I enclose the text from my favorite Michael Dell speech. It was given early last month but it concisely outlines why DELL will continue to outperform. Once you read this carefully, you will have TOO MANY GOOD REASONS TO BUY AND HOLD DELL STOCK. IMO, this company has one of the most focused and capable CEOs in the world.
-Scott
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Maximum Speed: Lessons Learned from Managing Hypergrowth
Michael Dell's Address to the Comerica Economic Forum
Dallas, Texas
September 10, 1998
If you were to look at all the companies in
the world with a large market capitalization,
you would find that 82 of them grew their
revenues and earnings consistently in
excess of 10 percent per year for the last
three years. If you raised the bar to find
companies that grew their earnings and
revenues at 30 percent per year for the last
three years, you'd find only 11 companies. If
you raised the bar even further, up to 50
percent, you'd find only one company. And
I'm proud to say that was our company, Dell
Computer Corporation.
Dell has experienced this kind of rapid
growth for a long time. In our first eight
years, we grew about 80 percent each year,
and in the last six years we've grown 55
percent per year. One of the common myths
about growth is that as you get larger you
slow down, but we have not had that
experience. Given that our business today
has only 8 percent market share, we know
there's considerable opportunity for
continued growth.
As the market evolved, the process of
standards came into play. Customers had
more choices, and they were able to define
whether one product would succeed and
another would fail. While some PC
companies have tried to develop technology
and push it on the market, we've decided to
find out what customers want and apply the
world's best technology to that problem.
About $10 billion is spent on research and
development in our industry, and we're not
going to try to outspend that figure. Instead,
we leverage the $10 billion and add in our
own expenditures - about $300 million in
research and development and 2,000
engineers -- to apply their innovative
technology into our products.
One of the struggles many companies face
is overcoming the desire to invent everything
themselves. Even today, you see a lot of
companies falling back on the idea that "my
baby's the most beautiful in the world and
I'm not going to accept anybody else's."
This can get in the way of logical business
thinking.
Last quarter, one of our Austin plants built
its average machine in about 3.9 days. This
is very, very rapid response for our industry.
If you consider that the value of materials
declines very rapidly, a lot of favorable
economics can occur when you take time
out of the process. To illustrate a bit further,
Dell's model has about eight days of
inventory. One of our competitors has 81
days of inventory-as well as 40 days of
inventory in their distribution channel. This is
about 16 weeks' difference from our eight
days. Given that the value of components
declines at 1 percent per week, it's
impossible for a competitor with that level of
inventory to compete with Dell and make
any money doing it. As a result, our
business is growing faster than our
competitors' and our profitability exceeds
that of all of our major competitors
combined.
Dell also has a more customer-focused
model. We have account teams that work
face-to-face with all of our large customers
around the world. We work with our
suppliers to deliver materials on a pull basis
instead of a push basis. We've flipped the
traditional manufacturing model around.
Instead of waiting to build a machine until
we have all the materials in the warehouse,
and then guessing what people are going to
buy, we have focused on how fast the
inventory is moving. If we can shorten that
time, not only will we save our customers a
great deal of money, but they'll also get a
superior product that meets their most
precise requirements.
We've also taken the initiative to define the
customer experience in a holistic fashion
from the order delivery process, to the
set-up, use, and operating experience.
We've developed a set of metrics that take
these customer measures and tie them
distinctly to our company's goals and to
every employee's profit sharing and incentive
compensation. We believe that the next
frontier of competition is in the area of
customer service and quality. This doesn't
mean that technology or cost-based
competition goes away. Those things
continue to be important, but the
competition is taken to a new level.
Early Hypergrowth
Let's review some of the lessons our
company has learned along the way in
growing our business. I believe that you have
to understand the economics of a business
before you have a strategy, and you have to
understand your strategy before you have a
structure. If you get these in the wrong
order, you will probably fail. In addition, if
you limit a company by its structure or by
the people in the company, you will, by
definition, limit the full potential of that
business. It sounds basic, but a lot of
companies don't follow the idea that the
structure should be last and not first.
Talent
We've been pretty aggressive in our
company about surrounding ourselves with
the best talent we can find and structuring
our business for success, even to the point
of dividing up peoples' jobs. This has now
become part of our company culture. The
first time we did it, some people didn't like it
very much. They said, "You're cutting my
job in half." Six months later, because of
growth, their job is the same size it was
before, and they say, "Please cut my job in
half, I've got too much!" We've used this idea
of growing our business by dividing and
conquering different parts of the market as a
real strategy, which has also helped us
acquire new talent into the business.
Breakthroughs
We're constantly looking for breakthroughs
that change the dynamics of the game. The
most obvious example is our direct business
model, but there are many, many others.
Twelve years ago, we invented something
called on-site service, now fairly common in
the computer industry, as a way to service
personal computers. The Internet is clearly a
massive breakthrough in the way products
are bought and sold. Another example is
Dell's sales force and system engineering
force out in the field. Instead of the
traditional approach of huge field offices,
these people use a centralized resource for
their support and infrastructure. Again,
finding a new way to deliver a better level of
customer experience at a lower cost is a
good strategy.
Mistakes
I think we can be proud of having made
mistakes and learning from them. I have
probably painted a picture that we're an
amazing company that has never made any
mistakes, but actually we've made plenty.
In the late '80s we created our own version
of UNIX -- not a very good idea! We've
developed overly ambitious products that
had the "boil the ocean" strategy of doing
everything for everybody - without a focus,
they were bound to fail. Along the way,
we've learned not to do those things again,
and we've often gone from last place to first.
Back in 1989, our company made a massive
mistake relating to inventory, and now we're
regarded as the best in our industry in
inventory. The answer is not having a brilliant
conception of all the best ideas before you
start a business, but rather learning from
your mistakes and not repeating them -- and
making sure that those lessons are passed
along as the organization continues to grow.
