STRATEGIC MARKETING/INNOVATION/CLIENT (ORIENTATION) / JULY - AUGUST 1999 No.

88

THE AUTHOR
Direct
from Dell
by Michael Dell
published by John Wiley, April 1999

Michael Dell is the President

and founder of Dell Computer
Corporation, one of the
computer companies with the
highest growth rate in the
world. He founded this firm in
1984 with a capital of 1,000
dollars on the basis of an
unprecedented idea in the
computer sector: do without
distributors and sell
customized PCs directly to
users. This innovative approach
THE KEY IDEAS
established Dell's reputation
and has been a constant source
Dell's success lies in an innovative
management/sales approach: the "Direct Model".
of improvement thanks to Surprisingly, the initial concept of the Dell company's leadership is a marketing
management that is described concept rather than a technological breakthrough. Starting with a simple idea
as visionary by the economic aiming at compensating for the deficiencies of the market in quality and servi-
press. ce, this company finally created an integrated organization focused on the client
and able to meet the sector's new challenges.
A culture of challenge and management able
THE EXPERT to mobilize are helpful in managing growth.
The specific characteristics of the Dell culture, emphasizing the mobi-
Marc Giget lization of the personnel around common objectives, enabled the com-
Marc Giget holds the Chair in
pany to survive the pressures due to its growth rate.
the Economics of Technology
and Innovation at CNAM. He You must know how to move from
founded Euroconsult, a intuitive management to disciplined management.
consulting firm specialized in At the last stage of its changeover to a "large company" Dell introdu-
growth and innovation strategies. ced a management culture based on a balance between profitability,
Marc Giget is the author of "The finances, and growth. Dell gradually became a "data driven company",
strategic dynamics of the i.e. it is now guided by plans and flow charts to measure and guide its
company", Dunod, Paris, 1988. activities.

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BUSINESS DIGEST No 88 - July - August 1999
 SUMMARY
ell is now the world's second direct interface with the client

D
✔
largest computer manufactu- when the order is taken guarantees
rer and specialist in computer precise knowledge of his need;
technology consulting. The company
began with a bet made by its founder: a sales force focused on direct
✔
to sell custom-built computers direct- users rather than on distributors
ly to clients, bypassing the traditional delivers a technical support service
distribution chain. Starting with what was apparently a which quickly established Dell's reputation in this
highly risky concept, Michael Dell brought his company area;
to the level of IBM, the world leader. This "Direct
Model", whose objective was to eliminate useless stages, ✔ production on order is the way to reduce stocks and
finally evolved with the company and was the source of thus related costs;
far greater success than its founder would have imagined
when he started. However, Michael Dell's personality ✔ analysis of information arising from contact with
and that of his associates, who were chosen for their clients quickly led the company to innovate in terms of
determination and capacity to see things in a different products and services.
way and to change methods, was certainly one of the key
factors in Dell's success. In practice, the "Direct Model" is Dell: key dates
far more than just direct sales. It is an attitude focused on 1984 Founding of Dell Computer Corp.,
permanent learning and improvement that deserves your the first manufacturer to sell compu-
interest, especially in an economy like the one we now ters directly.
live in, dominated by the notion of service to clients.
1986 First company to guarantee a
The "Direct Model" - Version 1.0 refund within 30 days if the client was
Dell's "Direct Model" is based on an innovative and not satisfied.
constantly evolving marketing approach.
1987 Opening of the first Dell subsidia-
At the time of the founding of the Dell company at the ry in the United Kingdom, which made
beginning of the 1980s the idea of selling directly was profits as of the first quarter.
based on first-hand observation of the market by a user
convinced that the personnel computer was a revolutio- 1988 Entry into the stock market with a
nary tool. When he was a student, Michael Dell used all value of 85 million dollars.
his free time - and even more - to improve the PCs
found on the market and to resell them to a local cliente-
1989 First problems: excessive invento-
ry and cancellation of a development
le. He very quickly realized that he was not the only per-
product.
son unsatisfied with the quality of the PCs that were
being marketed. He observes that when faced with 1990 First problems of profitability.
enthusiastic clients, distributors of PCs are incapable of Change in the organization and mana-
advising clients who are new to computers, and that they gement methods.
offer no service justifying the huge margin they make on
each sale. On the basis of this simple analysis, but also of 1992 Objective of 2 billion dollars in
real knowledge of demand, he decided to create his own sales exceeded.
company. He set the following threefold objective: to
ensure the best product at the best price and with the 1993 New motto: "Liquidity,
best service. To achieve this objective he decided to use Profitability, Growth".
direct sales.
1994 Opening of a subsidiary in Japan.
Indeed, this system quickly ensures may advantages over
competitors: 1996 Creation of a web site (June) and
on-line sales record: 1 million dollars
✔ the elimination of the distributor's margin makes it
per day in December.
possible to offer very competitive prices;
1998 Leadership in sales on the
Internet: 12 million dollars per day.

