Making the customer king made Dell rich

Perhaps no one in the computer industry will match Microsoft chairman, Bill Gates, in personal wealth. But here's an interesting fact about a man down in Texas: at the ripe old age of 33, Michael Dell is worth about $10 billion (£7.2 billion), more than Mr Gates had when he was that age.

Mr Dell, founder and chief executive of Dell Computer, doesn't brag about it. Ask him about his wealth and he becomes awkwardly shy. "I try not to think about [the money] too much," he said, in a recent interview. "I'm trying to focus on future challenges."

These days, he has a unique set of them. Foremost, is how to keep his company riding a growth curve that would give others vertigo. "Today, we have 7 per cent of the global PC market. We'd like to have more. If we were to grow to 20 per cent, that would be a good thing," Mr Dell said.

Dell's Irish operations are now major employers, with 2,900 people in a manufacturing plant in Limerick and sales support centre Bray. The success of the expansion plan is vital for Ireland, as it has recently announced that it plans to employ a further 3,000 people over the next five years.

Investors are betting he can achieve his growth targets and more. After letting the company's stock languish at a few dollars a share in the early 1990s, they've been on a rarely interrupted buying spree since 1996. The company's stock has soared, rising as high as $98.50 in mid-May.

It's not immune to market fluctuations, however. Industry apprehensions about sales of the PC industry in general and slightly-below-expectation figures in Dell Computer's most recent quarter have brought the stock down from the May high. Still, Dell Computer remains in a class of its own. It "has had an exceptional run when other (personal computer makers) have had failure," said Mr Steve Dube, an analyst with Wasserstein Perrella Securities in New York. By Mr Dube's calculation, every major PC maker except for Dell and Gateway 2000 is losing money. By contrast, in its most recent quarter, Dell posted profits of $305 million on sales of $3.9 billion, an increase of about 50 per cent over the previous year's results.

The secret is an idea that Mr Dell calls the "direct model" building to order and selling directly to customers and it's a concept he's never stopped honing since he was a teenager.

Michael Dell's story has become part of entrepreneurial lore. As a college freshman in 1983 at the University of Texas, he began buying excess computer parts from retailers and upgrading PCs. Reselling these souped-up systems swiftly become a tidy business for Mr Dell and a worry for his parents.

He promised them that if the business didn't continue to flourish, he'd return to school and stick with the books. Instead, during his first full month of business, he managed $180,000 in sales. He never showed up for his sophomore year.

A few months after his 23rd birthday, Mr Dell took his company public. By the end of its first fiscal year, the company had racked up sales of $257.8 million.

Even as it grew more successful, the company continued to sell its computers directly to customers. Large corporate customers would hear about Dell from sales people who knocked on their doors. Consumers could see pictures of Dell computers in the company's catalogues and order PCs over the telephone.

By contrast, most other computer makers typically shipped their computers to mass-market retailers or speciality computer stores, which in turn sold them to customers.

Selling directly to customers turned out to have many advantages. For starters, Dell Computer did not build up huge piles of unsold systems if customers turned out not to want them. It instead "built to order", assembling a machine only when it had an order for it.

At the same time, Dell also developed "just-in-time" delivery to its factories of such components as chips and monitors, and so did not have to spend money buying things it might not use for months. That meant that when component prices fell, Dell became the first computer maker to take advantage of the lower prices.

Because it dealt directly with its customers, Dell could also develop a clear picture of what its customers wanted. In the process, it developed a reputation as the sophisticated buyer's computer company its machines weren't the cheapest on the market, but they received high marks for being the latest and best at reasonable prices.

In the early 1990s, however, Dell lost its shine. The company stumbled when it made a brief attempt to sell computers through conventional retail stores. And its early laptop computers proved to be a disaster.

"1993 was a very difficult year," said Mr Mort Topler, one of Dell's two vice-chairmen. The company scrapped the notebook line and withdrew from that market for almost a year and a half.

The experience was a pivotal one for Michael Dell, Topler said, forcing him to refocus on the company's core advantage its direct sales model. At the same time, Mr Dell began to look for managers who had more experience and could help him learn how to run what had become a business with sales of $2.8 billion in 1993.

These days, Mr Dell, Mr Topler and Mr Kevin Rollins, who joined the company in December, run the PC maker together from its headquarters in Round Rock, Texas, an Austin suburb. While Mr Topler and Mr Rawlins devote most of their time to running daily operations, Mr Dell is the company's top salesman and strategist.

Together, they are working on version 2.0 of the direct sales model. Dell continues to find ways to shave the number of extra components and computers it has on hand.

"We have eight days of inventory, when typically a company has between eight to 12 weeks of inventory," Mr Topler said.

And Dell has turned to the World Wide Web to sell its products directly to consumers and to small businesses. The company now sells more than $5 million a day on the Web, seven days a week. Executives have said they hope to do as much as half the company's business via the Web by the end of 2000.

Staying close to the customer remains the core mantra at Dell. The company does not advertise bargain-basement computers; yet if corporate customers want them, the company will build them. "Dell will sell what his customers desire," Mr Topler said.