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Michael Dell believed his approach to PC manufacturing had two advantages: (1) bypassing distributors and retail dealers eliminated the markups of resellers, and (2) building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components, and finished goods. While Dell Computer sometimes struggled during its early years in trying to refine its strategy, build an adequate infrastructure, and establish market credibility against better-known rivals, its build-to-order and sell-direct approach proved appealing to growing numbers of customers in the mid-1990s as global PC sales rose to record levels. And, just as important, the strategy gave the company a substantial cost and profit-margin advantage over rivals that manufactured PCs in volume and kept their distributors and retailers stocked with ample inventories. Going into 1998, Dell Computer had a 12 percent share of the PC market in the United States, trailing only Compaq Computer and IBM, which held first and second place in the market, respectively. Worldwide, Dell Computer had nearly a 6 percent market share (see Exhibit 1). And the company was gaining market share quickly in all of the world's markets. The company's fastest growing market for the past several quarters was Europe. Even though Asia's economic woes in the first quarter of 1998 resulted in a slight decline in Asian sales of PCs, Dell's sales in Asia rose 35 percent. Dell's sales at its Internet Web site were averaging $5 million a day and were expected to reach $1.5 billion annually by year-end 1998. Dell Computer had 1997 revenues of $12.3 billion, up from $3.4 billion in 1994—a compound average growth rate of 53 percent. Over the same period, profits were up from $140 million to $944 million—an 89 percent growth rate. Since 1990, the company's stock price had exploded from a split-adjusted price of 23 cents per share to $83 per share in May 1998—a 36,000 percent increase. Dell Computer was the top-performing big company stock so far during the 1990s and seemed poised to become the stock of the decade. Dell's principal products included desktop PCs, notebook computers, workstations, and servers. The company also marketed a number of products made by other manufacturers, including CD-ROM drives, modems, monitors, networking hardware, memory cards, storage devices, speakers, and printers. The company's products and services were sold in more than 140 countries. Sales of desktop PCs accounted for about 65 percent of Dell's total revenues; sales of notebook computers, servers, and workstations accounted for about 33 percent of revenue. In early 1998, the company had 16,000 employees. At age 13, Michael Dell was running a mail-order stamp-trading business, complete with a national catalog, and grossing $2,000 per month. At 16, he was selling subscriptions to the Houston Post, and at 17 he bought his first BMW with money he had earned. He enrolled at the University of Texas in 1983 as a premed student (his parents wanted him to become a doctor) but soon became immersed in computers and started selling PC components out of his college dormitory room. He bought random-access memory (RAM) chips and disk drives for IBM PCs at cost from IBM dealers, who often had excess supplies on hand because they were required to order large monthly quotas from IBM. Dell resold the components through newspaper ads (and later through ads in national computer magazines) at 10-15 percent below the regular retail price. By April 1984 sales were running about $80,000 per month. Dell dropped out of college and formed a company, PCs Ltd., to sell both PC components and PCs under the brand name PCs Limited. He obtained his PCs by buying retailers' surplus stocks at cost, then powering them up with graphics cards, hard disks, and memory before reselling them. His strategy was to sell directly to end users; by eliminating the retail markup, Dell's new company was able to sell IBM clones (machines that copied the functioning of IBM PCs using the same or similar components) at about 40 percent below the price of an IBM PC. The price discounting strategy was successful, attracting price-conscious buyers and producing rapid growth. By 1985, the company was assembling its own PC designs with a few people working on six-foot tables. The company had 40 employees, and Michael Dell worked 18-hour days, often sleeping on a cot in his office. By the end of fiscal 1986, sales had reached $33 million. During the next several years, however, PCs Ltd. was hampered by a lack of money, people, and resources. Michael Dell sought to refine the company's business model, add needed production capacity, and build a bigger, deeper management staff and corporate infrastructure while at the same time keeping costs low. The company was renamed Dell Computer in 1987, and the first international offices were opened that same year. In 1988 Dell added a sales force to serve large customers, began selling to government agencies, and became a public company—raising $34.2 million in its first offering of common stock. Sales to large customers quickly became the dominant part of Dell's business. By 1990 Dell Computer had sales of $388 million, a market share of 2-3 percent, and an R&D staff of over 150 people. Michael Dell's vision was for Dell Computer to become one of the top three PC companies. Thinking its direct sales business would not grow fast enough, in 1990-93, the company began distributing its computer products through Soft Warehouse Superstores (now CompUSA), Staples (a leading office-products chain), Wal-Mart, Sam's Club, and Price Club (now Price/Costco). Dell also sold PCs through Best Buy stores in 16 states and through Xerox in 19 Latin American countries. But when the company learned how thin its margins were in selling through such distribution channels, it realized it had made a mistake and withdrew from selling to retailers and other intermediaries in 1994 to refocus