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BUSINESS DIGEST No 88 - July - August 1999

Most of the new products and services
introduced by Dell derive directly from
the "Direct Model". The guaranteed
refund within 30 days if the client is not
satisfied was set up to reassure potential
clients hesitating to send money to a prac-
tically unknown company.
Two factors in particular helped the
"Direct Model" and enabled Dell to diffe-
rentiate itself: the internal organization
which has constantly evolved to move clo-
ser to the client and the management of
Product Quality with suppliers.
An organization
focused on the client
Dell's internal organization has been
changed several times. ■ At first Dell was
a traditional organization, but it now calls
itself an integrated virtual organization.
At the beginning, the "Direct Model" ins-
pired the specialization of the sales force
in several clientele segments identified by
their needs and buying habits. Large and
medium-size companies, educational institutions,
administrations, and lastly small companies and indivi-
duals. During the first years, the rest of the company
was organized in a traditional way by functional
departments from design and assembly to marketing.
The client
3 ways of getting
information or buying from
Dell
An experienced seller takes the order from the client, checks
the information he provides and compiles it.
www.dell.com
Telephone (voice to voice)
Physical contact (face to face)
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BUSINESS DIGEST No 88 - July - August 1999
"Each
Dell But Dell's commercial success is such that
the maintenance of this type of organiza-
manage- tion would have led it straight to failure.
After reaching a certain size, the risk of
ment unit departments falling into a state of inertia is
is in char- great. A functional department becomes a
system in itself which develops its own
ge of a aims and interests which are different
from those of the company.
clientele This was the reason for the switch to an
segment organization in management units on the
basis of client segmentation. Each one of
and ope- Dell's management units is in charge of a
clientele segment and operates like a small
rates like a company. Each unit has its own marketing,
financial, technical support and product
small development departments, and of course
company" its own sales force. So contact with the
client remains real for the whole company.
The reason why Dell successfully comple-
ted this transition is that thanks to the
"Direct Model" the company was always
aware of the fact that services to the client
were the cause of its commercial success.
For a manufacturing company, which was not a purely
service company at the beginning, analysis of the spe-
cific character of the line of business, which might
seem to be an obvious matter of common sense, is
nonetheless worth stressing. Manufacturing companies
The "Direct Model"
Just-in-time Customized computers
The factor receives components The "traveler" is a sort of bar code specific to
only for immediate use. each client. It contains the most recent informa-
tion on the requests. This bar code accompa-
nies all assembly and shipping operations..
Direct sales relations
Preparation of the kit
The components needed for the configura-
Tests Assembly on order tion of the computer requested by the client
The systems that have been The kits are prepared by dedi- are packaged separately.
set up undergo a battery of cated teams
testsprepared by Dell
(the Dell diagnosis)
Quick delivery
Packing and shipping Between the beginning of the assembly and shipment out
of the factory, average time is 5 hours! For delivery to the
The assembled computers are packed
with all the necessary documentation, client the objective is 24 hours maximum. The same effi-
ready to be sent to the client. ciency is sought for after-sales service, etc.
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still too often define themselves by
their product instead of defining
themselves above all as suppliers of a
response to the need of a client, a
need which can change. By defining
itself as a strategic adviser in informa-
tion technology, Dell has broadened
its field of action and multiplied
growth opportunities. Starting with
