Chairman, Dell Inc.
Nationality: American.
Born: February 23, 1965, in Houston, Texas.
Education: Attended University of Texas, Austin, 1983–1984.
Family: Son of Alexander (orthodontist) and Lorraine D. (stockbroker) Dell; married Susan Lieberman (fashion designer, boutique owner), 1989; children: four.
Career: Dell Computer Corporation, Dell Inc., 1984–2004, chief executive officer; 1987–, chairman.
Awards: Customer Satisfaction Award, J. D. Power and Associates, 1991; CEO of the Year, Financial World, 1993; CEO of the Year, Industry Week, 1998; Entrepreneur of the Year, Inc., 1998; Chief Executive of the Year, Chief Executive, 2001.
Publications: Direct from Dell: Strategies That Revolutionized an Industry, 1999.
Address: Dell Inc., 1 Dell Way, Round Rock, Texas 78682-0001; http://www.dell.com.
Michael Dell defied conventional wisdom—that consumers would not purchase computer equipment over the telephone—and built a billion-dollar company doing just that. Through his direct method of offering low-cost, custom-configured personal computers direct to customers, Dell changed the competitive dynamic of the computer industry. Notable for a natural business talent coupled with a willingness to share power, Dell carried the company through rapid growth and economic difficulties. He innovated operating processes, took risks, learned through his mistakes, and built Dell Inc. from a college dormitory operation to a global corporation. Along the way Dell became one of the wealthiest Americans and the youngest CEO of a company on the Fortune 500 list of largest American companies.
Entrepreneurial Abilities Emerge
Dell understood the meaning of "business opportunity" early in life, as his mother's profession, stockbroker, frequently raised discussions of business and economic affairs at the family dinner table. So when he began to collect stamps at age 12 and noticed prices rising, Dell recognized a business opportunity. He determined the most profitable way to sell stamps would be to bypass the auctioneer and sell direct to collectors. He compiled a 12-page catalog of his and his friends' stamps and advertised in a stamp collectors' magazine. In this first business venture Dell earned $2000.
Dell further developed his business acumen at the age of 16, when he sold newspaper subscriptions for the Houston Post. The inefficiency of cold-calling prompted Dell to find better marketing methods. He determined that the people most likely to subscribe were newly married couples and people who had moved. He obtained lists of marriage license applicants and mortgage applicants then used his Apple II computer to address sales letters to people on these lists. The approach succeeded so well that Dell earned $18,000 the first year and had bought a BMW automobile by the time he went to college. In the back seat of that BMW, Dell carried three personal computers, the seeds of PC's Limited and Dell Computer Corporation.
Dell's fascination with computers began with exposure to a data processor in junior high school then to computers at the local Radio Shack store. After much persuasion, Dell's parents allowed him to use savings to buy an Apple II computer at the age of 15. To the fury of his parents, upon arriving home Dell dismantled the computer to see how it operated. The following year, in 1981, Dell bought an IBM desktop computer and learned how to upgrade and add new components. With insight that IBM-compatible computers would become the choice of business, Dell began to buy, upgrade, and resell personal computers for friends and acquaintances, eventually purchasing components at wholesale rates from distributors. Exposure to the computer industry fostered Dell's desire to start a computer business. In June 1982 he skipped classes for most of a week to attend the National Computer Conference. After saving money to buy a hard disk drive (not standard equipment at the time), Dell communicated with other computer enthusiasts on a bulletin board system and learned how the industry operated. He found dealers sold computers for $3,000 and made $1,000 gross profit, yet he could purchase components for less than $700.
Founding Dell Computer Corporation
Dell determined that he could compete with retail computer dealers by selling direct to consumers at a lower price and offering better technical service, but his parents had another idea—that Dell should become a physician. Dell went to the University of Texas at Austin in fall 1983. While he attended to premed studies, Dell continued to upgrade and resell computers, finding customers among students and local business-people through word-of-mouth. By the time his parents made a surprise visit in November to address poor class attendance, Dell knew he wanted to compete with IBM. An attempt to be the good son and study premed lasted approximately three weeks, then Dell returned to upgrading computers. In early 1984 Dell registered PC's Limited with the state of Texas and moved to a two-bedroom condominium. Between word-of-mouth referrals and a small advertisement in the local newspaper, PC's Limited sold between $50,000 and $80,000 per month in computers, add-on components, and upgrade kits. The week before final examinations in May 1983 Dell incorporated the company as Dell Computer Corporation with the state-required minimum of $1,000 capital. He never returned to college.
PC's Limited moved to a 1,000-square-foot office, and Dell hired a few people to take and fill orders and upgrade basic machines. Computer sales increased so rapidly that the company outgrew that facility and two larger ones in one year. When the company moved into a 30,000-square-foot facility in 1985, Dell believed the space would never be used. But that year the company began to design and build computers with purchased components. Dell hired an engineer to develop a 286 microprocessor from chip sets, a strategy that simplified computer design. In spring 1986 Dell introduced the fastest personal computer of the time, a 12-megahertz 286 processor. The price of $1,995 compared favorably with IBM's price of $3,995 for a 6-megahertz 286 processor. The machine caught the attention of the news media and garnered excellent performance reviews and a cover story in PC Week. Sales exploded to $60 million that year.
