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Dell Computer Corporation Strategy and Challenges

You don’t ever really know whether you’ve come up with the right plan until much later—when it either works or it doesn’t. What is the right plan? It’s the one that helps you identify what you need to do to ensure success. It’s the one that rallies your employees around a few common goals—and motivates them to achieve them. It’s one that involves your customers’ goals and your suppliers’ goals and brings them all together in a unified focus. —Michael Dell

In 1984, at the age of 19, Michael Dell founded Dell Computer with a simple vision and business concept—that personal computers could be built to order and sold directly to customers. Michael Dell believed his approach to the PC business 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.

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While the company sometimes struggled during its early years trying to refine its strategy, build an adequate infrastructure, and establish market credibility against better-known rivals, Dell’s build-to-order, the sell-direct approach proved appealing to growing numbers of customers worldwide during the 1990s as global PC sales rose to record levels. And, as Michael Dell had envisioned, the direct-to-the-customer strategy gave the company a substantial cost and profit margin advantage over rivals that manufactured various PC models in volume and kept their distributors and retailers stocked with ample inventories.

Dell Computer’s Market Position in Early 2000

Going into 2000, Dell Computer was the U.S. leader in PC sales, with nearly a 17 percent market share, about 1 percentage point ahead of second-place Compaq. Gateway was third with 8.9 percent, followed by Hewlett-Packard with 8.8 percent and IBM with 7.2 percent. Dell overtook Compaq as the U.S. sales leader in the third quarter of 1999, and it had moved ahead of IBM into second place during 1998 (see Exhibit 1). Worldwide, Dell Computer ranked second in market share (10.5 percent) behind Compaq (14.0 percent).

IBM ranked third worldwide, with an 8.2 percent share, but this share was eroding. Since 1996, Dell had been gaining market share quickly in all of the world’s markets, growing at a rate more than triple the 18 percent average annual increase in global PC sales. Even though Asia’s economic woes in 1997–98 and part of 1999 dampened the market for PCs, Dell’s PC sales across Asia in 1999 were up a strong 87 percent. Dell was also enjoying strong sales growth in Europe.

Dell’s sales at its Web site (www.dell.com) surpassed $35 million a day in early 2000, up from $5 million daily in early 1998 and $15 million daily in early 1999. In its fiscal year ending January 31, 2000, Dell Computer posted revenues of $25.3 billion, up from $3.4 billion in the year ending January 29, 1995—a compound average growth rate of 49.4 percent. Over the same time period, profits were up from $140 million to $1.67 billion—a 64.1 percent compound average growth rate. Since its initial public offering of common stock in June 1988 at $8.50 per share, the company had seen its stock price split seven times and increase 45,000 percent. Dell Computer was one of the top 10 best-performing stocks on the NYSE and the NASDAQ during the 1990s. In recent years, Dell’s annual return on invested capital had exceeded 175 percent.

Dell’s principal products included desktop PCs, notebook computers, workstations, servers, and storage devices. It also marketed a number of products made by other manufacturers, including CD-ROM drives, modems, monitors, networking hardware, memory cards, speakers, and printers. The company received nearly 3 million visits weekly at its Web site, where it maintained 50 country-specific sites.

It was a world leader in migrating its business relationships with both customers and suppliers to the Internet. In 1998 the company expanded its Internet presence with the launch of www.gigabuys.com, an online source for more than 30,000 competitively priced computer-related products. Sales of desktop PCs accounted for about 65 percent of Dell’s total systems revenue; sales of notebook computers generated 20–25 percent of revenues, and servers and workstations accounted for 10–15 percent of revenues. Dell products were sold in more than 170 countries. In early 2000, the company had 33,200 employees in 34 countries, up from 16,000 at year-end 1997; approximately one-third of Dell’s employees were located in countries outside the United States, and this percentage was growing.

Company Background

When Michael Dell was in the third grade, he responded to a magazine ad with the headline “Earn Your High School Diploma by Passing One Simple Test.” At that age, he was both impatient and curious—always willing to try ways to get something done more quickly and easily. Early on, he became fascinated by what he saw as “commercial opportunities.” At age 12, 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 the more than $18,000 he had earned.

He enrolled at the University of Texas in 1983 as a pre-med student (his parents wanted him to become a doctor) but soon became immersed in the commercial opportunities he saw in computer retailing 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 per cent below the regular retail price.

By April 1984 sales were running about $80,000 per month. Michael Dell at age 18 dropped out of college and formed a company, PCs Ltd., to sell both PC components and PCs under the brand 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 per cent below the price of an IBM PC.

The price-discounting strategy was successful, attracting price-conscious buyers and producing rapid growth. By 1985, with a few people working on six-foot tables, the company was assembling its own PC designs. 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 Limited was hampered by growing pains—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 to 3 percent, and an R&D staff of over 150 people. Michael Dell’s vision was for Dell Computer to become one of the world’s 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 Stores, 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, when Dell reportedly lost $38 million in the second quarter from engaging in a risky foreign-currency hedging strategy; had quality difficulties with certain PC lines made by the company’s contract manufacturers; and saw its profit margins decline. Also that year, 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 those products 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 Computer 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—second- and third-time computer buyers who wanted powerful computers with multiple features and 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 global industry leader in keeping costs down and wringing efficiency out of its direct-sales, build-to-order business model. Going into 2000, Dell Computer had made further efficiency improvements and was widely regarded as having the most efficient procurement, manufacturing, and distribution process in the global PC industry. The company was a pioneer and acknowledged world leader in incorporating e-commerce technology and use of the Internet into its everyday business practices.

