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DELL STRATEGY
In 1984, at the age of 19, Michael Dell founded Dell Computer with a simple vision and business
conceptthat 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. 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 1994a 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 1998a 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 CDROM 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.

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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 million.
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

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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
companyraising $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.
Further problems emerged in 1993. Dell reportedly had $38 million in second-quarter losses that
year from engaging in a risky foreign-currency hedging strategy. Also, quality difficulties
appeared in certain PC lines made by the company's contract manufacturers, profit margins
declined, and buyers were turned off by the company's laptop PC models. To get laptop sales
back on track, the company took a charge of $40 million to write off its laptop line and
suspended sales of laptops until it could get redesigned models into the marketplace. The
problems resulted in losses of $36 million for the company's fiscal year ending January 30, 1994.
Because of higher costs and unacceptably low profit margins in selling to individuals and
households, Dell did not pursue the consumer market aggressively until sales on the company's
Internet site took off in 1996 and 1997. Management noticed that while the industry's average

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selling price to individuals was going down, Dell's was going up people who were buying their
second and third computers, who wanted powerful computers with multiple features, and who
did not need much technical support were choosing Dell. It became clear that PC-savvy
individuals liked the convenience of buying direct from Dell, ordering exactly what they
wanted, and having it delivered to their door within a matter of days. In early 1997, Dell created
an internal sales and marketing group dedicated to serving the individual consumer segment
and introduced a product line designed especially for individual users.
By late 1997, Dell had become the industry leader in keeping costs down and wringing
efficiency out of its direct sales and build-to-order business model. Industry observers saw Dell
as being in strong position to capitalize on several forces shaping the PC industrial sharp
declines in component prices, rapid improvements in PC technology, and growing customer
interest in having PCs equipped with the power, components, and software they wanted.

Michael Dell
Michael Dell was widely considered one of the mythic heroes within the PC industry having
been labeled as "the quintessential American entrepreneur" and "the most innovative guy for
marketing computers in this decade." He was the youngest CEO to guide a company to a
Fortune 500 ranking. His prowess was based more on an astute combination of technical
knowledge and marketing know-how rather than on being a technowizard. In 1998 Michael
Dell owned about 16 percent of Dell Computer's common stock, worth about $10 billion.
In the company's early days Michael Dell was said to hang around mostly with the company's
engineers. He was so shy that some employees thought he was stuck up because he never
talked to them. But people who worked with him closely described him as a likable young man
who was slow to warm up to strangers.1 Early in the company's history, Michael's managerial
experience was limited, but Lee Walker, a 51-year-old venture capitalist brought in by Michael

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Dell provided much-needed managerial and financial experience during the company's
organization-building years, became Michael Dell's mentor, built up his confidence, and was
instrumental in turning him into a polished executive.2 Walker served as the company's
president and chief operating officer during the 1986-90 period; he had a fatherly image, knew
everyone by name, and played a key role in implementing Michael Dell's marketing ideas.
Under Walker's tutelage, Michael Dell became intimately familiar with all parts of the business
and turned into a charismatic leader with an instinct for motivating people and winning their
loyalty and respect. When Walker had to leave the company in 1990 because of health reasons,
Dell turned to Morton Meyerson, former CEO and president of Electronic Data Systems.
Meyerson provided guidance on how to transform Dell Computer from a fast-growing
medium-sized company into a billion-dollar enterprise.
Michael Dell usually spoke in a quiet, reflective manner and came across as a person with
maturity and seasoned judgment far beyond his age. He was an accomplished public speaker.
He delegated authority to subordinates, believing that the best results came from "turning loose
talented people who can be relied upon to do what they're supposed to do." Business associates
viewed Michael Dell as an aggressive personality, an extremely competitive risk-taker who had
always played close to the edge. Moreover, the people who he hired were aggressive and
competitive, traits that translated into an aggressive, competitive, intense corporate culture with
a strong sense of mission and dedication.