Despite speculation that consumers would not want to purchase a technologically complex product over the telephone, Dell succeeded. From the start Dell emphasized a customer focus. Another company could compete on price, but quality products and excellent service would make Dell Computer sustainable over the long term. The advantage of custom configuration and a direct relationship with customers meant that Dell did not have to guess what a customer might want then attempt to inventory and sell preconfigured computers, as the competition tended to do. Parts inventory and computer manufacturing processes were designed for rapid configuration and product delivery in a matter of days. Because the direct model did not allow the customer to see or handle the product, however, in 1986 Dell began to offer a 30-day money back guarantee, a first in the industry. When the company began to pursue corporate business, Dell initiated another industry first in 1986, next-day, on-site service for personal computers in the customer's home or office.
Business As an Experience in Hands-on Learning
Rapid growth challenged Dell's abilities as a businessman. Although he made many mistakes, Dell credited those mistakes with helping him learn quickly. It was ironic that when Dell made big mistakes, those mistakes conflicted with his most cherished ideas: to manage inventory, to focus on the customer, and to sell direct to the customer.
The first major mistake involved excess parts inventory and led to innovation in high-tech production. Growing at a rapid pace, the company bought as many parts as it could. When technology changed in 1989, however, the company was left with memory chips that could not be used or sold. The company had to raise prices to compensate for the loss, slowing growth. Taking an unconventional approach to problem solving, the company implemented supply process in partnership with vendors. This strategy limited parts inventory, so that when technology changed, Dell Computer could adopt the new technology quickly. During the late 1990s Dell refined supply chain management to less than an eight-day lead, whereas competitors maintained inventory of preconfigured computers for more than 60 days. The vendor relationships worked because Dell shared information and helped vendors stay abreast of technological change.
The second major mistake involved development of the Olympic computer, introduced in 1990 with technology that far exceeded anything in the industry. Customers said they did not need that much technology. While certain elements of the new technology were applied elsewhere, Dell realized he had not communicated with his customers before product development. He learned that slow, incremental change served the customer better.
The third problem involved entry into the retail market in 1990. Once profit and loss analysis by business segment was put into place, Dell discovered that the company lost money in retail. Although retail sales accounted for 10 percent of total sales, and retail sales were growing more than 15 percent industrywide, Dell risked an exit from retail in 1994 and refocused on the direct model. Dell launched www.dell.com that year, introduced online pricing in 1995, and initiated online sales in 1996. Internet sales quickly reached $1 million per day and increased to $50 million per day in 2000. Dell Computer entered the market for servers in 1996 and storage products in 1998, passing the cost savings of the direct model to customers. Again, Dell's direct method, selling servers and storage products directly over the telephone and then via the Internet, defied conventional wisdom.
Seeking Counsel and Sharing Power
Unlike many entrepreneurs, Dell learned to relinquish responsibility and share power when he could no longer handle responsibilities himself. He sought the wisdom of experienced executives early in the company's history. In 1986 Lee Walker, a venture capitalist and consultant, joined Dell Computer and established a mentoring relationship with Dell. Dell matured as a businessman when he accepted Walker's decision to fire or demote most of the senior management staff, recognizing the need to find people who could grow into positions of increasing responsibility as the company expanded. Walker encouraged Dell to overcome his shyness as well as his reluctance to take a public role. He persuaded Dell to use his name for the company and its computer brand, a change that took place in 1987 in conjunction with the company's first international foray, to the United Kingdom. Walker brought two high-profile executives to the board of directors, George Kozmetsky, the cofounder of Teledyne, and Bobby Ray Inman, the former chairman, president, and chief executive of Westmark Systems. These executives provided Dell executives with sound advice, particularly as the company made its first offerings of stock—a private placement in October 1987 and a public offering in June 1988.
When rapid growth surpassed the company's ability to provide quality products and service and operate profitably in the early 1990s, Dell sought objective perspectives. First he hired Thomas J. Meredith of Sun Microsystems as chief financial officer in November 1992. Rather than simply pursue rapid growth as a goal, Dell adapted to the need to include data about cash liquidity and profitability into daily decision making. When the company failed to launch quality laptop computer products in 1993, Dell hired John Medica, who had led development of the Apple PowerBook computer. Medica focused on a single product, the Latitude XP computer, which gave Dell Computer its first significant share of the laptop market in 1994. Aware that even a CEO-founder can be removed from position in a public company, Dell approached the board of directors in August 1993 with an outline for improving operations and profitability. He hired Bain & Company to assist with profit and loss analysis and to develop measurements that created responsibility and accountability at the level of each business unit.
In May 1994 Dell hired the former Motorola executive Morton L. Topfer as vice chairman. Topfer's experience in product cycles and management restructuring fit well with Dell Computer's needs for executive leadership. Dell handled products, technology, and general strategy and took a more public role, that of customer relations, dealing with the press, and giving speeches. Topfer handled budget, day-to-day operations, sales, and marketing. The change allowed Dell to spend more time with his growing family, and Topfer brought ideas and discipline to a new emphasis on detailed, long-range planning. A three-year goal of achieving $10 billion in revenue by the end of 1997 was exceeded by $2 billion.