The goal was to achieve what Michael Dell called “virtual integration”—a stitching together of Dell’s business with its supply partners and customers in real-time such that all three appeared to be part of the same organizational team.1 The company’s mission was “to be the most successful computer company in the world at delivering the best customer experience in the markets we serve.”2

Michael Dell

Michael Dell was widely considered one of the mythic heroes of the PC industry, and was labelled “the quintessential American entrepreneur” and “the most innovative guy for marketing computers in this decade.” In 1992, at the age of 27, Michael Dell became the youngest CEO ever to head a Fortune 500 company; he was a billionaire at the age of 31. Once pudgy and bespectacled, Michael Dell at the age of 35 was physically fit, considered good-looking, wore contact lenses, ate only health foods, and lived in a three-story 33,000 square-foot home on a 60-acre estate in the Austin, Texas, metropolitan area. In early 2000 Michael Dell owned about 14 percent of Dell Computer’s common stock, worth about $12 billion.

The company’s glass-and-steel headquarters building in Round Rock, Texas (an Austin suburb), had unassuming, utilitarian furniture, abstract art, framed accolades to Michael Dell, laudatory magazine covers, industry awards plaques, bronze copies of the company’s patents, and a history wall that contained the hand-soldered guts of the company’s first personal computer.3

In the company’s early days Michael spent a lot of his time with the engineers. He was said to be shy, but those who worked with him closely described him as a likable young man who was slow to warm up to people.4 Michael described his experience in getting the company launched as follows:

There were obviously no classes on learning how to start and run a business in my high school, so I clearly had a lot to learn. And learn I did, mostly by experimenting and making a bunch of mistakes. One of the first things I learned, though, was that there was a relationship between screwing up and learning: The more mistakes I made, the faster I learned.

I tried to surround myself with smart advisors, and I tried not to make the same mistake twice. . . . Since we were growing so quickly, everything was constantly changing. We’d say, “What’s the best way to do this?” and come up with an answer. The resulting process would work for a while, then it would stop working and we’d have to adjust it and try something else. . . . The whole thing was one big experiment.

From the beginning, we tended to come at things in a very practical way. I was always asking, “What’s the most efficient way to accomplish this?” Consequently, we eliminated the possibility for bureaucracy before it ever cropped up, and that provided opportunities for learning as well.

Constantly questioning conventional thinking became part of our company mentality. And our explosive growth helped to foster a great sense of camaraderie and a real “can-do” attitude among our employees.

We challenged ourselves constantly, to grow more or to provide better service to our customers; and each time we set a new goal, we would make it. Then we would stop for a moment, give each other a few high fives, and get started on tackling the next goal.5

In 1986, to provide the company with much-needed managerial and financial experience, Michael Dell brought in Lee Walker, a 51-year-old venture capitalist, as president and chief operating officer. Walker had a fatherly image, came to know company employees by name, and proved to be a very effective internal force in implementing Michael Dell’s ideas for growing the company. Walker became Michael Dell’s mentor, built up his confidence and managerial skills, helped him learn how to translate his fertile entrepreneurial instincts into effective business plans and actions, and played an active role in grooming him into an able and polished executive.

6 Under Walker’s tutelage, Michael Dell became intimately familiar with all parts of the business, overcame his shyness, learned the ins and outs of managing a fast-growing enterprise, and turned into a charismatic executive with an instinct for motivating people and winning their loyalty and respect. Walker also proved instrumental in helping Michael Dell recruit distinguished and able people to serve on the board of directors when the company went public in 1988. When Walker had to leave the company in 1990 because of health reasons, Dell turned for advice 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.

Though sometimes given to displays of impatience, Michael Dell usually spoke in a quiet, reflective manner and came across as a person with maturity and seasoned judgment far beyond his age. His prowess was based more on having a pragmatic combination of astute entrepreneurial instincts, good technical knowledge, and marketing savvy rather than on being a pioneering techno-wizard. By the late 1990s, he was a much-sought-after speaker at industry and company conferences. (He received 100 requests to speak in 1997, 800 in 1998, and over 1,200 in 1999.) He was considered an accomplished public speaker and his views and opinions about the future of PCs, the Internet, and e-commerce practices carried considerable weight both in the PC industry and among executives worldwide.

His speeches were usually full of usable information about the nuts and bolts of Dell Computer’s business model and the compelling advantages of incorporating e-commerce technology and practices into a company’s operations. A USA Today article labeled him “the guru of choice on e-commerce” because top executives across the world were so anxious to get his take on the business potential of the Internet and possible efficiency gains from integrating e-commerce into daily business operations.7

Michael Dell was considered a very accessible CEO and a role model for young executives because he had done what many of them were trying to do. 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 and an extremely competitive risk-taker who had always played close to the edge. Moreover, the people Dell hired had similar traits, which translated into an aggressive, competitive, intense corporate culture with a strong sense of mission and dedication. Inside Dell, Michael was noted for his obsessive, untiring attention to detail—a trait which employees termed “Michaelmanaging.”

Michael Dell’s Business Philosophy In the 15 years since the company’s founding, Michael Dell’s understanding of what it took to build and operate a successful company in a fast-changing, high-velocity marketplace had matured considerably. His experience at Dell Computer and in working with both customers and suppliers had taught him a number of valuable lessons and shaped his leadership style. The following quotes provide insight into his business philosophy and practices:

Believe in what you are doing. If you’ve got an idea that’s really powerful, you’ve just got to ignore the people who tell you it won’t work, and hire people who embrace your vision.

It is as important to figure out what you’re not going to do as it is to know what you are going to do.

We instituted the practice of strong profit and loss management. By demanding a detailed P&L for each business unit, we learned the incredible value of facts and data in managing a complex business. As we have grown, Dell has become a highly data- and P&L- driven company, values that have since become core to almost everything we do.

For us, growing up meant figuring out a way to combine our signature, informal style and “want to” attitude with the “can do” capabilities that would allow us to develop as a company. It meant incorporating into our everyday structure the valuable lessons we’d begun to learn using P&Ls. It meant focusing our employees to think in terms of shareholder value. It meant respecting the three golden rules at Dell: (1) Disdain inventory, (2) Always listen to the customer, and (3) Never sell indirect.

I’ve always tried to surround myself with the best talent I could find. When you’re the leader of a company, be it large or small, you can’t do everything yourself. The more talented people you have to help you, the better off you and the company will be.

