Business • Michael Dell

From boy wonder to grown-up CEO, he’s changed personal computing forever.

September 1997By Comments

DESPITE THE GRAY FLANNEL SUITS they wear as camouflage, the greatest businessmen are boys at heart. They approach their work with the same absorption, chutzpah, and steely love of competition that Michael Jordan brings to basketball, because they know that, above all, business is a game. It’s simply a matter of squashing the competition. Computermaker Michael Dell has proved himself to be a great businessman, and he’s having a really good time making his rivals squirm. “I can’t imagine many jobs that would be more fun than this,” says Dell. “I mean, I don’t really think of it as working. I think if you left the computer industry after having been in it for a long time, you’d be incredibly bored and your brain would atrophy.”

For years press stories have hailed Dell as some kind of passing phenomenon, a boy-wonder computer geek who began selling computers from his UT dorm room and was destined to stumble in the brutally fast world of microelectronics. Instead, Dell has become the longest-tenured CEO of a major computer company. While he has yet to shake the whiz kid image, he has proved that he has the stamina and the flexibility to remain at the top of the country’s most competitive business, even through bumpy times. Now that sales of computers over the Internet are barreling skywardan arena in which he and his company are at a clear advantageDell Computer Corporation is siphoning all kinds of business from its competitors. Last year profits rose to $518 million, nearly double that of the year before, and the company surpassed several others to become the world’s fourth-largest computer retailer in terms of market share. Going by liquidity, profitability, and growth rate, Dell Computer already beats every other manufacturer in the business. No wonder Michael Dell’s rivals are suddenly copying his moves.

He’s doing all right personally too. Dell owns 16 percent of his company, putting his worth somewhere between $3 billion and $4 billion. According to Forbes, he’s one of the one hundred richest people on the planet. Today, at 32, Dell works out of an airy, modern building in Round Rock constructed of blond wood and glass and appointed with black leather chairs. Wearing a starched white shirt, a red tie, and business suit, he looks more like a Wall Street banker than a computer nerd. His dark, curly hair is cut short, and he has an easy manner, the kind acquired after years in the public spotlight. Dell is happy to talk about his business, but he doesn’t feel like talking about himself. “I don’t have any desire to expose a great deal about my personal life. There’s an overfascination with certain things that don’t necessarily have to do with whether a company is succeeding. And ways of characterizing things in convenient buckets that make people feel good because it sounds like it ought to be true.”

It’s public knowledge that Dell grew up in Houston but has lived in Austin for the past thirteen years. People there love to speculate about the mansion he’s building in the hills overlooking Lake Austin, though he doesn’t like to talk about it much either. “The house is a place where we live,” says Dell. “It’s a sort of private place. If you drive by the house, you’ll notice that it’s placed in such a way that it’s not particularly easy to see, and quite frankly, that was somewhat intentional.” Despite his reticence, Dell has lately become more of a public figure, after he and his wife, Susan, donated $1 million to the Austin Children’s Museum. “It’s something we’ve been doing for a while,” he notes of his charitable contributions, “although the size and magnitude have probably increased as our capacity for giving has increased.”

At the ridiculously young age of nineteen, Dell came up with an idea that is still reverberating throughout the computer industry. “If you go back to 1984, you had computer dealers who were scattered all over the United States,” he recalls. “Almost every street corner had its own computer dealer. They had very high markups, very low service, and they had inventory everywhere.” And while the dealers were selling brand names like IBM, the parts inside the machines were being manufactured by companies like Intel, Samsung, and Western Digital. Dell, who had tinkered with personal computers the way some teenagers tinker with cars, realized that he could buy the same parts from the same suppliers, assemble the computers himself, and then sell them directly to customers for significantly less than the dealers were charging. In essence, he saw that it was possible to merge the roles of computermaker and computer dealer into one entity. And make a fortune. Today this idea is known throughout the computer industry as the direct model of selling.

