Michael Dell, however, sold computers somewhat unique-ly: he sold them directly to the customer. This means that Michael Dell didn’t have a showroom when he sold computers. He sold them over the phone. He sold them from his dorm room; and he may have even sold them in his pajamas.
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In fact, Dell was one of the pioneers of the direct-to-consumer approach. At the time of the inception of his company, computer dealerships were the primary way for a customer to purchase a computer. Dell helped revolutionize the idea that consumers could buy computers over the phone. By doing so, companies selling computers could gain higher margins through reduced overhead, and could offer the customer a better deal than retailers.
What resulted was a company that skyrocketed in growth.
Starting from $6 million in 1984, Dell Computer grew to $69
million in 1987, to $546 million in 1991. Dell wanted to grow, grow, grow and kept doing so. But as the giant beanstalk began soaring to dizzying heights, something strange happened: according to Dell, the company “hit the wall.”
Dell Computer began to unravel. Its chief financial officer resigned, and questions were raised over its accounting practices. More importantly, the company had to terminate all of its new lines of laptops because of poor communication and planning. Dark days were indeed upon Dell Computer, and its stock price plunged from $49 in January 1993 to $16 in July.
Dell blames these problems on “growing too fast”—growing without laying the infrastructural tracks needed for such growth.
Dell prides himself on realizing this mistake quickly, and on rapidly changing the philosophy of the company.
Consequently, the company quickly resurged, and today remains one of the towering leaders of the PC industry. Dell Computer had revenues of $5.3 billion in 1996 and now employs more than 8,000 people.
Due to time considerations, we interviewed Michael Dell over the telephone.
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“When you’re making company decisions and
driving a business, it doesn’t matter if you’re 22 or
42 or 82.”
You are the youngest giant in our book. Has being much younger than the people you dealt with in business ever bothered you?
No, it’s really never been a problem. I think that one of the reasons why it hasn’t been a problem is because of some of the folks who came before me, that you also interviewed. So, having a young guy running a company was not so unusual in the technology industry.
Now, there are cultures where this is less likely to occur. For example, in Japan, age is a trait with which comes respect, intelligence, etc. So, a 25-year-old CEO of a company in Japan—well, something must be wrong here. You do get a lot of funny looks.
But, my view has always been that when you’re making company decisions and driving a business, it doesn’t matter if you’re 22 or 42
or 82. We’re just doing business.
But, at the same time, there certainly must have been people during your business encounters who questioned your ability to make decisions as such a young person. How did you deal with that?
I ignored them, basically.
(They laughed.) But, if they are your customers, then you have to address them—
Ah. Never happened with customers. Never happened with suppliers.
Now, I’m sure behind closed doors, people were asking, “So, what’s with the kid?” But, this doesn’t happen anymore, because now I’m an old guy. [Dell is 32.]
When you were selling out of your dorm room—similar to the prototyp-ical garage, except yours was a dorm room—you obviously didn’t have a master plan to be a dominant PC vendor. At what point did you realize that you had the potential to create a very large business, and was this the reason why you left school?
I remember there was a point where I realized that I had the opportunity to sell in excess of a million dollars a month of computers, and that this was a very reachable goal without a lot of obstacles. That,
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combined with what I saw as an economic discontinuity with the retail computer dealers sprouting up all over the countryside with their high markups and low service, just appeared to be a basic opportunity.
My underlying thinking was to focus on economics first, and then the customer, and then the product—as opposed to product, customer, economics, which is the traditional way in our industry—
and this kind of thinking has been fundamental to our success for a long time.
When you made a decision to leave school, were you absolutely confident you would sell over $1 million per month, or did that seem like a risk to you?
Well, it didn’t really seem like a risk to me, because I was already earning obscene amounts of money for what, to me, appeared to be relatively simple work. The worst thing that could happen was that I would discover something that I didn’t know at the time, and I would return to school.
In fact, I thought that the greater risk for me would be to stay in school, in case this opportunity disappeared while I was in school.
So, would you give the same type of advice to students who are deciding between finishing school and starting a company? Would you just tell them that they can go back to school later on?
That’s a great question. And I’ve given the same answer many times, and that is: If I have to tell you, then you don’t know.
The reason I say that is because I’ve been to these “entrepreneur meetings,” and people ask, “Michael, tell me what I should do.” And, I tell them, “Well, if I have to tell you, then you don’t know.”
This is not something you can put in the context of a rule-of-thumb. It’s a very personal decision, and you have to have your own conviction, and if you don’t have it, then you won’t do it. If you do, then you will, and I don’t have to tell you that.
Let’s focus on this model of direct-to-consumers. Why didn’t your competitors try this earlier? They clearly saw you making so much money—
by eliminating overhead and offering customers a better deal. Why do you think they were so sluggish in responding?
