It's turned out well for Dell

Since launching Dell Computer Corp in 1984 from his dormitory at the University of Texas in Austin, Michael Dell has revolutionised the supply of PCs and servers to businesses.

Annual revenues of $18.2 billion (#11.4bn) and profits of $1.5 billion tell their own story. Apart from Dell's financial success, what has set the company apart is its breakthrough business model: selling built-to-order PCs directly to customers with no middleman.

Dell's direct model began using traditional mail-order techniques, but it has evolved to take full advantage of the Internet. Equally important, the company is a pioneer in streamlining operations. It outsources much of its manufacturing and maintains minimal inventory, allowing it to operate with low overhead and very fast turnaround.

Now Dell has launched an online shopping service, Gigabuys.com, which carries not just Dell PCs but also software, peripherals, and software from hundreds of suppliers.

Q Can you give a sense of expected revenue impact of Gigabuys.com and how big you expect it to be?

A It's a pretty big market. What you can expect to see is that Dell's online commerce, now including Gigabuys, will continue to grow. This should be a nice continuation of our leadership position.

Basically, we have a first-mover advantage in ecommerce. Twenty-five million people came to our site in the fourth quarter. It's a logical extension of our relationship with customers, not only at the time they buy PCs, but afterwards, and will allow us to introduce ourselves to new customers.

Q Switching gears to ecommerce: How did you have to reengineer your business around Internet technologies?

A We came to a realisation a few years ago. We were developing systems for our internal operations, things such as technical support tools and order-entry tools, and at the same time this web activity was going on.

And it became apparent that actually the internal organisation of tens of thousands of people and the external customers, which number in the millions, essentially used the same tools.

So we came up with an architecture where we said OK, here's our data.

Then you have the layer of business logic, which relates to the internal things we do such as support or sales, and then you have the front end, internally, which is the web browser.

So people access this data and business logic through a system like this, and externally, it's the same system, going to the same places, but with slightly different information.

So what you have is one common system, and what that means is that when somebody orders something at Dell.com, the order goes right to the factory, and so you get this real-time integration, so you get order status and support tools.

One of the keys in using the Internet is you have to not just automate things that occur in the physical world, but you have to use the information in ways that you couldn't before, and that adds value for the customer.

You can see this in our site, especially in the support areas, in a very dramatic context.

When you go to our support site and identify what kind of Dell PC you have, you get this massively rich information about your specific PC. The diagnostic tools, flowcharts on how to solve your problems, the BIOS files and upgrades, schematic diagrams.

That's not as exciting as $14 million a day in ecommerce, but it's more important to customers.

It's something we spend a lot of time on.

Q We're picking up signs of a shaky quarter. You announced your results, and Wall Street was disappointed. Are you seeing a slowdown in the PC business?

A I think it's going to be another very good year for the industry and for Dell. Industry growth ought to be in the 15% to 17% range, and I expect Dell will grow significantly faster than that. Now, there are some companies that are challenged with their own unique issues. But our earnings per share last quarter grew 55%.

I think what you'll see is some companies now going through the same issues they had before. This happens in product transitions. You know, you have a big fourth quarter, product transition comes up, and the (reseller) channel is stuffed with products, you get this transition, and you get this problem. It's not a problem for a company like ours, because we don't stuff the channel.

Product transitions for us are great, because we go to the new product faster than anybody, and we're off to the races. Pentium III is going to take off faster than anybody thinks it is, and here we go. So I think it's going to be a good year.

Q But that 15% to 17% is unit growth. With falling average selling prices, revenue growth for the industry is going to be flat, or up two per cent to five per cent. Does that meet with your expectations?

A That's a tougher one to call. I don't know what all of our competitors' strategies are going to be in terms of product pricing. So, I don't know.

Q You've been able to thrive without dipping into the low end of the market. You have pretty savvy customers. But are you feeling price pressure now? Are you going to have to start selling less expensive systems?

A Where this tends to show up the most is in the consumer market, and our consumer growth last quarter was about 80% in unit terms and 56% in revenue terms. That, to me, is not suggestive of a situation where we might have to bring out cheaper systems.

Q You don't have any sub-$1,000 PCs in your line-up?

A We sell some corporate systems for under $1,000, but not many people buy them, they tend to want the latest technology. We had huge growth in notebooks - we're now the number one supplier of notebook PCs to corporate America, and the number one supplier of desktops. We've had huge growth in servers, which helps offset some of this.

I guess with the growth we're seeing in the consumer market, yes, there are component reductions that will give us lower price points.

But we're not losing share, as some other companies are, we're gaining share.

Q What do you think about the split-up of Hewlett-Packard?

A I haven't really thought about it a lot. But it does raise the question of how this helps HP compete in the computer business.

Q Theoretically, it frees their top executives from having to think about a very different business.

A I believe in focus. Focus is a good thing. There are some big issues for HP to think about, in terms of how they make this transition from indirect to direct, particularly when they're so reliant on the channel for printers.

Q It seems that Pentium III systems are entering the market at lower prices then Pentium II systems, some for as low as $1,599. Does that represent a big change in PC pricing?

A This is all pretty explainable when you think about what's happening to component costs.

The price of PCs is not really that complicated a formula. Basically, you have the cost of components, and as component costs come down, PC prices come down. The interesting thing about that is that a lot of the component costs have been in a pretty depressed state. I mean, memory, disk drives, LCDs, CRTs. These guys have not made any money in the last three years.

Part of this is fuelled by the tremendous flight of capital in Asia.

When the International Monetary Fund came in and said this is over, Asian suppliers said 'we're not going to sell this stuff at a loss anymore, so we're going to stop lowering pricing. And eventually, we're going to have enough demand to match up with supply and we'll have an opportunity to earn a profit. We're not at that point yet. But when we do, we're not going to add any more capacity'.

So, for the last three years, the Western world has had sort of a windfall of cheap components, sold at below cost. All things being equal in the world of capitalism, that's not likely to persist.

Q But it's pretty hard to raise prices once a new price point has been set. That's the concern.

A That will be very interesting to see, particularly for the sub-$1,000 market, because it's precisely that customer who is most economically sensitive, and precisely that market that has been most fuelled by this flood of components sold below cost.

Q So, you don't see a broad-based tech slowdown out there?

A No.

First published in Business Week. Copyright 1999 by the McGrawHill companies. All rights reserved.