Michael Dell's Magic

Dec. 21, 2004
He listens -- and gives customers what they want, efficiently.

There are any number of good reasons to choose Michael Dell as IndustryWeek's CEO of the Year for 1998 -- or almost any other year this decade. There are Dell Computer Corp.'s average annual growth increases of 53% and average annual profit increases of 89% since fiscal 1995. . . . record revenues in 18 consecutive quarters and record profits in 17 of the last 18 quarters including the last 14 . . . six stock splits in the last six years and a more than 35,000% increase in the split-adjusted stock price in just over 10 years. (If you had invested $1,000 in Dell at its initial public offering, it would have been worth $309,322 when the stock split Sept. 4 and $373,588 on Nov. 2.) Then there's the unmatched success the company had in the first half of this year when other major personal-computer manufacturers were struggling because of problems in the Asian economy. Dell had sale increases of 35% in its Japan and Asia/Pacific markets, 73% in its Europe, Middle East, and Africa region, and overall revenue and net income increases of 54% and 62% in the first half of fiscal 1999 that ended Aug. 2. Not only that, Dell accounted for more than half of the industry's growth in the first half of the year. Need more? The business Michael Dell began in his college dorm room at age 18 has become a $15 billion company -- based on the four most recent quarters of business -- and given Dell, at age 33, a financial worth that is estimated by some to be larger than the wealth Bill Gates had accumulated at the same age. And then there are the personal philanthropic efforts of Michael Dell and his wife Susan. The Dells donated $1 million in September for an expansion and upgrading of X-ray facilities at Brackenridge Children's Hospital in Austin. The new Dell Children's Imaging Center will open next May with state-of-the-art equipment and will treat 15,000 children a year. That came on the heels of a $1 million contribution to the Austin Children's Museum for the construction of the Dell Discovery Center, which opened last December in downtown Austin with educational exhibits and activity spaces, as well as an outreach program for economically disadvantaged children and families. But Michael Dell isn't IW's CEO of the Year just because of Dell Computer's resounding financial success or because of his contributions to the community where he and his family live. He is IW's choice because of the way he keeps Dell Computer one step ahead of its competitors by constantly pushing the envelope of change. He has the ability to visualize and then capitalize on changes in the business world before they occur. And he has propelled Dell Computer to the top with an unconventional business model for selling and manufacturing, which his competitors are now scrambling to copy. (Dell has no finished-goods inventories, negligible component inventories, builds only to order, and sells and delivers a finished PC directly to its customers -- most of them other businesses or institutions -- in fewer than eight days. There are no middlemen.) "We have put a big X through traditional manufacturing," says Dell. "We focus on how fast we can deliver product, and we have designed manufacturing to be a continuous flow with customer-specific aspects such as loading proprietary customer software built into the process." His reasoning? "To have high levels of raw materials or finished goods in a warehouse can be very dangerous in a business where the value of these materials is going down about 1% a week." That inventory obsession has reduced the dollar volume of inventories at Dell by 15% in the last 21 months even as sales have risen sevenfold. Many of Dell's customers also want to copy that business model. "When they see costs can be taken out, a lot of our customers ask us to teach them how we operate so they can apply some of the same principles to their businesses," says Dell. "I think you will see more and more of this model in markets where the customer is more knowledgeable, where there is high markup, and where the distribution channel adds little or no value." Manufacturing and distribution aren't the only areas that Michael Dell has attacked. He and his company are feverishly defining the rules of electronic commerce and creating new paradigms for using the Internet to change global competition by more closely integrating the activities of suppliers, manufacturers, and customers. "You have to be self-critical to succeed," says Dell, to whom no method of doing business is sacred if a more efficient or faster way exists. "If you sat in on our management meetings, you would find that we are a remarkably self-critical bunch with a disdain for complacency that motivates us. We are always looking to do things more efficiently. We are 99% focused on what is going to happen and what could change the business in the future. We ask ourselves what are the risks to the business, what could go wrong." That's why Dell Computer jumped on the Internet with such zeal just over two years ago. "It was the only thing I've been able to identify that would change the business in the future," insists Dell. Indeed, it was Dell himself -- when other Dell executives were skeptical -- who pushed the idea of selling computers directly on the Internet. Today, Dell's Internet sales are about $6 million a day and $2 billion annually. "The Internet is the ultimate form of the direct model. These are zero-variable-cost transactions, and that is nirvana," says Dell. Incredibly, Dell has set a target of obtaining half of its revenues from the Internet by the end of the year 2000 -- a goal that would be viewed as impossible, if not foolish, in other organizations. (Based on current growth, Dell would be a $33 billion company and need to increase Internet sales eightfold from $2 billion a year to more than $16 billion.) Dell admits "there are a lot of challenges we have to meet" to achieve that. Among them: routing information online to the right person at the customer because computer configuration and computer ordering are separate processes at most companies. But he's convinced it's the only way to go. "There is