Michael Dell in person

The story of Michael Dell’s decision to drop out of college to start a business that has grown into a worldwide industry leader has fascinated many, but the chairman and CEO of Dell Computer Corp. readily admits his company’s ascent to sales of $32 billion wasn’t entirely smooth.

And he’s not just talking about having to cut approximately 10 percent of his work force to keep operating expenses in line during the recent tech slowdown.

There was the time, for example, when Dell ventured into the retail channel instead of selling direct to consumers.

“That turned out to be a pretty big mistake,” he says.

Another mistake: growing too fast. In one year, company revenue skyrocketed from $890 million to $2.1 billion.

“It’s said that when you reach $1 billion in sales, everything sort of falls apart, but we just kept on going and went to $2 billion,” he says.

The fast growth taught him the value of planning, the importance of growing a team and the necessity of saying “no” sometimes.

“One of the most important things we learned was (that) to try to do everything, to try to be in all businesses at all times, was really a mistake,” he says.

Dell shared these lessons with SBN Magazine, the business community and MBA students at The Ohio State University’s Max M. Fisher College of Business during a recent visit to Columbus. Here’s more of what he said during and after “Connectivity 2001: The TechPartners Forum for Ohio Leaders.”

Q: What were you involved in during your youth that influenced the start of your career?

A. Dell’s path of entrepreneurship started long before he used $1,000 to begin building his direct marketing computer company in 1984.

“My first business — if you call it that — was a stamp auction when I was 12 years old,” he says, adding that he made “a couple thousand dollars” from the venture.

His philosophy behind direct marketing is often retold by the story of another experience he had — this one as a 16-year-old.

He was selling newspaper subscriptions by telephone and figured out that the people who were most likely to buy were those who had recently married or moved. He got lists of those people through marriage license filings and companies that track people who have just obtained mortgages.

“I hired a bunch of my buddies from high school and went to a 16-county area and sold several thousand newspaper subscriptions and made $18,000 in high school — from my Saturday job,” he says.

Although he spent a year at the University of Texas working toward a biology degree — it was an expectation of his family that he’d enter a medical career — he decided instead he was really interested in computers.

Q: What was the most important medium for getting your name and product concept into the market so quickly when your company first started?

A: “We were basically appealing to enthusiasts and what I’ll call ‘lunatic fringe users,'” Dell says, referring to the newness of computers when he founded the company 17 years ago.

For that reason, he advertised in trade magazines that appealed to those types of people.

He also made efforts to win awards from those magazines in hopes that having those awards would create an “expert mentality” and give people more reason to refer others to Dell.

“Capturing the mind share of the enthusiast was key,” he says. “We also went out of our way to be somewhat bold and sometimes even obnoxious in our advertising.”

He talks about ads Dell ran comparing its product and service to competitors such as Compaq, using such tactics as “laptop vs. lapdog.”

“It made the phones ring,” he says. “Compaq even sued us, which was a stupid thing to do because it brought more attention to our ads and to our company. Word of mouth was a huge, huge impact.”

Q: Why did you decide to sell directly to customers instead of through retail outlets?

A: “When the business was conceived, I had seen an increase in inefficiencies in the dealer channel,” Dell says. As a customer himself, he saw the price markups and the slowness of the distribution chain.

Dell Computers, on the other hand, had in its latest quarter less than $350 million in inventory — just five days’ worth, Dell says.

“That’s good for a 5 to 10 percent cost advantage right off the top,” he says regarding storage.

“At our factory, you don’t see any raw material and you don’t see any finished goods. You only see the work in progress,” he says. “Production time is a matter of hours.”

Q: What is your secret to sustaining the long-term, incredible growth of Dell Computer?

A: “In any business, you’ve got to find something valuable and unique that delivers a product that you can be uniquely good at,” he says. “Then communicate the value of that. We went to great lengths to explain what we’re doing and why it’s valuable.”

Dell also attributes the success of his company to “centering on a winning strategy” by following a business model of efficiency, service, low pricing and productivity.

“We’ve strayed from that from time to time,” he says, but each time it came back to bite the company.

Q: Do you foresee problems with people copying your distribution process?

A: Some competitors, such as Compaq Direct, IBM Direct and Apple Direct, already have been copying Dell’s process for the better part of 10 years, he says, but they haven’t succeeded in the same way.

“The difficulty is that if you look inside these companies, they tend to not really understand what we do and they treat it as a niche, when really it’s an entire market,” he says.

One measure of efficiency, he explains, is the cash conversion cycle, or the number of days between your purchase of raw materials and the time you receive payment for your finished product.

“Last year our cash conversion cycle was negative 24 days,” Dell says smugly. “Put that in your spreadsheet.”

Q: Why hasn’t Dell entered the handheld market?