Developments in Early 1998

Dell's sales were up strongly in the first quarter of 1998, even in product areas where the
company had previously lagged, pushing its global market share to 7.9 percent and its U.S.
share to 11.8 percent. Unit shipments were 1.6 million units, compared to 978,000 in the first
quarter of 1997. In laptop PCs, Dell moved into third place in U.S. sales and fifth place
worldwide. And it climbed into second place in higher-margin products like servers and
Windows NT-based workstations. Dell announced the formation of an alliance with Data
General Corporation to enter the market for data storage equipment.

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In the first quarter of 1998, about half of the industry's PC sales consisted of computers selling
for less than $1,300. Dell's average selling price was $2,500 per unit, down 9 percent from the
prior quarter. The company was planning to broaden its product line to include lower-priced
PCs equipped with Intel's low-end Celeron chip; Dell's new budget models were priced in the
$1,200 range.

Competing Value Chain Models in the Personal Computer Industry

When the personal computer industry first began to take shape in the early 1980s, the founding
companies manufactured many of the components themselves such as disk drives, memory
chips, graphics chips, microprocessors, motherboards, and software. Believing that they had to
develop key components in-house, companies built expertise in a variety of PC-related
technologies and created organizational units to produce components as well as to handle final
assembly. While certain "non-critical" items were typically outsourced, if a computer maker was
not at least partially vertically integrated and an assembler of some components, then it was not
taken seriously as a manufacturer.
But as the industry grew, technology advanced quickly in so many directions on so many parts
and components that the early personal computer manufacturers could not keep pace as experts
on all fronts. There were too many technological innovations in components to pursue and too
many manufacturing intricacies to master for a vertically integrated manufacturer to keep its
products on the cutting edge. As a consequence, companies emerged that specialized in making
particular components. Specialists could marshal enough R&D capability and resources to
either lead the technological developments in their area of specialization or else quickly match
the advances made by their competitors. Moreover, specialist firms could mass-produce a
component and supply it to several computer manufacturers far cheaper than any one
manufacturer could fund the needed component R&D and then make only whatever smaller
volume of components it needed for assembling its own brand of PCs.

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Thus, in recent years, computer makers had begun to outsource most all components from
specialists and to concentrate on efficient assembly and marketing of their brand of computers.
Data shows the value chain model that such manufacturers as Compaq, IBM, Hewlett-Packard,
and Packard-Bell used in the 1990s. It featured arm's-length transactions between specialist
suppliers, manufacturer/assemblers, distributors and retailers, and end-users. However, Dell,
Gateway, and Micron Electronics employed a shorter value chain model, selling direct to
customers and eliminating the time and costs associated with distributing through independent
resellers. Building to order avoided (a) having to keep many differently-equipped models on
retailers' shelves to fill buyer requests for one or another configuration of options and
components and (b) having to clear out slow-selling models at a discount before introducing
new generations of PCs. Selling direct eliminated retailer costs and markups (retail dealer
margins were typically in the 4 to 10 percent range). Dell Computer was far and away the
world's largest direct seller to large companies and government institutions, while Gateway
was the largest direct seller to individuals and small businesses. Micron Electronics was the
only other PC maker that relied on the direct sales and build-to-order approach for the big
majority of its sales.

Dell Computer's Strategy

Dell Computer's strategy was built around a number of core elements: build-to-order
manufacturing, mass customization, partnerships with suppliers, just-in-time components
inventories, direct sales, market segmentation, customer service, and extensive data and
information sharing with both supply partners and customers. Through this strategy, the
company hoped to achieve what Michael Dell called "virtual integration" stitching together of
Dell's business with its supply partners and customers in real time such that all three appeared
to be part of the same organizational team.5

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Build-to-Order Manufacturing and Mass Customization