PCs, Dell then became interested in
portable computers, and then in ser-
vers and networks, finally moving on
to global solutions.
The "Direct Model" Version 1.1
On the basis of its marketing approach, Dell has develo-
ped a true organizational model. ■ This model brings
into play suppliers and clients, and it has become more
efficient with the arrival of the Internet.
The extension of the "Direct Model" to suppliers was
motivated by the search for better quality - one of
Dell's golden rules - led the company to strengthen its
relations with them. Faced with recurring problems in
Michael Dell's
recipe for success
✔ Give priority to service rather than to
price.
✔ Put your partners in an integrated vir-
tual organization and eliminate all the
unnecessary stages in the relations of your
company: this is the "Direct Model" prin-
ciple.
✔ Focus on your clients (who are your futu-
re) rather than on competition (your pre-
sent or your past). Listen to them and build
your organization on the segmentation of
their needs.
✔ Find out the strong points - and espe-
cially the weak points - of your competi-
tors.
✔ Consider changes as an opportunity and
not as a threat.Encourage them,if possible,
making sure to anticipate so as to build a
competitive edge.
✔ Use the potential of the Internet - the
Internet is today's most effective agent of
change.
6 Tel: +33 1 55 46 96 97 Fax: +33 1 55 46 96 95 E-mail: info@business-digest.fr
keeping track of components, Dell
began preparing specifications and
quality validation tests in partnership
with its suppliers. Later, due to negli-
gent inventory management, Dell suf-
fered losses which affected its sales
margins. However, this event taught
Dell important lessons. Dell rediscove-
red a key point at the origin of its suc-
cess, a point which was neglected
because of the company's strong
growth: inventory management. As
the volume of orders no longer allo-
wed Dell to produce only for orders, the company
decided to revise its management methods to increase
the speed of the flow and to limit the risks of equip-
ment depreciation. This revision led to two types of
initiatives:
✔ Taking into account the inventory factor as soon as
products are designed: the idea is to simplify assembly
so as to reduce the number of components to manage.
✔ Rationalizing the number of suppliers (in 1997 bare-
ly 40 suppliers provided 90% of the equipment) and
the choice of suppliers keeping in mind the criterion of
geographical proximity.
With the Internet and the placing in a network of all
the company's information systems, a new stage in
modernization was reached. Dell established relations
with suppliers on the basis of the principle that the
more information you have on the needs of the mar-
ket, the lower the physical inventory can be. The
Internet makes it possible to exchange information at a
low cost and high speed! Concretely, Dell treats its
suppliers like Dell subsidiaries by giving them access to
internal data bases. Thus, the supplier of a Dell screen,
whose quality level is nearly perfect, sends its orders
directly without transit through the Dell factories. The
results prove the success of this strategy. In 1993, for a
turnover of 2.9 billion dollars, the value of Dell's
inventory was 220 million dollars; in 1997 for a sales of
12.3 billion dollars, the value of the inventory was only
233 million dollars! Moreover, Dell now measures the
inventory level in terms of hour rather than days!
Remember 4 key points about relations with suppliers:
✔ Create an alliance with your suppliers: its is better to
build strong relations with them and to focus on your
line of business than to try to replace them.
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BUSINESS DIGEST No 88 - July - August 1999
 “The most
✔ Reduce the number of suppliers so you essential at any time can consult the status of their
can simplify the management of relations order or technical support services. As for
with them. aspect of potential clients, they can visit the site and

Complexity kills, proximity pays: prefera- Dell's

design their computer by selecting the
✔ hardware they want. They receive an esti-
bly choose suppliers close to your produc-
tion site.
internal mate immediately. This is a personalized
order with a convivial, interactive, and