A company’s success should always be defined by its strategy and its ideas—and it should not be limited by the abilities of the people running it . . . When you are trying to grow a new business, you really need the experience of others who have been there and can help you anticipate and plan for things you might have never thought of.

For any company to succeed, it’s critical for top management to share power successfully. You have to be focused on achieving goals for the organization, not on accumulating power for yourself. Hoarding power does not translate into success for shareholders and customers; pursuing the goals of the company does. You also need to respect one another, and communicate so constantly that you’re practically of one mind on the most important topics and issues that face the company.

I have segmented my own job twice. Back in 1993–1994, it was becoming very clear to me that there was far too much to be done and far more opportunities than I could pursue myself . . . That was one of the reasons I asked Mort Topfer to join the company (as vice-chairman) . . . As the company continued to grow, we again segmented the job. In 1997, we promoted Kevin Rollins, who had been a key member of our executive team since 1996, to what we now call the office of the chairman. The three of us together run the company.

Beyond winning and satisfying your customer, the objective must be to delight your customer—not just once but again and again. I spend about 40 percent of my time with customers . . . Customers know that I am not looking for insincere praise, or an affirmation of our strengths. They know by the quantity of the time that I spend and the kinds of questions that I ask that I want to hear the truth, and that I want to walk away with a list of ideas about how we can work to make a valued partnership that much more significant . . . When you delight your customers—consistently—by offering better products and better services, you create strong loyalty. When you go beyond that to build a meaningful, memorable total experience, you win customers for life. Our goal, at the end of the day, is for our customers to say, “Dell is the smarter way to buy a computer.”

The pace of decisions moves too quickly these days to waste time noodling over a decision. And while we strive to always make the right choice, I believe it’s better to be first at the risk of being wrong than it is to be 100 percent perfect two years too late. You can’t possibly make the quickest or best decisions without data. Information is the key to any competitive advantage. But data doesn’t just drop by your office to pay you a visit. You’ve got to go out and gather it. I do this by roaming around. I don’t want my interactions planned; I want anecdotal feedback. I want to hear spontaneous remarks . . . I want to happen upon someone who is stumped by a customer’s question—and help answer it if I can . . . I show up at the factory to talk to people unannounced, to talk to people on the shop floor and to see what’s really going on. I go to brown-bag lunches two or three times a month, and meet with a cross-section of people from all across the company.8

Developments at Dell in Early 2000

Dell’s unit shipments in the fourth quarter of 1999 were 3.36 million units, compared to 2.3 million units in the fourth quarter of 1998. In laptop PCs, Dell moved into second place in U.S. sales and fourth place worldwide in 1999. In higher-margin products like servers and workstations running on Windows NT, Windows 2000, and Linux, Dell ranked number two in market share in the United States and number three worldwide. In Europe, Dell ranked first in market share in Great Britain, third in market share in France, and second overall behind Compaq Computer. In Asia, Dell’s sales were up 87 percent over 1998, despite sluggishness in the economies of several important Asian countries.

In 1999, about half of the industry’s PC sales consisted of computers selling for less than $1,000. Dell’s average selling price was $2,000 per unit in 1999, down from $2,500 in the first quarter of 1998. The company had recently introduced a line of WebPCs that was intended mainly for browsing the Internet. To counter the decline in the average selling prices of PCs, the company was placing increased emphasis on its line of PowerEdge servers and its Precision line of workstations, where average selling prices were $4,000 and higher, depending on the model.

Market Conditions in the PC Industry in 2000

There were an estimated 350 million PCs in use worldwide in 2000. Annual sales of PCs were approaching 130 million units annually (see Exhibit 6). About 50 million of the world’s 350 million PCs were believed to have Intel 486 or older microprocessors with speeds of 75 megahertz or less. The world’s population was over 6 billion people. Many industry experts foresaw a time when the installed base of PCs would exceed 1 billion units, and some believed the total would eventually reach 1.5 billion—a ratio of one PC for each four people.

Forecasters also predicted that there would be a strong built-in replacement demand as microprocessor speeds continued to escalate past 1,000 megahertz. A microprocessor operating at 450 megahertz could process 600 million instructions per second (MIPS); Intel had forecast that it would be able to produce microprocessors capable of 100,000 MIPS by 2011. Such speeds were expected to spawn massive increases in computing functionality and altogether new uses and applications for PCs and computing devices of all types.

At the same time, forecasters expected demand for high-end servers carrying price tags of $5,000 to over $100,000 to continue to be especially strong because of the rush of companies all across the world to expand their Internet and e-commerce presence. Full global build-out of the Internet was expected to entail installing millions of high-speed servers.

Declining PC Prices and Intense Competition

Sharp drops in the prices of a number of PC components (chiefly, disk drives, memory chips, and microprocessors) starting in late 1997 had allowed PC makers to dramatically lower PC prices—sales of PCs priced under $1,500 were booming by early 1998. Compaq, IBM, Hewlett-Packard, and several other PC makers began marketing sub-$1,000 PCs in late 1997. In December 1997, the average purchase price of a desktop computer fell below $1,300 for the first time. It was estimated that about half of all PCs sold in 1998 were computers carrying price tags under $1,500; by 1999, close to half of all PCs sold were units under $1,000. Growth in unit volume was being driven largely by sub-$1,000 PCs.

The low prices were attracting first-time buyers into the market and were also causing second- and third-time PC buyers looking to upgrade to more powerful PCs to forgo top-of-the-line machines priced in the traditional $2,000–$3,500 range in favor of lower-priced PCs that were almost as powerful and well-equipped. Powerful, multifeatured notebook computers that had formerly sold for $4,000 to $6,500 in November 1997 were selling for $1,500 to $3,500 in December 1999. The profits at Compaq, IBM, and several other PC makers began sliding in early 1998 and continued under pressure in 1999. Declining PC prices and mounting losses in PCs prompted IBM to withdraw from selling desktop PCs in 1999.