Dell built its computers, workstations, and servers to order; none were produced for inventory.
Dell customers could order custom-built servers and workstations based on the needs of their
applications. Desktop and laptop customers ordered whatever configuration of microprocessor
speed, random access memory (RAM), hard-disk capacity, CD-ROM drive, fax/modem, monitor
size, speakers, and other accessories they preferred. The orders were directed to the nearest
factory. Until recently Dell had operated its assembly lines in traditional fashion, with workers
each performing a single operation. An order form accompanied each metal chassis across the
production floor; drives, chips, and ancillary items were installed to match customer
specifications. As a partly assembled PC arrived at a new workstation, the operator, standing
beside a tall steel rack with drawers full of components, was instructed what to do by little red
and green lights flashing beside the drawers. When the operator was finished, the components
were automatically replenished from the other side of the drawers and the PC chassis glided
down the line to the next workstation. However, Dell reorganized its plants in 1997, shifting to
"cell manufacturing" techniques whereby a team of workers operating at a group workstation
(or cell) assembled an entire PC according to customer specifications. The result had been to
reduce assembly times by 75 percent and to double productivity per square foot of assembly
space. Assembled computers were tested, then loaded with the desired software, shipped, and
typically delivered within five to six business days of the initial order.
This sell-direct strategy meant, of course, that Dell had no in-house stock of finished goods
inventories and that, unlike competitors using the traditional value chain model, it did not have
to wait for resellers to clear out their own inventories before it could push new models into the
marketplace. (Resellers typically operated with 60-70 days' inventory.) Equally important was
the fact that customers who bought from Dell got the satisfaction of having their computers
customized to their particular liking and pocketbook.

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Dell had three PC assembly plant in Austin, Texas; Limerick, Ireland; and Penang, Malaysia.
The company was constructing another plant in Ireland to serve the European market as well as
a new plant in China (the company expected the market for PCs in China to soon be huge). Both
of the new plants were expected to come into use at the end of 1998.

Partnerships with Suppliers

Michael Dell believed it made much better sense for Dell Computer to partner with reputable
suppliers of PC parts and components rather than to integrate backward and get into parts and
components manufacturing on its own. He explained why:
If you've got a race with 20 players all vying to make the fastest graphics chip in the world, do
you want to be the 21st horse, or do you want to evaluate the field of 20 and pick the best one?6
Management believed long-term partnerships with reputable suppliers yielded several
advantages. First, using name-brand processors, disk drives, modems, speakers, and
multimedia components enhanced the quality and performance of Dell's PCs. Because of the
varying performance of different brands of components, the brand of the components was as
important or more important to some buyers than the brand of the overall system. Dell's
strategy was to partner with as few outside vendors as possible and to stay with those vendors
as long as they maintained their leadership in technology, performance, and quality. Second,
because Dell committed to purchase a specified percentage of its requirements from each of its
long-term suppliers, Dell was assured of getting the volume of components it needed on a
timely basis even when overall market demand for a particular component temporarily
exceeded the overall market supply. Third, Dell's formal partnerships with key suppliers made
it feasible to have some of their engineers assigned to Dell's product design teams and for them
to be treated as part of Dell. When new products were launched, suppliers' engineers were
stationed in Dell's plant. If early buyers called with a problem related to design, further

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assembly and shipments were halted while the supplier's engineers and Dell personnel
corrected the flaw on the spot.7 Fourth, Dell's long-run commitment to its suppliers laid the
basis for just-in-time delivery of suppliers' products to Dell's assembly plants in Texas, Ireland,
and Malaysia. Some of Dell's vendors had plants or distribution centers within a few miles of
Dell's Texas assembly plant and could deliver daily or even hourly if needed. To help suppliers
meet its just-in-time delivery expectations, Dell openly shared its daily production schedules,
sales forecasts, and new-model introduction plans with vendors.
Michael Dell explained one aspect of the information-sharing relationship with suppliers as
follows:
We tell our suppliers exactly what our daily production requirements are. So it's not, "Well,
every two weeks deliver 5,000 to this warehouse, and we'll put them on the shelf, and then we'll
take them off the shelf." It's, "Tomorrow morning we need 8,562, and deliver them to door
number seven by 7 am."8
Dell also did a three-year plan with each of its key suppliers and worked with suppliers to
minimize the number of different stock-keeping units of parts and components in designing its
products.

