History of Dell "DELL Inc."

Company Perspectives:

Dell was founded in 1984 by Michael Dell, the computer industry's longest-tenured chief executive officer, on a simple concept: that by selling computer systems directly to customers, Dell could best understand their needs and efficiently provide the most effective computing solutions to meet those needs. This direct business model eliminates retailers that add unnecessary time and cost, or can diminish Dell's understanding of customer expectations. The direct model allows the company to build every system to order and offer customers powerful, richly-configured systems at competitive prices. Dell also introduces the latest relevant technology much more quickly than companies with slow-moving, indirect distribution channels, turning over inventory every three days on average.

History of Dell Inc.

Long the world's largest direct-sale computer vendor, Dell Inc. is now also the leading seller of computer systems in the world, capturing a global market share of more than 15 percent. Dell markets desktop personal computers, notebook computers, network servers, workstations, handheld computers, monitors, printers, high-end storage products, and a variety of computer peripherals and software. The firm also has moved into the consumer electronics arena, offering LCD televisions, projectors, and other products. Dell manufactures most of the products it sells, maintaining six production facilities worldwide, located in Austin, Texas; Nashville, Tennessee; Eldorado do Sul, Brazil; Limerick, Ireland; Penang, Malaysia; and Xiamen, China. About two-thirds of revenues are generated in the Americas, with 22 percent originating in Europe, the Middle East, and Africa and with the Asia-Pacific region accounting for the remaining 11 percent. Dell sells its equipment directly to consumers, small to large businesses, government agencies, and healthcare and educational institutions through dedicated sales representatives, telephone-based sales, and online via the company web site. Founder Michael Dell holds 12 percent of the company and will remain chairman of the company after stepping down as CEO in July 2004.

Early History

Dell was founded by Michael Dell, who started selling personal computers out of his dorm room as a freshman at the University of Texas in Austin. Dell bought parts wholesale, assembled them into clones of IBM computers, and sold them by mail order to customers who did not want to pay the higher prices charged by computer stores. The scheme was an instant success. He was soon grossing $80,000 a month, and in 1984 he dropped out of school, incorporating his business as Dell Computer Corporation (though it would initially do business as PC's Limited).

At the time, the PC industry was dominated by such large firms as IBM, while smaller, lesser known mail-order firms sold IBM clones at a steep discount. Dell used low-cost direct marketing to undersell the better known computers being sold through such high-overhead dealer networks. Dell placed ads in computer magazines, gearing his merchandise to buyers who were sophisticated enough to recognize high-quality merchandise at low prices. Customers placed orders to Dell by dialing a toll-free number. As a result of these methods, Dell's computers became the top brand name in the direct-mail market.

Dell achieved sales of $6 million its first full year in business, approaching $40 million the next year. Dell hired former investment banker E. Lee Walker as president in 1986 to help deal with his firm's explosive growth. By 1987 Dell held a dominant position in the mail-order market, but it was clear that the firm had to move beyond mail order if it was to continue growing. To accomplish this goal the firm needed a larger professional management staff, and Dell hired a group of marketing executives from Tandy Corporation, another maker of low-cost PCs. The group built a sales force able to market to large corporations and put together a network of value-added resellers, who assembled packages of computer components to sell in specialized markets.

The Tandy team soon helped raise gross margins to 31 percent, up from 23 percent a year earlier. Rather than merely undercutting the prices of competitors, they set prices in relation to the firm's costs. The new marketing department soon ran into trouble with Michael Dell, however. Battles erupted over advertising budgets and the number of salespeople required for corporations and resellers. While Dell believed that the new team did not understand direct selling and was trying to create a traditional marketing department with an overly large sales force, the Tandy group alleged that Dell lacked the patience to wait for the sales force to pay off. By early 1988, most of the Tandy group had resigned or been forced out.

Regardless, the firm continued growing rapidly, opening a London office that sold $4 million worth of computers during one month in 1988. Dell also formed a Canadian subsidiary. Early in 1988 the firm formed various divisions to raise its profile among corporate, government, and educational buyers. With reported sales of $159 million in 1987, the firm went public in June 1988, selling 3.5 million shares at $8.50 a share.

