As we get a more complete product line, and Dell becomes more of a default choice, we're counting on share gains. But Dell is only interested in products with proven markets, and so has steered clear of handheld computing devices, or personal digital assistants, sub-notebooks, television set-top devices and Web-based information appliances, although it would consider any of these if a volume market developed. Dell is similarly cautious with its other main growth vehicle, geographic expansion.
Dell has been slow to enter South America, despite the booming eco-nomies of some countries there, and has almost no presence on the continent. Compaq is No. One way Dell chooses not to expand is by acquisition. Dell scoffs at Compaq's acquisitions of the Tandem Computer Corporation and a host of networking companies. When you use shares to buy a company, that's dilution.
We're acquiring employees; we're acquiring our own stock. We basically don't have any better use for the cash, so we're giving it back to our shareholders. Although Mr. Dell said he is too busy managing the company to think about applying its model to other industries, he notes that major customers are studying Dell, looking for ways to adopt some of its processes. One of the less visible benefits of the direct model is the elimination of inventory depreciation. This is particularly important in the PC industry, where component prices are always falling as suppliers introduce faster chips, more capacious disk drives and higher-bandwidth communications devices.
While Dell has 12 days of inventory, a typical competitor that does not sell directly has 30, with another 40 in the channel. And while Dell is known for undercutting competitors' prices on comparable machines, its average selling price is actually higher because it is typically selling a newer configuration.
Dell executives say their A. Dell is providing more performance and the customers are paying for it. Customers also like dealing directly with a manufacturer. I can get a service technician on the phone in five minutes. To be sure, competitors have taken notice of Dell's success and are looking for ways to emulate portions of its model. Compaq, after first exploring the acquisition of Gateway or the personal computer subsidiary of Micron Technology Inc. Wolf, a PC industry analyst with First Boston.
Dell's growth rate will slow and their margins will come under pressure. Another challenge to Dell is persuading suppliers to alter their way of doing business to suit the Dell model. Despite the rapid growth of Dell and the other direct sellers, they remain a minority in the PC industry, and most suppliers' models are based on customers buying substantial inventories, not relying on just-in-time shipments. You gain the velocity to make up for shifts in demand. Indeed, even Dell's preferred suppliers say adopting build-to-order at Dell's level would be a strain.
We're responsible for it; if we miss forecast, we have to eat it, not them. The network cards Dell buys from 3Com are custom configured, as are the motherboards it buys from S. But most of the parts in a Dell computer are off-the-shelf commodities, and Dell executives say any sense of a proprietary advantage in the PC industry is an illusion. Meredith, the chief financial officer. Inventory and accounts receivable are risks; if you don't have any, you don't have any risk.
If you can accelerate the time between your suppliers and your customers, you've just improved your return on capital and tremendously improved your competitive position. Senior executives of the Dell Computer Corporation often talk about taking their direct sales model to the next level. By this, they usually mean making inventories even smaller, cycle times shorter and relationships with key customers and suppliers still tighter. But one vision of the next level is already available to anyone with an Internet connection: Dell's on-line sales link on the World Wide Web.
Dell began offering its products over the Web in July , at a time when most companies were still commissioning feasibility studies of on-line commerce. For Michael S. Dell, the company's founder, chairman and chief executive, the decision to sell on the Web was an easy one. He recognized that Dell's target customers -- second- and third-time buyers who know what they want -- were already there. As of late fall, Dell's indirect competitors -- Compaq, I. Only Micron Technology and Power Computing, which are far smaller direct players, had joined Dell in actually selling on the Web.
For anyone who aims a browser at www. Clicking on these links takes the user to pages of product offerings, segmented, as in Dell's off-line business, by customer set: business, home, home office, Federal, state and local governments, education and so on. From there, customers can link to on-line "configurators,'' which allow them to custom configure and price a machine to their own needs. Another click lands the user on a secure page for on-line credit card transactions.
Five to 10 days later, Federal Express delivers the computer. Key objectives were to reduce costs, for customers and for Dell, and to improve customer relationships.
Configurators bring build-to-order right to the user's desktop. Service and support on the Web site give users direct access to the same diagnostic tools used by Dell technicians. Dell's information systems record each user's particular configuration. Although the Web site was initially aimed at small business and home customers, 90 percent of Dell's business is with corporate customers.
So now Dell builds custom mini-sites accessible only by key customers, like Boeing or MCI, with their basic configurations already specified, and their volume discounts applied. The site gives access to sales representatives and field support personnel assigned to that account, and offers status reports on all open orders with Dell.
Eckert said. We should add incremental revenue over time. Whether Dell's Web sales are adding revenue at this time is open to debate. See you later. Remember, a lot of companies have far more complex problems to deal with than PC purchasing and servicing. The idea is to use technology to free people up to solve more complicated problems. For example, a customer like MCI can access our internal support tools on-line in the same way our own technical-support teams do, saving time and money on both sides.
They simply go to dell. These tools are used by internal help-desk groups at large companies as well as by individuals. One of our customers, for example, allows its 50, employees to view and select products on-line. They use the Premier Page as an interactive catalog of all the configurations the company authorizes; employees can then price and order the PC they want.
