Greg: I just discovered that the texts of MSD's speeches are all out on the DELL website. I met Michael last fall and was VERY impressed with the presentation that he gave in Chicago. IMO, DELL is fortunate to have a visionary leader like him. Here is a copy of his speech. There clearly is a lot to be learned by reviewing it <G>.
See you in the 50s..!!
Best Regards, Scott
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<<NetSpeed:
The Supercharged Effect of the Internet
Michael Dell's Address at the Executives' Club of Chicago
October 23, 1998
I am very happy to be here this afternoon and thrilled to see the turnout here at the Executives' Club of Chicago. I would like to talk today about a subject I think is having a profound effect on businesses all over the world: the Internet. First I would like to talk about our company and how our vision of the Internet evolved.
We are the No. 2 and fastest growing supplier of personal computers and servers in our industry. We created and have led the whole process of buying these products directly from the manufacturer. When we started the business, IBM was selling a PC for about $3,000. That PC contained about $600 worth of parts. That struck me as rather odd. Not only was there a high price mark-up from the dealer to the customer, but there was an even higher mark-up from the manufacturer to the dealer. We envisioned a way of creating a direct relationship with the customer to provide not only a better level of service but also a more efficient economic model.
The business was started with only $1,000 of capital, which led us to make some very important decisions about what things we were and were not going to do. We had to define our value-add in a very narrow way.
Dell relies on direct customer relationships. We call this system our direct business model. It integrates a wide variety of functions from design to manufacturing to delivery to service and support. We think that by controlling all of these elements, we can provide our customers with the optimal experience in buying and using PCs. When we started, we knew there were economic advantages to our model, but what we found over time is that powerful linkages with our customers and our suppliers also give us a relationship advantage and an ability to provide a much greater level of service.
When the Internet came along as a way of contacting our customers and providing support information, it was a natural for us. We started with providing information, and eventually went into the process of selling products online, and now the Internet has fundamentally changed the way we do business and is an integral part of our whole company strategy. In March 1997 we reached a milestone, selling about $1 million per day online. About a year later, in March 1998, we reached $4 million a day. Then, in our second quarter at the end of July this year, we were up to $6 million per day in sales. And the number keeps rising.
Online commerce gets a lot of headlines. Many people talk about it as a very exciting element of what is happening on the Internet, and clearly it is. But I think one area that doesn't get enough recognition is service and support. We get about 100 million visitors every year to our website. If you imagine the physical infrastructure that a company would have to have to support 100 million customer contacts, you can begin to see the efficiency that comes from working online with our customers in the way we do. About 20 percent of those 100 million visitors receive service and support information from Dell. In fact, as I will describe in a minute, we have turned over to our customers the technical information that we use internally.
The Internet-based systems we are building allow us to revolutionize the business process that we have. The Internet is blurring the traditional boundaries that have existed between manufacturers, suppliers, manufacturers and customers. It eliminates paper-based functions. It eliminates hierarchies and flattens organizations. It shrinks time and distance to a degree that was never before possible. And importantly, it eliminates assets and improves the productivity of our capital. The Internet makes it possible to bring customers and suppliers into our business in a very intimate way: to share information, to share business applications and to create true information partnerships. These partnerships are formed around information assets, and that is really transforming the notion of how economic value is created.
If you think back to the emergence of any industry, vertical integration is fairly typical. These vertically integrated businesses are centered on physical assets, and economic value is gained on the cost of transactions and the cost of interaction. The cost that a customer pays for a product is based, in sum total, on the costs of all those interactions and all those transactions. When you have technologies like the Internet, you are able to fundamentally change this. We perform transactions online at an incremental cost of virtually zero per transaction. If you think about the effect of that on just about any business, it is very profound. It affects our customers, suppliers, and services.
If you think about Dell in an economic model, you'll notice that every year the operating costs we apply to every computer have continued to go down. We have gotten more efficient and applied less overhead to every sale-today about 11 percent in total and less than 10 percent for most of the United States-and we pass the savings along to our customers.
A good example of transaction costs and how this affects a business is the cost of inventory. In our business, the value of inventory changes very quickly. In the 1908s, we used to measure inventory in weeks. Today we measure inventory in days. Soon we'll measure inventory in hours. In fact, a few of our manufacturing plants already do so. By building web-based links with our suppliers, Intel for example, we are able efficiently manage order flow, provide real-time data from our manufacturing plants, and control just-in-time inventory delivery. We are in the process of moving the bulk of our top 20 suppliers, which account for almost 90 percent of our purchases, to be online with us. The Internet can link our production data to our suppliers. It can be used to perform workflow applications across an entire enterprise, and the time is not far off for real-time delivery of inventory.