However, unexpected shortages of certain key components (namely, memory chips and screens for notebook computers) drove up prices for these items in late 1999 and moderated the decline in PC prices somewhat. But the shortages were expected to last only until suppliers could gear up production levels.

Continuing Economic Problems in Parts of Asia

Economic woes in a number of Asian countries (most notably, Japan, South Korea, Thailand, Indonesia, and to some extent, China) had put a damper on PC sales in Asia starting in 1997 and continuing through much of 1999. Asian sales of PCs in 1998 grew minimally (though sales were fairly robust in China); sales improved in 1999 but remained depressed in Thailand, Indonesia, and several other countries.

China began experiencing some economic problems in 1999. In addition, the sharp appreciation of the U.S. dollar against Asian currencies had made U.S.-produced PCs more expensive in terms of local currency to Asian buyers. In contrast, sales growth in the United States and Europe in 1999 remained strong, despite all the Y2K fears, mainly because of lower PC prices.

Disk-drive manufacturers and the makers of printed circuit boards, many of which were in Asia, were feeling the pressures of declining prices and skimpy profit margins. Industry observers were predicting that competitive conditions in the Asia-Pacific PC market favoured growing market shares by the top four or five players and the likely exit of PC makers that could not compete profitably.

The Uncertain Near-Term Outlook for PC Industry Growth

While few industry observers doubted the long-term market potential for PC sales, there were several troubling signs on the near-term horizon, along with differences of opinion about just how fast the market for PCs would grow. A number of industry observers were warning of a global slowdown in the sales of PCs in 2000 and beyond, partly due to the economic difficulties in several Asian countries and partly due to approaching market maturity for PCs in the United States, Japan, and parts of Europe. Consequently, some analysts were forecasting gradual slowing of the industry growth rates from the 20–25 percent levels that characterized the 1990s down to the 10–12 percent range by 2005.

However, U.S. shipments of PCs in the 1997–99 period had grown 20–25 percent annually, a much higher rate than most industry analysts had expected. Some 45 million new PCs were sold in the United States alone in 1999. Sales of servers, along with low-end PCs and workstations, were the fastest-growing segments of the PC industry in 1999 and were expected to be the segment growth leaders in 2000 and beyond.

On the positive side, some analysts expected that worldwide computer hardware sales in 2000–2003 period would grow at a compound annual rate of 15 to 20 percent, following cautious corporate buying in the second half of 1999 in preparation for meeting Y2K deadlines. Their expectations for 15–20 percent growth were based on (1) the introductions of Windows 2000 and Intel’s new 64-bit Itanium microprocessors, (2) rapidly widening corporate use of the Internet and e-commerce technologies, (3) wider availability of high-speed Internet access, and (4) growing home use of PCs—as first-time purchasers succumbed to the lure of reasonably equipped sub-$1,000 PCs and as more parents purchased additional computers for use by their children. The three most influential factors in home ownership of PCs were education, income, and the presence of children in the household.

Competing Value Chain Models in the Global PC Industry

When the personal computer industry first began to take shape in the early 1980s, the founding companies manufactured many of the components themselves—disk drives, memory chips, graphics chips, microprocessors, motherboards, and software. Subscribing to a philosophy of “We have to develop key components in-house,” they built expertise in a variety of PC-related technologies and created organizational units to produce components as well as to handle final assembly. While certain “noncritical” items were typically outsourced, if a computer maker was not at least partially vertically integrated and an assembler of some components, then it was not taken seriously as a manufacturer.

But as the industry grew, technology advanced quickly in so many directions on so many parts and components that the early personal computer manufacturers could not keep pace as experts on all fronts. There were too many technological innovations in components to pursue and too many manufacturing intricacies to master for a vertically integrated manufacturer to keep its products on the cutting edge.

As a consequence, companies emerged that specialized in making particular components. Specialists could marshal enough R&D capability and resources to either lead the technological developments in their area of specialization or else quickly match the advances made by their competitors. Moreover, specialist firms could mass-produce a component and supply it to several computer manufacturers far cheaper than any one manufacturer could fund the needed component R&D and then make only whatever smaller volume of components it needed for assembling its own brand of PCs.

Thus, in recent years, computer makers had begun to abandon vertical integration in favor of a strategy of outsourcing most all components from specialists and concentrating on efficient assembly and marketing their brand of computers. Exhibit 7 shows the value chain model that such manufacturers as Compaq Computer, IBM, Hewlett- Packard, and others used in the 1990s. (see Exhibit 7) It featured arm’s-length transactions between specialist suppliers, manufacturer/assemblers, distributors and retailers, and end users.

However, Dell, Gateway, and Micron Electronics employed a shorter value chain model, selling direct to customers and eliminating the time and costs associated with distributing through independent resellers. Building to order avoided (1) having to keep many differently equipped models on retailers’ shelves to fill buyer requests for one or another configuration of options and components and (2) having to clear out slow-selling models at a discount before introducing new generations of PCs. Selling direct eliminated retailer costs and markups. (Retail dealer margins were typically in the 4 to 10 percent range.) Dell Computer was far and away the world’s largest direct seller to large companies and government institutions, while Gateway was the largest direct seller to individuals and small businesses. Micron Electronics was the only other PC maker that relied on the direct-sales, build-to-order approach for the big majority of its sales.

Dell Computer’s Strategy

Dell management believed it had the industry’s most efficient business model. The company’s strategy was built around a number of core elements: build-to-order manufacturing, partnerships with suppliers, just-in-time components inventories, direct sales to customers, award-winning customer service and technical support, and pioneering use of the Internet and e-commerce technology. Management believed that a strong first-mover advantage accrued to the company from its lead over rivals in making e-commerce a centerpiece in its strategy.

