What You Don't Know About Dell
A look at the management secrets of the best-run company in technology Nov 3 , 2003
When Dell
CEO Michael S. Dell and President Kevin B. Rollins met privately in the fall of
2001, they felt confident that the company was recovering from the global crash
in PC sales. Their own personal performance, however,
was another matter. Internal interviews revealed that subordinates thought
Dell, 38, was impersonal and emotionally detached, while Rollins, 50, was seen
as autocratic and antagonistic. Few felt strong loyalty to the company's
leaders. Worse, the discontent was spreading: A survey taken over the summer,
following the company's first-ever mass layoffs, found that half of Dell Inc.'s
(DELL
) employees would leave if they got the chance.
What happened next says much about why Dell is the best-managed company in
technology. At other industry giants, the CEO and his chief sidekick might have
shrugged off the criticism or let the issue slide. Not at Dell. Fearing an
exodus of talent, the two execs focused on the gripes. Within a week, Dell
faced his top 20 managers and offered a frank self-critique, acknowledging that
he is hugely shy and that it sometimes made him seem aloof and unapproachable.
He vowed to forge tighter bonds with his team. Some in the room were shocked.
They knew personality tests given to key execs had repeatedly shown Dell to be
an "off-the-charts introvert," and such an admission from him had to
have been painful. "It was powerful stuff," says Brian Wood, the head
of public-sector sales for the
Michael Dell didn't stop there. Days later, they began showing a videotape of
his talk to every manager in the company -- several thousand people. Then Dell
and Rollins adopted desktop props to help them do what
didn't come naturally. A plastic bulldozer cautioned Dell not to ram through
ideas without including others, and a Curious George doll encouraged Rollins to
listen to his team before making up his mind.
WALKING DATABASES
To some, the way Michael Dell handled sagging morale
might seem like another tale of feel-good management. But to those inside the
company, it epitomizes how this Round Rock (
As it turns out, it's how Michael Dell manages the company that has elevated it
far above its sell-direct business model. What's Dell's secret? At its heart is
his belief that the status quo is never good enough, even if it means painful
changes for the man with his name on the door. When success is achieved, it's
greeted with five seconds of praise followed by five hours of postmortem on
what could have been done better. Says Michael Dell: "Celebrate for a
nanosecond. Then move on." After the outfit opened its first Asian
factory, in
Just as crucial is Michael Dell's belief that once a problem is uncovered, it
should be dealt with quickly and directly, without excuses. "There's no
'The dog ate my homework' here," says Dell. No, indeedy. After Randall D. Groves, then head of the
server business, delivered 16% higher sales last year, he was demoted. Never
mind that none of its rivals came close to that. It could have been better, say
two former Dell executives.
Above all, Michael Dell expects everyone to watch each dime -- and turn it into
at least a quarter. Unlike most tech bosses, Dell believes every product should
be profitable from Day One. To ensure that, he expects his managers to be
walking databases, able to cough up information on everything from top-line
growth to the average number of times a part has to be replaced in the first 30
days after a computer is sold.
But there's one number he cares about most: operating margin. To Dell, it's not
enough to rack up profits or grow fast. Execs must do both to maximize
long-term profitability. That means products need to be priced low enough to
induce shoppers to buy, but not so low that they cut unnecessarily into
profits. When Dell's top managers in
It's this combination -- reaching for the heights of perfection while burrowing
down into every last data point -- that no rival has
been able to imitate. "It's like watching Michael Jordan stuff the
basketball," says Merrill Lynch & Co. technology strategist Steven Milunovich. "I see it. I understand it. But I can't do
it."
How did this Mike come by his management philosophy? It started 19 years ago,
when he was ditching classes to sell homemade PCs out of his
It's not that Michael Dell leads by force of personality. He's blessed with
neither the tough-guy charisma of Jack Welch nor the folksy charm of the late
Sam Walton. Once, after hearing about the exploits of flamboyant Oracle Corp. (ORCL
) CEO Lawrence J. Ellison, he held up a piece of paper and deadpanned to an
aide: "See this? It's vanilla and square, and so am I." This egoless
demeanor permeates the company. Everyone is expected to sacrifice their own
interests for the good of the business, and no one gets to be a star. If
Michael Dell is willing to modify the personality traits he was born with,
other top execs are expected to be just as self-sacrificing. Frequently, Dell pairs execs to run an important business, an approach called
"two-in-a-box." That way, they work together, checking each others'
weaknesses and sharing the blame when something goes wrong. One such executive
calls Dell's senior leadership "the no-name management team."