Kevin Rollins, a Bain & Company consultant credited with recommending that Dell Computer cease retail operation, joined the company in 1996 and began to work with Dell and Topfer in the office of chairman in 1997. The three men shared the responsibilities until Topfer left in 1999. Afterward, Dell and Rollins shared responsibilities, working from adjoining offices divided by a glass wall and a glass door that never closed. In 2004 Dell relinquished the CEO title to Rollins, a recognition that Rollins was already functioning in that role, rather than of a change in responsibilities.
Maintaining the Entrepreneurial Spirit in a Global Corporation
During the company's early years of rapid growth, unconventional thinking and new ideas pervaded the decision-making process at Dell. A simple, informal business process was the consequence and the facilitator of rapid expansion. Employees frequently handled any task needed, such as taking orders when the telephone lines were busy. That salespeople had to set up their own computers cultivated customer service through hands-on experience with the product from the point of view of the user.
As sales rose from the millions into the billions, Dell sought to maintain an entrepreneurial company culture while addressing the needs of a publicly owned, global corporation. Involving more facts and data in the decision-making processes constituted a major adjustment to the free-spirited, entrepreneurial culture of the company. A careful approach involved not pursuing every business opportunity but prioritizing, because growth can occur too quickly and threaten the existence of the company. Rather than pursue every idea, Dell chose to examine ideas more closely in relation to the whole of the company and to develop chosen ideas to their full potential.
While he learned to apply facts to intuitive knowledge and an awareness of risk, Dell encouraged all of the attitudes embodied in the company culture from the start. Open communication and exchange of ideas across all levels of the organization contributed to a flexible, nonhierarchal structure that allowed for quick responses in a constantly changing environment. Dell found employees' spontaneous interactions and candid comments more helpful than planned presentations. A learning attitude accepted failure as essential to the process of taking unconventional approaches to problems, and openminded self-criticism provided the foundation for innovation.
One way that Dell strove to maintain the intimacy of a small company involved creating manageable business units, beginning in the mid-1990s. Corporate sales divided into small and large companies, then medium-sized companies. International divisions divided into specific markets as sales increased. In 2003 sales to educational institutions segmented into kindergarten through grade 12 and higher education. Segmentation allowed executives to move into positions of manageable, if fewer, responsibilities. The challenge of segmentation involved sustaining a sense of common goals. To unify a large organization of people with diverse responsibilities, Dell believed that each individual needed to understand his or her role in contributing to overall success. Communication throughout the company via e-mail newsletters and posters as well as compensation incentives furthered this goal.
Competitiveness Expands Market Share
Although Dell was known to be friendly and approachable, these qualities belied the competitiveness that helped his company become the leading manufacturer of personal computers worldwide. Although he designed the direct method with the intention of competing on price and service, Dell used that competitive edge whenever necessary. In 1992, when industry consolidation threatened smaller operations, Dell initiated a price war. When he introduced servers in 1996 Dell knew that Compaq used high profit margins in servers to offset low margins in desktop computers. He also knew the direct model gave Dell a price advantage.
When economic downturn negatively affected sales of personal computers, Dell initiated another price war, beginning in January 2001, adding aggressive advertising and cost cutting to the strategy. Dell restructured earlier than the competition, reducing the company's workforce by 1,700 in February 2001 and by another 3,000 jobs later that year. Dell also reduced inventory lead time to several hours. Supply trucks held inventory at the dock until needed on the factory floor when the customer paid for the computer. In 18 months the company rose from number five in worldwide personal computer sales to number one. Dell competed directly with Hewlett Packard (HP) by initiating printer sales in 2001. Taking advantage of the atmosphere of uncertainty surrounding the merger between Compaq and HP, Dell cut prices and captured market share. When HP implied possible price increases to offset low profits in 2003, Dell cut prices again and captured market share.
Dell's entry into any product market or geographical market caused prices to decline, a process referred to as "the Dell effect." Industry observers noted that competition on price hindered innovation, as other companies cut research and development costs to remain profitable while Dell relied on suppliers to innovate technology. For Dell, focusing on the customer meant value at low cost with excellent service. While Dell emphasized a focus on the customer rather than the competition, he and his executive team kept their attention on both.
Sources for Further Information
Anderson Forest, Stephanie, et al., "The Education of Michael Dell," BusinessWeek, March 20, 1993, p. 82+.
"Dell, The Conqueror," BusinessWeek, September 24, 2001, p. 92+.
Goldstein, Mark L., "An Industry Legend—At 21," Industry Week, April 20, 1987, p. 72+.
Pellet, Jennifer, "Who's Afraid of Michael Dell?" Chief Executive, July 2001, p. 29+.
Pletz, John, "Dell Founder Still Hones Instincts 20 Years Later," Palm Beach Post, May 16, 2004.
—Mary Tradii