In procurement, we are using what we call Premier Pages. These are secure web-sites dedicated to individual customers. They provide information about the products that the company has standardized upon, the Dell account team, the special pricing that we have agreed to with them, the Dell global contacts that serve them and about the service partners certified to service our products. Companies like Shell, Ford and Bayer have told us that they are saving millions of dollars just in their procurement operations by being able to order and configure online with us. This doesn't eliminate the need for our field account executives or our phone-based organization, but rather makes the entire process more efficient and drives our incremental costs per unit down even further. There are significant cost savings both for our customers and for Dell, and it enhances the relationship.
In this way, the Internet is redefining economic value throughout the supply chain. It is changing how profits are made and how they're lost. It is going to change a number of industries that were traditionally structured as a function of physical proximity -- when you went to buy something you did so based on how close it was. You got in your car, you got on your horse, you got on your feet, and you went to get it. Today that is all changing. The field of consideration, the field of suppliers, the transparency of pricing around the world has never been greater. That is going to affect more and more businesses. Traditional business models are giving way from vertical integration to virtual integration, just as the formerly self-contained economies and conglomerations are giving way to competitive global economies and focused companies that understand where they add value.
If we take some lessons from the economic models of the 20th Century, I think we're seeing some fundamental shifts from the value of inventory to the value of information, from physical assets to intellectual assets, and from closed business systems to collaborative business systems. There a few principles I think need to be adopted to embrace a business like this. The first is to form direct relationships with suppliers and customers. Those direct relationships are made possible because the cost of transactions has come down considerably and because we no longer need the legacy of layers of cost and distribution.
Second, we need to focus on what we do best and partner with leading companies for other competencies. We are seeing more and more companies do this. Clearly our company could not have achieved a return on invested capital of more than 200 percent had we engaged in every single process involved in the delivery of our products to our customers.
Third, we need to partner with those best-in-class companies and integrate them into our businesses and hold them accountable to the same standards to which our customers hold us accountable. We have service partners in the field who deliver on-site service for us on a two-hour basis for enterprise products. Customers like Ford and Boeing, who have hundreds of thousands of Dell computers, have taken processes they would have previously done themselves -- loading custom software, deploying machines, servicing machines, and so on -- and turned them over to our company so they can focus on more important challenges. Virtual integration implies basic changes in the way we view the information assets that we have as organizations. We must treat these no longer as closely guarded secrets, but as the foundation of an open partnership, an information partnership. The speed and the flow of this data and the processes that we are able to create are going to accelerate the internal efficiencies and add value for both organizations.
The Internet has also allowed us to share the applications and tools that we use internally in our organization with our customers. Those of you who are responsible for IT in your organization will know that the pressures that exist today are greater than ever. One of the things that we have done is taken the tools that we use for order entry and support, and literally handed those to our customers on the Internet. If you go to our Website for service and support information and type in your Dell PC's service tag number, you are presented with a massive customized page with all sorts of information for your specific PC -- the very same data that one of our technical support people uses when you call us on the telephone.
We are using the Internet to form collaborative research and development partnerships to share information real time. This notebook computer on the podium with me has won tremendous industry recognition and has been the four-time champion in an industry torture test where they shake and bake them and pour coffee on them and heat them up and throw them down and cool them off. We used the Internet to share a common design database with our suppliers around the world to speed the introduction of this product, and to ensure that our customers are able to consistently receive exactly the same notebook whether it is from our factory in China, Malaysia, Austin, Ireland or our new factory in Brazil.
The speed of the Internet provides a fundamentally different perspective on how business relationships occur and the opportunity to create value for customers. The approach relies on collaboration, not on competition ... on sharing information, and understanding what we as businesses do best. It relies on treating both suppliers and customers as information partners joining forces to improve efficiency across the entire spectrum of the value chain, not just in our respective businesses. In this way, we think we can create more enduring, deeper partnerships and relationships that can result in shared efficiencies, enhanced customer loyalty, and as a result, long-term value for everyone involved.
I would like to thank you for joining me this afternoon at the Executives' Club of Chicago. >> |
