Having ruled the PC market, the company Michael Dell built lost its way when he took a back seat five years ago. Now firmly in charge again, he talks about renewing his $60bn brand, taking risks in a volatile era and why innovation is paramount
One of the first things Michael Dell did when he regained full control of his computer company was to call an amnesty. For two months in early 2007, Dell managers and executives were encouraged to bring their problems to the table—criticisms of the old regime, condemnation of their own performances—without any fear of recrimination. In exchange for their candour, Michael Dell would be supplying hope.
Dell was returning as chief executive after two and a half years as chairman to try to reinvigorate the 25-year old computer firm he had started from his bedroom. Under the stewardship of Kevin Rollins, Dell struggled. Revenue targets were missed, the share price suffered, but worst of all, Dell lost its coveted number one slot in the PC market to Hewlett-Packard. The board decided it wanted Michael Dell, not Rollins, to arrest the slide.
The amnesty was partly designed to identify some of the bad practices that had led to the disintegration of Dell's hard-earned reputation. Perhaps most damaging to its business-to-business activity was the revelation that between 2003 and 2006 senior management had regularly falsified quarterly returns to create the impression that sales targets had been met. On the consumer side, Dell was hurt badly by accusations of poor customer service, an area in which it had previously excelled. Blogger Jeff Jarvis set the ball rolling with a series of incandescent posts that catalogued a frustrating experience with a faulty laptop. "Dell lies, Dell sucks" became an unfortunate internet hit, its bile-fuelled rants served up, often to unsuspecting customers, from the search pages of Google. Thanks to Jarvis, Dell became a cute synonym for Hell.
Michael Dell's reprieve was also aimed at revitalising his employees. He wanted to show them he was listening. According to Forbes technology editor Elizabeth Corcoran, internal relationships needed rebuilding, and Dell was well placed to do just that. "Within Dell, Michael Dell was clearly a hero—a warm guy with good instincts for making people feel like part of a team." Rollins, though, had kept "an emotional distance" from staff. The company needed to be glued back together again. John Enck, managing vice-president of research analysts Gartner, thinks Michael Dell has learned a more inclusive management style. "I've seen a big difference in the two reigns," he says. "The leadership of Dell isn't as autocratic as it used to be. When Michael was originally CEO he was the decision-maker. Coming back, he created a leadership board and did a very good job of delegating decisions and responsibility to his executive team. That will theoretically allow Dell to be more nimble."
Dell denies making an adjustment to his management technique, but does accept that his leadership style is built on collaboration. "I wouldn't say I'm big on command control," he says, after a measured pause. "I believe in rules and having some order to things, but my natural proclivity is not to control everything myself. I am more inclined to provide frameworks and guidelines."
But has Dell not adjusted his style, second time around, either to reflect tougher market conditions, or at least in an attempt to reunite the company? "That question assumes that during the entire 20-year period I only used one approach, which would be wrong," he replies. "I constantly adjust my approach and way of doing things based on all the inputs and opportunities that I see."
So how will he divide his time? Where will he focus his energy as he leads from the front again? "Lots of places. I'm helping set business strategy and providing clear performance objectives for the different parts of the business," he says. "I'm selling Dell all the time to lots of people: customers, investors, employees."
Michael Dell had already developed a keen commercial sense by the time he was 16. There was a brief flirtation with stamps: instead of simply collecting and selling them at auction, though, Dell decided there was more money in holding the auction himself. With the middleman out of the way, he happily kept all $2,000 (£1,420) of the profits—a valuable, early lesson in controlling sales channels.
For his 15th birthday, Dell received a brand new Apple II computer, which he took up to his bedroom and promptly dismantled. With the bowels of the machine spread around the room, he began to understand for the first time the gap between what a computer user might want and what was actually available. That knowledge grew as he began to investigate the more powerful IBM PC. These machines were the future, he thought. "I didn't know how big the computer industry would become," Dell recalls, "I just thought it was an unbelievable opportunity. It was irresistible to me."
PC's Ltd was born with $1,000 in capital and a simple question:
how could Dell make the process of buying computers more efficient, more profitable? The prevailing wisdom back in the early 1980s was that in order for this new technology to penetrate the market quickly and effectively, computers should be sold through the existing retail network.
But for such a new and complicated product, this wasn't an ideal distribution system. Retailers weren't all that effective at explaining what all the bells and whistles actually did. And then there was the price. Dell knew from his bedroom tinkering that the parts which made up a $3,000 IBM machine were available individually for a fifth of the cost. He decided on a radical solution: cut out the middleman and sell factory-assembled machines direct to the masses.
