Direct From Dell: Strategies That Revolutionized An Industry
Michael Dell's first business venture, at 12 years old, arose from his hobby of philately. He had bought stamps at auction and realised that stamp sellers made good money, so got together a catalogue of his and his friends' stamps and sold them via mail order. He made $2000. This effort at cutting out the middleman and selling direct was a taste of things to come.
Born in 1965 in Houston, Texas, Dell came of age at the dawn of the personal computer, and they quickly became his real love. He hung around computer stores and eventually got his parents to give him a PC for his 15th birthday. They were infuriated when he immediately took it to pieces in order to find out how it worked. Then, by good fortune, the 1982 National Computer Conference happened to be held in Houston and Dell skipped school every day to attend. This was industry side of computing, and it opened Dell's eyes. He discovered the huge markups sustaining computer sales, by which IBM could buy the components for a PC for $600-700 and then sell it on to retailers, who would charge the public $3000.
Germination of a business
What Dell also realised was that anyone could buy these components and make their own machine. Furthermore, the person who sold you a computer in a store generally didn't know much about them. Retailers were making $1000 a computer but offering no real customer support. Demand for computers was enormous; people didn't ask questions, they just bought. Even at this age, Dell believed he could make better machines and sell them at a lower price - but his parents wanted him to go to college and become a doctor.
In his freshman year at the University of Texas, Dell was taking classes while on the side doing computer upgrades for businessmen and professionals. With his grades looking shaky, his parents paid him a surprise visit. He managed to stow away all the computer parts in his dorm room, but was firmly told he had to give up the computer business and concentrate on his studies.
His Dad said: "Get your priorities straight. What do you want to do with your life?" The reply, which Dell reports his father did not find amusing, came: "I want to compete with IBM!"
The Dell difference
So begins Michael Dell's account of the early years of his company, one of the great success stories of our times. Dell readily admits it is neither a memoir nor a history of his company; the purpose of the book is to help the reader in 'honing your competitive edge, no matter what industry you're in or what your role is.' His story is one of a very small player changing an industry. As a piece of writing, Direct From Dell is not brilliant, but its value is in showing us how thinking differently, and then having the courage of our convictions, is a real law of success. To return to the story.
At the beginning of 1984, Dell formally registered a company. Through a small ad in the local newspaper he started to sell over $50,000 a month of upgrades, upgrade kits and components, and without telling his parents moved from his dorm into a two bedroom apartment. He leased a 1000-square-ft office space and started employing people. As the business took hold, Dell knew there was no time for him to spare at college, and left.
Was he scared? 'Yes' he admits, but the risk was balanced by the fact that students were allowed to take a semester off with no penalty, so the door was left open to return. He needn't have worried. In the next year or two the company had to move three times to bigger premises, and as well as upgrades Dell started selling its own 286-based PC.
Although hard to believe now, Dell's idea of selling equipment direct through the mail or over the phone was something new; just about everyone bought their computer from a retailer or distributor. By cutting out the middleman and dealing with public and businesses direct, he could save them a lot of money. What's more, through direct communication he could find out exactly what each customer wanted, not just for their current machine but for anything in the future. This established a crucial element of Dell's success: getting the customer involved in the developmental phase.
In early computer sales, speed and performance were everything. IBM had 70% of the market with a 6 megahertz 286 PC, so Dell designed and sold a 12 megahertz machine at half the price. At the next Comdex show there were lines of people to see the machines and Dell made it onto the cover of PC Week. Dell says he learned the lesson of 'time to market' and the speed at which the computer industry moves. This unbeatable combination of performance and price saw business boom. In 1986 Dell did $60 million in sales, less than three years after the firm officially began. In 1988 it became a public company.
Dell's lessons for success
Plenty of people told Dell that his 'direct' approach to selling computers would never work on a large scale. "It's fun to do things that people don't think are possible or likely" he says. Consequently, questioning conventional wisdom became a basic element of the culture of the firm.
'Despise the status quo'
Dell staff are told to think like entrepreneurs or as if they are owners of Dell. They are much more likely to take risks. He tells staff: "There's not risk in preserving the status quo, but there's no profit, either."
Set big goals that may just be doable
At the end of 1986 the company set a goal to achieve $1 billion in sales by 1992 and to expand internationally. By 1992 it was doing twice this. Setting a large goal makes you think about how you will achieve it.
'Being on the cover of Fortune doesn't guarantee you anything' Dell says. In the computer industry, no-one can rest on their laurels; you need a climate of perpetual change and be a voracious learner to foresee what is happening and provide for it. Dell even surfs the Web after his kids have gone to sleep to see what people in chat rooms are saying about the company.
Focus on your possibilities, not your competitors
A simple tip, easily forgotten in the stress of the business arena, but which assists creative solutions. Don't act from fear; measure yourself not by others but by an absolute standard of excellence.
Dell jokes that no-one taught him in school how to run a billion dollar company. Its enormous growth itself became a problem, because it blinded him to the more important measures of profitability and cashflow i.e. value as opposed to just pure growth. The solution, as obvious as it seems now, was to put a new emphasis on facts and data. Out of this came a laser-sharp focus on making doing fewer things better. Instead of trying to put out a range of laptops, the firm put everything into the Dell Latitude. It was the first notebook to have a lithium iron battery that would last as long as a flight from Los Angeles to New York. It was a big success. Of this challenging period, Dell says: "[W]e began to realize that it's as important to figure out what you're not going to do as it is to know what you are going to do."
Dell embraced selling on the Internet virtually before anyone else. Its expertise was in direct selling, therefore the direct (no intermediary) nature of selling on the Internet was the perfect medium for growing the company. In June 1996 it started selling computers over the Net, and by December 1996 was doing $1 million a day - when Amazon.com was only turning over $15 million a quarter and losing money. Thus the business model that had already been put in place receive a massive boost from a medium that perfectly suited it. Dell's suppliers started to supply Dell with components only hours before they would be needed. This was a crucial advantage in an industry where, because of the speed of new technological improvements, being stuck with 'old' components could be disastrous.
Dell also became well-known for its home servicing, at a time when if something went wrong with your computer you had to lug it to a store. Because it had no shopfront, in a way Dell had to provide this. Being a direct selling company meant it had to work extra hard to convince the public and businesses of its credibility. It had to 'underpromise and overdeliver' as Dell puts it, never doing things just for technology's sake and making sure that what they offer customers is what they want.
Written at the height of hi-tech mania in the honeymoon of the Internet, Direct From Dell is a classic because it is both a record of this amazing period and a success manual. Some will say that Dell was just lucky to be sitting on the tip of a rocket that took off, but he has lived through the hype, returned to the top position in the company, and continues to produce remarkable results. Dell's overriding success lesson: the simpler you can make life for people, the more valuable you will be to them.
While it sags in the middle and is a bit repetitive, Direct From Dell is an inspiring book if you are thinking about forming a company. Part One is more interesting because it more personal and follows the excitement of the firm's rise from dorm room to the Fortune 500. Yet unlike some success manuals, there is little element of the heroic. It is quite understated, and although he is clearly a passionate businessman, Dell's humanity can be read between the lines.
Source: 50 Success Classics: Winning Wisdom For Work and Life from 50 Landmark Books by Tom Butler-Bowdon (London & Boston: Nicholas Brealey).
"Believe in what you are doing. If you've got an idea that's really powerful, you've just got to ignore the people who tell you it won't work, and hire people who embrace your vision."