Well, I think that in large measure they have underestimated the business model, and continue to do so even today. If you look in the
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archives of business publications, you’ll see all sorts of this phenomenon. For example, in Business Week around 1988, there was a story about Dell at about the time we were going public. And a noted industry guru basically said that he didn’t think we could grow beyond $150 million of sales. And now, that’s about two days worth of orders. ( He laughed. )
A lot of people just totally misunderstood what we were doing. I remember Rod Canion [the founder of Compaq] telling PC Magazine that he didn’t compete with so-called “garage shop operations.” It’s a wonderful quote.
So, it’s perhaps a snobbish view of Dell’s business model, and second, maybe not being as close to customers and understanding their requirements.
Yes. Being detached from the customer is the ultimate death. And a lot of these guys—they think their customer is the dealer! Which is still amazing to me.
What kind of qualities do you look for when hiring new management people?
We’ve probably hired one senior person a month since the company has been in existence. And this has been because of the scaling of the business, and new markets, and the like.
The qualities we look for are data-driven, fact-driven people.
Content experience. People who have a strong achievement ethic and have integrity, and know where risk should be taken, and where it should not be taken.
If experience is important, then if a young Michael Dell were to come to you today and tell you that he wants to be part of your senior team, is that pretty much out of the question because he
doesn’t have a proven track record?
Well, I would have never gone to work for a company! ( All laughed. ) I would have never imagined myself going to work inside of a corporation. Now, I’m very happy running a company—I like to create things and be involved in strategy, and there is plenty for me to do in that regard here. But, if I were 19 today, I would probably go start another business instead of going to work for a company.
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Your track record before you were 19 would have led us to believe that—your stamp auction, newspapers, etc. Would you describe yourself as an entrepreneur?
Sure. But sometimes that implies that you’re not a builder or developer. I think I’ve passed through a couple of stages of evolution here, and have been very comfortable in building and growing a business as opposed to starting and creating a business. But, at the same time, realize that we are creating things here all the time, because the business is so dynamic.
One of the skills you have down is selling. Do you think salesmanship can be developed, or do you think you’ve always been a good salesman?
Well, I’m probably not generically a good salesman, in the sense that I could sell anything. I think that I’m good at communicating the value of things that I think are genuinely valuable ( Dell laughed), as opposed to just selling anything.
If you’re good at “communicating the value of valuable things,” do you think this skill can be developed or not? And if so, how?
I think it’s almost like sharing the passion and the excitement. I’ve always believed that with a business this exciting, it’s just a tremendously valuable resource to be able to tap into this. For example, inside a company, to motivate employees and get them excited, just ask them, “How many times do you get to be able to be part of creating a business? And how many times are you able to be a part of creating a business that is doing well?”
Can this be learned? Sure. Through examples and role modeling, and that sort of thing. I’m sure that there is some genetic influence, but I think that most of what I’ve learned is a function of the people that I’ve been around, including our customers.
If you think I came into this business with a master plan—we knew everything we were going to do in the next 12 years, and everything was all mapped out, and let’s go do it... Wrong. We made lots of mistakes. But we corrected those mistakes really fast, and we often didn’t make the same mistake twice. Or if we did, it wasn’t fatal.
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Speaking of mistakes, people would consider Dell’s previous failed notebook launches and the repercussions of growing so quickly as perhaps the biggest test in the company’s history. In retrospect, what could you have done better as a manager from that whole situation, and what did you learn from that?
Well, what we learned was that there is such a thing as growing too fast. I’ve asked a couple of suppliers and people we deal with that haven’t gone through this, listening to them talk as I did many years ago—and ask them, “Can you grow too fast?”
And they won’t tell you no. They have to experience it themselves before they figure it out. We grew 127 percent one year. There I am, cover of Fortune magazine, the 127-percent poster boy. This is killer stuff. You don’t know you’re going to have a problem until you hit the wall—and you hit the wall high-speed, and parts go flying every-where. And, more growth, in this case, doesn’t help you. Because it’s just more confusion. We were at a point where the infrastructure just got totally outstripped.
So, I think what we would have done differently is to balance the growth with the infrastructure. Cash flow—at least in the business model we have, if you can keep your cash flow very positive, then this minimizes your risk dramatically. Profits—the whole infrastructure around information systems, and eventually building strong internal audit capability. Not the kind of things you learn about in high school. ( All laughed. )
Which is about the extent of my preparatory education. I mean, I had macroeconomics in college, and I think I remember something about buy low, sell high. ( All laughed. ) Do you ever look back and regret not finishing up your bachelor’s degree?
