Dell Inc.: Changing the Business Model

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 world's largest companies.

By 1995, with sales of nearly $3.5 billion, the company was the world's 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 Fortune's list of "Most Admired Companies."

Fiscal year 2005 (Dell's 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 Dell's margins.

Even though the company's 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. Dell's 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, Dell's 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 company's 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 corporation's 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 Dell's house in order so that the company could

continue its phenomenal sales growth. Management decided in 1995 to abandon distribution

of Dell's products through U.S. retail stores and return solely to direct distribution. This

enabled the company to refocus Dell's 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 corporation's 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