In 1984, at the age of 19, Michael Dell founded Dell Computer with a simple vision and business concept—that personal computers could be built to order and sold directly to customers. Michael Dell believed his approach to the PC business 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 the company sometimes struggled during the 1986-1993 period trying to refine its strategy, build an adequate infrastructure, and establish market credibility against better-known rivals, Dell’s strategy started to click into full gear in the late 1990s. Going into 2003, Dell’s sell-direct and build-to-order business model and strategy had provided the company with the most efficient procurement, manufacturing, and distribution capabilities in the global PC industry and given Dell a substantial cost and profit margin advantage over rival PC vendors. Dell’s operating costs ran about 10 percent of revenues in 2002, compared to 21 percent of revenues at Hewlett Packard, 25 percent at Gateway, and 46 percent at Cisco Systems (considered the world’s most efficient producer of networking equipment). Dell’s low-cost provider status was powering its drive for market leadership in a growing number of product categories.
Dell Computer was solidly entrenched as the market leader in PC sales in the U.S., with nearly a 28 percent market share in 2002, comfortably ahead of Hewlett Packard with 16.8 percent and Gateway with 5.7 percent. Dell had moved ahead of IBM into second place during 1998 and then overtaken Compaq Computer as the U.S. sales leader in the third quarter of 1999. Its market share leadership in the U.S. had widened every year since 2000. Worldwide, Dell Computer was in a neck-and-neck race with Hewlett Packard (which acquired second-ranked Compaq Computer in May 2002) for global market leadership—Dell was the world leader in unit sales in the first and third quarters of 2002 and HP was the sales leader in the second and fourth quarters. Dell had overtaken Compaq as the global market leader in 2001. But when HP, the third ranking PC seller in the world, acquired Compaq, the second-ranking PC vendor, Dell found itself in a tight battle with HP for the top spot globally.
Since the late 1990s, Dell had also been driving for industry leadership in servers. In 2002 Dell was the No.1 domestic seller of entry-level servers and high performance workstations (used for applications with demanding graphics). It was No. 2 in the world in server shipments and in striking distance of taking over the global market lead. In the mid- and late-1990s, a big fraction of the servers sold were proprietary machines running on customized Unix operating systems and carrying price tags ranging from $30,000 to $1 million or more. But a seismic shift in server technology, coupled with growing cost-consciousness on the part of server users, produced a radically new server market during 1999-2002. In 2003 about 8 out of 10 servers sold were expected to carry prices tags below $10,000 and to run on either Windows or the free Linux operating system rather than more costly Unix systems. The overall share of Unix-based servers shipped in 2003 was expected to be about 10 percent, down from about 18 percent in 1997. Dell’s domestic and global market share in low-priced and mid-range servers was climbing rapidly. Dell had over a 30 percent share of the 2002 world market for servers, up from 2 percent in 1995.
In addition, Dell was making market inroads in other product categories. Its sales of data storage devices were growing rapidly, aided by a strategic alliance with EMC, a leader in the data storage. In 2001-2002, Dell began selling low-cost, data-routing switches—a product category where Cisco Systems was the dominant global leader. In late 2002 Dell introduced a new line of handheld PCs—the Axim X5 to compete against the higher-priced products of Palm, HP, and others; the Axim offered a solid but not trendsetting design, was packed with features, and was priced roughly 50 percent below the best-selling models of rivals. Starting in 2003, Dell planned to begin marketing Dell-branded printers and printer cartridges, product categories where Hewlett Packard was the global leader and a category that provided HP with the lion’s share of its profits. In January 2003, Dell announced that it would begin selling retail-store systems, including electronic cash registers, specialized software, services, and peripherals required to link retail-store checkout lanes to corporate information systems. Since the late 1990s, Dell had been marketing CD and DVD drives, printers, scanners, modems, monitors, digital cameras, memory cards, ZIP drives, and speakers made by a variety of manufacturers.
In a February 2003 article in Business 2.0, Michael Dell said, “The best way to describe us now is as a broad computer systems and services company. We have a pretty simple system. The most important thing is to satisfy our customers. The second most important thing is to be profitable. If we don’t do the first one well, the second one won’t happen.” For the most part, Michael Dell was not particularly concerned about the efforts of competitors to copy many aspects of Dell’s build-to-order and sell direct strategy. He explained why:
The competition started copying us seven years ago. That’s when we were a $1 billion business. Now we’re $36 billion. And they haven’t made much progress to be honest with you. The learning curve for them is difficult. It’s like going from baseball to soccer.
I think a lot of people have analyzed our business model, a lot of people have written about it and tried to understand it. This is an 18½ year process…..it comes from many, many cycles of learning…..It’s very, very different than designing products to be built to stock…..Our whole company is oriented around a very different way of operating……I don’t, for any second, believe that they are not trying to catch up. But it is also safe to assume that Dell is not staying in the same place.
As Dell Computer battled Hewlett-Packard for leadership in the global PC market in 2003, Michael Dell believed the opportunities in front of Dell were tremendous:
…..when technologies begin to standardize or commoditize, the game starts to change. Markets open up to be volume markets and this is very much where Dell has made its mark—first in the PC market in desktops and notebooks and then in the server market and the storage market and services and data networking.
The way we think about it is that there are all of these various technologies out there…..What we have been able to do is build a business system that takes those technological ingredients, translates them into products and services and gets them to the customer more efficiently than any company around.
We only have about a 3 percent market share in the $800 billion-plus IT market, so we think…. we have got a lot more opportunity going forward…. it’s a pretty exciting time to be in our industry and the opportunities are pretty awesome.
1. What is your evaluation of Michael Dell as CEO? How well has he performed the tasks of strategic management discussed in Chapter 1?
2. What are the elements of Dell’s strategy? How well do the pieces fit together? Is the strategy evolving?
3. Does Dell’s expansion into other IT products and services make good strategic sense? Why or why not?
4. What does a SWOT analysis reveal about the attractiveness of Dell Computer’s situation?
5. What does a competitive strength assessment reveal about Dell, as compared to IBM, Hewlett-Packard, and Gateway? Among these competitors, who enjoys the strongest competitive position? Who is in the weakest overall competitive position?
6. Has Dell’s strategy resulted in a substantial competitive advantage over its rivals? What is the basis for whatever competitive advantage it has?
7. What is your assessment of the company’s financial performance the past five years?
8. Is Dell’s strategy potent enough to beat out Hewlett-Packard? What are Dell’s chances for becoming the dominant leader in the global PC market?