Dell Computer Corp

views updated

DELL COMPUTER CORP.

Dell Computer Corp. is the largest personal computer (PC) vendor in the world, a position it has held since April 2001 when it usurped Compaq Computer Corp. The firm also is the leading seller of PCs via the Internet, a medium that accounts for more than half of Dell's PC sales. In 2000, total revenues reached roughly $32 billion, and employees exceeded 38,000. Although PCs account for roughly 55 percent of Dell's total annual sales, a late-1990s push into the Internet-based server and storage markets has started to pay off for the firm, which now is second only to Compaq in U.S. server sales. Fortune magazine ranked Dell 10th on its list of "Most Admired Companies" in 2001.

EARLY HISTORY

University of Texas freshman Michael S. Dell began selling IBM-compatible computers from his dorm room in 1984. Using parts he purchased at wholesale prices, Dell built the machines to closely resemble IBM models and then sold them to PC users looking to avoid the prices typically charged by computer retailers. Realizing that the $80,000 per month he brought in could easily be transformed into a full-fledged business, Dell left school and founded Dell Computer Corp. in April of 1984. Believing that more experienced computer users would likely recognize the value his custom-built machines offered, Dell began placing advertisements in computer magazines. Customers used an 800 number to places orders that Dell would ship via mail upon completion. Dell used no middleman, and the firm's direct sales model allowed it to price machines significantly lower than competing PC vendors.

Dell quickly found itself a leader in mail order PC sales. Revenues of $6 million in 1985 ballooned to nearly $40 million the following year. Realizing that he needed help managing the company's growth, Dell recruited several marketing managers from competitor Tandy Corp., as well as investment banker E. Lee Walker to serve as president. Dell himself served as CEO. In 1987, Dell began expanding its manufacturing facilities. The firm also created a national customer support center and started offering on-site setup, maintenance, and repair services for Dell products. An office in the United Kingdom marked the firm's initial foray into international sales. Dell also published its first catalog.

The firm's new marketing team began peddling Dell products to larger businesses. It also expanded Dell's sales force and increased advertising expenditures. Believing his firm was moving too far away from its initial direct selling model, Dell began criticizing his marketing executives for spending too much on advertising and using traditional marketing tactics. By the end of 1987, most of the executives from Tandy had either been asked to leave or had left on their own. Dell reorganized to improve its customer services in 1988. The firm also launched three new PC models, opened an office in Canada, began offering a leasing option, and increased its emphasis on targeting larger clients, such as governmental entities, corporations, and educational institutions. That year, Dell completed its initial public offering, selling shares for $8.50 each.

To better compete with Japanese PC firms that were lowering their prices, Dell began working to upgrade its machines. To this end, Dell hired former IBM Corp. engineer Glenn Henry in 1989, charging him with the task of overseeing product development. The firm also became one of the first to create file servers that used the Unix platform, and began working to incorporate Intel Corp.'s 486 microprocessor into its computers as soon as the chip was released. Dell also began selling several new dot matrix printers manufactured by Epson. Corporations accounted for 40 percent of the firm's 1990 revenues, which reached $546 million. Despite twofold sales growth, profits plunged by 64 percent, which Dell blamed on the higher research and development costs and a surplus inventory of memory chips. The firm began using retail outlets for the first time that year after reaching a sales agreement with Soft Warehouse Inc., the leading U.S. computer retailer. International growth continued with the construction of a manufacturing plant in Ireland and offices in France, Italy, and Sweden.

INTENSE GROWTH

Believing that its selling model was as important to the company's success as the products it sold, Dell devoted considerable resources to training its customer service staff, requiring all employees to complete a six-week training program—which covered how to answer questions, resolve complaints, take orders, and help clients select the best options for their computing needs—before allowing them to answer the phones. Customer complaints were aired in weekly staff meetings, which focused on how to best resolve issues. These efforts paid off in 1990 when J.D. Powers & Associates ranked Dell number one in its first customer satisfaction survey regarding PC makers. That year, the firm moved into the sixth place spot among the largest U.S. PC manufacturers, compared to 22nd in 1989.

In 1991, Dell unveiled its first notebook PC, hoping to become a major player in the burgeoning market. International growth continued at a rapid pace. Subsidiaries were established in Belgium, Finland, Luxembourg, Norway, and Spain; a customer support center was set up in the Netherlands; sales offices opened in Ireland and Belgium; and a direct marketing and on-site service program launched in Mexico. To enhance its industry leading customer service practices, Dell became the first PC maker to install applications software free for its clients.

Unlike many of its competitors, Dell actually benefited from the recessionary economic conditions of the early 1990s. Although corporate and consumer belt tightening was not severe enough to prevent PC users from making purchases, it did prompt many PC shoppers to seek discounted options for the first time. Consequently, Dell's customer base continued to swell. However, with the firm's success came increased competition from companies tying to imitate its direct sales model. Once such copycat rival, Gateway 2000, replaced Dell as the leading U.S. PC direct seller in 1992. That year, Dell implemented a program that reduced onsite service call response time to less than four hours. The firm also created its Professional Services Capabilities Unit, which facilitated communication among Dell's systems integrators, network integrators, and consultants across the globe. Subsidiaries opened in Poland, the Czech Republic, and Switzerland. Dell and Pertech Computer Ltd. of New Delhi agreed to jointly market systems throughout India. Sales grew to $890 million, and in 1992 Dell was listed as a Fortune 500 company for the first time.