Build-to-Order Manufacturing

Dell built its computers, workstations, and servers to order; none were produced for inventory. Dell customers could order custom-built servers and workstations based on the needs of their applications. Desktop and laptop customers ordered whatever configuration of microprocessor speed, random access memory (RAM), hard disk capacity, CD-ROM drive, fax/modem, monitor size, speakers, and other accessories they preferred. The orders were directed to the nearest factory. In 2000, Dell had PC assembly plants in Austin, Texas; Nashville/Lebanon, Tennessee; Limerick, Ireland; Xiamen, China; Penang, Malaysia; and El Dorado do Sul, Brazil. All six plants manufactured the company’s entire line of products.

Until 1997, Dell operated its assembly lines in traditional fashion, with each worker performing a single operation. An order form accompanied each metal chassis across the production floor; drives, chips, and ancillary items were installed to match customer specifications. As a partly assembled PC arrived at a new workstation, the operator, standing beside a tall steel rack with drawers full of components, was instructed what to do by little red and green lights flashing beside the drawers containing the components the operator needed to install.

When the operator was finished, the drawers containing the used components were automatically replenished from the other side, and the PC chassis glided down the line to the next workstation. However, Dell had reorganized its plants in 1997, shifting to “cell manufacturing” techniques whereby a team of workers operating at a group workstation (or cell) assembled an entire PC according to customer specifications. The shift to cell manufacturing reduced Dell’s assembly times by 75 percent and doubled productivity per square foot of assembly space. Assembled computers were tested, then loaded with the desired software, shipped, and typically delivered within five to six business days of the order placement.

Dell’s build-to-order, sell-direct strategy meant, of course, that Dell had no in-house stock of finished goods inventories and that, unlike competitors using the traditional value chain model (Exhibit 7), it did not have to wait for resellers to clear out their own inventories before it could push new models into the marketplace—resellers typically operated with 60 to 70 days’ inventory. Equally important was the fact that customers who bought from Dell got the satisfaction of having their computers customized to their particular liking and pocketbook.

Quality Control Programs All assembly plants had the capability to run testing and quality control processes on components, parts, and subassemblies obtained from suppliers, as well as for the finished products Dell assembled. Suppliers were urged to participate in a quality certification program that committed them to achieve defined quality specifications. Quality control activities were undertaken at various stages in the assembly process.

In addition, Dell’s quality control program included testing of completed units after assembly, ongoing production reliability audits, failure tracking for early identification of problems associated with new models shipped to customers, and information obtained from customers through its service and technical support programs. All of the company’s plants had been certified as meeting ISO 9002 quality standards.

Partnerships with Suppliers and Just-in-Time Inventory Practices

Michael Dell believed it made much better sense for Dell Computer to partner with reputable suppliers of PC parts and components rather than integrate backward and get into parts and components manufacturing on its own. He explained why:

If you’ve got a race with 20 players all vying to make the fastest graphics chip in the world, do you want to be the twenty-first horse, or do you want to evaluate the field of 20 and pick the best one?9

A central element of Dell Computer’s strategy, therefore, was to evaluate the various makers of each component, pick the best one or two as suppliers, and partner with them for as long as they remained leaders in their specialty. Management believed long-term partnerships with reputable suppliers yielded several advantages. First, using name-brand processors, disk drives, modems, speakers, and multimedia components enhanced the quality and performance of Dell’s PCs. Because of varying performance of different brands of components, the brand of the components was as important or more important to some end users than the brand of the overall system.

Dell’s strategy was to partner with as few outside vendors as possible and to stay with them as long as they maintained their leadership in technology, performance, and quality. Second, because Dell’s partnership with a supplier was long term and because it committed to purchase a specified percentage of its requirements from that supplier, Dell was assured of getting the volume of components it needed on a timely basis even when overall market demand for a particular component temporarily exceeded the overall market supply.

Third, Dell’s formal partnerships with key suppliers made it feasible to have some of their engineers assigned to Dell’s product design teams and for them to be treated as part of Dell. When new products were launched, suppliers’ engineers were stationed in Dell’s plant, and if early buyers called with a problem related to design, further assembly and shipments were halted while the supplier’s engineers and Dell personnel corrected the flaw on the spot.10

Fourth, Dell’s long-run commitment to its suppliers laid the basis for just-in-time delivery of suppliers’ products to Dell’s assembly plants. Many of Dell’s vendors had plants or distribution centers within a few miles of Dell assembly plants and could deliver daily or even hourly if needed. To help suppliers meet its just-in-time delivery expectations, Dell openly shared its daily production schedules, sales forecasts, and new-model introduction plans with vendors. Using online communications technology, Dell communicated inventory levels and replenishment needs to vendors on a daily or even hourly basis. Michael Dell explained what delivery capabilities the company expected of its suppliers:

We tell our suppliers exactly what our daily production requirements are. So it’s not, “Well, every two weeks deliver 5,000 to this warehouse, and we’ll put them on the shelf, and then we’ll take them off the shelf.” It’s, “Tomorrow morning we need 8,562, and deliver them to door number seven by 7 am.”11

Dell also did a three-year plan with each of its key suppliers and worked with suppliers to minimize the number of different stock-keeping units of parts and components in designing its products. Current initiatives included using the Internet to further improve supply chain management and achieve still greater manufacturing and assembly efficiencies.

Why Dell Was Committed to Just-in-Time Inventory Practices Dell’s just-in-time inventory emphasis yielded major cost advantages and shortened the time it took for Dell to get new generations of its computer models into the marketplace. New advances were coming so fast in certain computer parts and components (particularly microprocessors, disk drives, and modems) that any given item in inventory was obsolete in a matter of months, sometimes quicker.

Having a couple of months of component inventories meant getting caught in the transition from one generation of components to the next. Moreover, it was not unusual for there to be rapid-fire reductions in the prices of components—in 1997 and early 1998, prices for some components fell as much as 50 percent (an average of 1 per cent a week). Intel, for example, regularly cut the prices on its older chips when it introduced newer chips, and it introduced new chip generations about every three months. The prices of hard disk drives with greater and greater memory capacity had dropped sharply in recent years as disk drive makers incorporated new technology that allowed them to add more gigabytes of hard disk memory very inexpensively.