Going direct to the consumer meant building computers to order: in Dell's words, delivering "exactly what the customer wanted when they wanted it". That meant no wasted inventory sitting around in the warehouse (even in the early days, the time it took the company to convert its raw-material computer components into sales was measured in weeks, while its rivals counted it in months; now Dell gauges the process in hours) and valuable, real-time customer feedback. Going direct was what Dell did best.
While selling direct gave the company a strong relationship with its customers, supply chain and inventory efficiencies provided the foundation for attractive prices. Dell grew phenomenally quickly by giving customers exactly what they wanted at a price that no other manufacturer could match. Rapid growth unfortunately created its own problems, recalls Dell. "In the first eight years we grew 80 per cent per year and in the six years after that we grew 60 per cent per year. It's a rare person that can expand their capability faster than the business grows. So that presented all types of challenges in terms of constantly adding capability and confidence into the teams."
But as the market grew, customers demanded closer contact with the product. They wanted to touch and feel a machine before they could commit to buying it. Retailers such as Wal-Mart were signed up. But, as Dell says, direct sales still play a crucial role: "It's not that the strategy has gone away." Eighty per cent of the business is still direct. But ultimately, he says, the company has moved on. "This past year Dell had $60bn in sales. We are a fundamentally different company. One has to adjust strategies as conditions change."
And conditions have certainly altered. On the enterprise side, unit shipments of servers across the industry fell 12 per cent in the last quarter of 2008 compared with a year ago, and every major server supplier saw sales fall, as revenue in the sector dipped 14 per cent, according to market research company IDC. Dell, the third-largest supplier of server equipment, suffered slightly less (10 per cent down) in 2008 than rivals IBM (15 per cent) and HP (10.1 per cent), but the results will nonetheless provide a wake-up call. The PC market is similarly volatile. According to IDC, the fourth quarter of 2008 was the industry's worst for six years. HP dismayed analysts with a 20 per cent drop in sales in the fourth quarter. Dell's fourth-quarter revenue fall was also steeper than analysts' expectations (down 16 per cent), but not the market's, which has responded positively with a slight share price boost. "A lot of IT spending is being deferred until there's better economic visibility," says Dell.
Shareholders have praised Dell's cost-cutting, which has, over the past year, led to a sizeable reduction in headcount. "We're being disciplined in managing costs, generating profitability and cashflow, and investing in ways that separate Dell from others," says the CEO. "We'll be the first to admit that this is a work in progress and that there's more to do," adds Dell's chief financial officer, Brian Gladden. "We can't predict how long this slowdown will last."
Set against that slump is the rise of netbooks—smaller, less powerful laptops used mainly for surfing the Web. Many consumers know that unless you're a professional graphics artist, or you play a lot of games, the processing power in a regular, £500-plus laptop goes to waste, especially if many of the applications that used to come in a pretty box can be sourced online, via the cloud. Both Dell and HP have moved into netbooks on the basis that if your business is going to be cannibalised, you might as well cannibalise it yourself, but the margins are microchip-thin. Dell's global consumer division saw shipments rise 18 per cent in the last quarter, but revenues dipped seven per cent.
Last month, JP Morgan analyst Mark Moskowitz cut his Dell rating to "sell" on the grounds that the company's high exposure in the PC market makes it vulnerable. Dell gets around 60 per cent of its total revenue from PC sales, but the company is working hard on its enterprise portfolio. IT services, already bringing in around £3.5bn in revenues, are the company's current big-ticket item.
Diversification will help protect margins if the downturn worsens. But Gartner's Enck says Dell still has some way to go. "[Enterprise] customers are looking for a combination of hardware and software, and services that will provide them with an advantage. But Dell is reluctant to develop software: that limits their ability to serve some of their enterprise customers."
Dell has been labelled as a business that struggles to innovate, instead relying on supply chain efficiencies to sell established technologies at low prices. Michael Dell disputes this view. "Our global consumer business introduced double the number of products in 2008 than in 2007," he says. But the firm was late, say analysts, to capitalise on netbooks and failed to recognise a growing appetite for MP3 players in time to manufacture a worthwhile challenger to the iPod. Rumours of a Dell smartphone have been circulating for a while, not helped by Dell himself fanning the flames, telling a journalist in 2007: "There was a reason we hired a new consumer head from Motorola." Ever since, Dell has remained tight-lipped. Is he planning a smartphone launch? "Ask me again in six months," he replies.
Dell insists innovation and risk are at the heart of the firm. Product inspiration now comes courtesy of ideastorm.com, a Dell community website that allows customers to identify and vote on new lines, while also rating current ones. User comments reflect adulation and harsh criticism equally. "It brings an authentic quality to the site and our relationships if we are able to expose the great things but perhaps also areas of improvement on the not so great things."
Like all effective leaders, Michael Dell is good at listening.
Michael Dell is speaking at this year's IoD Annual Convention. For more details, visit www.annualconvention.iod.com.