No, not at all. I think I’m receiving a wonderful education. I haven’t gotten my degree yet, but I’m learning tremendously, and growing, and the business offers all sorts of opportunity to learn new things every day.
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You talked a lot about the fact that you don’t want to grow just for growth’s sake. If that’s the case, then what is your metric for Dell’s success?
Well, of course, even though we say we don’t want growth for growth’s sake, we are outgrowing all of our competitors. What we really want is growth combined with strong profits and cash flow. If you take the first-time consumer, you can sell a lot of computers to first-time consumers with low prices. You can also not make any money doing it. That’s not a very economically redeeming or fun activity —
i.e., Packard Bell—
i.e., Packard Bell. And to us, economically redeeming and fun are the same things. We want to be in businesses where we can make money, and just growing a business without creating value for our shareholders, for our customers, and for the people inside the company—we don’t think that that is a responsible way to run a business.
Most of the people we’ve spoken with said that when their company hit a speed bump, there were calls to have them removed as the CEO of their company. Did you face that?
Not really. I don’t recall any real people outside the building chant-ing, or anything like that. Perhaps one of the reasons why that happened was that we were so aggressive in identifying the problems, communicating the problems, and addressing the problems in a very fast way.
We were very forward in saying, “OK, this is what we screwed up.
This is what we did wrong. We shouldn’t have done this. Here’s how we are going to fix it. Here’s what we think is going to happen.”
And then, we overachieved on our recovery plan—you’ve got to give people a way forward to get out of things like this. If we had dug our heels in and said, “Oh, well it was the market, the economy, the recession, dog ate my homework...” Nonsense.
When a business goes wrong, look only to the people who are running it. That’s my belief. And it was our fault. We screwed up. And we were very forward about saying that inside and outside the company.
And there was a lot of support for the management team throughout this.
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Someone once observed that one of the reasons why they thought Dell and Compaq were doing so well was because these companies were so competitive with each other, because each company had a target company to compete with. About a year before we had our problems, Compaq had a similar experience. And one of the things that inspired me was that 12 months later, everybody had completely forgotten about Compaq’s previous problems. It was like it had never happened. And so I knew that all we had to do was to fix all of these problems, and 12 months later, nobody would ever think about it. And that’s exactly what happened.
Regarding the future of the PC, some of the CEOs we’ve spoken with have spoken about how the network computer will become a standard household appliance, and how PCs are going to be defunct because of their non-user-friendliness. Even you have commented that computers are too hard to install and use. Do you see the network computer as being a threat to Dell’s future?
Well, I think that the network computer, or set top box, or whatever you want to call it, is not in our view at all a replacement for the PC.
There may be some incremental markets that emerge for people who want to have low adaptability, low flexibility devices that are in a different space than the PC.
For a company, you have two kinds of [computer] users: fixed and mobile. If you have a network computer, and you’re in a mobile environment, like on an airplane, then you are out of luck. There’s no connection. So you can’
t use a network computer on an airplane. Or in a train or in a car, because there is no local storage or processing.
Except, in some NCs [network computers], these things are included, and some of them have processors. And some of them look a whole lot like low-end PCs, and in fact, they cost a lot like low-end PCs, which brings up the whole question, “Why are you getting these to begin with?”
The other problem is that users will want to store their data on a big server somewhere and there is obviously a cost to that. If you are a corporate user and you have NCs and PCs, then you have to develop the applications twice, which adds cost.
Then, you have the whole bandwidth question. Your typical CD-ROM has about 500 megabytes, and the amount of data you are sending from the CD-ROM drive to the processor is huge.
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Think about it this way. If you have a network, it’s probably about a 10-megabit network today. Put [Microsoft] Powerpoint on one machine, and try running it from another machine over the network.
It sort of works okay, you’d rather have it on your local disk, but it functions. Now, step down 10 times to a 1 megabit network, and try it. Well, it’s absolutely unmanageable. You’d rather have a root canal.
If you go down another 10 times, you’re at ISDN—128 kilobits.
There is absolutely no chance you can transmit that amount of data over an ISDN line.
So, the problem is that a lot of computing is data- and graphic-intensive. You go to the grocery store and your kid wants to get the CD-ROM from the latest Disney movie—well, if you don’t have a high bandwidth interaction, you can’t send that much data.
I’ve never run into a user who has logged onto the internet and has suddenly found that he needs less power now that he is on the internet. In fact, exactly the opposite occurs. You get on the internet, and you need more power. Here comes the screaming sound, faster network connection, larger monitor.
Here’s a challenge for you. Get out your NC, and type www.dis-ney.com. Pretty popular site. What you’ll find is that there are just a tremendous amount of things on that site that are PC-centric—if you don’t have a PC, you can’t use them!
In the Company of Giants Page 14