✔ Demand flexibility from your suppliers

communi- even fun style, as the client creates his own
customized computer. Lastly, the analysis
and treat them as a unit of your company cation stra- of behavior related to on-line purchasing
by fixing objectives for them and evalua- provided the occasion for Dell to create an
tions recorded in a specification. tegy is order module specific to large companies
so as to adapt to their decision-making
Thanks to a full understanding of the based on process, divided into two stages: on the
Internet in terms of marketing advantages, one hand, the choice of the hardware to
Dell improved its relations with its clients. the impor- acquire, and on the other hand the deci-
The Internet soon was placed at the heart
of Dell's strategy, whose new objective -
tance sion to buy.

now achieved - was to become THE on-

line source for information systems and ser-
given to There, too, the results are striking: at the
end of 1996, barely 6 months after the
vices. sharing a beginning of on-line sales of PCs and por-
tables, Dell had already sold 1 million dol-
The Internet is the extension of the "Direct common lars worth or hardware per day! Like the

three opportunities: facilitating transac- goal”

Model" to the tenth power in the form of
tions, reducing their cost, and improving
relations with clients by being a source of
personalized, efficient, and innovative rela-
tions without sharply increasing structural
costs. To convince clients of the advantage
of on-line sales, Dell has staked on services.
At the Dell site, all Dell's clients have access to free
services like the year 2000 bug, diagnosis of hardware
aging, diagnosis of the most common computer
errors...Clients have access to internal data bases and
Long-term
impact of the Internet
Michael Dell, General Manager of Dell, predicts a
wave of transition in all sectors of the economy,
one after the other, and a redistribution of mar-
ket shares in favor of the most efficient compa-
nies - those which provide the client with the
greatest added value. Indeed, the Internet is:
✔ a universal tool with no barrier at the
entrance;
✔ reduced transaction costs and unlimited
penetration, i.e. personalized relations at a
lower cost;
✔ creation of new organizational models
based on the circulation of information rather
than on physical inventory, the Internet being
above all an accelerator in exchanges of
information.
first version of the "Direct Model", the
Internet is a source of fine clientele seg-
mentation, and moreover offers the possi-
bility to make marketing experiments in
real time. Dell's leading position is richly
deserved: unlike most companies, Dell is
not content to use the Internet as an addi-
tional way of allowing clients to place
orders.
A management style
that mobilizes personnel
The entire history of Dell is filled with strategic deci-
sions. ■ Personnel was soon placed at the heart of the
concerns of Dell's managers, who were convinced that
the loss of the "Dell culture" would be an obstacle in the
way of achieving its objectives.
The most essential aspect of Dell's internal communi-
cation strategy is the importance given to sharing a
common goal. The company's general strategy must be
known and understood by every employee. Each
employee must be aware of his role in achieving the
company's general objectives. For example, the deci-
sion to build the strategy around the Internet was the
occasion for specific initiatives directed at the person-
nel. This strategy required at least that the employees
know how to use this tool and that they be aware of its
advantages. In addition to access to the Internet at

