Dell or the Custom Business Model

One sentence particularly irritates Michael Dell. It comes back to him regularly because he is the author. We are in 1997 and Apple, then at its lowest point, has just recalled its founder, Steve Jobs, to try and save what can be saved. Michael Dell, questioned by a reporter about this return, replies sharply: What would I do in Steve Jobs’s place? I would close and return the money to the shareholders!” Jobs had replied during a keynote: “We want to tell you, Michael, that we’re going to catch up with you with our new products and our new online store of ‘configuration on demand’, mate! We know the rest: a worldwide success for Apple. But we tend to forget that Steve Jobs relaunched his company in the late 1990s by modeling his strategy on Dell’s – the famous build to order (PC on demand).

A business model that Michael Dell invented while still a medical student in Austin, Texas. He then spent his weekends disassembling and reassembling his computer (an Apple II!). In order to fund his studies, this early geek got a summer job in 1984 with the local Houston Post newspaper, spending his days on the phone getting subscriptions. “That’s how he came up with the idea of ​​selling computers over the phone,” said Emmanuel Mouquet, general manager of Dell France. A genius that makes it possible to eliminate middlemen (wholesalers, distributors, etc.) and thus lower prices. In 1985, he released his Turbo PC for $795, while Apple sold his Mac for $2,500! Another advantage of the Dell model: the computers are not produced until the customer places the order, which reduces storage costs. Finally, this direct contact makes it possible to better understand consumer needs. Perfect, sort of real-time market research.

Turbo take off. In the great tradition of computer days, Michael Dell started small. It was in his dorm room that the young man of 19 assembled his first models. At first he sold them to acquaintances under the name PC’s Limited. The influx of assignments soon forced him to discontinue his studies. In 1985, aided by his family, he raised $300,000 and took his first real property. He then launched the Turbo PC series, which garnered immediate success. The first year PC’s Limited made a turnover of 78 million dollars, the second year 160 million… Companies praised its robust, efficient and cheap computers. Michael Dell then understands that in order to gear up, it will be necessary to seek capital in the stock market.

The Walmart Failure. He then called on Lee Walker, a 51-year-old financier, to become his mentor. At the end of 1987, it was he who advised the young CEO to rename his company, which took the name from the founder. He also led the IPO in June 1988. From $30 million on launch date, Dell’s value rose to $80 million in less than two weeks. Enough to finance the opening of a subsidiary in Great Britain in 1988 and in France in 1989. The computer world is dedicating the Texan brand as the next big thing. And it becomes the undisputed champion of the business computer. In 1992 Fortune magazine included Dell in the top 500 of American companies, making Michael Dell, 27, the youngest CEO in the history of this ranking… The latter then made a first departure from the model that made its hit. In 1993, he decided to sell PCs in supermarkets, at Walmart, to reach the general public. Not really a strategic turnaround, but rather the desire to test new avenues and above all to increase sales. But Dell’s cost structure is not suitable for mass distribution and what it gains in sales it loses in profitability. “To be good at mass distribution, explains Emmanuel Mouquet, you have to be able to mass produce with few delivery points. But Dell’s strength is just the opposite.” Less than a year later, the company is pulling its PCs off Walmart’s shelves.

A quickly forgotten failure thanks to the worldwide expansion of the years 1990-2000… The turnover of millions then becomes billions. In 1999, Dell became the world’s largest PC supplier. The detonator that caused such an explosion? internet. Before the rise of the web, PC orders were made over the phone. Since 1996, customers have been able to configure their own PCs on the company’s site with just a few clicks. To meet demand and ensure just-in-time production, Dell is opening assembly plants around the world. Thanks to the Web, the corporate computer champion is finally reaching the general public: In the early 2000s, the consumer market accounted for 10% of Dell’s sales.

Fortune made, Michael Dell decides to take a step back. In 2004, he entrusted the reins of his company to Kevin Rollins, a long-time employee. A poisoned gift, as the mid-2000s mark a rift in the PC industry that will make the Dell model obsolete. The PC becomes a mass product sold in supermarkets and at unbeatable prices with the arrival of new players from Asia (Acer, Lenovo, Asus). To make matters worse, Dell’s famous reliability has been called into question with the recall of 4 million defective batteries… stagnant and even beginning to decline. In 2007 Michael Dell came out of golden retirement and took over the company.

Exit scholarship. The founder then made a good diagnosis – the Dell model was no longer suitable – but he was wrong about the therapy. It launches a $3 billion savings plan, closes its least profitable factories, such as in Ireland, and launches the battle for the standard PC by outsourcing its production to Asia. Again, Dell PCs are thriving on the shelves at Walmart, in the United States, or Carrefour, in France. Again, it’s an oven. “Their prices were not competitive and their products were not attractive,” said a buyer of a major French retailer. The arrival of tablets in 2010, which makes PCs obsolete, does not help. In 2013, global computer sales are expected to fall by 10%.

Michael Dell takes one last look at his copy. At the start of a new IT revolution with cloud, big data, mobility and security as its pillars, it aims to refocus on these segments where business demand is high. It will spend $13 billion to buy some thirty companies specializing in these advanced technologies. The share of the PC business, which still represents two-thirds of the Dell business, will shrink. And profitability is likely to slow down. Hence the founder’s desire to leave the stock market and buy back with his own money the 75% of the capital that no longer belongs to him. “Impossible to make long-term investments with the stock market, which operates on a quarterly basis,” explains Emmanuel Mouquet. Fifteen years after his small sentence against Jobs, Michael Dell has decided to “return the money to shareholders”. Not to close.

> The Nine Most Important Dates of the Dell Empire

1985: Launch of Dell’s first PC, the Turbo PC. It was sold outright and made à la carte, inaugurating Dell’s business model.
1993: Dell breaks its model by putting its PCs for sale at Walmart. Not profitable enough, he gave up a year later.
– 1999: Dell becomes the world’s largest PC supplier, ahead of Compaq.
– 2003: Launch of the first series of PCs for “gamers”: the XPS.
– 2004: Michael Dell steps down and steps down as CEO. Kevin Rollins succeeds him.
– 2006: Dell acquires Alienware, PC specialist for gamers and breaks its exclusivity with Intel.
– 2007: Michael Dell takes over the reins of the group and renews the mass distribution experience at Walmart and Carrefour.
– 2013: Michael Dell wins confrontation with Carl Icahn and regains ownership of his company.
– October 2013: Launch of two new tablet models, Venue 7 and Venue 8.

> Icahn versus Dell: the clash of the titans

The soap opera of the summer will have been short but intense. Last spring, Michael Dell, then a 12% shareholder in the company he founded, announced that he wanted to regain control. His goal: to take Dell off the stock exchange, which he says risks penalizing its long-term strategy. But then he stumbles upon a minority shareholder who believes that the $25 billion that Michal Dell and the Silver Lake fund are proposing to take over 75% of the company’s capital isn’t terribly expensive to pay. This shareholder is none other than Carl Icahn, 26th world fortune built on aggressive stock market transactions. Michael Dell found bigger than him along the way. The battle begins between the two men to convince the shareholders.

Even if the 77-year-old financier manages to outbid his opponent, Michael Dell wins the battle. On September 10, Icahn announces that he is relinquishing control of Dell and launching one last pike by treating his opponent as a “dictator”. So, since October, Dell has been a private company of the founder and no longer accountable to anyone.

Martin Soma

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