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Dell Computer Corporation

Dell Computer Corporation

1 Dell Way
Round Rock, Texas 78682-2244
U.S.A.
Telephone: (512) 338-4400
Toll Free: (800) 472-3355
Fax: (512) 728-3653
Web site: http://www.dell.com

Public Company
Incorporated: 1984
Employees: 29,300
Sales: $18.24 billion (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: DELL
NAIC: 334111 Electronic Computer Manufacturing

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, Dells 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 firms 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 firms 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 IBMs new PS/2 computer system well before it was actually ready, Dell later had trouble reproducing important aspects of the PS/2s 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 companys first attempts at cloning IBMs PS/2, Henry initiated new plans for producing clones. Henry built Dells 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 Henrys 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. Dells 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. Dells 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 Dells 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 Dells 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 Dells $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 Statesup from number 22 in 1989and retained a staff of 2,100. Furthermore, the companys 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 firms 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 Dells 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 Dells 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 Intels fast 486 microchip.

Company Perspectives:

Dells 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.

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 Dells 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 Compaqs 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. Dells database, containing information on the buying habits of over 750,000 of its customers, was instrumental in this effort.

Toward the end of 1992 Dells 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 Compaqs 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 consumers 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 industrywide 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 Dells 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 Dells 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 companys overall revenue. Dell achieved enviable efficiencies using the Internet to coordinate the orders of consumers with its own orders of parts from suppliers. The companys 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 Dells direct-selling strategy, it encountered suffer 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 Dells 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.

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.

Principal Competitors

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

Further Reading

Dell Computer: Selling PCs Like Bananas, Economist, October 5, 1996.

Forest, Stephanie Anderson, PC Slump? What PC Slump?, Business Week, July 1, 1991, p. 66.

Jones, Kathryn, Bad News for Dell Computer, New York Times, July 15, 1993, p. C3.

Kelly, Kevin, Dell Computer Hits the Drawing Board, Business Week, April 24, 1989, p. 138.

, Michael Dell: The Enfant Terrible of Personal Computers, Business Week, June 13, 1988, p. 61.

Pope, Kyle, For Compaq and Dell Accent Is on Personal in the Computer Wars, Wall Street Journal, July 2, 1993, p. A1.

Personal Computers: Didnt Delliver, Economist, February 20, 1999.

Youll Never Walk Alone, Economist, June 26, 1999.

Scott M. Lewis

updated by Susan Windisch Brown

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"Dell Computer Corporation." International Directory of Company Histories. . Encyclopedia.com. 19 Aug. 2017 <http://www.encyclopedia.com>.

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Dell Computer Corporation

Dell Computer
Corporation

2214 West Braker Lane, Suite D
Austin, TX 78758
(512) 338-4400
www.dell.com

In the history of computers and electronics, several well-known companies got their start in their founders' garages. Dell Computer Corporation (DCC) may be the only leading computer company in the world that began in a college dorm room. Michael Dell was an eighteen-year-old freshman at the University of Texas when he decided to put more time into selling computers than attending classes. From there, Dell went on to build one of the fastest-growing companies ever, changing how computers are sold, and making himself a billionaire.

Big Doings in Room 2713

When Michael Dell entered the University of Texas at Austin in 1983, he was already somewhat of a computer nerd. A biology major intending to go into medicine, Dell had bought his first computer, an Apple II, when he was fifteen years old (see Apple Computer, Inc. entry). In Direct from Dell, the story of his company, Dell describes how he picked up the computer with his parents, "I jumped out of the car, carried the precious cargo to my room, and with great relish, promptly took my computer apart." Dell learned how to improve a computer's performance by adding new parts, and by the time he reached college, he already had a small business selling upgraded machines.

Dell continued his business at the University of Texas, as local business owners and professionals heard about his work and visited his dorm, Room 2713 in Dobie Hall. "I'd put in some memory or a disk drive," Dell told Fortune in 1999, "they'd pay me, and I'd send them on their way." He also advertised in local papers, promising computers at prices lower than retail stores. In January 1984, Dell formed a company called PC's Limited. Sales reached $30,000 a month and kept growing. Before the end of the school year, Dell officially incorporated his business as Dell Computer Corporation.

From upgrading existing IBM machines, DCC began building and selling "clones"computers that were similar to IBM PCs. From the beginning, Dell decided to cut out the middlemanretail storesand sell directly to consumers. He shipped computers to them through the mail. By building a computer only after a customer ordered it, Dell did not have to spend money buying and storing large quantities of parts. When prices for parts fell, the company could pass on savings to its customers much more quickly than competitors could. Dell also saved money by not hiring the sales and marketing people most companies used. By the end of 1985, Dell was selling its clones for about 40 percent less than an IBM machine. The company moved into a larger building in Austin, employing about one hundred people.

