Peak performance

Turning 40 can be a tough time for anyone. It’s the moment when the old mid-life crisis comes hammering on the door and there’s no escaping the hard questions. Have you established yourself in your career? Are you going fast enough? Is this the career for you? Are you making the most of your life? What’s it all about?

Spare a thought then for Michael Dell, who no doubt faced the usual existential crisis when he hit the big two-score last month. Like so many others he probably sat down with his checklist to see whether his achievements measured up to his aims, and what it was all worth anyway.

That checklist would make interesting reading. Has he established himself in his career? Well, starting from $1,000 and his room in his university dormitory he’s built up a business that has become the clear number one in the world’s personal computer market with 18% of the market. Is he going fast enough? Well, three years ago, with revenues at $30bn, he set a goal for them to double to $60bn by 2007. In they last 12 months they reached $47.2bn, with double-digit growth being recorded in all regions. Is this the career for him? If not, the big players in some other industry are in for a very nasty shock.

The rise and rise of Dell Computing has been one of the most astonishing business stories of our times. In a market dominated by huge, heavy-hitting beasts like IBM and Hewlett-Packard, Dell has come from nowhere to dominate the global PC business, continuing to grow through the internet downturn, dramatic technological development and the best efforts of its giant competitors to squeeze it out.

But now, just as the meteoric wonderbusiness is moving into new areas in which to work its magic and give its competitors the shudders, a new threat to its core market is emerging from that most inscrutable of quarters, China. The $1.75bn acquisition last December of IBM’s PC manufacturing business by China’s Lenovo Group has created an entirely new creature in the PC market. With the reach provided by the link-up with IBM and the low cost base of its Chinese manufacturing operations, this new entity could mount a serious challenge to Dell’s dominance of the world’s PC market.

Lenovo’s chief executive and President, Yang Yuanqing, makes no bones about his company’s intentions. ‘This acquisition will form the third-largest global PC company,’ he says. ‘We will target the global consumer and enterprise market, leveraging the complementary strengths of the two companies.

‘We will bring our consumer PC products to the global market through the existing IBM global marketing, sales and distribution channels. The new Lenovo will provide the best notebooks as well as efficient and high-quality consumer and enterprise desktops. We will further improve our market position.’

No mixed messages there. Lenovo first has to clear the hurdle of a US Government inquiry into the IBM deal, to see whether it has repercussions for US national security interests, but if it does its intentions are clear: it will attack the global PC market. And that means attacking Dell.

If Michael Dell is troubled by this development, he’s not showing it. Besides blowing out all those candles on his cake and perhaps wondering like many 40-year-olds whether to give it all up to go and grow artichokes, he’s busy touring the world giving cheery, gung-ho talks on everything from Sarbanes-Oxley to the future of technology, all the time keeping in close touch with Dell’s global operations and the moods and demands of its customers. He may have relinquished the CEO’s job to Kevin Rollins last year, limiting himself to the role of chairman, but he’s still very much at the heart of the business.

Revolutionary

While a student in Austin, Texas in 1984, Michael Dell hit upon the idea that has been the key to his company’s phenomenal success. It was astonishingly simple: cut out the middleman and sell directly to customers, on demand. It might not seem particularly original, but in the IT industry it was revolutionary.

While other companies make a forecast of customer demands, build a range of products to meet that forecast and then sell from their stock, Dell never builds a computer until there’s a customer order for it. That means it carries no inventory and has no redundant stock to get rid of. It also means it can produce exactly what the customer wants, rather than having to persuade the customer to make do with something close to the specification but not quite there.

Combined with tight control over the supply chain all the way from the component manufacturer to the customer’s door - squeezing 60% of costs out of its supply chain in the last five years - this responsive, low-cost system allows Dell both to substantially undercut its competitors and earn a high degree of customer satisfaction, a rare combination in any industry. Its focus on continually shortening lead times and improving reliability produces the Holy Grail of business: pushing costs down and volumes up. And the customers love it.

This remarkably successful business model, rather than any technological wizardry, has made Dell what it is. ‘I’ve heard it said that it’s not really a technology company at all, it’s just a manufacturing company,’ says Philip Carnelley, research director at technology analysts Ovum. ‘There’s an element of truth in that. Where it really excels is in getting things to the customer in the most efficient manner possible.

‘One way of putting it is that Michael Dell is the Henry Ford of the computer age, because he hasn’t innovated in any way around the product per se, but in how it’s put together. Dell has basically looked at how things are done and found a better way to do it, and Compaq and IBM and so on have been scrambling around trying to match the efficiency of their machine.’

For a company built on stupendous growth, standing still is never likely to be an option, and with its primary market of PCs maturing, Dell has started taking on the incumbents in a range of new areas. The question now is whether the unique business model that worked so well with PCs can be transferred to these new markets.

‘There are two or three different directions Dell is pushing in,’ says Carnelley. ‘One is the associated peripherals area, big storage, printers and that sort of thing, surrounding the basic box with other bits and pieces. It’s seen how hugely successful the printing business has been for Hewlett-Packard, and Dell would very much like a piece of that pie.

‘But most interesting is that Dell is moving into services. Over the last year or so it’s been offering services, particularly to businesses, to manage their machines for them and take all of that pain away. That’s been growing really fast, and the margins on that are going to be higher than on the hardware manufacturing.

‘Managing people’s desktops is a big business in its own right. Hewlett-Packard and IBM have always done it, and Dell has been making huge inroads into that market very rapidly. Its brand name is very strong, and it’s got an extended reach now on the business as well as the consumer side.’

Substantial advantage

Alan Mac Neela, research Vice President at IT analyst Gartner, says that although Dell’s unique business model does not easily transfer to the services area, its expertise and reputation give it an substantial advantage there all the same. In other areas he believes Dell has plenty of scope to transfer its distinctive approach into significant market share.

‘The one thing Dell does very well from a product perspective is that it really engages with its customers,’ he says. ‘If I could get my car manufacturer to engage with me at that level I’d be a very happy driver. In many new areas Dell has applied its supply-chain excellence and the ability to deliver to customers exactly what it is they want from a features and functions point of view.

‘So is the Dell success story over’ Not by a long shot. There are many markets that are clearly addressable to it. And it hasn’t even touched the software market at all, which is another totally different multi-billion-dollar marketplace. There’s a lot of headroom for Dell to grow.’

But at the same time Mac Neela believes the challenge from the East could be serious. ‘Dell’s competitors have mostly been the traditional ones - IBM, HP, Toshiba, Acer. While they’ve been tough competitors, Dell has gone for their Achilles’ heel with the low-cost model. Lenovo is different because it comes from a low-cost manufacturing background. It’s early days yet, but it will be a very interesting marketplace.’

And that’s another mid-life conundrum for Michael Dell to add to his birthday checklist.

Richard Brass is a freelance columnist and feature writer.