All this has kept Dell on track as rivals have gone off the rails. Since 2000,
the company has been adding market share at a faster pace than at any time in
its history -- nearly three percentage points in 2002. A renewed effort to
control costs sliced overhead expenses to just 9.6% of revenue in the most
recent quarter and boosted productivity to nearly $1 million in revenue per
employee. That's three times the revenue per employee at IBM and almost twice
Hewlett-Packard Co.'s rate.
Still, for the restless Michael Dell, that's not nearly enough. He wants to
make sure the company he has spent half his life building can endure after he's
gone. So he and Rollins have sketched out an ambitious financial target: $60
billion in revenues by 2006. That's twice what the company did in 2001 and
enough to put it in league with the largest, most powerful companies in the
world. Getting there will require the same kind of success that the company
achieved in PCs -- but in altogether new markets. Already, Michael Dell is
moving the company into printers, networking, handheld computers, and tech
services. His latest foray: Dell is entering the cutthroat $95 billion
consumer-electronics market with a portable digital-music player, an online
music store, and a flat-panel television set slated to go on sale Oct. 28.
Can Dell graduate from PC prodigy to corporate icon? Driving for nonstop growth
will require grooming a new generation of leaders, which Rollins concedes is a
major challenge given the company's pressure-cooker atmosphere. In the 1990s,
after seasoned execs recruited from titans such as Intel and IBM quickly jumped
ship, Dell learned that outsiders don't adapt easily to its demanding culture.
And unlike in the past, Dell won't be able to count on stock options to make up
for the discomfort. Some 32% of its outstanding options are priced above the
current share price of $35, and the company has sliced grants to about 40
million shares this year, one-third the 2001 level. Little wonder that so far,
Dell has achieved only a modest improvement in morale, according to its
internal surveys. "They need to work a lot on appreciating people,"
says Kate Ludeman, an executive coach who has worked
with Dell since 1995.
"ONE-TRICK PONY"
Dell also faces an innovation dilemma. Its penny-pinching ways leave little
room for investments in product development and future technologies, especially
compared with rivals. Even in the midst of the recession, IBM spent $4.75
billion, or 5.9% of its revenues, on research and development in 2002, while HP
ponied up $3.3 billion, or 5.8% of revenues. And Dell? Just a paltry $455 million,
or 1.3%. Rivals say that handicaps Dell's ability to move much beyond PCs,
particularly in such promising markets as digital imaging and utility
computing. "Dell is a great company, but they are a one-trick pony,"
says HP CEO Carleton S. Fiorina. What's more, Dell
has shown little patience for the costs of entering new markets, killing off
products -- like its high-end server -- when they didn't produce quick profits,
rather than staying committed to a long-term investment. "They're the best
in the world at what they do," says IBM server chief William M. Zeitler. "The question is,
will they be best at the Next Big Thing?"
For Michael Dell, inventing the Next Big Thing is not the goal. His mission is
to build the Current Big Thing better than anyone else. He doesn't plan on
becoming IBM or HP. Rather, he wants to focus on his
strength as a superefficient manufacturer and
distributor. That's why Dell continues to hone the efficiency of its
operations. The company has won 550 business-process patents, for everything
from a method of using wireless networks in factories to a configuration of
manufacturing stations that's four times as productive as a standard assembly
line. "They're inventing business processes. It's an asset that Dell has
that its competitors don't," says Erik Brynjolfsson,
director of the Center for eBusiness at the
Massachusetts Institute of Technology's Sloan School of Management.
Dell's expansion strategy is carefully calibrated to capitalize on that asset.