Dell at a Glance

  • Employees: 34,600
  • CEO: Michael Dell
  • Subsidiaries: DCC Executive Security Inc.; SFD/SPV LP.
  • Major Competitors: International Business Machines (IBM); Hewlett-Packard Company; Gateway, Inc.; Sun Microsystems, Inc.; Apple Computer, Inc.; Hitachi, Ltd.
  • Notable Products: PowerEdge servers; PowerApp servers; PowerVault storage products; Precision workstation; Opti-Plex desktop computers; Dimension desktop computers; Latitude notebook computers; Inspiron notebook computers; SmartStep desktop and notebook computers

Becoming One of the "Big Boys"

By the end of 1986, Dell's sales reached $60 million, and the company won praise for its newest computer, the fastest IBM clone of the time. The next year, Dell became the first U.S. computer company to offer next-day, on-site repair services, using technicians provided by another company. Customers could also call in for technical help; Dell learned that most problems could be solved in a few minutes.

This constant interaction with customers helped Dell learn what computer users wanted, so the company could offer products that served their needs. The calls also helped Dell identify production problems. If one model received many complaints, Dell engineers modified the design. The company' slogan became, "When you talk, we listen."

Timeline

1983:
Michael Dell begins selling computers while attending the University of Texas.
1984:
Dell officially forms Dell Computer Corporation and leaves school to focus on his business; Dell becomes one of the first companies to make clones of IBM personal computers.
1986:
Dell introduces the world's fastest personal computer (at that time).
1988:
The sale of 3.5 million shares of Dell stock raises $30 million.
1990:
Dell opens its first overseas manufacturing plant, in Limerick, Ireland.
1992:
Annual sales at Dell reach $2 billion.
1994:
Dell stops selling computers at retail stores to focus on direct sales.
1996:
Dell begins making servers and soon captures a large share of that market.
2000:
Slashing prices, Dell sets off a PC price war that boosts sales.

The attention to customer service and lower prices helped Dell grow. By the end of 1989, the company's sales were $258 million, with profits of more than $14 million. Michael Dell and his "direct business model" were winning national attention, and Inc. named Dell its "Entrepreneur of the Year." The next year, however, the company hit a rough spot. It spent heavily on research and development and made a wrong choice about which microprocessor, or chip, to use in its computers. Sales increased, but profits fell. "We made some mistakes," Dell told Nation's Business in April 1991, "but we also had the strength to work our way out."

By 1991, Dell was firmly established internationally, with a manufacturing plant in Ireland. At home, the company focused its sales on businesses, schools, and government agencies, selling about half of its computers to those markets. For home use, Dell targeted more experienced computer users, people who knew exactly what they wanted and didn't need help from a store clerk. The company controlled just over 1 percent of the U.S. computer market, but it was poised to grow even more, and its profits remained healthy while other computer companies struggled.

In 1986, Dell and his top executives said they wanted annual sales to reach $1 billion by 1992. They were off the mark: DCC sales were $2 billion that year. Dell, however, faced another difficult stretch in 1993. Problems with the design of some of its notebook computers forced the company to halt development. A financial analyst accused the company of using questionable accounting tactics. Dell's stock price fell dramatically.

The Road to Number One

Dell decided he needed more expertise in running a large corporation, so he hired talented executives from other computer firms. He also changed the company's focus. Growth was no longer the only goal. It had to be balanced with profits and liquidity, or cash on hand. In 1994, the company introduced a new notebook computer with a longer battery life, which became a hit with consumers. DCC also focused more on selling higher-priced machines to businesses, which generated more profit.

Going Retail

In 1990, Dell Computer Corporation made its first agreement to sell computers through retail stores. It partnered with Soft Warehouse (now CompUSA) and sold its machines at warehouse stores, then later moved into other large retail outlets. At first, sales were fair, but over time Dell found it could not compete with Compaq, which was better known at the time, or Packard Bell, which offered lower prices. Dell ended its experiment in retail sales in 1994. Chief financial officer (CFO) Tom Meredith told Fortune the next year, "We were losing our shirts."

Dell's ability to custom-make machines appealed to its business clients. Dell even added custom software for certain companies. By 1995, Dell controlled about 5 percent of the computer market and profits were strong. In some computer circles, the company was criticized for not creating new technologies. Dell, however, was content to let other companies innovate while it continued to offer reliable computers at good prices.

Throughout the rest of the 1990s, Dell's sales grew, and its rising stock made Michael Dell one of the richest people in the United States. The company's business philosophy became what Dell called "virtual integration." In other industries, a key to growth is vertical integrationcontrolling all aspects of a business, from making the basic parts, to assembly, to sales and repairs. Dell preferred to work with outside companies to achieve almost the same result at a lower cost. DCC turned to outside suppliers for its parts, working closely with their engineers. "They assign their engineers to our design team," Dell explained to the Harvard Business Review in 1998, "and we start to treat them as if they were part of the company."

