Essay on Dell

This essay has a total of 2004 words and 9 pages.


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 PC manufacturing 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 Dell Computer sometimes struggled
during its early years in trying to refine its strategy, build an adequate infrastructure,
and establish market credibility against better-known rivals, its build-to-order and
sell-direct approach proved appealing to growing numbers of customers in the mid-1990s as
global PC sales rose to record levels. And, just as important, the strategy gave the
company a substantial cost and profit-margin advantage over rivals that manufactured PCs
in volume and kept their distributors and retailers stocked with ample inventories.

Going into 1998, Dell Computer had a 12 percent share of the PC market in the United
States, trailing only Compaq Computer and IBM, which held first and second place in the
market, respectively. Worldwide, Dell Computer had nearly a 6 percent market share (see
Exhibit 1). And the company was gaining market share quickly in all of the world's
markets. The company's fastest growing market for the past several quarters was Europe.
Even though Asia's economic woes in the first quarter of 1998 resulted in a slight decline
in Asian sales of PCs, Dell's sales in Asia rose 35 percent. Dell's sales at its Internet
Web site were averaging $5 million a day and were expected to reach $1.5 billion annually
by year-end 1998. Dell Computer had 1997 revenues of $12.3 billion, up from $3.4 billion
in 1994—a compound average growth rate of 53 percent. Over the same period, profits were
up from $140 million to $944 million—an 89 percent growth rate. Since 1990, the company's
stock price had exploded from a split-adjusted price of 23 cents per share to $83 per
share in May 1998—a 36,000 percent increase. Dell Computer was the top-performing big
company stock so far during the 1990s and seemed poised to become the stock of the decade.

Dell's principal products included desktop PCs, notebook computers, workstations, and
servers. The company also marketed a number of products made by other manufacturers,
including CD-ROM drives, modems, monitors, networking hardware, memory cards, storage
devices, speakers, and printers. The company's products and services were sold in more
than 140 countries. Sales of desktop PCs accounted for about 65 percent of Dell's total
revenues; sales of notebook computers, servers, and workstations accounted for about 33
percent of revenue. In early 1998, the company had 16,000 employees.

Company Background
At age 13, 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 money he had earned. He enrolled
at the University of Texas in 1983 as a premed student (his parents wanted him to become a
doctor) but soon became immersed in computers 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. Dell dropped out of college and
formed a company, PCs Ltd., to sell both PC components and PCs under the brand name 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, attracting price-conscious buyers and producing rapid
growth. By 1985, the company was assembling its own PC designs with a few people working
on six-foot tables. The company had 40 employees, and Michael Dell worked 18-hour days,
often sleeping on a cot in his office. By the end of fiscal 1986, sales had reached $33

During the next several years, however, PCs Ltd. was hampered by a lack of money, people,
and resources. Michael Dell sought to refine the company's business model, add needed
production capacity, and build a bigger, deeper management staff and corporate
infrastructure while at the same time keeping costs low. The company was renamed Dell
Computer in 1987, and the first international offices were opened that same year. In 1988
Dell added a sales force to serve large customers, began selling to government agencies,
and became a public company—raising $34.2 million in its first offering of common stock.
Sales to large customers quickly became the dominant part of Dell's business. By 1990 Dell
Computer had sales of $388 million, a market share of 2-3 percent, and an R&D staff of
over 150 people. Michael Dell's vision was for Dell Computer to become one of the top
three PC companies.

Thinking its direct sales business would not grow fast enough, in 1990-93, the company
began distributing its computer products through Soft Warehouse Superstores (now CompUSA),
Staples (a leading office-products chain), Wal-Mart, Sam's Club, and Price Club (now
Price/Costco). Dell also sold PCs through Best Buy stores in 16 states and through Xerox
in 19 Latin American countries. But when the company learned how thin its margins were in
selling through such distribution channels, it realized it had made a mistake and withdrew
from selling to retailers and other intermediaries in 1994 to refocus on direct sales. At
the time, sales through retailers accounted for only about 2 percent of Dell's revenues.
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