Increased Competition in the Late 1980s

The firm faced several challenges, however. Announcing their own clone of IBM's new PS/2 computer system well before it was actually ready, Dell later had trouble reproducing important aspects of the PS/2's architecture, and the computers were delayed significantly, embarrassing the young company. Furthermore, Dell faced competition from several Japanese manufacturers, which were offering IBM clones at low prices. Further, having had trouble meeting demand, Dell used money raised from its stock offering to expand capacity and warehouse space, leaving the company with little cash. When it overestimated demand during the fourth quarter of 1988, the firm suddenly had no cash and warehouses full of unsold computers.

Dell responded to the increasing competition by increasing the level of technical sophistication in its computers. Half of its 1988 sales came from PCs using the Intel Corporation's 80386 microprocessor, the most powerful PC chip at the time, and the company began producing file servers using the sophisticated UNIX operating system. Dell also hired computer scientist Glenn Henry away from IBM to work on product development. Scrapping the company's first attempts at cloning IBM's PS/2, Henry initiated new plans for producing clones. Henry built Dell's research and development staff from almost nothing to 150 engineers, who began working on ways to combine the function of several chips onto one chip. When Intel released its 486 microprocessor, Dell began speeding to market the computers that could use it. Another of Henry's goals was high-quality graphics, which required better monitors and special circuit boards. By mid-1989 Dell had finished initial attempts at graphics hardware, giving it inroads into the higher end of the PC market.

Despite these advances, Dell still had a research and development budget of $7 million, compared with the hundreds of millions spent by such larger competitors as IBM. Dell's share of the PC market was only 1.8 percent, but it was still growing rapidly. U.S. sales for 1989 reached $257.8 million, while sales in Britain increased to $40 million and a branch in Western Germany realized the break-even point.

Price Wars in the Early 1990s

Also during this time, the traditional PC market channels were in flux. With a recession dampening sales, PC makers engaged in a furious price war that resulted in slumping profits nearly across the board. Compaq, IBM, and Apple all had profit declines or were forced to lay off employees. Furthermore, Compaq filed a lawsuit against Dell, which it eventually won, claiming that Dell's advertising made defamatory statements against Compaq. Nevertheless, the economic recession actually benefited Dell. While customers had less money, they still needed PCs, and they purchased Dell's inexpensive but technologically innovative IBM clones in record numbers. Consequently, annual sales shot up toward $1 billion.

In the early 1990s, notebook-sized computers were the fastest growing segment of the PC market, and Dell devoted resources to producing its first notebook model, which it released in 1991. The following year it introduced a full-color notebook model and also marketed PCs using Intel's fast 486 microchip.

As the PC wars continued, Compaq, which had been a higher priced manufacturer stressing its quality engineering, repositioned itself to take on Dell, releasing a low-end PC priced at just $899 and improving its customer services. The new competition affected Dell's margins, forcing it to cut its computer prices by up to $1,400 to keep its market share. Dell could afford such steep price cuts because its operating costs were only 18 percent of revenues, compared with Compaq's 36 percent. The competition also forced Dell away from its attempts to stress its engineering. Dell executives began speaking of computers as consumer products similar to appliances, downplaying the importance of technology. Reflecting this increased stress on marketing, Dell began selling a catalogue of computer peripherals and software made by other companies; it soon expanded into fax machines and compact discs. Dell's database, containing information on the buying habits of more than 750,000 of its customers, was instrumental in this effort.

Toward the end of 1992 Dell's product line experienced technological difficulties, particularly in the notebook market. In 1993 quality problems forced the firm to cancel a series of notebook computers before they were even introduced, causing a $20 million charge against earnings. The firm was projected to hold a 3.5 percent share of the PC market in 1993, but Digital Equipment Corporation, whose focus was minicomputers, nevertheless topped Dell as the biggest computer mail-order company. To fight back against Compaq's inexpensive PC line, Dell introduced its Dimensions by Dell line of low-cost PCs. Sales for the year reached $2 billion, and Dell made a second, $148 million stock offering.