Dell also continued to pay close attention to its customers' needs. For its largest corporate customers, the company built special Web sites called "Premier Pages." Workers at these corporations had direct access to information about the specific computers Dell built for their company. Dell also began holding "Platinum Councils," meetings with managers from these large clients. Comments and concerns from these council members helped Dell shape its new products.

By 2000, Dell's annual sales reached more than $25 billion, as computer sales boomed during the late 1990s. Dell passed Compaq in 1999 to become the world's largest seller of desktop PCs; notebook sales also remained strong. The market, however, began to shrink as the new century began. Dell had already started looking for new ways to boost sales. It began making servers, the more powerful computers used to connect PCs into networks. In this market, it faced tough competition from well-known companies, such as Hewlett-Packard (see entry), Sun Microsystems, and Compaq. Still, with much lower prices and a good product, Dell proved successful. It then turned to storage systems used to hold the large amounts of data used on the Internet. Some business experts and competitors questioned Dell's ability to succeed in these new areas. "Just as people doubted us [before]," Dell told Fortune in October 2000, "they doubt us now. Bring them on. We're coming right at them."

Cutting Prices with the "Dude"

For years, Dell tried to focus on the commercial computer market, where it could make more profit on each computer sold. The slowing of computer sales in 2000 led the company to try a new tactic. For the first time, it began slashing prices on computers geared to home users. Dell's move began a price war, as leading competitors cut their prices to try to keep their share of the market. Dell's cheapest machine, the SmartStep desktop, cost just $599.

Along with the price cut, Dell began its first major television campaign. The ads showed a young man, Steven, telling his friend's parents why they should buy a Dell. After his convincing sales pitch, Steven assured his friends, "Dude, you're getting a Dell." Steven became known as the "Dell Dude," and the commercials were noticed around the United States. Steven's pleasant goofiness and sense of humor appealed to people of all ages, and made the actor who played him, college student Ben Curtis, something of a star. He began receiving fan mail and one fan built a Web site dedicated to him.

For Dell, the commercials doubled their name recognition with the general public. The ads, along with the lower prices, also helped Dell increase its share of the home PC market in the United States, while its major competitors lost market share.

Looking Ahead

The overall economic slowdown of 2001, along with decreased PC sales, affected Dell and other computer makers. Dell's sales reached almost $32 billion in 2000, then remained flat the following year. The company had its first major layoff ever in February 2001, letting go seventeen hundred employees. Still, the company had many strengths. Although profits fell in the fiscal (financial) year ending in February 2002, they remained over $1 billion. The company continued to win a larger share of the server and storage markets, and it seemed poised for growth in Asia, where it has two manufacturing sites (in Malaysia and China). Worldwide, Dell was the leading PC maker.

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Dell Computer Corp.

Dell Computer Corp.

9505 Arboretum Blvd.
Austin, Texas 78759-7299
U.S.A.
(512) 338-4400
Fax: (512) 338-8700

Public Company
Incorporated: 1984
Employees: 4,700
Sales: $2.01 billion
Stock Exchanges: NASDAQ
SICs: 3571 Electronic Computers

Dell Computer Corp. is the fifth largest personal computer company in the United States and holds a 3.5 percent share of the world market. The company manufacturers a wide variety of computer hardware, which it sells primarily through direct marketing. In addition, Dell has begun selling software and other peripheral PC equipment through catalogues.

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 large firms like 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, Dells 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 firms 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 firms 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.

The firm faced several challenges, however. Announcing their own clone of IBMs new PS/2 computer system well before it was actually ready, Dell later had trouble reproducing important aspects of the PS/2s 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 companys first attempts at cloning IBMs PS/2, Henry initiated new plans for producing clones. Henry built Dells 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 Henrys 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. Dells 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. Dells 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 Dells 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 Dells 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 Dells $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 Statesup from number 22 in 1989and retained a staff of 2,100. Furthermore, the companys 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 of line of workstations. As a result, 1990 profits fell 65 percent to $5 million, despite the doubling of the firms sales.

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 Dells advertising made defamatory statements against Compaq. Nevertheless, the economic recession actually benefited Dell. While customers had less money, they still needed PCs, and they purchased Dells 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 Intels 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 Dells 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 Compaqs 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. Dells database, containing information on the buying habits of over 750,000 of its customers, was instrumental in this effort.

Toward the end of 1992 Dells 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 Compaqs 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.

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, and by 1993, 36 percent of its sales were abroad.

Further Reading

Forest, Stephanie Anderson, PC Slump? What PC Slump? Business Week, July 1, 1991, p. 66.

Kelly, Kevin, Michael Dell: The Enfant Terrible of Personal Computers, Business Week, June 13, 1988, p. 61.

____, Dell Computer Hits the Drawing Board, Business Week, April 24, 1989, p. 138.

Pope, Kyle, For Compaq and Dell Accent Is on Personal in the Computer Wars, Wall Street Journal, July 2, 1993, p. Al.

Jones, Kathryn, Bad News for Dell Computer, New York Times, July 15, 1993, p. C3.

Scott M. Lewis

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