Crafting a Winning Business Strategy and Sustainable Competitive Advantage

Case In Point: Michael Dell & Direct-From-Dell Business Model

In 1984, as a 19-year-old freshman, and going against one of the largest companies in the world, IBM, Michael Dell launched his company in his dorm room with $1,000. He had a vision that he could build computers made-to-order and sell them directly to consumers. His idea for a direct-sales business model came from observing the discontinuity in the way PCs were being sold at that time.

He saw that 4,000 PC stores sprang up instantly across the US. He saw problems with the cost structure of the supply chain to the consumer; what was $600 worth of parts was being sold for $3,000. And there was no direct relationship with the customers or no ownership of the customers.

Touting a business model that sidestepped middleman markups for lower prices, Dell eliminated the middlemen of the computer industry supply chain, the value-added resellers and retailers, by offering its own brand of assembled to order from the same quality of components used by the established players.

In 1985, the first year outside of the dorm room, Dell Computer made $33 million in sales and in the first 8 years it grew 80% or better. Following the worst years in computing industry ever, mid-1980s, and in the week after the market crash of 1987, Michael Dell raised $20 million in a private placement and a year later went public. In 1992 Dell Computer was included in the Fortune 500 roster of the world’s largest companies and by 1997 it shipped its 10-millionth computer system.

More than a “first-mover,” Dell became a “first-prover.” Ziff-Davis reported in 2000 that the “manufacturer-direct” business model became the largest single method of buying PCs with 23% of the purchases, passing consumer electronics stores which sold 19% of the PCs. By 2002, this dorm-room start-up had $35.4 billion in sales and 39,100 employees around the world.

SOURCE: Roadmap To Entrepreneurial Success