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BUSINESS DIGEST No 88 - July - August 1999
every work station, a communication Note the following advice about
campaign was launched in the entire internal relations:
company leading to briefings, e-mail
messages, and a humorous poster sho- ✔ Devote great attention to commu-
wing the General Manager as Uncle nicating general objectives internally
Sam with the caption "Michael wants and learn how to mobilize teams
YOU to learn about the Internet"! around a common aim. Make sure
that the personnel contributes to
Other key points of Dell's internal achieving he objectives. You can do
communication: emphasis on the spi- this by calculating bonuses, offering
rit of innovation and encouragement shares...
of learning through mistakes. The
managers themselves were able to learn, on the occa- ✔ Encourage creativity on the part of personnel by
sion of certain setbacks, that excessively used strength allowing personnel to learn through mistakes.
can become a weakness. For example, Dell's growth
rate might have become a vulnerable point because of ✔ Stay in touch with your personnel whatever the size
greater risks that nobody was aware of. But good com- of your company.
munication and a good analysis of the situation also
make it possible to turn a failure into success. ✔ Promote the spirit of "partnership". At Dell, evalua-
tion of individual performance is a collective process:
One serious setback suffered by Dell, the dropping of the so-called "360 degree" interview entails the partici-
the "Olympic" project, illustrates Dell's exemplary atti- pation of everyone working with the person being eva-
tude when faced with failure. Under this code name, luated, and not only his supervisor.
Dell developed a very ambitious product. However,
during a presentation of the prototype to clients, the Discipline management to
clients remained unenthusiastic. Despite certain become "big"
improvements, the product did not offer any signifi-
cant advantages in the eyes of the users. Dell, one of Starting with an intuitive entrepreneurial culture, Dell
whose golden rules to be attentive to the client, fell successfully found the way to switch over to rational
into a classical trap: the development of a product sim- management to meet new challenges.
ply for the sake of its technology. The reaction, howe-
ver, was exemplary: the project was stopped before it Two types of observations led Dell to understand the
was launched and the product development process
was revised to stress early involvement of users.
Internally, the engineers who designed the project were IN THE AUTHOR'S OWNWORDS
not punished, but were sent out on sales missions so
they, too, could acquire indispensable knowledge of "The "Direct Model" is a marketing approach
client expectations. Then Dell chose a strategic option which places the client at the heart of the
on its new product development policy: rather than company. The ultimate segmentation is to
focus only one client. Dell does this with its
trying to create revolutionary products, Dell oriented
biggest clients. Thus, 30 persons from Dell are
its service toward seeking successive improvements in
working with Boeing, where they manage the
existing product lines, using general technological evo-
information system in on the financial and
lution. This strategy reduced the dangers of failure and
technical levels."
offered greater flexibility to adopt technological transi-
tions faster. Dell refocused its line of business and used "Knowing your client means knowing what
specialized suppliers for part of its R & D. This offers added value in his eyes, but it also
example clearly illustrates the Dell culture and the means understanding his line of business to
importance of internal communication. help him to be more effective."
"The greatest danger for Dell might have
The "Key Ideas" and "Summary" sections are intended to be the most fai- come not from its competitors, but from the
thful presentation possible of the ideas and reflection of the author of the
original book, without any form of critical interference. These sections, employees themselves. The internal "Direct
which are original descriptions for which we are wholly responsible, are Model" made it possible to avoid the dangers
intended as summaries: they are neither extracts from or abridged versions
of the book by Michael Dell. We recommend that the reader turn to the of bureaucracy."
original book.

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BUSINESS DIGEST No 88 - July - August 1999
need for a minimum amount of discipline in manage- The major lesson to be learned from all these expe-
ment. Mobilizing teams for shared objectives consis- riences is that a company that changes its size also
tent with the strategy of the company led to awareness considerably increases its risks. The company must the-
of the need for day-to-day planning. A schedule helps refore go through a stage of focusing its energies on
identify initiatives to carry out to reach the objectives improving what exists and on disciplined management
previously set. instead of scattering its efforts trying to grab every
growth opportunity.
The second type of observations started early in the
1990s when for the first time the company became based on
interested in profitability. Until then, Dell's motto was DIRECT FROM DELL,
clear: "Growth, Growth, Growth". However, due to by Michael Dell
problems with the company's treasury, the managers John Wiley, April 1999 (USA).
realized that they had no notion of the profitability of
Dell's activities. The recruiting of a financier and the
use of a consultant were the first two steps toward a
solution. Let us emphasize that the capacity to use an
outside eye and not to deny problems is one of the
greatest qualities of Dell's management. The new
motto, "Treasury, Profitability, Growth" summarizes
the change in strategy preliminary to the change in the FOR FURTHERINFORMATION
company culture. At the same time, concrete measures
Work at the speed of thought
were taken to encourage personnel to change their atti-
by Bill Gates
tude. Once the profitability of each product was analy- Robert Laffont, March 1999.
zed, the information system was updated to acquaint
Customers.com : how to create
the sales representatives with the margin of each pro-
a profitable strategy for the Internet and beyond
duct. The bonus of sales representatives is no longer
indexed on the final value sold, but on the percentage by Patricia B. Seybold, R.T. Marshak, Ronni Marshak
of the margin resulting from sales. Times Books, November 1998.

