Michael Dell Taking The Direct Approach
"You don't have to be a genius or a visionary or even a college graduate to be successful. You just need a framework and a dream."-Michael Dell
Michael Dell wasn't the only young entrepreneur to ride the computer boom of the late 1980s and early 1990s from rags to riches. Like Rod Canion of Compaq and Steve Jobs of Apple, Dell turned a fledging start-up into a multibillion-dollar computer empire. But unlike the ill-fated Canion and Jobs, who lost control of their creations as they grew, Dell has managed to hold on to the reins of his maverick venture and achieve the unique distinction of being the computer industry's longest-tenured CEO.
Following the simple idea that by selling customized personal computer systems directly to customers he could best understand their needs and provide the most effective computing solutions to meet those needs, Dell has made Dell Computer Corp. the world's leading direct computer systems company.
Dell's parents wanted him to be a doctor. But by the time he was in junior high, Dell was hooked on computers. While most of his classmates were tinkering under the hoods of old cars, Dell loved to tinker with his Apple IIe.
To please his parents, Dell enrolled as a premed student at the University of Texas in 1983, but by then his only real interest was in computers. During his first semester, Dell spent his spare time buying up remaindered, outmoded PCs from local retailers, then upgrading and selling them from his dorm room. He was so successful, that one day his roommate piled his ever-growing inventory up against the door of their dorm room.
Dell took this as a sign it was time to move his burgeoning business off campus. His parents were furious when he told them he wanted to drop out of college, so to appease them, Dell agreed to go back to school if the summer's sales proved disappointing. In his first month in business, Dell sold some $180,000 worth of PCs. He never returned for his sophomore year.
While looking for ways to expand his fledgling start-up, Dell concluded computers would soon become a commodity, and with commodities, what matters most is price and delivery. Dell saw that the quickest way to achieve both goals was to cut out the middleman. He realized that he could buy components and assemble the whole PC himself more cheaply. Then he could sell each machine over the phone directly to customers at a 15 percent discount to established brands. This technique, which came to be known as "the direct model of selling," would revolutionize the industry and make Dell a multibillionaire in the process.
The 19-year-old Dell dubbed his venture PCs Ltd., and the Austin-based company soon became one of the fastest-growing enterprises in the country. Rather than flooding the market with hundreds of thousands of "plain brown wrapper" computers, the company would focus on what it did best-creating customized machines to order.
The strategy worked. During its first year in operation, PCs Limited pulled in more than $6 million in sales, and Dell quickly gained a reputation as a "boy wonder." To cash in on his growing fame, he changed the company's name to Dell Computer Corp. in 1987. Sales continued to soar, topping $159 million by the end of 1988. That same year, Dell made an initial public offering which raised $30 million, about $18 million of which went directly into Dell's pocket.
For many start-up entrepreneurs, that would have been a pinnacle signaling it was time to move on to the next promising adventure. But in Dell's mind he was just getting started. He now set his sights on overtaking industry leader IBM, rallying his employees by telling them his newborn daughter's first words were "Daddy, kill IBM." The technique got a response, and Dell's sales leapt to more than $800 million by 1991. In 1992, Dell set a goal of passing the $1.5 billion mark by the end of the year. Always the overachiever, Dell met his goal and then some, as sales rocketed to $2 billion. But in the midst of this success, there were storm clouds gathering on the horizon.
The company was growing at a pace that was too fast for the young entrepreneur to handle. By mid-1993, Dell Computer Corp. seemed to be spiraling out of control. Stock prices had plummeted from $49 in January of 1993 to a mere $16 by July. Dell's CFO resigned, leaving a management void. And worst of all, Dell had scrapped all its new lines of notebook computers because of poor production and was forced to sit on the sidelines of the fastest-growing segment of the PC market for more than 12 months.
Dell realized he needed to do something-and do it quickly. His solution was to seek out older, more experienced managers to help him regain control of his 9-year-old juggernaut. First he brought in Mort Topfer, a seasoned executive from Motorola, to handle day-to-day operations. Next he tapped the talents of Kevin Rollins, an organizational expert from Bain and Co., to run the American operations. And, perhaps his most important coup, Dell stole Apple Powerbook designer John Medica.