nothing more direct than letting customers configure their own system in real time and giving them an order confirmation right away," says Dell. "We want to make it the easiest way to do business with us." With that in mind, Dell has developed unique Web sites in 36 countries and in 18 languages. And it has created more than 6,000 password-protected, customized customer Web pages, which it calls Premier Pages, that contain information and purchase-order processes unique to each customer company. "Premier Pages allow us to deliver critical service and support information -- drawn from the same databases our own technicians and engineers use -- directly to our customers based on the specific products they use and buy," says Dell. It is "a whole new level of intimacy with customers." As a result, its Web site is already the overwhelming choice of Dell's customers. Dell receives 400,000 weekly e-mails for service and support -- compared with the 165,000 weekly phone calls it receives for service and support. Yet, as Michael Dell is quick to add, online commerce represents only a fraction of the Internet's value. "The real potential lies in its ability to transform relationships within the traditional supplier-vendor-customer chain . . . and to create value that can be shared across organizational boundaries. The companies that position themselves to build information partnerships" with suppliers and customers and make the Internet an integral part of their strategy -- not just an "add-on" -- have the potential to "fundamentally change the face of global competition." Dell, for example, has put together customized Web pages for the roughly two dozen companies that supply most of its components. These allow those firms to provide Dell with real-time information on their capacities, capabilities, supply inventories, and component quality as measured by Dell's metric and current-cost structures. And Dell gives suppliers feedback it receives from customers -- gathered from those Premier Pages and from semiannual customer councils -- on product quality, future demand, technical requirements, and market pricing. "By sharing with suppliers the intimate details of our company and our plans, we literally bring them into the business" as a partner and "blur traditional boundaries between suppliers and manufacturers," Dell says. To be sure, sharing what traditionally has been guarded information still makes many in the corporate world squeamish -- especially, says Dell, "those who like to get their arms around every aspect of the process." But he argues that "collaboration is the new competitive imperative." He contends that the companies that fully capitalize on the promise of the Internet by looking at their businesses as "more than building and selling products and services" will be the ones that survive, because the traditional approach is "not how the world works today. "Both suppliers and customers must be treated as partners and collaborators, jointly looking for ways to improve efficiency across the entire spectrum of the value chain, not just in their respective businesses," insists Dell. "You have to approach the relationship with both the customer and supplier from the standpoint of what is the most efficient way to accomplish things rather than the old traditional view of 'if we don't control things, it won't work.'" That penchant for looking ahead to find more effective and efficient ways to do things is one reason Michael Dell always seems to have a good pulse on market needs and on what needs to be done today to satisfy customer and internal needs. "You have to try to anticipate changes coming in the future that could cause dislocation, while staying focused on executing today's strategy," he says. That's not radically different from the way Dell, as an 18-year-old freshman at the University of Texas at Austin, began selling computers. He saw people buying PCs and rebuilding them to suit their needs. So he bought surplus PCs from retailers, sold them door-to-door, by mail, and over the phone, and added features customers wanted. He did $180,000 of business his first month and formed the company in 1984 when it was grossing nearly $80,000 a month. That's why even today Dell still builds only to order -- but on a mass-production line where products can be tailored to a customer's needs. "The customer doesn't want to buy a preset configuration" but a PC, workstation, or server suited to specific needs, says Dell. "If you had static building of goods, your chance of forecasting demand would be very slim, and chances are you would be building the wrong things." As he points out, "If the customer is looking today for 100 desktop PCs and I can't deliver them for 120 days, by then the customer might want notebook computers, and that creates a lot of problems." That direct-selling approach and custom manufacturing on a mass production line also is an enormous economic and competitive advantage, because the computer a Dell customer receives often is built eight days or even less before delivery. That lets Dell capitalize on lower component prices and incorporate the latest technology. "The system we have eliminates a lot of the waste in manufacturing and the opportunities for losses that can occur. . . ," says Dell. What's more, with no pipeline of finished products to sell, Dell can meet customer needs quickly. It shipped eight customized, fully loaded servers to the Nasdaq stock exchange in 36 hours last October so that the exchange could handle the higher trading volume triggered by the Asian economic troubles. It also shipped 3,700 computers to Delta Air Lines in 11 days. And last fall it built and delivered in just six weeks thousands of PCs and servers loaded with Wal-Mart's proprietary software to the retail chain in time for the Christmas selling season. Nearly every analyst believes Dell can capitalize on that structural advantage for at least another year. Indeed, Dell's competitors have been scrambling for much of the last year to reduce their own warehouse inventories and distributor inventories from as high as 12 weeks to three by next summer. That would still be three times longer than Dell's. And competitors only recently have begun