The economics of minimal component inventories were dramatic. Michael Dell explained:

If I’ve got 11 days of inventory and my competitor has 80 and Intel comes out with a new 450-megahertz chip, that means I’m going to get to market 69 days sooner.

In the computer industry, inventory can be a pretty massive risk because if the cost of materials is going down 50 percent a year and you have two or three months of inventory versus 11 days, you’ve got a big cost disadvantage. And you’re vulnerable to product transitions, when you can get stuck with obsolete inventory.12

Collaboration with suppliers was close enough to allow Dell to operate with only a few days of inventory for some components and a few hours of inventory for others. Dell supplied data on inventories and replenishment needs to its suppliers at least once a day—hourly in the case of components being delivered several times daily from nearby sources. In a couple of instances, Dell’s close partnership with vendors allowed it to operate with no inventories.

Dell’s supplier of monitors was Sony. Because the monitors Sony supplied with the Dell name already imprinted were of dependably high quality (a defect rate of fewer than 1,000 per million), Dell didn’t even open up the monitor boxes to test them.13 Nor did it bother to have them shipped to Dell’s assembly plants to be warehoused for shipment to customers. Instead, using sophisticated data exchange systems, Dell arranged for its shippers (Airborne Express and UPS) to pick up computers at its Austin plant, then pick up the accompanying monitors at the Sony plant in Mexico, match up the customer’s computer order with the customer’s monitor order, and deliver both to the customer simultaneously. The savings in time, energy, and cost were significant.

The company had, over the years, refined and improved its inventory tracking capabilities, its working relationships with suppliers, and its procedures for operating with smaller inventories. In fiscal year 1995, Dell averaged an inventory turn ratio of 32 days. By the end of fiscal 1997 (January 1997), the average was down to 13 days. The following year, it was 7 days, which compared very favorably with Gateway’s 14-day average, Compaq’s 23-day average, and the estimated industry-wide average of over 50 days. In fiscal year 1999, Dell operated with an average of 6 days’ supply in inventory. The company’s long-term goal was to get its inventories down to a 3-day average supply.

Direct Sales

Selling direct to customers gave Dell firsthand intelligence about customer preferences and needs, as well as immediate feedback on design problems and quality glitches. With thousands of phone and fax orders daily, $35 million in daily Internet sales, and daily contacts between the field sales force and customers of all types, the company kept its finger on the market pulse, quickly detecting shifts in sales trends and getting prompt feedback on any problems with its products. If the company got more than a few of the same complaints, the information was relayed immediately to design engineers, who checked out the problem.

When design flaws or components defects were found, the factory was notified and the problem corrected within a matter of days. Management believed Dell’s ability to respond quickly gave it a significant advantage over rivals, particularly PC makers in Asia, that operated on the basis of large production runs of standardized products and sold them through retail channels. Dell saw its direct-sales approach as a totally customer-driven system, with the flexibility to change quickly to new generations of components and PC models.

Despite Dell’s emphasis on direct sales, industry analysts noted that the company sold perhaps 10 percent of its PCs through a small, select group of resellers.14 Most of these resellers were systems integrators. It was standard for Dell not to allow returns on orders from resellers or to provide price protection in the event of subsequent declines in market prices. From time to time, Dell offered its resellers incentive promotions at up to a 20 per cent discount from its advertised prices on end-of-life models. Dell was said to have no plans to expand its reseller network, which consisted of 50 to 60 dealers.

Dell’s Use of Market Segmentation To make sure that each type of computer user was well served, Dell had made a special effort to segment the buyers of its computers into relevant groups and to place managers in charge of developing sales and service programs appropriate to the needs and expectations of each market segment.

Until the early 1990s, Dell had operated with sales and service programs aimed at just two market segments: (1) corporate and governmental buyers who purchased in large volumes and (2) small buyers (individuals and small businesses). But as sales took off in 1995–97, these segments were subdivided into finer, more homogeneous categories (see Exhibit 8).

In 1999, 65 percent of Dell’s sales were to large corporations, government agencies, and educational institutions. Many of these large customers typically ordered thousands of units at a time and bought at least $1 million in PCs annually. Dell had hundreds of sales representatives calling on large corporate and institutional accounts. Its customer list included Shell Oil, Sony, Exxon-Mobil, MCI, Ford Motor, Toyota, Eastman Chemical, Boeing, Goldman Sachs, Oracle, Microsoft, Woolwich (a British bank with $64 billion in assets), Michelin, Unilever, Deutsche Bank, Wal-Mart, and First Union (one of the 10 largest U.S. banks). However, no one customer represented more than 2 percent of total sales.

Dell’s sales to individuals and small businesses were made by telephone, fax, and the Internet. It had a call center in the United States with toll-free phone lines; customers could talk with a sales representative about specific models, get information faxed or mailed to them, place an order, and pay by credit card. Internationally, Dell had set up toll-free call centers in Europe and Asia.15 The call centers were equipped with technology that routed calls from a particular country to a particular call center. Thus, for example, a customer calling from Lisbon, Portugal, was automatically directed to the call center in Montpelier, France, and connected to a Portuguese-speaking sales rep. Dell began Internet sales at its Web site (www.dell.com) in 1995, almost overnight achieving sales of $1 million per day. In 1997 sales reached an average of $3 million daily, hitting $6 million on some days during the Christmas shopping period.

Dell’s Internet sales averaged nearly $4 million daily in the first quarter of 1997, reached $14 million daily by year-end 1998, and climbed sharply to $35 million daily at the close of 1999. In early 2000, visits to Dell’s Web site for information and order placement were approaching 2.5 million weekly, about 20 times more that the number of phone calls to sales representatives. In early 2000, about 43 percent of Dell’s sales were Web-enabled and the percentage was increasing.

Dell in Europe In fiscal year 1999, $6.6 billion of Dell’s $18.2 billion in sales came from foreign customers. Europe, where resellers were strongly entrenched and Dell’s direct sales approach was novel, was Dell’s biggest foreign market, accounting for sales of $4.7 billion, up from $3.0 billion the prior year. Dell’s European revenues were growing over 50 percent annually, and unit volume was increasing at nearly a 35 percent annual rate. Sales of PCs in Europe were 19.7 million units in 1997, 25.4 million units in 1998, and 29.9 million units in 1999.