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BUSINESS DIGEST No 88 - July - August 1999
 THE EXPERT
M ichael Dell's book belongs to
the American tradition of suc-
cess story narratives by the self-made
France is now very Malthusian and
defensive, and often believes in the
myth of economic war, protection of
man who is the hero of his book. The acquired advantages and standardi-
question that always arises is whether zed behavior (in particular through
the explanatory principles which he economic intelligence, competitive
proposes are specific to his story or watch, and benchmarking). The crea-
whether they constitute, as Michael tive dimension is very limited.
Dell believes, golden rules that can Through their excessive criticism of
be transposed to other companies. the rejection of "not invented here",
Although some explanatory factors many established companies may
in Dell's success are widely known, have slipped into a "nothing invented
others are far more revolutionary here" attitude, with no capacity to
and deserve consideration by well design their own future.
established companies. Michael Dell reminds us that in a
For one thing, Michael Dell intuitive- Marc Giget period of technological and social
ly rediscovered rather well-known Professor holding the Chair of the revolution, it is the newcomer who
strategic principles, and he proves Economics of Technology and has the strategic advantage, with his
their effectiveness. Namely: Innovation at the Centre National des fresh look and capacity to link up
– put the client at the heart of the Arts et MÈtiers, Founder of "directly" new opportunities due to
company; Euroconsult, a consulting firm speciali- progress in knowledge with unsatis-
– teach the company to learn from zed in growth and innovation strategies. fied user expectations.
its failures; The newcomer changes the
– have close-to-zero inventory overall codes of a sector by
and work "just-in-time"; The strategic advantage introducing a higher level of
– use a maximum amount of efficiency which revolutio-
outsourcing and focus on your
belongs to the newcomer nizes a sector. The aim is not
line of business; to compete with this or that
– involve employees in creating value; established company, but rather to be a global alternative
– above all, eliminate all useless stages and related costs. to existing companies. From the very start, the objective is
Working "in direct contact" is one true obsession that incredibly ambitious: to become the leader in a sector that
structures Michael Dell's vision. you have redefined, in cooperation with as many partners
There are few objections to these rules for good mana- as possible in this new creation of wealth.
gement. This assertion of revolutionary strategic principles com-
More interestingly, Michael Dell asserts revolutionary mon to innovative newcomers - for example in Europe
principles characteristic of a strategy for renewing a sec- SMH (Swatch), SAP, Sidel, BO, Gemplus, Dyson,
tor. Infogrames - constitutes the most interesting contribution
In particular, he believes that: of Michael Dell's book. Backed by his success, these prin-
– established competitors protect the margins of the out- ciples remind us of the fragility of established positions -
sider; even if they are supported by considerable financial
– a very weak starting capital is a decisive asset; resources and large size - and of the permanent danger of
– you must not waste time studying competitors, but the blindness of leaders in the face of the changes in the
rather devoting it to studying the needs of potential world around them. In terms of strategy, the lesson is
clients; logically valid for the innovator who has become a leader
– you must manage simplicity rather than complexity; himself. The world of information technology offers
– you must widely open information about the company many examples of quick success stories of newcomers
to suppliers and clients, who are viewed as strategic part- who wrote best-sellers based on their success, and who
ners; then found themselves in besieged fortresses attacked by
– you must always play the card of alliances (by putting more creative newcomers. Marc GIGET.
them at the heart of the network) rather than confronta-
tion.
These principles are far from being as widespread as the
previous ones. They are even iconoclastic in prevalent
strategic thinking in France today. Dominant thinking in

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BUSINESS DIGEST No 88 - July - August 1999