Late 1990s Expansion

After a loss of $36 million in 1994, Dell rebounded spectacularly, reporting profits of $149 million in 1995. That year, the company introduced Pentium-based notebook computers and a popular dual-processor PC. The company grew by almost 50 percent that year and the next, raising its market share to approximately 4 percent and entering the company into the ranks of the top-five computer sellers in the world.

Expansion continued on many fronts in 1996. Dell introduced a line of network servers and was soon the fastest-growing company in that sector. The company also opened a manufacturing facility in Penang, Malaysia. The most important development that year, however, was Dell's expansion into selling directly to consumers over the Internet. Within three years, Dell was selling $30 million a day over the Internet, which would come to account for 40 percent of the company's overall revenue. Dell achieved enviable efficiencies using the Internet to coordinate the orders of consumers with its own orders of parts from suppliers. The company's web site also provided technical support and allowed consumers to track their orders from manufacturing through delivery.

Dell continued its exponential growth in 1997 and 1998, reaching profits of $944 million in 1998. The company introduced new products and services, including a line of workstations, a leasing program for individual consumers, and a line of storage products under the PowerVault brand. Dell also expanded its manufacturing facilities in the United States and in Europe. In 1998 it established a production and customer center in Xiamen, China, raising the number of its overseas plants to three. By the time Dell sold its ten millionth computer in 1997, it was a close fourth behind IBM, Hewlett-Packard, and Compaq in the computer industry. By mid-1998, it had captured 9 percent of the market and the number two spot.

Following on the success of its direct sales over the Internet, Dell opened an online superstore of computer-related products in 1999. Gigabuys.com offered low-priced computer hardware, software, and peripherals from various companies in the industry, although Dell continued to sell its own products at www.dell.com. The company also expanded its Internet offerings in 1999 with Dellnet, an Internet access service for Dell customers. Two more manufacturing facilities were added to the firm's global production network that year, located in Nashville, Tennessee; and Eldorado do Sul, Brazil. For the fiscal year ending in January 2000, Dell reported net income of $1.86 billion on total revenues of $25.26 billion.

Early 2000s: Surviving Global PC Downturn, Diversifying

When the global PC industry fell into its worst slump ever during 2000, Dell responded by initiating a price war to which its rivals were slow to respond, providing Dell with a chance to further increase its market share. As a result, by 2001 Dell managed to gain for the first time the top spot globally in PC sales, with a 13 percent worldwide share. The downturn also triggered the creation of a more formidable competitor in the form of Hewlett-Packard, which acquired Compaq during this period. Dell also responded to the PC slump by aggressively pushing into the market for Internet servers, a more profitable sector than that of PCs. It launched another price war on the low end of the server market, which cut into its margins somewhat but enabled it to gain share. Dell targeted other higher-margin sectors as well. It continued its push into the storage market in late 2001 by entering into an alliance with EMC Corporation to develop a new line of data-storage systems, and it entered the market for low-end networking gear used by small businesses, launching its PowerConnect line of network switches in 2001. Finally, Dell stayed solidly in the black--while its rivals were losing money--via a major cost-cutting program. The company made the first significant layoffs in its history, slashing 5,700 jobs from the payroll during 2001 and taking nearly $600 million in charges relating to restructuring actions. The charges reduced profits, but Dell still managed to record net income of $1.78 billion on revenues of $31.17 billion for 2002.

Although Michael Dell remained firmly in charge of the company he had founded as chairman and CEO, Kevin B. Rollins was increasingly taking over the day-to-day operations at Dell Computer and had been instrumental in the maneuvers that had enabled the company to gain ground on its rivals during the industry slump. Rollins had consulted for Dell while employed with the consulting firm Bain & Company, before joining Dell in 1996 as a senior vice-president. He was named vice-chairman in 1997 and then became president and chief operating officer in 2001. Rollins's assumption of the operating reins enabled Michael Dell to concentrate more on long-range, strategic planning.