“It’s a pretty simple concept,” says Dell. “There are two key principles. The first one is if you eliminate the reseller’s markup, you’re going to save the customer money. And if you flow inventory more quickly than your competitors in a business where inventory devalues rapidly, you create profound advantages.” While typical manufacturers build large numbers of machines based on forecasts of what customers will demand from dealers, Dell’s company builds every computer as it is ordered. He also requires suppliers to bring him parts as he needs them rather than buying them in bulk. Unlike most of his rivals, Dell rarely gets stuck with unwanted, leftover computers or useless, expensive parts. He runs an unusually nimble company, better than most at negotiating the lethal turns of the computer industry.

After he put the direct model into practice, Dell discovered another crucial advantage. “You actually get to have a relationship with the customer. You have the opportunity to listen, and that means you can learn. You’re in constant contact with the customer, so you can tailor what you’re doing to the customer’s exact needs. And, it turns out, companies prefer a direct relationship to an indirect relationship.” The fact that companiesbig companies, Fortune 500 companieswould turn to a bargain-basement retailer like Dell was the twist that established rivals like IBM failed to anticipate. While many people outside the industry continue to think of Dell as selling primarily to individuals, such customers actually represent just one tenth of the firm’s business. Today the majority of Dell’s machines are sold to corporations, government agencies, and schools. Among the company’s clients are titans such as Boeing, Ford, and the World Bank.

Serving more and more buyers of this size has driven Dell Computer to grow at breakneck speed. Over its first eight years the company ballooned at an average of 80 percent a year, and for the past five it has grown at 50 percent a year, a rate few companies can handle. Of course, Wall Street loves that kind of pace, and since Dell Computer was founded, the value of its stock has increased by a staggering 12,000 percent. For a while, though, the biggest problem Dell faced was the nagging one of how to handle rampant success. In 1992 the business hit $2 billion in sales after growing 126 percent over the year before. The company was thrown into turmoil; nobody could keep track of what was going on. “Too much of a good thing is not a good thing,” concedes Dell. “We were growing so quickly that our infrastructure just could not keep pace with the company.”

Just as Dell was beginning to regain control of his ever-expanding business, he missed a boom period in the notebook-computer market; the fiasco wasn’t as serious as slowing the company’s growth, but it was a public stumble in a very competitive industry. In 1993, realizing that the laptops his company had been developing weren’t going to match up with the more powerful products being introduced by other companies, Dell decided to scrap the line of machines he’d been planning. For twelve painful months, an eternity in the computer industry, he watched the notebook market take off without him before he finally introduced his own revised version. In retrospect he views the experience as enlightening. “In some ways it was hard, but in some ways it was easy, because it was the obvious thing to do. I mean, once you get past the emotion of Gee, we think this is a good product, we spent a lot of time doing this, we put our heart and our energy into it,’ and you go to the cold reality of Is this actually going to be something that a customer would want to buy? Is it going to allow the company to succeed?’ then the decision becomes pretty clear. A lot of people make mistakes, not just in the computer business but in a lot of things, by using emotion when emotion just is not really going to help.”

Ultimately Dell launched a sleek, efficient line of notebooks. He had help from John Medica, an executive lured from Apple who had designed the popular Powerbook laptops. Dell has often hired people who are more experienced than he is to help him run his business. The more successful he has become, the more he has been able to cherry-pick talent from the top ranks of rival companies, the more successful he has become, and so on. Aside from its CEO, the most important person at Dell Computer today is vice chair-man Morton L. Topfer, who was recruited from Motorola, a company known for being disciplined in its planning for future growth. At Dell Topfer has introduced a more deliberate approach to expansion.

It seems to be working. Today Dell Computer has grown into a sprawling multinational company with offices around the globe; sales topped $3.4 billion in 1994, $5.2 billion in 1995, and $7.7 billion last year. The company’s European sales force now generates as much revenue as the entire company did three years ago, and its Asian sales force generates as much as the entire company did six years ago, and revenues from both divisions continue to climb. “Our business last quarter grew ninety percent again in Asia,” says Dell. “The potential for growth is enormous. You have two thirds of the world’s population living there, and very low usage rates for computers.” U.S. sales keep multiplying too. Under the direction of Kevin Rollins, who was hired away from the corporate consulting firm Bain and Company, Dell’s domestic sales division has been reorganized into teams that focus solely on particular customer markets. For example, Dell is the second-largest supplier of computers to grade schools, high schools, and universities across the countrya specialized market with its own needs. “We have this whole team of people who are very, very focused on the education market,” notes Dell. “That’s all they do.” The same is true for the federal government market, the small-business market, and the medical market. Dell will soon apply this theory of niche salesmanship to his foreign markets.