The game plan is to move into commodity markets -- with standardized technology
that's widely available -- where Dell can apply its skills in discipline,
speed, and efficiency. Then Dell can drop prices faster than any other company
and prompt demand to soar. In markets that Dell thinks are becoming
commoditized but still require R&D, the company is taking on partners to
get in the door. In the printer market, for example, Dell is slapping its own
brand on products from Lexmark International Inc. (LXK
) And in storage, Dell has paired up with EMC Corp. (EMC
) to sell co-branded storage machines. Dell plans to take over manufacturing in
segments of those markets as they become commoditized. It recently took on
low-end storage production from EMC, cutting its cost of goods 25%.
Dell's track record suggests the CEO will meet his $60 billion revenue goal by
2006. Already, Dell has grabbed large chunks of the markets for inexpensive
servers and data-storage gear. After just two quarters, its first handheld
computer has captured 37% of the
What should help Dell as it plunges into so many new markets is the founder's
level-headed realism. A student of business history, he has paid close
attention to how some of tech's legendary figures lost their way by refusing to
admit mistakes. He cites Digital Equipment Corp.'s Ken Olsen as one who stuck
with his strategy until the market passed him by and hints that Sun
Microsystems Inc.'s (SUNW ) Scott G. McNealy could be next.
Dell, on the other hand, has reversed course so fast he's lucky he didn't get
whiplash. In 2001, he scrapped a plan to enter the mobile-phone market six
months after hiring a top exec from Motorola Inc. to head it up. He decided the
prospects weren't bright enough to offset the costs of entry. The next year,
Dell wrote off its only major acquisition, a storage-technology company bought
in 1999 for $340 million. Dell backed out of the high-end storage business
because it decided its technology wasn't ready for market. "It's amazing
how a guy who was so young when he founded the company could evolve as he
has," says Edward J. Zander, former president of
Sun Microsystems. "Guys that have been in the saddle for 15 and 20 years
tend to get too religious. He's the exception to the rule."
Michael Dell, in fact, has one of the longest tenures of any founder who
remains CEO. At 19 years and counting, he's second in the tech industry only to
Oracle's Ellison. "This sounds strange coming from me," says William
H. Gates III, who was CEO of Microsoft Corp. for 25 years before giving it up
to be chairman and chief software architect, "but very few business
leaders go from the early stage of extremely hands-on stuff to have a
leadership style and management process that works for a company that's an
absolutely huge and superimportant company."
One way Dell has done it is through his power-sharing arrangement with Rollins,
à la his "two-in-a-box" philosophy. Brought
on as a consultant in 1993 to help plot the company's first long-range plan,
Rollins helped it recover from a series of miscues, including the bungled
launch of its notebook business and a disastrous go at trading currencies.
Three years later, Dell hired Rollins away from Bain & Co. to run North
American sales.
Now, Rollins is the day-to-day general. He and Dell sit in adjoining offices
separated by only a glass wall. During a pivotal meeting in the fall of 2001,
Dell proposed they agree not to make a major move without the other's approval.
Working in tandem helps avoid mistakes that the more entrepreneurial Dell or
the more rigid Rollins might make alone. Says Dell: "This company is much stronger when the two of us are doing it
together." And there's no question that Rollins is the successor. "If
I get hit by a truck, he's the CEO. Everyone knows that."
THE GAUNTLET
Not that the current CEO is letting up. He maintains pinpoint control
over the company's vast operations by constantly monitoring sales information,
production data, and his competitors' activities. He keeps a BlackBerry strapped to his hip at all times. In the office,
he reserves an hour in the morning and one each afternoon to do nothing but
read and respond to e-mail, according to one former executive. "Michael
can be a visionary, and he can tell you how many units were shipped from
Dell's penchant for tracking every last detail can land him in hot water. On
Oct. 10, during the trial of former Credit Suisse First Boston (CSR
) tech banker Frank P. Quattrone for allegedly
obstructing an investigation into the bank's handling of hot initial public
offerings, prosecutors revealed e-mails between Dell and Quattrone.
