Dell Computer Corporation Business Information, Profile, and History

Company Perspectives:

Dell's mission is to be the most successful computer company in the world at delivering the best customer experience in markets we serve. In doing so, Dell will meet customer expectations of: highest quality; leading technology; competitive pricing; individual and company accountability; best-in-class service and support; flexible customization capability; superior corporate citizenship; financial stability.

History of Dell Computer Corporation

The largest direct-sale computer vendor in the world, Dell Computer Corporation sells desktop personal computers, notebook computers, network servers, and a variety of computer peripherals and software. The manufacturer sells its equipment directly to consumers, largely businesses and government agencies, through its toll-free number and its web site. Dell also sells workstations, network servers, and high-end storage products. Founder Michael Dell holds 14 percent of the company and continues to run the company as CEO.

Early History

Dell was founded by Michael Dell, who started selling personal computers out of his dorm room as a freshman at the University of Texas in Austin. Dell bought parts wholesale, assembled them into clones of IBM computers, and sold them by mail order to customers who did not want to pay the higher prices charged by computer stores. The scheme was an instant success. He was soon grossing $80,000 a month, and in 1984 he dropped out of school to found Dell Computer.

At the time, the PC industry was dominated by such large firms as IBM, while smaller, lesser known mail order firms sold IBM clones at a steep discount. Dell used low-cost direct marketing to undersell the better known computers being sold through such high-overhead dealer networks. Dell placed ads in computer magazines, gearing his merchandise to buyers who were sophisticated enough to recognize high quality merchandise at low prices. Customers placed orders to Dell by dialing a toll-free number. As a result of these methods, Dell's computers became the top brand name in the direct mail market.

Dell achieved sales of $6 million its first full year in business, approaching $40 million the next year. Dell hired former investment banker E. Lee Walker as president in 1986 to help deal with his firm's explosive growth. By 1987 Dell held a dominant position in the mail-order market, but it was clear that the firm had to move beyond mail order if it was to continue growing. To accomplish this goal the firm needed a larger professional management staff, and Dell hired a group of marketing executives from Tandy Corp., another maker of low-cost PCs. The group built a sales force able to market to large corporations and put together a network of value-added resellers, who assembled packages of computer components to sell in specialized markets.

The Tandy team soon helped raise gross margins to 31 percent, up from 23 percent a year earlier. Rather than merely undercutting the prices of competitors, they set prices in relation to the firm's costs. The new marketing department soon ran into trouble with Michael Dell, however. Battles erupted over advertising budgets and the number of salespeople required for corporations and resellers. While Dell believed that the new team did not understand direct selling and was trying to create a traditional marketing department with an overly large sales force, the Tandy group alleged that Dell lacked the patience to wait for the sales force to pay off. By early 1988, most of the Tandy group had resigned or been forced out.

Regardless, the firm continued growing rapidly, opening a London office that sold $4 million worth of computers during one month in 1988. Dell also formed a Canadian subsidiary. Early in 1988 the firm formed various divisions to raise its profile among corporate, government, and educational buyers. With reported sales of $159 million in 1987, the firm went public during this time, selling 3.5 million shares at $8.50 a share.

Increased Competition in the Late 1980s

The firm faced several challenges, however. Announcing their own clone of IBM's new PS/2 computer system well before it was actually ready, Dell later had trouble reproducing important aspects of the PS/2's architecture, and the computers were delayed significantly, embarrassing the young company. Furthermore, Dell faced competition from several Japanese manufacturers, which were offering IBM clones at low prices. Further, having had trouble meeting demand, Dell used money raised from its stock offering to expand capacity and warehouse space, leaving the company with little cash. When it overestimated demand during the fourth quarter of 1988, the firm suddenly had no cash and warehouses full of unsold computers.

Dell responded to the increasing competition by increasing the level of technical sophistication in its computers. Half of its 1988 sales came from PCs using the Intel Corp.'s 80386 microprocessor, the most powerful PC chip at the time, and the company began producing file servers using the sophisticated Unix operating system. Dell also hired computer scientist Glenn Henry away from IBM to work on product development. Scrapping the company's first attempts at cloning IBM's PS/2, Henry initiated new plans for producing clones. Henry built Dell's research and development staff from almost nothing to 150 engineers, who began working on ways to combine the function of several chips onto one chip. When Intel released its 486 microprocessor, Dell began speeding to market the computers that could use it. Another of Henry's goals was high-quality graphics, which required better monitors and special circuit boards. By mid-1989 Dell had finished initial attempts at graphics hardware, giving it inroads into the higher end of the PC market.

