FROM THE FOOLS BOARDS
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I attended a meeting at the Economic Club of Detroit. Every week the Club invites a prominent speaker involved in business or government. The Club's speaker yesterday (November 1) was Michael Dell (MD).
My intent is to convey what *I heard in the speech and observed from the slide presentation that accompanied it*. This post is grounded upon my observations and inferences and to a much lesser extent, my opinions. What you get is what you've paid for and in this instance; well, you're getting this article free.
IMO the content of the speech served dual purposes; to discuss E-Commerce and to promote Dell Computer Corp., though MD accomplished this diplomatically.
The topic of MDs speech was entitled ?Expanding the Internet Economy?.
Some facts regarding MD or Dell before MD spoke:
Peter Karmanos, Jr., Chairman and CEO of Compuware Corporation presided over the meeting and gave a brief introduction before MD spoke at the podium:
Business Week selected MD as one of the Top 20 Managers of the Year. MD serves on the BOD of the U.S. Chamber of Commerce. Other recognitions highlighted, too numerous to mention, will not be cited here.
MD is the youngest CEO to ever earn a ranking in Fortune's 500-company listing. Fortune said that Dell stock was the best single investment of the Fortune 500 index for the last three years because it produced the best return for those three years running.
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After Peter's introductory comments, MD took the floor. I overheard comments from others in attendance who were surprised to see MDs visit draw a full house, though there was standing room available. The only time I recall there not being standing room was when President Clinton visited the Economic Club last year, but then I suppose half the crowd wanted to see if someone besides the President was behind the podium preparing to give a speech too. :)
Dell has averaged $21.7 billion in revenues during its most recent four QTRs of operations. MD said that Dell expects to achieve $26 billion in revenues during this fiscal year. MD added that Dell is now averaging $30 million per day in online sales.
In < 4 years, Dell has gone from the fourth largest U.S. PC maker to the first largest PC OEM. Globally, Dell went from number five to number two during the same period. MD said that Dell's success has been ?largely experimental? -- this was an interesting comment.
Dell currently has operations in 33 countries and employs over 29,000 individuals worldwide. Its cost structure is one-half that of all its competitors. As a result of Dell's successes, MD expressed his appreciation to those in the audience that are Dell customers for ?the confidence and trust you've placed in us -- thanks? -- as he encouraged new customers to contact Dell for their computing needs.
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MD then went to the topic of the day. Companies without a Web and E-Commerce presence in 1997 saw their revenues decline 17% over firms that did, while in 1999 companies with a Web and E-Commerce presence experienced revenues growth of some 42% over those companies that did not.
According to MD, ?the Internet is bringing about the demise of traditional? corporate operations. For example, Yahoo's market cap is 6 times > the valuation of the N.Y. Times. E-Toys, another E-Commerce entity has a valuation 3 times > than that of Toys-R-Us.
Companies are going from being largely built around having huge inventories to making better use of information. Physical assets are better utilized when transformed into intellectual assets. Closed systems are optimized when they see the benefits afforded by collaboration. The firm that was once vertically integrated is becoming more virtually oriented.
Based on these concepts, Dell's inventory averages just 6 days of on hand goods vs. 60 days, on average, for a few of Dell's competitors. The Internet makes this (transition) possible, a concept Dell pioneered. The Internet has created greater efficiencies and loyalty with its vendors and customers in this manner. Forty-percent of Dell's sales are completed online.
Dell's goal is to drive out inefficiencies while extracting new efficiencies in the process. For instance, when a Dell customer places an order through a Dell employee live, the average cost to Dell for taking the order is $13. When the same order is placed on Dell's Website, the ?labor cost? is $0. To go one step further, the heavy machinery industry realized a Return on Invested Capital (ROIC) of 13.7% in 1998. By introducing E-Commerce to their operations, their ROIC is 26.4% today. Conversely, Dell's ROIC is 195% today and during its most recent QTR, Dell's ROIC was 260%.
By transforming to the E-Commerce method of doing business, MD said that Shell Oil saved 15% of its purchasing costs by working deals online. Ford Motor Company is saving 25% in productivity costs by directing more of its core operations to the E-Commerce model.
MD suggested that GM and Ford, for example, could shave $35 billion in brick and mortar type assets and add the savings to the bottom line by selling vehicles made to order direct from an Internet Website. These assets could be removed from long-term property type asset categories, turned into cash, and added to their bottom lines.
Dell's Website started out as a cost-efficient method for firms and individual customers to check the status of their orders. Initially, Dell's Website received 5,000 hits per week. Dell's Website has since grown into a premier Website for an abundance of electronically available, user-friendly E-Commerce chores that Dell just a short time ago had not even thought of.
?Dudley?, a Dell FAQ E-Commerce service, answers some 400,000 questions a week, while Dell's servers complete approximately 160,000 file (upgrade) downloads on a weekly basis too. According to MD, ?there really is a person named Dudley that works? in Austin: ?[Dudley] takes a lot of grief over his job on the Website? but Dudley handles it in stride.
