Company Background

At age 13, Michael Dell was running a mail-order stamp-trading business, complete with a national catalog, and grossing $2,000 per month. At 16, he was selling subscriptions to the Houston Post, and at 17 he bought his first BMW with money he had earned. He enrolled at the University of Texas in 1983 as a premed student (his parents wanted him to become a doctor) but soon became immersed in computers and started selling PC components out of his college dormitory room. He bought random-access memory (RAM) chips and disk drives for IBM PCs at cost from IBM dealers, who often had excess supplies on hand because they were required to order large monthly quotas from IBM. Dell resold the components through newspaper ads (and later through ads in national computer magazines) at 10-15 percent below the regular retail price.

By April 1984 sales were running about $80,000 per month. Dell dropped out of college and formed a company, PCs Ltd., to sell both PC components and PCs under the brand name PCs Limited. He obtained his PCs by buying retailers' surplus stocks at cost, then powering them up with graphics cards, hard disks, and memory before reselling them. His strategy was to sell directly to end users; by eliminating the retail markup, Dell's new company was able to sell IBM clones (machines that copied the functioning of IBM PCs using the same or similar components) at about 40 percent below the price of an IBM PC. The price discounting strategy was successful, attracting price-conscious buyers and producing rapid growth. By 1985, the company was assembling its own PC designs with a few people working on six-foot tables. The company had 40 employees, and Michael Dell worked 18-hour days, often sleeping on a cot in his office. By the end of fiscal 1986, sales had reached $33 million.

During the next several years, however, PCs Ltd. was hampered by a lack of money, people, and resources. Michael Dell sought to refine the company's business model, add needed production capacity, and build a bigger, deeper management staff and corporate infrastructure while at the same time keeping costs low. The company was renamed Dell Computer in 1987, and the first international offices were opened that same year. In 1988 Dell added a sales force to serve large customers, began selling to government agencies, and became a public company—raising $34.2 million in its first offering of common stock. Sales to large customers quickly became the dominant part of Dell's business. By 1990 Dell Computer had sales of $388 million, a market share of 2-3 percent, and an R&D staff of over 150 people. Michael Dell's vision was for Dell Computer to become one of the top three PC companies.

Thinking its direct sales business would not grow fast enough, in 1990-93, the company began distributing its computer products through Soft Warehouse Superstores (now CompUSA), Staples (a leading office-products chain), Wal-Mart, Sam's Club, and Price Club (now Price/Costco). Dell also sold PCs through Best Buy stores in 16 states and through Xerox in 19 Latin American countries. But when the company learned how thin its margins were in selling through such distribution channels, it realized it had made a mistake and withdrew from selling to retailers and other intermediaries in 1994 to refocus on direct sales. At the time, sales through retailers accounted for only about 2 percent of Dell's revenues.

Further problems emerged in 1993. Dell reportedly had $38 million in second-quarter losses that year from engaging in a risky foreign-currency hedging strategy. Also, quality difficulties appeared in certain PC lines made by the company's contract manufacturers, profit margins declined, and buyers were turned off by the company's laptop PC models. To get laptop sales back on track, the company took a charge of $40 million to write off its laptop line and suspended sales of laptops until it could get redesigned models into the marketplace. The problems resulted in losses of $36 million for the company's fiscal year ending January 30, 1994.

Because of higher costs and unacceptably low profit margins in selling to individuals and households, Dell did not pursue the consumer market aggressively until sales on the company's Internet site took off in 1996 and 1997. Management noticed that while the industry's average selling price to individuals was going down, Dell's was going up—people who were buying their second and third computers, who wanted powerful computers with multiple features, and who did not need much technical support were choosing Dell. It became clear that PC-savvy individuals liked the convenience of buying direct from Dell, ordering exactly what they wanted, and having it delivered to their door within a matter of days. In early 1997, Dell created an internal sales and marketing group dedicated to serving the individual consumer segment and introduced a product line designed especially for individual users.

By late 1997, Dell had become the industry leader in keeping costs down and wringing efficiency out of its direct sales and build-to-order business model. Industry observers saw Dell as being in strong position to capitalize on several forces shaping the PC industry—sharp declines in component prices, rapid improvements in PC technology, and growing customer interest in having PCs equipped with the power, components, and software they wanted.

Exhibit 2, Exhibit 3, Exhibit 4, and Exhibit 5 contain a five-year review of Dell Computer's financial performance and selected financial statements contained in the company's 1998 annual report.