Daring Dell to branch out
By John G. Spooner
If there is a key to Michael Dell's success, it is his ability to make the right decision at the right time--and often, that decision is to do nothing at all.
He did not join the rush to make handheld devices. He did not open stores as Gateway and Apple Computer did. He did experiment briefly with a stylishly designed PC but axed the product six months after putting it on the market.
"Customers have the best ability to determine which products and services are valid," said the 36-year-old CEO of Dell Computer. "It's not so much people in laboratories. That's actually proven to be a pretty bad way of coming up with products. There's a lot of technology in search of a problem."
That ingrained caution--combined with a cool feel for the jugular--has paid off for the corporate wunderkind, who was 10 years old when the first personal computer was unveiled. In building a multibillion-dollar company before he was 30, Dell has revolutionized the way computers are sold by mastering the game at hand, luring his rivals into losing price wars instead of chasing the latest industry fads.
Time and again, Dell's willingness to sacrifice profit margins for market share has won these wars of attrition. Even with PC growth slowing and prices falling, the famously efficient system he constructed allowed Dell to reap better returns than could bloodied competitors.
Yet for all his accomplishments, Dell can scarcely afford to slow down. In the unrelenting demand for growth and profits that defines so much of the high-tech industry, his company must branch into new areas to continue its impressive trajectory.
In 2002 and beyond, Dell's challenge is to expand the company's offerings in precisely those higher-margin areas where Dell Computer has barely rated an honorable mention: services, storage and networking, which now make up about 20 percent of revenue.
Dell will need to tap its $6.4 billion stockpile of cash as of November and short-term securities to either buy a services company or build its existing in-house capabilities, analysts say. All this is happening as corporate budgets remain soft; Dell has already seen workstation and server revenue decline for three consecutive quarters.
A troublesome harbinger? Perhaps, but this is where the Dell formula is put to work.
"It takes time. We've been at this for 18 years," the chief executive said in a recent interview with CNET News.com. "But we've seen that in the enterprise market, it works well."
"It" is the Dell Way, the company's methodical plan of attack for turning higher-priced computer categories into commodity markets.
Dell Computer takes orders directly from customers and keeps only about five days' worth of inventory in its warehouses. That keeps annual write-offs for excess and obsolete inventory down to 0.1 percent. Contrast that with companies like Compaq Computer, which may need to stock its middlemen with several weeks' worth of products--and, when sales soften, is stuck with much higher inventories.
The question is whether Dell can afford to pursue that strategy in relatively new areas where products are far more costly to produce than standard PCs.
"Dell couldn't be competitive with IBM or Compaq without a substantial investment (in services) at this point," IDC analyst Roger Kay said. "They still have a long way to go in their global services capabilities."
But Michael Dell isn't worried, for this isn't the first time he has faced a difficult proposition.
Since founding his Austin, Texas-based company in 1984 as a 19-year-old dropout from the University of Texas, Dell has heard no shortage of experts explain why the sky was about to come crashing down on top of him--starting with the stock market collapse of 1987, which hit just as he was preparing to take the business public.
A company of less than $8 billion at the time, the PC maker grew to finish 2001 with $32 billion in sales. Perhaps most remarkable, Dell has succeeded without the next-big-thing bluster and hype that have come to define much of the high-tech industry in recent years.
The cautious empire
Microsoft and Apple often speak about the changing nature of technology and bring out new, experimental products to capitalize on alleged pent-up demand. Similarly, Hewlett-Packard CEO Carly Fiorina has touted the proposed acquisition of Compaq as an epoch-making event for the technology field.
Michael Dell is a sober, less flashy study in contrast. Much of his success was achieved by avoiding mistakes that took down competitors and by concentrating on doing a few things very well. Dell Computer has acquired just one company, ConvergeNet, in its entire history.
Dell's is a conservative outlook that pervades the entire corporate culture. The company rarely announces executive shuffles or new departments, preferring to make most changes quietly without calling attention to them. In interviews with reporters, Dell executives rarely stray beyond that message, taking their cues as if the boss were sitting down next to them.
The company also makes a priority of an increasingly rare phenomenon these days: customer satisfaction. Dell himself frequently takes a turn staffing the company call center, where he pitches in taking customer orders over the phone. Even though he has delegated day-to-day responsibilities to President Kevin Rollins, Dell keeps close watch over operations, especially when it comes to product development.
He is often his company's best beta tester. During a recent meeting with an industry analyst, for example, he tested a prototype 802.11b wireless-equipped machine. Using it as a customer might, Dell kept an eye on his e-mail all throughout the discussion.
It is this kind of personal research that keeps Dell in touch with consumer needs.
At technology conferences, for example, he frequently asks attendees to raise their hands if they carry handhelds or cell phones. Nearly all hands go up. Then he'll ask them how many run spreadsheets or perform other PC tasks on their cell phones or handheld computers. All the hands go down.
That is the kind of anecdotal evidence Dell will cite when he resists jumping into other businesses.
"There isn't another technology hardware company that we are aware of that has seen this level of stability during these tough times," Goldman Sachs noted after the end of Dell Computer's fiscal third quarter last October.
Indeed, the man who ranked 15th on Forbes Magazine's list of the richest people in America last year has made a career of having the last laugh.
Not long ago, Sun Microsystems CEO Scott McNealy sniffed that his rival essentially operated a grocery store for Microsoft, merely building boxes to house Windows software and Intel chips. But like others who have underestimated Dell Computer as a one-trick pony, McNealy had it only partly right.
It is true that the company rarely ventures beyond the Microsoft and Intel technologies, spending just 1.5 percent of its net revenue on research and development. Nevertheless, whatever the company is doing, it works.
Five years after entering the server market in 1996, Dell Computer sold more systems than any other competitor. The company similarly climbed to the top of the workstation heap three years after introducing its first machines in 1997. And while most rivals in both categories are suffering declines, Dell Computer's market share is on the upswing.
Technologically, there's also a benefit. Dell Computer can immediately offer the latest products from Microsoft and Intel because its computers are custom built. In addition, as the largest customer of the Wintel duopoly, it enjoys the largest volume discounts handed out by Microsoft and Intel.
The response from competitors? "Lose money," Dell said. "You consolidate. You run away."
The efficiency of the distribution model comes across in the numbers. Dell Computer had 10.3 percent operating expenses in its last quarter, compared with 21.3 percent for Compaq. That kind of disparity gives the company leeway to get aggressive on pricing.
In the early 1990s, Dell launched a price war with higher-cost computer makers that eventually forced cross-state rival Compaq to oust its CEO and scramble to find a low-cost strategy of its own. He launched another withering price war last year, picking up four points in market share and dethroning Compaq as the world's largest provider of PCs.
"Dell has enough of a buffer that, even by accelerating its own profit erosion, competitors experience twice as much erosion," said Brooks Gray, a senior analyst with Technology Business Research.
This is not to say that Dell has been free of casualties. As the company continued to squeeze out more cost efficiencies, it handed out pink slips to more than 4,000 employees. That was a bitter pill, but management was able to keep operating margins flat or to increase them in the past four quarters during one of the fiercest price wars in the history of the computer industry.
Having survived those battles, Dell is trying to apply his Darwinian principles to new markets. Later this year, the company will have new products in two server categories that Dell says will be more affordable than anything offered by the competition.
It is, for all intents and purposes, another declaration of war.
"Now," Dell said, "we're getting to the fun part." |