In
Rollins has the same attention to detail as Michael Dell. He is overseeing a
Six Sigma transformation of everything from manufacturing to marketing that is
expected to help cut expenses $1.5 billion this year. The emphasis is on small
surgical strikes on defects and waste, not massive restructurings. Consider a
Six Sigma meeting one balmy July afternoon. Rollins listened to John Holland, a
technician in Dell's server factory, describe how his team replaced the colored
paper it used to print out parts lists with plain white paper, saving $23,000. "Where
else do you get a supervisor making $40,000 a year presenting to the president
of a $40 billion company?" says Americas Operations Vice-President Dick
Hunter,
The discipline in Michael Dell's management style is most apparent in how the
company approaches new markets. Take Dell's plunge into the $50 billion printer
business. Beginning in 2001, a team of Dell strategists spent more than a year
researching the market. Dell only started serious planning after finding that
nearly two-thirds of its customers said they would buy a Dell printer if they
could get the same kind of service they got when they bought a PC or server. In
the summer of 2002, Vice-President Tim Peters, a veteran of Dell's handheld
launch, was tapped to lead the effort. But like any exec planning to put out a
new product, he had to face the gauntlet of Dell and Rollins. After thinking up
a strategy, he had to sit by while it was picked apart.
Nothing was left to chance. Dell prodded Peters to think about product features
and the buying experience, while Rollins pushed him to keep costs low without
sacrificing quality. Both bosses wanted to make sure the timing was right. That
required intense discussions about how standardized printer technologies were
and the state of the supply chain that Dell would use. One key challenge: ink.
Customers typically buy replacement cartridges at a nearby retailer. It didn't
seem likely that they would wait for days for an Internet order from Dell to
arrive.
The toughest task in any product launch is the math. At Dell, a new line of
PCs, which is good for $2 billion to $3 billion in annual revenue, costs
roughly $10 million to launch. Any new idea must have a comparable return says
G. Carl Everett, a Dell senior vice-president who retired in 2001, and turn a profit from the get-go. That's what Peters had to
promise in printers. The rare exceptions occur only when Dell senses an
opportunity that's critical to the company's future. Dell's server business,
for instance, took 18 months to reach profitability, says former Vice-President
Michael D. Lambert.
In the printer business, it took seven months for Peters to work everything
out. The products debuted in March and were profitable immediately. Peters'
proposed solution to the ink riddle: Every Dell printer comes loaded with
software directing users to Dell.com, where they can order a new cartridge and
have it delivered the next day. Still, Michael Dell never let up: The night
before the launch, he sat up until
That flick may turn out to have more than therapeutic value, considering that
rival HP is determined to wipe out Dell's printer ambi-
tions. HP's strategy is to
leave Dell in the dust with a burst of innovation. It spends $1 billion a year
on printer research -- more than twice Dell's entire R&D budget. HP is
using that money to develop products like high-end photo ink, which will last
73 years, nearly 10 times as long as what Dell offers. "Dell is going to
hit a wall," says Jeff Clarke, HP's executive
vice-president for global operations. "We view them as low-tech and
low-cost. They're the Kmart of the industry." And some experts say Dell
won't threaten HP's 60% market share anytime soon.
Gartner Inc. estimates that Dell claimed less than 1% of the printer market in
the second quarter, mostly at the low end of the business.
ATTACKING FROM BELOW
If past experience is any guide, Dell may struggle as
it tries to move upmarket. With its bare-bones
R&D budget, it had to kill off high-end servers that go head-to-head with
fancy gear from Sun, saying the soft demand didn't merit its attention. And
after two and a half years selling networking gear, Dell has failed to deliver
products powerful enough to threaten Cisco Systems Inc.'s (CSCO
) dominant market share. Yet Dell is betting that as technology improves, the
low-end products it sells so deftly will become more than good enough for most
customers, leaving rivals scrambling to find their next high-end innovation.
"The history of the industry is [that] the attack from below works,"
says Merrill Lynch's Milunovich.
Indeed, Dell has had no trouble gobbling up sales as markets mature. In
storage, its sales now account for 10% of EMC's
revenue, some $600 million annually. In the low-margin home-PC market, which
Dell long avoided, unit sales have grown an average of 46% in the past four
quarters.
Michael Dell certainly would take exception to HP's
jabs about his company being the Kmart of tech. But there are some striking
similarities between Dell and another giant retailer: Wal-Mart. Like the
behemoth from
By Andrew
Park in Round Rock,
Business Week Nov 3, 2003