For a time, Dell’s rivals clung to the consoling thought that surely the upstart’s growth would be limited to the individual and business personal-computer market; conventional wisdom held that while big clients might turn to a company like Dell for everyday machines, they would never look to the company for more-sophisticated equipment. But as if he couldn’t resist the challenge, last year Dell dove into the market for servers, powerful machines that act as the linchpins of linked computer networks. “There were several reasons,” he explains. “The first reason was that our corporate customers wanted one vendor for all products. So if you had just desktops and notebooks, you were going to get in trouble with those accounts. The second problem was that our competitors had enormous profits in servers, and they were overcharging customers for servers and using those excess profits to compete with us in desktops and notebooks. So we said, We’ve got to put an end to this. We’re going to go into the server market and take away the profit havens of our competitors.’” Dell Computer is now a close third in the domestic server market, behind Hewlett-Packard and industry leader Compaq. Flush with that victory, in July Dell introduced a line of low-priced workstationscomplex tools used for engineering and design purposes.

Dell’s latest coup has been selling computers over the Internet, a medium fortuitously suited to direct-sales tactics. Since the company started hawking computers on its Web site last July, equipment and software sales have snowballed to an average of $2 million a day. “I think you have a combination of factors causing it to take off right now,” Dell says. “Internet usage inside companies has increased at a huge rate, so everybody has access. We’ve driven visits to our site through aggressive communication in our advertising. Look at any Dell advertisement anywhere in the world and you’ll see’ And computer users know that the experience on the Web is going to be much richer and much more interactive. They get all the information they want, it’s twenty-four hours a day, and it’s not intrusive.” Selling over the Internet is also cost-effective. “There’s no telephone call, there’s no person answering the phone, and all the people at Dell are getting much more efficient, because when people do call, they already know exactly what they want,” says the CEO. “Now we’re creating custom Web pages for large customers and putting the support tools that our own help people have right on the Web, which for a lot of users is really fantastic.”

This past year, in a concession to Dell’s steady onslaught on their market shares, the company’s three main rivals, Compaq, IBM, and Hewlett-Packard, all announced that they too were going to adopt the direct model of selling to some of their customers while continuing to sell indirectly. Michael Dell finds this development highly amusing: “Think about it. You have fifty thousand dealers who are selling your product. They represent all of your revenue at the moment, and now you’re going to go to each one of them and tell them you’re going into competition with them. It’s wacky.”

To date nobody has been able to master the fine art of selling both directly and indirectly, though several computermakersincluding Dellhave tried. (In the early nineties Dell attempted to reach additional consumers through retail outlets like Wal-Mart but abandoned the effort after deciding the costs of maintaining two routes to market outweighed the benefits.) Dell knows that even if his adversaries ever figure out a way to sell both directly and indirectly without alienating dealers, it would still be a long time before they became as good at direct sales as he is.

Which raises a final question about the place that history will someday accord Michael Dell: What exactly does it mean to be really good at direct sales? The computer industry prizes technological wizardry above all else, and for that reason Dell has always been viewed as suspect by his own kindas little more than a Sam Waltonwannabe in a lucrative niche market. Dell shrugs at the idea that he is doomed never to achieve true greatness in the eyes of his colleagues and suggests that this attitude explains his constant trouncing of the competition. “I’d much rather design the winning system to sell and support customers than design an incredibly technically proficient microprocessor that nobody wants to buy. I mean, that’s the problem with our industry: There are a lot of technologists who will create wonderful things and then go try to find people who want to buy them. We started with the customer, and then we worked our way back.”

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