By the end of 1993, Dell had become the world's fifth-largest PC maker with sales of more than $2 billion. A new service program allowed clients to choose the level of service they wanted from Dell. Technical problems with Dell's notebook PCs prompted the firm to shelve a new notebook line and take a $20 million hit. The firm deviated from its direct sales model when it agreed to let Sam's Club sell Dell Precision PCs at its 200 retail outlets in the United States. However, within a year it had abandoned all efforts to sell its computers in warehouse clubs and superstores such as Soft Warehouse, limiting its focus once again to mail-order sales. To counter the deep discounting tactics of Compaq Computer Corp., Dell launched Dimensions by Dell, a new series of low-cost PCs. Competitors like Compaq found it difficult to compete with Dell because the direct seller's operating costs were only 18 percent, roughly half those of a traditional PC seller. Dell was able to achieve these operating costs in large part because it operated with a minimal inventory. Customers told Dell exactly what machine they wanted before Dell made it, eliminating the guesswork faced by PC makers who were selling their machines through retail outlets. In 1995, Dell's share of the worldwide PC market reached three percent.

IMPACT OF THE INTERNET

Dell's direct sales model was ideally suited to a medium like the Internet. Dell began selling its PCs and related equipment via the World Wide Web in 1996. Via a process similar to the one used when they called Dell on the phone, customers were able to place their order on Dell's Web site. The firm's Internet store allowed users to choose configuration options, solicit price quotes, and place orders for single or multiple systems. The site also allowed purchasers to view their order status and offered support services to Dell owners. Within a year, Dell was selling roughly $1 million worth of computers a day via the Internet, and nearly 80 percent of the online clients were new to Dell. Because the Web helped to automate the PC purchasing process, Dell found itself able to handle the growing sales volume without having to drastically increase staff. Cost savings also were achieved as the firm's phone bill began shrinking.

By the end of 1997, nearly one-third of the orders received by Dell were being placed on the Internet. Because most of these orders were coming from individual consumers and small businesses, Dell began investigating ways to lure its larger clients to place orders online. The firm decided to create customized Web pages, known as Premiere Pages, for these customers. Along with housing information such as the system configurations already used by the firm and any discounts Dell might offer the firm, the pages also allowed users to request service and track orders electronically. For example, Detroit Edison Co. began buying Dell computers online to reduce the amount of time its employees spent on technology procurement, to eliminate paperwork, and to speed delivery.

According to the May 14, 2001 issue of BusinessWeek Online, "Michael Dell was e-business before e-business was cool. During the boom in technology spending, he used the Internet to reach out to customers and sell $50 million worth of computers a day." However, the Internet served as more than just a powerful sales medium for Dell in the late 1990s. The growing number of Internet users also fueled the server market, which Dell had started targeting in 1996, hoping to lessen its dependence on decreasingly expensive PCs. The following year, Dell also diversified into workstations. By 1998, servers were bringing in 16 percent of the Dell's total sales, which topped $12 billion. One year later, Dell was second only to Compaq Computer Corp. in U.S. server sales. That year, when competitors once again began cutting PC prices, Dell responded with its first PC under $1,000. Sales nearly doubled to $25.3 billion, and stock prices surged roughly 140 percent for the fourth consecutive year.

As the PC industry continued to decelerate in 2000, Dell started repositioning itself as an Internet technology provider, increasing its focus on servers and also moving into the storage systems market. The firm also started selling a variety of Internet services such as wireless access to the Internet and Web hosting. Sales growth for the year totaled 38.5 percent, down nearly 10 percent from the previous year, and stock prices began dropping. According to BusinessWeek Online, Dell's Internet savvy helped the firm to weather the storm. "Thanks to efficiencies created, in part, by Dell's Web-based supply chain, the company can remain profitable even while it launches a bloody PC price war." Because Dell had spent most of 2000 linking its suppliers to its online ordering system, suppliers only sent additional merchandise when Dell needed it. As a result, inventory was cut to one-third the amount stored by many competitors, and Dell saved roughly $50 million. In April of 2001, Dell moved ahead of Compaq Computer to become the world leader in PC sales.

Despite Dell's success in the PC price wars, several analysts criticize the firm, pointing out that more than half of Dell's sales still came from the deteriorating PC market. Furthermore, the firm's efforts in 2000 to develop an Internet PC called WebPC had dissolved when the firm realized it wouldn't be able to develop the technology without charging a relatively high price for it. In the past, Dell had been known more as a marketer of technology developed by other firms than a technology developer itself. The firm's attempt to develop a machine for the relatively new Internet appliance market marked a shift in direction for Dell. According to the October 2000 issue of Fortune, "Another way of explaining the troubles with WebPC is to say that Dell lost focus on being a market taker and tried instead to be a market maker. But as the company moves toward its third decade, it seems fair to ask if market taking will be enough." To maintain its second-place position in the server market and increase its sixth-place spot in the storage industry, Dell will find itself face to face with the likes of Sun Microsystems Inc., IBM, and EMC—all of which are known for their strength in developing new technology. However, those bullish on Dell's future cite the firm's past ability to use its direct sales model in new markets as an indication that it will likely succeed, despite formidable competition.