on direct sales. At the time, sales through retailers accounted for only about 2 percent of Dell's revenues. Further problems emerged in 1993. Dell reportedly had $38 million in second-quarter losses that year from engaging in a risky foreign-currency hedging strategy. Also, quality difficulties appeared in certain PC lines made by the company's contract manufacturers, profit margins declined, and buyers were turned off by the company's laptop PC models. To get laptop sales back on track, the company took a charge of $40 million to write off its laptop line and suspended sales of laptops until it could get redesigned models into the marketplace. The problems resulted in losses of $36 million for the company's fiscal year ending January 30, 1994. Because of higher costs and unacceptably low profit margins in selling to individuals and households, Dell did not pursue the consumer market aggressively until sales on the company's Internet site took off in 1996 and 1997. Management noticed that while the industry's average selling price to individuals was going down, Dell's was going up—people who were buying their second and third computers, who wanted powerful computers with multiple features, and who did not need much technical support were choosing Dell. It became clear that PC-savvy individuals liked the convenience of buying direct from Dell, ordering exactly what they wanted, and having it delivered to their door within a matter of days. In early 1997, Dell created an internal sales and marketing group dedicated to serving the individual consumer segment and introduced a product line designed especially for individual users. By late 1997, Dell had become the industry leader in keeping costs down and wringing efficiency out of its direct sales and build-to-order business model. Industry observers saw Dell as being in strong position to capitalize on several forces shaping the PC industry—sharp declines in component prices, rapid improvements in PC technology, and growing customer interest in having PCs equipped with the power, components, and software they wanted. Exhibit 2, Exhibit 3, Exhibit 4, and Exhibit 5 contain a five-year review of Dell Computer's financial performance and selected financial statements contained in the company's 1998 annual report. Michael Dell was widely considered one of the mythic heroes within the PC industry having been labeled as "the quintessential American entrepreneur" and "the most innovative guy for marketing computers in this decade." He was the youngest CEO to guide a company to a Fortune 500 ranking. His prowess was based more on an astute combination of technical knowledge and marketing know-how rather than on being a technowizard. In 1998 Michael Dell owned about 16 percent of Dell Computer's common stock, worth about $10 billion. In the company's early days Michael Dell was said to hang around mostly with the company's engineers. He was so shy that some employees thought he was stuck up because he never talked to them. But people who worked with him closely described him as a likable young man who was slow to warm up to strangers.1 Early in the company's history, Michael's managerial experience was limited, but Lee Walker, a 51-year-old venture capitalist brought in by Michael Dell provided much-needed managerial and financial experience during the company's organization-building years, became Michael Dell's mentor, built up his confidence, and was instrumental in turning him into a polished executive.2 Walker served as the company's president and chief operating officer during the 1986-90 period; he had a fatherly image, knew everyone by name, and played a key role in implementing Michael Dell's marketing ideas. Under Walker's tutelage, Michael Dell became intimately familiar with all parts of the business and turned into a charismatic leader with an instinct for motivating people and winning their loyalty and respect. When Walker had to leave the company in 1990 because of health reasons, Dell turned to Morton Meyerson, former CEO and president of Electronic Data Systems. Meyerson provided guidance on how to transform Dell Computer from a fast-growing medium-sized company into a billion-dollar enterprise. Michael Dell usually spoke in a quiet, reflective manner and came across as a person with maturity and seasoned judgment far beyond his age. He was an accomplished public speaker. He delegated authority to subordinates, believing that the best results came from "turning loose talented people who can be relied upon to do what they're supposed to do." Business associates viewed Michael Dell as an aggressive personality, an extremely competitive risk-taker who had always played close to the edge. Moreover, the people who he hired were aggressive and competitive, traits that translated into an aggressive, competitive, intense corporate culture with a strong sense of mission and dedication. Dell's sales were up strongly in the first quarter of 1998, even in product areas where the company had previously lagged, pushing its global market share to 7.9 percent and its U.S. share to 11.8 percent. Unit shipments were 1.6 million units, compared to 978,000 in the first quarter of 1997. In laptop PCs, Dell moved into third place in U.S. sales and fifth place worldwide. And it climbed into second place in higher-margin products like servers and Windows NT-based workstations. Dell announced the formation of an alliance with Data General Corporation to enter the market for data storage equipment. In the first quarter of 1998, about half of the industry's PC sales consisted of computers selling for less than $1,300. Dell's average selling price was $2,500 per unit, down 9 percent from the prior quarter. The company was planning to broaden its product line to include lower-priced PCs equipped with Intel's low-end Celeron chip; Dell's new budget models were priced in the $1,200 range. Bibliography: Word Count: 1926
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