it is a whole lot easier to achieve fabulous growth percentages at $100 million in annual revenues than it is at $50 billion!

These same lessons are applicable to smaller businesses competing in smaller business environments. Even if your business has embraced the principles in Good to Great and believe that you have galvanized your organization around a powerful and appropriate Hedgehog Concept, the following guidelines still apply:
  1. Each business must have a clear understanding of the size of their core business markets and a realistic expectation of how far their Hedgehog Concept will carry them.
  2. Each business must have clear understanding of the capabilities of their competitors and, in particular, monitor their rate of improvement in areas that could undermine the advantages of the Hedgehog Concept.
  3. Each business must adapt their organization to the challenges of compounding growth. Constantly question whether your team of managers and the resources of your organization are equipped to handle the next phase of corporate growth.
Let's keep the Dell story in perspective. From February 2002 through February 2006, their sales grew 79 percent and their earnings per share were up over 200 percent -- not exactly a story of disappointment and despair! The biggest criticism of their current situation is that they did not begin developing their next avenues of future growth long before they were needed, and the stock market has punished them accordingly. Let that be the final lesson for the rest of us: Even while enjoying the productive growth made possible by our Hedgehog Concept, be aware of its limitations and expend some planning resources on developing those ideas that will sustain your growth beyond your current business model.

Steve Rutan is a Consultant with Center for Simplified Strategic Planning, Inc.
He can be reached by email at

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