Michael Dell: The Texas 'Ford Fiesta' changes gear to burn up its computing competitors

The company rode out the IT downturn in comfort, its founder tells Stephen Pritchard, and now it is well placed to enjoy the good times

Dell Computer is 20 years old this month. Founded with just $1,000 by Michael Dell when he was just 19, it is now the worldwide number one supplier of computers. The company's turnover was $41.1bn (£23.2bn) last year, and while HP, its nearest rival, saw its share of the UK market fall by 12 per cent, Dell's was up 36.6 per cent.

Michael Dell attributes that success to supplying his products straight to customers. Dell sells directly in most big markets, not just over its internet site but also by phone. This model, pioneered for selling desktop computers to individuals and small businesses, seems to be just as suited to supplying high-end computer equipment to the world's largest companies.

Dell's success has come despite, or perhaps because of, a tough few years for the IT sector. "Two years ago, the industry was not doing very well, but we have had strong growth in revenues and profit," Mr Dell says. "Last year, our unit shipments [of computers] grew 25 per cent and our revenue 18 per cent. The latest worldwide figures show that we are number one in desktop computers, notebooks and workstations."

The company's value-for-money message played well during the sector's downturn, with IT directors opting for Dell systems rather than more expensive alternatives from rivals such as HP, IBM and Sun Microsystems. But the challenge for Dell is to capitalise on that success as companies start to increase their spending again.

If Dell is the Ford Fiesta of computing - it will get you there, but perhaps not in great comfort, nor style - will companies be tempted to opt for a BMW or Mercedes when there is more money in the budget?

Dell executives think not. "We are a direct provider of products, and the customer is always value oriented," says Jeff Clarke, general manager of Dell's product group. "Just as it's important in a downturn, it's important in an upturn. Companies are not going to say, 'we are making more money, so we'll pay more for stuff'."

Over the past few years, the computer industry has been in money-saving mode, as corporate IT buyers have slashed budgets. As a low-cost producer, Dell has been affected less than most by this decline in spending, but Mr Dell maintains that focusing purely on cost cutting in IT misses the point.

"Corporate customers are dusting off their memories. They want IT because it brings productivity," says the tall, intense Texan. "Two years ago, it was all about cost. Customers were focused on that to a fault. The fault was that they forgot why they were buying IT, which was to gain productivity. If you earn $50,000, it probably costs your company $70,000 just to get you there, with overheads. If a computer costs $1,000, and lasts three years, and it makes you more productive than a pad of paper and a calculator, it is a good way to leverage that investment."

Dell plans to leverage its investment in its customer base to win more orders. It expects to produce double-digit growth this year, much of which will come from increasing the proportion of IT equipment that existing customers buy from Dell.

The company's emphasis on its "enterprise" hardware - including larger servers and storage systems - and on professional services supports this. Mr Dell highlights his company's relationship with SAP, the German enterprise software giant, as an example. Some 5,000 firms now run SAP software on Dell hardware; a few years ago, scarcely any large businesses were running their critical back-end systems on the relatively cheap, industry-standard equipment sold by Dell.

Often, companies that buy Dell equipment in one part of the business - desktop PCs, for example - come back to it for more. "It is important for Dell that they can run enterprise-scale, mission-critical applications," says Henning Kagermann, the chairman and chief executive of SAP. "Customers do want to see those proof points."

Working with the likes of SAP makes it easier for Dell to show that it is not just a company doing desktop computers and servers for small firms, but a credible rival to IBM, Sun and HP for the high-end and more profitable enterprise servers that run central applications in big business. However, Dell's strategy extends further than this, to selling printers, networking equipment, handheld computers and even flat-panel TVs.

"If you talk about our market share at, say, 30 per cent, what that really means is that in 70 per cent of companies we have a 40 per cent share of their IT," says Mr Dell. "A big part of our challenge is to sell more of our portfolio to the same customer. A hospital in Illinois recently bought 600 of our printers. We are constantly expanding into new categories such as servers, storage or even projectors."

Like some of its IT rivals, Dell also has its eye on consumer electronics. Companies such as Gateway have already made their move into this potentially lucrative market, though with mixed results. And of the computer manufacturers, perhaps only Apple has succeeded in producing a must-have consumer gadget, in the form of the iPod.

But unlike the iPod, which was designed from scratch, Dell's home electronics products derive a number of components from its mainstream PC business. Even its flat-screen TVs share a high percentage of parts with the company's computer monitors.

Home computers and accessories make up between 12 and 15 per cent of Dell's turnover, and Mr Dell concedes they are not as profitable as the core IT business. But, he adds: "People want to connect their different devices and use digital media such as MP3 files, more. They want to share pictures and video in a networked environment. There are a lot of opportunities for the role of the computer to expand. It is a great opportunity for us."

And he maintains that he can apply the "Dell effect", driving prices down to new levels, even in the competitive consumer electronics market. "Look at the margins of any electronics retailer and compare them to our industry five to 10 years ago. That is the Dell effect at play."

This could, if he is right, mean factories in Europe producing consumer electronics at a price lower than businesses in Asia. Supply-chain and manufacturing efficiency, rather than cheap labour, are behind the Dell effect, he says.

Achieving this means being close to markets, which suggests that Dell will maintaining its commitment to its European plant, outside Limerick in Ireland. "We deliver our product to our customers in a few days. They are configured to order and shipped within a few hours," says Mr Dell. "You have to be close to your customers to do that; you can't do it from China or Malaysia."

BIOGRAPHY

Born: 1965.

Education: University of Texas.

Career (1984): Founded Dell with $1,000 in his bedroom.

1992: Dell joins Fortune 500, making him the youngest chief executive to enter the listing.

1999: Wrote his story of the company, Direct from Dell: Strategies that Revolutionized an Industry.

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