Why Dell Was Committed to Just-in-Time Inventory Practices

Dell's just-in-time inventory emphasis yielded major cost advantages and shortened the time it
took for Dell to get new generations of its computer models into the marketplace. New
advances were coming so fast in certain computer parts and components (particularly
microprocessors, disk drives, and modems) that any given item in inventory was obsolete in a
matter of months, sometimes quicker. Having a couple of months of component inventories
meant getting caught in the transition from one generation of components to the next.
Moreover, there were rapid-fire reductions in the prices of components most recently;

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component prices had been falling as much as 50 percent annually (an average of 1 percent a
week). Intel, for example, regularly cut the prices on its older chips when it introduced newer
chips, and it introduced new chip generations about every three months. And the prices of
hard-disk drives with greater and greater memory capacity had dropped sharply as disk drive
makers incorporated new technology that allowed them to add more gigabytes of hard-disk
memory very inexpensively.
The economics of minimal component inventories were dramatic. Michael Dell explained:
If I've got 11 days of inventory and my competitor has 80 and Intel comes out with a new 450megahertz chip that means I'm going to get to market 69 days sooner.
In the computer industry, inventory can be a pretty massive risk because if the cost of materials
is going down 50 percent a year and you have two or three months of inventory versus eleven
days, you've got a big cost disadvantage. And you're vulnerable to product transitions, when
you can get stuck with obsolete inventory.
Collaboration with suppliers was close enough to allow Dell to operate with only a few days of
inventory for some components and a few hours of inventory for others. Dell supplied data on
inventories and replenishment needs to its suppliers at least once a dayhourly in the case of
components being delivered several times daily from nearby sources. In a couple of instances,
Dell's close partnership with vendors allowed it to operate with no inventories. Dell's supplier
of monitors was Sony. Because the monitors Sony supplied with the Dell name already
imprinted were of dependably high quality (a defect rate of fewer than 1,000 per million), Dell
didn't even open up the monitor boxes to test them.10 Nor did it bother to have them shipped
to Dell's assembly plants to be warehoused for shipment to customers. Instead, utilizing
sophisticated data exchange systems, Dell arranged for its shippers (Airborne Express and UPS)
to pick up computers at its Austin plant, then pick up the accompanying monitors at the Sony

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plant in Mexico, match the customer's computer order with the customer's monitor order, and
deliver both to the customer simultaneously. The savings in time, energy, and cost were
significant.
The company had, over the years, refined and improved its inventory-tracking capabilities and
its procedures for operating with small inventories. In 1993, Dell had $2.6 billion in sales and
$342 million in inventory. In fiscal year 1998, it had $12.3 billion in sales and $233 million in
inventory an inventory turn ratio of seven days. By comparison, Gateway, which also pursued a
build-to-order strategy, had 1997 sales of $6.3 billion and inventories of $249 million an
inventory turn ratio of 14 days. Compaq had inventories of $1.57 billion at year-end 1997, and
1997 sales of $24.6 billion (thus turning its inventories about every 23 days). Dell's goal was to
get its inventory turn down to three days before the year 2000.

Direct Sales
Selling direct to customers gave Dell firsthand intelligence about customer preferences and
needs, as well as immediate feedback on design problems and quality glitches. With thousands
of phone and fax orders daily, $5 million in daily Internet sales, and daily contacts between the
field sales force and customers of all types, the company kept its finger on the market pulse,
quickly detecting shifts in sales trends and getting prompt feedback on any problems with its
products. If the company got more than a few similar complaints, the information was relayed
immediately to design engineers. When design flaws or components defects were found, the
factory was notified and the problem corrected within a matter of days. Management believed
Dell's ability to respond quickly gave it a significant advantage over rivals, particularly over PC
makers in Asia, that made large production runs and sold standardized products through retail
channels. Dell saw its direct sales approach as a totally customer-driven system that allowed
quick transitions to new generations of components and PC models.

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Despite Dell's emphasis on direct sales, industry analysts noted that the company sold 10-15
percent of its PCs through a small, select group of resellers.11 Most of these resellers were
systems integrators. It was standard for Dell not to allow returns on orders from resellers or to
provide price protection in the event of subsequent declines in market prices. From time to time,
Dell offered its resellers incentive promotions at up to a 20 percent discount from its advertised
prices on end-of-life models. Dell was said to have no plans to expand its reseller network,
which consisted of about 50-60 dealers.