Expectations were for continued growth of 18 to 22 percent for the next several years. Europe’s population and economy were roughly the same as those of the United States, but computer usage was only half that of the United States in 1999. Germany led Europe in sales of PCs, with 6.6 million units in 1999 (up 21.6 percent over 1998); Great Britain was second, with unit sales of 5.5 million (up 25.2 percent over 1998); and France was third, with 1999 unit sales of 4.4 million (up 26.7 percent over 1998). According to Dataquest, the top five market leaders in PCs in Europe were as follows:

Fujitsu and Siemens had merged their PC operations in 1999 to move ahead of Dell in the ratings in Europe during 1999 (based on the combined market shares of the two brands); based on individual brand, however, Dell ranked second in Europe, ahead of both the Fujitsu brand and the Siemens brand.

Dell in China Dell Computer entered China in 1998 and by 2000 had achieved a market share close to 2 percent. China was the fifth largest market for PCs in the world, behind the United States, Japan, Germany, and Britain. But with unit volume expanding 30 per cent annually and a population of 1.2 billion people, the Chinese market for PCs was expected to become the second-largest in the world by 2005 (with annual sales of $25 billion) and to become the world’s largest PC market sometime thereafter.

The market leader in China was Legend, a local company; other major local PC producers were Founder (ranked fourth) and Great Wall (ranked sixth). IBM, Hewlett-Packard, and Compaq were among the top five market share leaders in China—all three relied on resellers to handle sales and service. Other companies among the top 10 in market share in China included Toshiba, NEC Japan, and Acer (a Taiwan-based company). Dell, ranked eighth in market share in 1999, was the only market contender that employed a direct-sales business model. Dell’s sales in China in 1999 were up 87 percent over 1998 levels.

Dell management believed that in China, as in other countries around the world, the company could be very price-competitive by cutting out middlemen and selling direct via the Internet, telephone, and a sales force that called on large customers. Dell’s primary market target in China was large corporate accounts. Management believed that many Chinese companies would find the savings from direct sales appealing, that they would like the idea of having Dell build PCs to their requirements and specifications, and that—once they became Dell customers—they would like the convenience of Internet purchases and telephone orders.

Dell recognized that its direct-sales approach would temporarily put it at a disadvantage in appealing to small-business customers and individual consumers. According to an executive from rival Legend, “It takes two years of a person’s savings to buy a PC in China. And when two years of savings is at stake, the whole family wants to come out to a store to touch and try the machine.”16 But Dell believed that over time, as Chinese consumers became more familiar with PCs and more comfortable with making online purchases, it would be able to attract growing numbers of small-business customers and consumers through Internet and telephone sales.

IBM was the market leader in 1999 in the entire Asia-Pacific region, with an estimated 8.4 percent share, up from 8.1 percent in 1998.17 Compaq had a second-place 7.3 percent share but was the market leader in a number of individual countries within the region. China-based Legend had a 7.1 percent share, most all of which came from sales in China. Samsung had the fourth largest market share, followed by Hewlett-Packard.

Dell in Latin America In 2000, PC sales in Latin America were approaching 5 million units annually. Latin America had a population of 450 million people. Dell management believed that in the next few years use of PCs in Latin America would reach 1 for every 30 people (one-tenth the penetration in the United States), pushing annual sales up to 15 million units. The company’s new plant in Brazil, the largest market in Latin America, was opened to produce, sell, and provide service and technical support for customers in Brazil, Argentina, Chile, Uruguay, and Paraguay.

Customer Service and Technical Support

Service became a feature of Dell’s strategy in 1986 when the company began providing a year’s free on-site service with most of its PCs after users complained about having to ship their PCs back to Austin for repairs. Dell contracted with local service providers to handle customer requests for repairs; on-site service was provided on a next-day basis. Dell also provided its customers with technical support via a toll-free phone number, fax, or e-mail.

Dell received close to 40,000 e-mail messages monthly requesting service and support and had 25 technicians to process the requests. Bundled service policies were a major selling point for winning corporate accounts. If a customer preferred to work with its own service provider, Dell supplied that provider with the training and spare parts needed to service the customer’s equipment.

Value-Added Services Selling direct allowed Dell to keep close track of the purchases of its large global customers, country by country and department by department—information that customers found valuable. And its close customer relationships resulted in Dell being quite knowledgeable about what each customer needed and how its PC network functioned.

Aside from using this information to help customers plan their PC needs and configure their PC networks, Dell used it to add to the value it delivered to its customers. For example, Dell could load a customer’s software at the factory, thereby eliminating the need for the customer’s PC personnel to unpack the PC, deliver it to an employee’s desk, hook it up, place asset tags on the PC, then load the needed software from an assortment of CD-ROMs and diskettes—a process that could take several hours and cost $200 to $300.18 Dell’s solution was to load the customer’s software onto large Dell servers at the factory and, when a particular version of a customer’s PC came off the assembly line, to use its high-speed server network to load whatever software the customer had specified onto the PC’s hard disk in a few seconds.

If the customer so desired, Dell would place the customer’s asset tags on the PC at the factory. Dell charged customers only $15 or $20 for the software-loading and asset-tagging services—the savings to customers were thus considerable. One large customer-reported savings of $500,000 annually from having Dell load its software and place asset tags on its PCs at the factory.19 In 1997, about 2 million of the 7 million PCs Dell sold were shipped with customer-specific software already loaded on the PCs.

In late 1997, in another effort to add value for its customers, Dell, following Compaq’s lead, creating a financial services group to assist customers with financing their PC networks.

