From: reisert@mast.enet.dec.com (Alpha Personal Systems -- DTN 223-5747 -- MLO3-6/B8  17-Dec-1992 1024)
Subject: Why Dell is a Survivor
Date: Thu, 17 Dec 92 07:22:30 PST
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    [Forbes October 12th 1992]

    Dell more than doubled its revenues in its Aug. 2 quarter from the 
    equivalent period last year, closing at close to $2 billion.

    Far from ignoring Dell, its competitors are paying it the ultimate form 
    of flattery by adopting Dell's direct-to-consumer marketing, bypassing 
    retailers. In the face of this stepped-up competition, Dell's (800)
    lines are ringing off the hooks. Calls to Dell's order line have swollen
    by about 40% since a June announcement that Dell was introducing an even
    cheaper line of computers. 

    Dell's factory is running overtime, cranking out nearly 3,000 machines 
    a day to keep up with orders.

    Dell, however, is going to have to work a little harder for its money. 
    Its after tax net margin dropped from 6% in the fiscal year that ended
    last February to a shade under 5% for the most recent quarter, with
    revenues continuing to grow faster than net profit.

    Dell's selling and administrative expenses eat up just 14 cents of its 
    sales dollar, against 24 cents at Apple and 30 cents at IBM. Even after 
    its massive layoffs of last year, Compaq's marketing overhead costs are
    still taking 20 cents out of the sales dollar.

    Economies of scale work in favor of the Dell distribution system. To 
    the extent that its sells directly to consumers rather than to
    retailers, Dell has merely to add additional telephone sales people in
    Austin as demand increases. That's how Dell took selling and overhead
    that were 20% of sales last year down to 14% in the last quarter.

    Most people have assumed that Dell sold on price alone. It did in the 
    beginning, but no longer. Those who attributed Dell's success to
    price-cutting have missed an important point. Although it sells almost
    entirely by telephone, Dell has managed to maintain a level of customer
    satisfaction at least equal to that of competitors who sell through
    stores. "We're not the low cost supplier," Michael Dell says. "Compaq
    and IBM are assuming that price is the problem. The problem is that the
    dealer channel has fundamentally failed at servicing customers." 

    It helps to understand Dell if you realize that Michael Dell is not so 
    much a computer entrepreneur as he is a marketing pioneer. His
    forerunners are not Steve Jobs and Bill Gates but Ray Kroc and Charles
    Schwab.

    Dell took the fears and uncertainties out of mail-order computers. Dell
    has astutely positioned his company at a middle point on the 
    cost-and-quality curve.

    By the mid-1980s Michael Dell realized that while selling on price 
    might be a good way of breaking into a market, it was no way to build a 
    future. Someone else could cut prices a percentage point lower. Dell 
    needed a different edge - reliability. So he offered such amentities as 
    unlimited calls to a toll-free technical support line, a 30 day
    moneyback guarantee and next-day, on-site service through independent
    contractors, free for the first year of ownership.

    Compaq was the first to hit it big with first-class IBM clones. But 
    soon others were putting together clones that would match the IBM PC's 
    performance, and suddenly there was extreme ease of entry into what had 
    formerly been a highly technological business. Dell correctly saw the
    only way to get an edge in what was fast becoming a commodity business
    was through marketing innovations.

    Most retailers thought customers would pay a substantial retail markup 
    in return for being able to go to a store and feel and touch a machine. 
    Some did and still do. But fewer of them than the establishment
    expected, especially not when a lot of the buyers are old-time users
    coming back for their second or third machine.

    The retailers were stunned when they saw how quickly the Texas upstart 
    could deliver customized products - in substantially less time than it 
    would take them to place the order and wait for the manufacturer to ship 
    it.

    Suddenly, everyone realized what he had wasn't just a product, it was a 
    process.

    While IBM, DEC and the others copy an outfit that they once considered 
    little more than a nuisance, Dell is pushing its telemarketing strategy
    a step further. This fall Dell should start sending out DellWare, a
    catalog that will offer PC games, software packages like Lotus 1-2-3 and
    computer peripherals like modems, printers and disk drives. Dell hopes
    to become the mail-order equivalent of the computer superstore and is in
    the process of signing up scores of suppliers. "We intend to put the
    reseller out of business," Michael Dell says.

    More important, as Dell deeps potential customers out of computer 
    stores altogether, the catalog will marry them more to Dell. Already
    Apple Computer has announced it will be starting a similar catalog.

    The Dell factory has changed somewhat since the days when assembly was 
    done by three men, each sitting at a 6-foot-long table. Today in the 
    Austin factory an order for a half dozen machines mingles with one for
    200 traveling down the assembly lines. But it remains virtually a
    screwdriver operation, with little automation and an almost job-shop
    approach to manufacturing. This both keeps capital costs low and permits
    great flexibility. The disk drives might be on the top or the bottom of
    the base or be absent altogether, if that's what the customer wants.

    Because it buys most of its components, Dell supports its near $2 
    billion in sales revenues with just $55 million in land, property, plant 
    and equipment. That's about $33 of sales for every dollar of fixed
    assets. The comparable figure for IBM is $2. Even WalMart gets only $7
    of retail revenue for every dollar of fixed assets. Dell uses its
    capital chiefly to finance inventories, which it currently turns over at
    a rate of more than eight times a year. Return on equity like that of
    IBM in its heyday - an annualized 29% in Dell's latest Quarter.
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