Despite these advances, Dell still had a research and development budget of $7 million, compared with the hundreds of millions spent by larger competitors like IBM. Dell's share of the PC market was only 1.8 percent, but it was still growing rapidly. U.S. sales for 1989 reached $257.8 million, while sales in Britain increased to $40 million and a branch in western Germany realized the break-even point.

Dell considered itself as much a marketing company as a hardware company, and its sales staff played an important role in its successes. Dell's sales personnel trained for six weeks or more before taking their seats at the phonebanks, and, along with their managers, they held weekly meetings to discuss customer complaints and possible solutions. In addition to fielding questions and taking orders, sales staff were trained to promote products. They helped buyers customize orders, selling them more memory or built-in modems. Orders were then sent to Dell's nearby factory where they were filled within five days. The telemarketing system also allowed Dell to compile information on its customers, helping the firm spot opportunities and mistakes far more quickly than most other PC companies.

In 1990 Dell set up subsidiaries in Italy and France and began selling some computers through large computer stores, whose high-volume, low-margin strategy complemented Dell's established operations. The firm was making important corporate inroads as well, developing client/server computing systems with Andersen Consulting, for example, and introducing powerful servers using the Unix operating system. As a result, 40 percent of Dell's $546 million in 1990 sales came from the corporate world, up from 15 percent in 1987. Dell became the sixth largest PC maker in the United States--up from number 22 in 1989--and retained a staff of 2,100. Furthermore, the company's emphasis on customer satisfaction paid off, as it was rated number one in J.D. Powers & Associates' first survey of PC customer satisfaction.

That year, however, Dell manufactured too many memory chips and was forced to abandon a project to start a line of workstations. As a result, 1990 profits fell 65 percent to $5 million, despite the doubling of the firm's sales.

Price Wars in the Early 1990s

Also during this time, the traditional PC market channels were in flux. With a recession dampening sales, PC makers engaged in a furious price war that resulted in slumping profits nearly across the board. Compaq, IBM, and Apple all had profit declines or were forced to lay off employees. Furthermore, Compaq filed a lawsuit against Dell, which it eventually won, claiming that Dell's advertising made defamatory statements against Compaq. Nevertheless, the economic recession actually benefitted Dell. While customers had less money, they still needed PCs, and they purchased Dell's inexpensive but technologically innovative IBM clones in record numbers. Consequently, annual sales shot up toward $1 billion.

In the early 1990s, notebook-sized computers were the fastest growing segment of the PC market, and Dell devoted resources to producing its first notebook model, which it released in 1991. The following year it introduced a full-color notebook model and also marketed PCs using Intel's fast 486 microchip.

As the PC wars continued, Compaq, which had been a higher priced manufacturer stressing its quality engineering, repositioned itself to take on Dell, releasing a low-end PC priced at just $899 and improving its customer services. The new competition affected Dell's margins, forcing it to cut its computer prices by up to $1,400 to keep its market share. Dell could afford such steep price cuts because its operating costs were only 18 percent of revenues, compared with Compaq's 36 percent. The competition also forced Dell away from its attempts to stress its engineering. Dell executives began speaking of computers as consumer products like appliances, downplaying the importance of technology. Reflecting this increased stress on marketing, Dell began selling a catalogue of computer peripherals and software made by other companies; it soon expanded into fax machines and compact discs. Dell's database, containing information on the buying habits of over 750,000 of its customers, was instrumental in this effort.

Toward the end of 1992 Dell's product line experienced technological difficulties, particularly in the notebook market. In 1993 quality problems forced the firm to cancel a series of notebook computers before they were even introduced, causing a $20 million charge against earnings. The firm was projected to hold a 3.5 percent share of the PC market in 1993, but Digital Equipment Corporation, whose focus was minicomputers, nevertheless topped Dell as the biggest computer mail order company. To fight back against Compaq's inexpensive PC line, Dell introduced its Dimensions by Dell line of low-cost PCs. Sales for the year reached $2 billion, and Dell made a second, $148 million stock offering.

