2. Case Study of Dell: Driving for Industry Leadership in 1984, at the Age of 19, Michael Dell Founded Dell Computer with a Simple Vision and Business Concept—That Personal Computers Could Be Built to Order and Sold

2. Case Study of Dell: Driving for Industry Leadership

In 1984, at the age of 19, Michael Dell founded Dell Computer with a simple vision and business concept—that personal computers could be built to order and sold directly to customers. Michael Dell believed his approach to the PC business had two advantages: (1) bypassing distributors and retail dealers eliminated the markups of resellers and (2) building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components, and finished goods. While the company sometimes struggled during the 1986-1993 period trying to refine its strategy, build an adequate infrastructure, and establish market credibility against better-known rivals, Dell’s strategy started to click into full gear in the late 1990s. Going into 2003, Dell’s sell-direct and build-to-order business model and strategy had provided the company with the most efficient procurement, manufacturing, and distribution capabilities in the global PC industry and given Dell a substantial cost and profit margin advantage over rival PC vendors. Dell’s operating costs ran about 10 percent of revenues in 2002, compared to 21 percent of revenues at Hewlett Packard, 25 percent at Gateway, and 46 percent at Cisco Systems (considered the world’s most efficient producer of net­working equipment). Dell’s low-cost provider status was powering its drive for mar­ket leadership in a growing number of product categories.

Dell Computer was solidly entrenched as the market leader in PC sales in the U.S., with nearly a 28 percent market share in 2002, comfortably ahead of Hewlett Packard with 16.8 percent and Gateway with 5.7 percent. Dell had moved ahead of IBM into second place during 1998 and then overtaken Compaq Computer as the U.S. sales leader in the third quarter of 1999. Its market share leadership in the U.S. had widened every year since 2000. Worldwide, Dell Computer was in a neck-and-neck race with Hewlett Packard (which acquired...