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Dell Computer Corporation: Strategy and Challenges

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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 altogether 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. 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, 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 percent 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 percent below the price of an IBM PC. The price-discounting strategy was successful,

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