Excess Growth
On the subject of growth, if you had asked
me seven or eight years ago whether there
is such a thing as a company that's growing
too fast, I probably would have said no. All
growth is good and you cannot grow a
company too fast. But we learned that is
absolutely not true -- there is a level of
growth that is not only too fast but
dangerous and deadly to a company. We
grew in one year from $890 million in sales
to $2.1 billion in sales. It was thrilling and
exciting and at the same time, we were
concerned. The problem that emerged from
this didn't occur in the year that we grew at
127% and received recognition for doing so.
It occurred the year after that. We hit the
wall in a spectacular fashion and splintered
into thousands of pieces -- and we had to
pick them all up and learn some new
lessons: How to understand the profitability
of different parts of our business, where our
business was succeeding and where it
wasn't, and how to anticipate and build an
infrastructure to support growth.
Customer Focus
We've also believed for as long as the
company has been in existence that the
customer is always right, and we've
maintained an intense focus on the
customer. This is something that has not
changed in our company even as we've
grown. When the first JD Power and
Associates survey of customer satisfaction
came out in 1991, Dell was ranked number
one. Today, Dell is still ranked number one
in customer satisfaction surveys, even
though the company is about 25 times
larger.
ROIC
Let's look at some of the more advanced
stages of hypergrowth. When we found
ourselves having to re-prioritize and focus on
the best opportunities in our business, we
adopted the idea that return on invested
capital was a great way to measure the
different parts of our business. If the cost of
capital is about 15 percent, and a business
is earning 20 percent return on invested
capital, it is creating value for shareholders.
If that business is earning 10 percent, then it
is destroying value for shareholders. When
we sorted through our business, we had
some businesses with very high ROIC and
very low growth, and we had some
businesses with very low ROIC and very
high growth. We didn't want either one of
those. We wanted a reasonable level of
ROIC and a reasonable level of growth.
Segmentation
By segmenting our business, we found the
path to grow from a functional organization
to an organization that has many different
businesses in it. This is a transition that for
us occurred in the $3 billion to $4 billion
range, when we realized that our company
is made up of very different businesses. We
have a business selling to large customers,
to global customers, to the consumer. And
these businesses have different
characteristics -- different support costs,
margins, levels of investment, capital
intensities. As the education business
grows, for example, it becomes clear that
the higher education business and the
K-through-12 business are quite different.
You separate those, and you create another
opportunity to promote someone to be the
general manager running that business. By
understanding this, we've been able to
achieve return on invested capital last
quarter of 217 percent -- obviously well in
excess of our cost of capital. This,
combined with segmentation, has allowed
us a new avenue to grow.
Our segmentation approach allows us not
only to aggressively bring talent into the
company and grow talent, but also to get
very finely focused on the unique needs of
specialized customers. A lot of businesses
probably suffer from not understanding the
true segment economics that go on within
their businesses. While all customers are
not created equal, they certainly act
differently and have different requirements. In
a school, for example, there is no telephone
for a teacher to be able to call technical
support, so a teacher has a whole different
need for a support infrastructure than a
business or a consumer does.
Global presence
We've also used global expansion as a
growth strategy. We started global
expansion about 11 years ago in the UK and
then spread out across western and central
Europe and into the rest of North America,
and then Japan, Australia, Asia Pacific. We
now have a plant in Malaysia. We have a
new one in China. We're building one in
Brazil. We see that our business model is
not one that is based on the English
language or American culture, but on
economics. And the economics work
whether you're in Beijing or Boston or
Barcelona or Botswana, so we've been able
to apply it around the world.
Leadership
Another lesson we've learned is that you
can't follow the other guys. If you take the
approach of saying, "Competitor X has a
good business, let's be just like them,"
that's not going to create a lot of value.
We've always believed that we should find
our own way to do things better. It doesn't
mean that we won't borrow good ideas from
other companies when we see them, but
we're not held to convention and we're not
striving to be like other companies. We're
not trying to remake our company into the
IBM of the 1990s, and we're not trying to
merge with other firms so that we can have
a different profile as a company. We are
building our own path.
Anticipation
We also strive to be out in front of key
trends in our business. Let's look at the
move to Windows NT in the server space.
We could offer several different flavors of
UNIX and also have NT, but we would have
to invest tremendous amounts in UNIX,
which is in decline, and not as much in NT.
Instead we decided to dominate the NT
space as much as we can. While this might
take us a little longer, we're going to have a
greater share of a faster-growing market.
The Internet is another great example. We
know that virtually everybody is going to buy
their computer over the Internet in five or ten
years. We want to dominate that market
and have a leadership position in sales of
computers through this new distribution
channel. Getting out in front of key trends is
important.
Opportunities
We also look aggressively for add-on
businesses. This does not mean wild
diversification, or looking at cash on our
balance sheet and saying, "Hey, we've got
lots of money, let's go spend it." Our focus
is on clearly connected businesses. We
have developed services that our customers
wanted, such as selling peripherals in
software, integration services, financial
services. It's a logical progression strategy,
as opposed to trying to diversify.
Dell has a real challenge. We have a
homogeneous business that's succeeding
very well. Add-on businesses that are
directly attached and fit within the framework
of our existing business have given us a nice
growth. But if we diversify too broadly, we
run the risk of de-focusing the organization
from the most wonderful opportunity right in
front of us. If we don't execute on that
opportunity, we'll have only ourselves to
blame.
As I said, today Dell has about 8 percent
market share. We expect that we can
continue to grow our business much faster
than the industry for several years. I'm still
having a wonderful time running the
company and, along with our talented team
of employees, I plan to take the company to
its full potential - for our customers, our
shareholders, and our employees - for a long
time to come. |