Premier Pages Dell had developed customized, password-protected Web sites (called Premier Pages) for 40,000 corporate, governmental, and institutional customers worldwide. Premier Page sites gave customer personnel online access to information about all Dell products and configurations the company had purchased or that were currently authorized for purchase. Employees of Dell’s large customers could use Premier Pages to (1) obtain customer-specific pricing for whatever machines and options they wanted to consider, (2) place an order online that would be electronically routed to higher-level managers for approval and then on to Dell for assembly and delivery, and (3) seek advanced help desk support. Customers could also search and sort all invoices and obtain purchase histories.

These features eliminated paper invoices, cut ordering time, and reduced the internal labor customers needed to staff corporate purchasing and accounting functions. A customer’s Premier Pages also contained all of the elements of its relationship with Dell, including who the Dell sales and support contacts were in every country where the customer had operations, what software Dell loaded on each of the various types of PCs the customer purchased, and service and warranty records for each machine. So far, customer use of Premier Pages had boosted the productivity of Dell salespeople assigned to these accounts by 50 percent. Dell was providing Premier Page service to thousands of additional customers annually and adding more features to further improve functionality.

www.dell.com At the company’s Web site, which underwent a global redesign in late 1999 and had 50 country-specific sites in local languages and currencies, prospective buyers could review Dell’s entire product line in detail, configure and price customized PCs, place orders, and track those orders from manufacturing through shipping.

The closing rate on sales coming through www.dell.com were 20 per cent higher than sales inquiries received via telephone or fax. The company was adding Web-based customer service and support tools to make a customer’s online experience pleasant and satisfying. Already the company had implemented a series of online technical support tools:

• Support.Dell.com —This Web-based feature allowed customers to create a customized support home page; review technical specifications for Dell systems; obtain information and answers from an extensive database collected by Dell technicians, service providers, and customers; click on online links to Dell’s primary suppliers; and take three online courses on PC usage at no charge. The site enabled customers to select how they received online help, based on their comfort and experience with PC technology. The information available at this part of Dell’s Web site was particularly helpful to the internal help-desk groups at large companies. In late 1999, customer visits to support.Dell.com were running at a rate of 19 million per year.

• E-Support —Dell had developed advanced technology called “E-Support—Direct from Dell” that helped Dell systems detect, diagnose, and resolve most of their own problems without the need for users to interact with Dell’s support personnel. The goal of Dell’s E-Support technology was to create computing environments where a PC would be able to maintain itself, thus moving support from a reactive process to a preventive one. Michael Dell saw E-Support as “the beginning of what we call self-healing systems that we think will be the future of online support.”20 Dell expected that by the end of 2000 more than 50 percent of the customers needing technical help would use E-Support—Direct from Dell. Management believed the service would shorten the time it took to fix glitches and problems, reduce the need for service calls, cut customer downtimes, and lower Dell’s tech-support costs.

• Dell Talk —An online discussion group with 100,000 registered users, Dell Talk brought users and information technology (IT) professionals together to discuss common IT problems and issues.

• Ask Dudley —The Ask Dudley tool gave customers instant answers to technical service and support questions. Customers typed in the question in their native language and clicked on “ask.”

In February 2000, 40 to 45 percent of Dell’s technical support activities were being conducted via the Internet. Dell was aggressively pursuing initiatives to enhance its online technical support tools. Its top priority was the development of tools (as described in the above list) that could tap into a user’s computer, make a diagnosis, and if the problem was software related, perform an online fix.

Dell expected that such tools would not only make it easier and quicker for customers to resolve technical problems but would also help it reduce the costs of technical support calls (currently running at 8 million calls a year). The company estimated that its online technical support tools had resulted in 25 per cent fewer support calls from users, generating savings of between $5 and $10 per call.

Management believed that the enhancements it was making to www.dell.com made it easier and faster for customers to do business with Dell by shrinking transaction and order fulfillment times, increasing accuracy, and providing more personalized content. According to management, a positive Web site experience was a bigger driver of “e-loyalty” than traditional attributes like price and product selection.

On-Site Service Corporate customers paid Dell fees to provide support and on-site service. Dell generally contracted with third-party providers to make the necessary on-site service calls. Customers notified Dell when they had PC problems; such notices triggered two electronic dispatches—one to ship replacement parts from Dell’s factory to the customer sites and one to notify the contract service provider to prepare to make the needed repairs as soon as the parts arrived.21 Bad parts were returned to Dell for diagnosis of what went wrong and what could be done to see that the problems wouldn’t happen again. Problems relating to faulty components or flawed components design were promptly passed along to the relevant supplier, who was expected to improve quality control procedures or redesign the component. Dell’s strategy was to manage the flow of information gleaned from customer service activities to improve product quality and reliability.

On-Site Dell Support A number of Dell’s corporate accounts were large enough to justify dedicated on-site teams of Dell employees. Customers usually welcomed such teams, preferring to focus their time and energy on the core business rather than being distracted by PC purchasing and servicing issues. For example, Boeing, which had 100,000 Dell PCs, was served by a staff of 30 Dell employees who resided on-site at Boeing facilities and were intimately involved in planning Boeing’s PC needs and configuring Boeing’s network. While Boeing had its own people working on what the company’s best answers for using PCs were, there was close collaboration between Dell and Boeing personnel to understand Boeing’s needs in depth and to figure out the best solutions.

Migration to New Technology Dell had opened facilities in both Europe and North America to assist its customers and independent software providers in migrating their systems and applications to Windows 2000, Intel’s new 64-bit Itanium computer chip technology, and other next-generation computing and Internet technologies. Dell was partnering with Intel, Microsoft, Computer Associates, and other prominent PC technology providers to help customers make more effective use of the Internet and the latest computing technologies.

Dell, which used Intel microprocessors exclusively in its computers, had been a consistent proponent of standardized Intel-based platforms because it believed those platforms provided customers with the best total value and performance. Dell management considered both Intel and Microsoft as long-term strategic partners in mapping out its future.

Customer Forums In addition to using its sales and support mechanisms to stay close to customers, Dell held regional forums to stimulate the flow of information back and forth with customers. The company formed “Platinum Councils,” com

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