Dell Inc.: Changing the Business Model
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DELL INC. was founded in 1984 by Michael Dell at age 19 while he was a student living in a
dormitory at the University of Texas. As a college freshman, he bought personal computers
(PCs) from the excess inventory of local retailers, added features such as more memory
and disk drives, and sold them out of the trunk of his car. He withdrew $1,000 in personal
savings, used his car as collateral for a bank loan, hired a few friends, and placed ads in
the local newspaper offering computers at 10%-15% below retail price. Soon he was selling
$50,000 worth of PCs a month to local businesses. Sales during the first year reached
$600,000 and doubled almost every year thereafter. After his freshman year, Dell left school
to run the business full time.
Michael Dell began assembling his own computers in 1985 and marketed them through
ads in computer trade publications. Two years later, his company witnessed tremendous
change: It launched its first catalog, initiated a field sales force to reach large corporate accounts,
went public, changed its name from PCs Limited to Dell Computer Corporation, and
established its first international subsidiary in Britain. Michael Dell was selected “Entrepreneur
of the Year” by Inc. in 1989, “Man of the Year” by PC Mjavascript:activate_paper(244568)agazine in 1992, and “CEO of
the Year” by Financial World in 1993. In 1992, the company was included for the first time
among the Fortune 500 roster of the worlds largest companies.
By 1995, with sales of nearly $3.5 billion, the company was the worlds leading direct
marketer of personal computers and one of the top five PC vendors in the world. In 1996, Dell
supplemented its direct mail and telephone sales by offering its PCs via the Internet at dell.com.
By 2001, Dell ranked first in global market share and number one in the United States for
shipments of standard Intel architecture servers. The company changed its name to Dell Inc. in 2003 as a way of reflecting the evolution of the company into a diverse supplier of technology
products and services. In 2005, Dell topped Fortunes list of “Most Admired Companies.”
Fiscal year 2005 (Dells fiscal year ended in early February or late January of the same calendar
year) was an outstanding year in which the company earned $3.6 billion in net income on
$55.8 billion in net revenue.
Soon, however, increasing competition and cost pressures began to erode Dells margins.
Even though the companys net revenue continued to increase to $57.4 billion in fiscal year
2007 and $61.1 billion during fiscal year 2008, its net income dropped to $2.6 billion in 2007
with a slight increase to $2.9 billion in 2008. The “great recession” of 2008-2009 took its toll
on both Dell and the computer industry. Dells fiscal 2010 (ending January 29, 2010) net
income fell further to $1.4 billion on $52.9 billion in net revenue. Sales improved during
calendar year 2010 as the global economy showed signs of recovery. Net revenue for February
through July 2010 increased to $30.4 billion compared to only $25.1 billion during the first
half of 2009, while first half net income rose to $886 million in 2010 compared to $762 million
during the same period in 2009. Nevertheless, Dells net income was only 2.91% of net revenue
during the first half of 2010 contrasted with a much rosier 6.45% during 2006.
Problems of Early Growth
The companys early rapid growth resulted in disorganization. Sales jumped from $546 million
in fiscal 1991 to $3.4 billion in 1995. Growth had been pursued to the exclusion of all else,
but no one seemed to know how the numbers really added up. When Michael Dell saw that
the wheels were beginning to fly off his nine-year-old entrepreneurial venture, he sought
older, outside management help. He temporarily slowed the corporations growth strategy
while he worked to assemble and integrate a team of experienced executives from companies
like Motorola, Hewlett-Packard, and Apple.
The new executive team worked to get Dells house in order so that the company could
continue its phenomenal sales growth. Management decided in 1995 to abandon distribution
of Dells products through U.S. retail stores and return solely to direct distribution. This
enabled the company to refocus Dells efforts in areas that matched its philosophy of high
emphasis on customer support and service. In July 2004, Kevin Rollins replaced Michael Dell
as Chief Executive Officer, allowing the founder to focus on being Chairman of the Board. This
situation did not last long, however. Rising sales coupled with rapidly falling net income
caused Michael Dell to rethink his retirement and resume his role as CEO in January 2007.
Although Michael Dell in 2010 owned only 11.7% of the corporations stock, at age 45, he owned
the largest block of stock and continued to be the “heart and soul” of the firm. The rest of the
directors