During the early 1990s Dell also attempted a foray into retail marketing, the most popular venue with individual consumers. In 1990 Dell placed its products in Soft Warehouse Superstores (later renamed CompUSA) and in 1991 they moved into Staples, a discount office supply chain. Dell agreed to allow the stores to sell the products at mail-order prices, a policy that soon caused Dell a lot of grief. The value of existing computers on store shelves plummeted whenever Dell offered a new computer through its direct sales, and Dell had to compensate retailers for that loss. With its direct sales channel, Dell had never had inventories of old computers that it could not sell, because each of those computers was made specifically to fill a consumer's order. Dell abandoned the retail market in 1994.

With price wars continuing, Dell cut prices again in early 1993 and extended the period of its warranty. However, increased competition and technical errors had hurt Dell, and despite growing sales, the firm announced a quarterly loss in excess of $75 million in 1993, its first loss ever. Dell attributed many of the problems to internal difficulties caused by its incredible growth. It responded by writing down PCs based on aging technology and restructuring its notebook division and European operations.

Like most of its competitors, Dell was hurt by an industry-wide consolidation taking place in the early 1990s. The consolidation also offered opportunity, however, as Dell fought to win market share from companies going out of business. Dell moved aggressively into markets outside of the United States, including Latin America, where Xerox began to sell Dell computers in 1992. By 1993, 36 percent of Dell's sales were abroad. That year, Dell entered the Asia-Pacific region by establishing subsidiaries in Australia and Japan.

Late 1990s Expansion

After a loss of $36 million in 1994, Dell rebounded spectacularly, reporting profits of $149 million in 1995. That year, the company introduced Pentium-based notebook computers and a popular dual-processor PC. The company grew by almost 50 percent that year and the next, raising its market share to approximately four percent and entering the company into the ranks of the top-five computer sellers in the world.

Expansion continued on many fronts in 1996. Dell introduced a line of network servers and was soon the fastest-growing company in that sector. The company also opened a manufacturing facility in Penang, Malaysia. The most important development that year, however, was Dell's expansion into selling directly to consumers over the Internet. Within three years, Dell was selling $30 million a day over the Internet, which would come to account for 40 percent of the company's overall revenue. Dell achieved enviable efficiencies using the Internet to coordinate the orders of consumers with its own orders of parts from suppliers. The company's web site also provided technical support and allowed consumers to track their orders from manufacturing through delivery.

Dell continued its exponential growth in 1997 and 1998, reaching profits of $944 million in 1998. The company introduced new products and services, including a line of workstations, a leasing program for individual consumers, and a line of storage products. Dell also expanded its manufacturing facilities in the United States and in Europe. In 1998 it established a production and customer center in Xiamen, China, raising the number of its overseas plants to three. By the time Dell sold its ten-millionth computer in 1997, it was a close fourth behind IBM, Hewlett-Packard, and Compaq in the computer industry. By mid-1998, it had captured nine percent of the market and the number two spot.

Following on the success of its direct sales over the Internet, Dell opened an online superstore of computer-related products in 1999. Gigabuys.com offered low-priced computer hardware, software, and peripherals from various companies in the industry, although Dell continued to sell its own products at www.dell .com. The company also expanded its Internet offerings in 1999 with Dellnet, an Internet access service for Dell customers.

Although Dell had faced competition from numerous small companies imitating Dell's direct-selling strategy, it encountered stiffer competition in the late 1990s from the big players in the industry. Compaq, for example, began selling a new line of personal computers over the phone and through its web site. While Dell's growth showed some signs of slowing in 1999, few doubted that Dell would continue to maintain a lead position in the industry, given its hit combination of direct sales and made-to-order merchandise.

Principal Divisions: Dell Americas; Dell Asia Pacific; Dell Japan; Dell Europe, Middle East, Africa.

Principal Competitors: Compaq Computer Corporation; Gateway, Inc.; Hewlett-Packard Company; International Business Machines Corporation (IBM).

Chronology

• Key Dates:

• 1984: Michael Dell founds Dell Computer Corporation.
• 1988: Company goes public with 3.5 million shares of company stock.
• 1991: Dell introduces its first notebook PC.
• 1993: Dell establishes subsidiaries in Australia and Japan.
• 1996: Company begins selling over the Internet.
• 1997: Dell introduces a line of workstations.