Dell's E-Commerce capabilities have ?freed up people to do things that are [more] productive?, said MD. The cost saved to Dell: $21 million.
Dell also designs ?Premier Pages? for those Dell customers that find them useful. These pages, designed by Dell, are for the proprietary needs of Dell's special customers, for example, Shell Oil or Ford Motor Company. Any number of items might be placed on these pages, such as order status, file downloads specific to the servers, PCs or laptops sold to that customer, email links to certain Dell representatives assigned to serve the needs of that customer, and so forth. In other words, Dell will design these Premier Pages to suit the needs of those customers that find their own Dell Web Pages useful and time saving conveniences.
Dell also sponsored an online seminar in conjunction with the Small Business Administration (SBA) and approximately 7,000 SBA customers to address issues related to those Y2K concerns that some SBA customers had.
MD pointed out that E-Commerce's speed and execution define early leaders within the E-Commerce world. Building a rich online presence through user-friendly Websites' content not only works to continue to grow one's customer base rapidly as more users go online, but also and more notably works to establish the Online Community that will be the Internet of the 21st Century.
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This concluded the primary points of MDs speech. Following the speech, MD was asked questions randomly selected from the audience:
1) Where will Dell be in 3 to 5 years?
MD expects Dell to double or triple its market share within 3 to 5 years. Dell has positioned itself to capture a good percentage of the $750 billion industry that it's in. MD sees China, Japan, and Brazil to play significant roles in Dell's growth. MD will fly to Brazil this week to continue to coordinate efforts that will allow Dell to become a key player in the South American market. MDs goal is to make Dell the #1 player in South America.
There remain huge opportunities in the server and storage areas, and Dell now has about 25% of the U.S. market in servers according to MD. He sees additional opportunities in the storage area and mentioned Dell's recent storage unit acquisition. In Dell's $2 billion ?services? area, MD commented that Dell's services revenues are growing at a rate of 100% annually.
2) How will the Internet affect physical retailers like Kmart?
I sensed that KM is a Dell customer or that KM may soon be a Dell customer (or is at least a potential Dell customer). KM is headquartered here in the Detroit Metro area.
MD made the point that physical retailers will not go away because consumers ?can do things in the physical world? that they cannot do in the virtual one. He sees physical retailers succeeding best by going to what he referred to as a ?click and mortar strategy? -- or a combination of both avenues to making purchases.
For example, can you test drive a PC in the virtual world, touch the keyboard, click the mouse, pick up the CPU, adjust the monitor settings? No. Can you try on that pair of Levi's you want in the virtual world? No.
3) Will or should all states tax Internet sales?
MD supports sales taxes on Internet sales but none that are any different than taxes imposed on items purchased in the physical retail environment.
4) Many high level executives have become wealthy at Dell through Dell's stock and stock option programs. How do you keep them productive when they already have all they want?
MD chuckled a bit and said that many Dell executives have a huge desire for things they have yet to acquire. ?Some of our executives have pretty big imaginations.? Keeping them productive and innovatively thinking toward the future is not an issue. Dell will continue to grow and innovate.
5) What do you think the outcome of the MSFT/DOJ suit will be, and how might this impact the industry?
MD had no idea what the outcome of the trial will be. He commented that huge corporations ?must be the bad guys? according to the DOJ and others.
6) Sun Microsystems is going to Net-PCs again as the wave of the future. How do you see this impacting Dell?
What Sun proposes are not PC replacement devices. Rather, they are ?complimentary devices? and need to be thought of as such. Web TV is an example. You can't do on Web TV what you can do with a PC or a laptop. For example, MD asked Sun's CEO what do you do when you're on an airplane without a laptop? Sun's CEO replied; read a good book!
(Well, what about when you're on your way to a business meeting when you haven't yet completed your assignment for the meeting you're flying in to)? ;o
7) Will Compaq find its way out of its problems? Will Compaq get out of its slump?
MD -- ?No: Not if I have anything to do with it.? He added that CPQ added to its problems with the acquisition of DEC; this complicated CPQs culture and made it more problematic. Don't worry about Compaq: Come over to Dell. We will save you money and give you great service without ?[having] to deal with a tumultuous company.?
Incidentally, I posted my take regarding CPQs problems just prior to their latest earnings report of October 26. Here's the link to my post on TMFs CPQ board:
boards.fool.com
8) Dell's been a best performing stock in the '90s. What's happened to Dell stock this year?
MD said that Dell will continue to build upon its core business model based on continuing to add value within its growth oriented schematic aimed at growing sales, market share, and revenues. In other words, he does not nor does he intend to try to control what price the market places on Dell stock. That activity is the market's business. Dell's work is to service customers and create shareholder value, which Dell will continue to do.
9) In that we are entering a presidential election year, what should we do with the surplus funds in government?
?Work to improve the education system and allow companies to thrive without governmental interference.?
FWIW, at the end of the event I went up and got MDs autograph: I figured it was a once in a lifetime event. What the heck! He gladly obliged. ;)
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