Market Segmentation
In 1998, 90 percent of Dell's sales were to business or government institutions and of those 70
percent were to large corporate customers who bought at least $1 million in PCs annually.
Many of these large customers typically ordered thousands of units at a time. Dell had
hundreds of sales representatives calling on large corporate and institutional accounts. Its
customer list included Shell Oil, Exxon, MCI, Ford Motor, Toyota, Eastman Chemical, Boeing,
Goldman Sachs, Oracle, Microsoft, Woolwich (a British bank with $64 billion in assets),
Michelin, Unilever, Deutsche Bank, Sony, Wal-Mart, and First Union (one of the 10 largest U.S.
banks). However, no one customer represented more than 2 percent of total sales. Because
corporate customers tended to buy the most expensive computers, Dell commanded the highest
average selling prices in the industryover $1,600 versus an industry average under $1,400.
Dell's sales to individuals and small businesses were made by telephone, fax, and the Internet. It
had a call center in the United States with toll-free lines; customers could talk with a sales
representative about specific models, get information faxed or mailed to them, place an order,
and pay by credit card. Internationally, Dell had set up six call centers in Europe and Asia that
customers could dial toll free.12 The call centers were equipped with technology that routed
calls from a particular country to a particular call center. Thus, for example, a customer calling
from Lisbon, Portugal, was automatically directed to the call center in Montpelier, France, and

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connected to a Portuguese-speaking sales representative. Dell began Internet sales at its Web
site (www.dell.com) in 1995, almost overnight achieving sales of $1 million per day. In 1997
Internet sales reached an average of $3 million daily, hitting $6 million some days during the
Christmas shopping period. In the first quarter of 1997, Dell's Internet sales averaged nearly $4
million daily; and the company expected that 1998 sales at its Web site would reach $1.5 billion.
The fastest growing segment of Dell's international segment was on the Internet in Europe,
where sales were running at a weekly volume of $5 million in early 1998. Internet sales were
ramping up rapidly from Asian buyers. In early 1998, Dell's Internet sales were about equally
divided between sales to individuals and sales to business customers. Nearly 1.5 million people
visited Dell's Web site weekly to view information and place orders, about 20 times more than
called to talk with sales representatives over the telephone.
In 1997, 31 percent, or $3.8 billion, of Dell's sales came from foreign customers. Europe, where
resellers were strongly entrenched and Dell's direct sales approach was novel, was Dell's
biggest foreign market. Dell's European sales were growing at 50 percent annually. The market
leader in Europe was Compaq, with a 14.8 percent market share, followed by IBM with 8.3
percent, Dell with 7.8 percent, Hewlett-Packard with 7.6 percent, and Siemens Nixdorf
(Germany) with 5.6 percent. In Britain, which Dell had entered in the late 1980s, Dell had a 12
percent share, trailing only Compaq. Sales of PCs in Europe were expected to reach 22-24
million in 1998 and 28.5 million in 1999. Total European sales in 1997 were 19.7 million units.

Customer Service
Service became a feature of Dell's strategy in 1986 when the company began providing a
guarantee of free on-site service for a year with most of its PCs after users complained about
having to ship their PCs back to Austin for repairs. Dell contracted with local service providers
to handle customer requests for repairs; on-site service was provided on a next-day basis. Dell
also provided its customers with technical support via a toll-free number, fax, and e-mail. Dell

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received close to 40,000 e-mail messages monthly requesting service and support and had 25
technicians to process the requests. Bundled service policies were a major selling point for
winning corporate accounts. If a customer preferred to work with his or her own service
provider, Dell gave that provider the training and spare parts needed to service the customer's
equipment.
Selling direct allowed Dell to keep close track of the purchases of its large global customers,
country by country and department by department information that customers found valuable.
Maintaining its close customer relationships allowed Dell to become quite knowledgeable about
its customers' needs and how their PC network functioned. Aside from using this information
to help customers plan their PC needs and configure their PC networks, Dell used its
knowledge to add to the value it delivered to its customers. For example, Dell recognized that
when it delivered a new PC to a corporate customer, the customer's PC personnel had to