A: Dell is applying the lesson of saying “no” in this case.

“First of all, it’s not a particularly huge market,” he says. Second, he says, the market hasn’t settled down enough among the current operating systems to show a clear winner. He’ll stay clear until it’s resolved.

“If it was, I could guarantee Dell would definitely be in that business. We like to enter markets where we can leverage our business model,” he says, referring on Dell’s reliance on industry standards.

“When a product became an industry standard, we could ride the commoditization wave better than any company. Dell goes after profit pools — not revenue pools or product pools. We wait until there’s a profit opportunity, then we show up.”

Q: How difficult was it for you to go online, and how did you brand it?

A: The Internet, Dell says, was just another method of selling directly to the customer.

“For a brief period, 60 to 90 days, the sales force said, ‘This is going to take away jobs.’ But then they saw their new quotas and realized there was no way they could reach those quotas without the Internet,” he says.

“We said, ‘We want Dell.com to be at the center of everything — whenever you see Dell, you see Dell.com.’ We wanted that to be the first point of contact for any customer to go online.”

In Japan, for example, Dell launched products that were available only through Internet purchase for a brief period.

Dell says the Internet’s arrival turbocharged his company’s growth beginning in 1995.

“We were able to use it to significantly enhance communication with customers,” he says, adding that 90 percent of the company’s interaction with suppliers is done electronically, resulting in a return on invested capital that has increased from 30 percent to more than 300 percent.

Many businesses have built-in costs that could be reduced by the use of e-commerce, he adds.

“The first thing you have to do is look at the cost structure of the business and see how it can be changed,” he says. “Are there areas where e-business can make a difference? E-business is not one-size-fits-all.”

Q: What are your thoughts on the current economic and technology industry slowdown?

A: Dell describes changes in the economy, particularly in the technology realm, as waves that undulate within boundaries rather than hills and valleys that have no limits.

“Remember, technology has been the most important fulcrum in the economy that we’ve ever seen,” he points out.

In the technology industry, the slump is simply a weeding out of dot-coms that were overcapitalized from the start, he says.

“It would be a bad time to underestimate the long-term potential for any technology,” he notes.

In fact, he expects the next big buying cycle to begin around the middle of next year, giving the tech industry a welcome boost.

Computer buying last peaked in the United States in the second quarter of 1999, he says, at a 36 percent growth rate.

“Two years isn’t when you replace something; three years is when you replace something,” he says. “We believe next year around the second quarter — it will build up and not be all in one quarter — that there will be a pretty active replacement cycle.”

In addition, new technology coming out, such as the Pentium 4, wireless networking and broadband will improve industry growth, he says.

Q: What is your vision of the computer industry in the next few years?

A: “The industry has a history of companies that cooperate together but compete together,” he says. “I don’t see that changing. The trend seems to be deverticalization.”

He also forecasts more machine-to-machine communication, such as Web sites that accept electronic payment. If two small companies want to link together, it has been generally hard to do and too expensive, he says, but he predicts that will begin to improve.

“As it increases, it will bring the whole system up,” he says.

Q: What inspires you now that you’ve built up a successful company?

A: “My kids.”

Q: How has Dell’s relationship with the University of Texas and other universities developed over time?

A: “Early on it was quite beneficial that I went to a larger university because if I didn’t show up for class, nobody would notice,” he joked.

“It became more important as we started growing,” he says, particularly in the early ’90s, when Dell Computer started recruiting more of its talent directly from universities.

“The old tactic of stealing them from other companies became somewhat impractical.”

Q: What criteria do you use in Dell Ventures when you’re deciding whether to invest in various companies?

A: Dell Ventures makes investments in areas that could specifically benefit Dell Computer’s future. Wireless, security, storage and e-commerce companies, for example, are good targets, he says. As any investment company does, Dell Ventures looks for companies with good business models and good leadership. It does not tend to do early stage investing.

When asked what makes a company attractive to Dell Ventures, his response is simple: “Customers and profits.”

Q: What is your strategy to promote customer loyalty?

A: “Loyalty is a big focus for us,” Dell says. “At the center of it, we have what we call the customer experience.”

That means Dell has to support customers all the way through their computer ownership, from the purchase and use to the technical support and disposal, he explains.

“Ultimately, the real measure is: Did that customer buy it from you the next time?” he says. “If they’re happy but didn’t buy it from you (the next time), it’s really a mess. That’s a satisfied customer, not a loyal customer.” How to reach: Dell Computer Corp., T.R. Reid, senior manager of public relations, (512) 778-7977 or [email protected]; TechPartners, (614) 292-8258 or techpartners.osu.edu/tp_home.html

Joan Slattery Wall ([email protected]) is associate editor of SBN Magazine in Columbus.