They are happy to have some choice, and Dell and the customer are both happy to eliminate the paperwork and sales time normally associated with corporate purchasing. That frees our salespeople to play a more consultative role. We also have developed tools to help customers set up their own customized versions of dell. There are about 7, of these to date. In a direct business like ours, you have, by definition, a relationship with customers.
But beyond the mechanisms we have for sales and support, we have set up a number of forums to ensure the free flow of information with the customer on a constant basis. In these meetings, our senior technologists share their views on where the technology is heading and lay out road maps of product plans over the next two years. There are also breakout sessions and working groups in which our engineering teams focus on specific product areas and talk about how to solve problems that may not necessarily have anything to do with the commercial relationship with Dell.
For example, Is leasing better than buying? People in businesses as dissimilar as Unilever and ICI can learn from each other because, amazingly, they have very similar problems when it comes to PCs.
The ratio is about one Dell person to one customer. At our last session, we had about customers. All our senior executives participate in these meetings with our largest customers.
And that helps us, as well, with our own demand forecasting. We hire a lot of people from other companies in the industry, and they tell us that these meetings are unique. I spend three days at each of them. In the normal course of our business, I have lots of opportunity to talk to customers one on one, but there is something much more powerful about this kind of forum.
At every Platinum Council, we review what they told us last time and what we did about it. We keep an ongoing record of the issues. Let me give you a concrete example: A few years ago, the engineers responsible for our desktops were operating on the theory that customers really wanted performance from these products—the faster the better. What really matters is stability.
It took the direct feedback from the Platinum Councils to spotlight this failure to communicate. We responded by building product with intergenerational consistency over many years. The same feedback has helped shape the creation of our brands.
For both our desktop and notebook businesses, we created different brands designed to deliver greater stability to corporate customers, as opposed to the fast technology changes that consumers demand. Things that seemed fairly small at the time have turned out three or four years later to be the basis for billions of dollars of revenue. Most of the managerial challenges at Dell Computer have to do with what we call velocity —speeding the pace of every element of our business.
Managing velocity is about managing information—using a constant flow of information to drive operating practices, from the performance measures we track to how we work with our suppliers. Performance Metrics. From the balance sheet, we track three cash-flow measures very closely. We look at weekly updates of how many days of inventory we have, broken out by product component.
We can then work closely with our suppliers so we end up with the right inventory. So we use inventory information to work both the front and back ends at the same time. We also track and manage receivables and payables very tightly. This is basic blocking and tackling, but we give it a high priority.
The payoff is that we have a negative cash-conversion cycle of five days—that is, we get paid before we have to pay our suppliers. Since our competitors usually have to support their resellers by offering them credit, the direct model gives us an inherent cost advantage. And the more we can shorten our cash-collection cycle, the greater our advantage. These metrics can alert us instantly to problems, for example, with the mix of products being sold in any particular country.
Working with Suppliers. The greatest challenge in working with suppliers is getting them in sync with the fast pace we have to maintain. The key to making it work is information.
The right information flows allow us to work with our partners in ways that enhance speed, either directly by improving logistics or indirectly by improving quality. Take our service strategy, for example. Customers pay us for service and support, and we contract with third-party maintainers TPMs to make the service calls. So we take back the bad part to diagnose what went wrong, and we feed that information back to our suppliers so they can redesign the component.
So for us, working with a handful of partners is one of the keys to improving quality—and therefore speed—in our system. As your customer strategy has evolved, has the Dell brand changed as well? A big piece of our brand is being the most efficient and effective way for customers to buy Intel or Microsoft technologies.
Increasingly, what matters is what the customers want and whether it works with all their other stuff. You need to track anything having to do with the flow of electrons, and you need to keep asking how these marvelous developments might be useful to customers.
Dell, please wait one minute. We have a new power-system technology we want to explain to you. He starts showing me chart after chart about the performance of lithium ion batteries.
This is wonderful, I tell him. We then sent a team over to check it out, and a year and a half later we were the first computer company to have a notebook that lasted five-and-a-half, six hours. We tested it with American Airlines, handing out the notebooks to passengers at the start of flights from New York to Los Angeles.
Taken together, this research suggests at least the possibility of a Dell turnaround. Two decades later, it offers hints at what Dell must do to succeed. There are two basic patterns to a successful turnaround, Rivkin told me in a recent interview.
The company must identify some assets from which it can squeeze more cash, in order to improve its short-term position. Both strategies are evident in the case of Gerstner and IBM. And yet by the next year, due to an overreliance on the mainframe computer market and a bloated cost structure, it began posting losses. Yet the improved financial position came at a cost. Though the history of tech turnarounds suggests some optimism about the future of Dell, the specifics are far from certain.
With the PC market in decline, Dell will need to look elsewhere both to improve its short-term financials and to invest in the future. If you were to make a list of people who could make it work despite all the challenges, Michael Dell would have to be on your short list. You have 1 free article s left this month. You are reading your last free article for this month.
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