Within 12 months the listing company was righted, and the following year profits climbed to $149 million. But even with this amazing turnaround, Dell knew his company's place in the increasingly competitive PC industry was in no way guaranteed. To ensure continued success, Dell and his top executives made a pair of controversial strategic decisions that ran counter to prevailing industry trends. First, instead of initiating a price war in pursuit of greater sales units, Dell chose to focus on high-margin business customers. Second, the company opted to rely exclusively on direct marketing rather than retail.
Industry pundits questioned the second move, pointing out that by selling direct Dell was slighting the then sizzling home PC market. But Dell knew better. In an earlier brief foray into retail stores, Dell discovered he could not compete with Compaq's strong brand name and Packard Bell's cutthroat pricing. Selling through retail stores was definitely out. But Dell wasn't about to give up the lucrative consumer market. Instead, he decided to sell fully customized PCs via phone, fax and direct sales to more sophisticated, second-time home computer buyers.
Once again, Dell proved his critics wrong. The company's new approach had sales topping $5.5 billion by the end of 1996. But Dell had yet another ace up his sleeve. In July 1996, Dell launched one of the first direct-sale computer Web sites, and in just two months, was averaging Internet sales in excess of $2 million a day (a number that would rise to $6 million a day by 1998). The combination of selling direct via phone and Internet pushed Dell's sales to $7.7 billion by February 1997.
Until this time, industry experts and Dell's three main rivals, Compaq, IBM and Hewlett-Packard, were convinced that direct sales would only gain Dell a niche market. But as Dell's direct onslaught began to increasingly cut into their market share, all three competitors adopted the direct model of selling, but unlike Dell, continued to offer their machines through retail stores as well.
Whether or not Compaq, IBM and Hewlett-Packard's revamped strategy will eventually recapture the market share lost to Dell remains to be seen. But by being first, Dell definitely has the advantage, as the numbers clearly show. While the PC industry grew by a paltry 5 percent in 1998, Dell grew at an incredible pace of more than 50 percent, achieving sales of $12.3 billion. By January 1999, Dell was outselling both IBM and Hewlett-Packard and was poised to overtake the number-one computer maker, archrival Compaq.
While he has yet to completely silence his critics, Michael Dell has proven that he has the flexibility, the stamina and the vision to remain at the top of the country's most competitive business, even through the bumpiest of times. As Internet sales rocket skyward ($30 million a day in July 1999), Dell continues to baffle his competitors, astound analysts and enthrall stockholders.
If It Ain't Broke.Fix It Anyway
One of the reasons Dell Computer Corp. has remained so successful is Michael Dell's firm belief in constantly rethinking his company's operations. Case in point: Although the company's computers have always boasted some of the highest quality ratings in the PC industry, in 1997 Dell became obsessed with finding a way to reduce his machines' failure rate. Convinced that the key to achieving this goal lay in reducing the frequency hard drives were handled during assembly, Dell insisted that the number of "touches" be dramatically cut down from the existing level of more than 30. After extensively revamping the company's production lines, the number of touches was trimmed to fewer than 15. The result? The rate of rejected hard drives fell by 40 percent and the overall failure rate for Dell PCs dropped by 20 percent.
Business In His Blood
Michael Dell has often been quoted as saying, "I always knew I wanted to run a business someday." Indeed, it does appear that Dell was born a businessman. At the age of 12, he was making thousands of dollars in mail order sales to stamp collectors. During his senior year in high school, he made $18,000 selling newspaper subscriptions for the now defunct Houston Post and bought his first BMW-paying in cash, no less. Obviously no ordinary paperboy, Dell had figured out that the most likely subscribers were newlyweds or families who had just moved in. So using sources such as the city marriage license bureau, he put together a targeted mailing list on his first computer-an Apple IIe-and sent out personalized mailings offering special subscription deals. By age 18, Dell was telling people his life's ambition was to compete with IBM. Ironically, today a lot of folks at IBM have the ambition of competing with Dell.