or renewed efforts to sell new PCs on the Internet. That's why when Dell enters markets, it shoots to the top very quickly. Some examples: It became the leading supplier of Intel-processor workstations in Europe after its first three months in that market last year. Dell entered the high-performance workstation market in 1997 and within a year was No. 2 in worldwide shipments on workstations with Windows NT. Two years ago, it added servers and by the end of the second quarter of this year it was the second-leading supplier in the U.S. and fourth worldwide. In the same quarter, it edged out Compaq as the No. 1 supplier of PCs in the U.S. and captured the No. 2 spot worldwide. And after three years in the notebook market, it's already fourth worldwide and third in the U.S. If there's a risk in Dell's current strategy, it might be the company's reliance on partnerships for field service and support and for component manufacturing. But even that's unlikely for a company founded with $1,000 that had no choice but to rely on partners, or for a CEO with a keen understanding of the need to listen to the customer and an uncanny ability to pay attention to every detail. For example, Dell Computer constantly is rethinking operations. When problems arise, "we ask ourselves how can we design that so it doesn't occur or how can we improve the process to prevent that from happening," says Dell. A case in point: A few years back Michael Dell was convinced excess handling of disk drives during assembly was contributing to computer failures and insisted that the amount of times the drives were "touched" during assembly be cut in half. Disk-drive failures dropped 40% and PC failures dropped 20%. Michael Dell also understands the importance of listening to customers. Dell holds Platinum councils twice a year in each major region of the world. About 100 members from the company's senior management and key people from engineering and development teams meet with customers to share concerns and to discuss the technology changes. "The purpose of these Platinum councils is clearly for us to listen," says Dell. "We also have self-discipline built in, in that we tell our customers: This is what you told us last time, and this is what we did about it. We just think . . . that it is the right thing to do to take care of the customers. Michael Dell also understands that the message of customer focus must "be reinforced by everything that is done within the company." That's particularly true now, because Dell more than doubled the number of its employees from 10,350 at the end of fiscal 1997 to 20,800 at the midpoint of fiscal 1999. That's why one company initiative this calendar year is focused on enhancing the customer experience. "We embedded in everyone the idea that this is what drives company success. We explained how we were going to measure it. And we made it the basis of everyone's profit-sharing and incentive-compensation plan," says Dell. That bent toward customer service is also why Michael Dell has no desire for his organization to be an expert at or "own" every aspect of computer manufacturing. He understands what Dell's mission has been since day one. "A company has to ask itself where it adds its value and define that value-add very [narrowly]," asserts Dell. "To us, it is delivering computer solutions. We keep our focus on doing what we do best and ask ourselves what is the most efficient way" to do things. There are two approaches a company can take, Dell believes. "We could try to outspend our competitors and suppliers or we could say -- which we have done -- let's try to leverage [the investments our suppliers have made]. That is the real question for us: How efficiently are we going to leverage the 96% of industry R&D dollars that we don't spend? We partner. It is just more efficient." A case in point: By listening to a Japanese executive extol the virtues of his firm's lithium-ion batteries and partnering with that company, Dell was the first to market notebook computers with enough battery power to operate during coast-to-coast airline flights. "We might not have been able to do that, otherwise," explains Dell. "All you have to do is be listening . . . and take a proactive stance" to provide what customers are demanding. As scary as it might seem to his competitors, Michael Dell believes that there is even more growth in the future for Dell Computer, especially since only 32% of its sales are outside the Americas. (It just opened a plant in China in August and will open a plant in Brazil next year to complement existing plants in Austin, Ireland, and Malaysia.) Michael Dell seems unconcerned about the prospect of another fiscal 1994, a year when several marketing problems and out-of-control growth caused a financial loss and naysayers to think Dell's success was short-lived. "We had a [number] of growth-related company disorders" back then, says Dell. A smile crosses his face and Michael Dell walks eagerly to a nearby whiteboard. He talks as he draws a picture of the computer market and Dell's small position in limited markets in 1991 compared with its larger position in a much greater market today. "In 1991 only about the 30% of the market was available to us, and we had maybe 3% of that market," says Dell with enthusiasm. "But now we are in China, Japan, all over Europe, and we have integrated capabilities and all these new products [high-end workstations, notebook computers, and servers]. So now 90% of the market becomes available, and we have about 9% of that. Our available market has expanded enormously." Michael Dell has no doubt that Dell Computer will capture more market share as it expands globally and enters new markets. "The best thing that has happened to us is that our competitors have continued to underestimate the strength of the direct-selling model," says Dell, pointing out how competitors first insisted that the approach wouldn't work, then that it would only work with some customers, and now argue that as they mimic Dell's approach, Dell's growth will slow. Michael Dell smiles. "What's important is that our customers seem to like our approach, and we just keep growing."

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