Michael Dell Answers Students’ Questions

Michael Dell

By Monica Nakamine
Photos by Sarah Foote

October 18, 2002

Dell Computer’s Founder and CEO Michael Dell spoke at MIT’s Wong Auditorium on Thursday, September 26, 2002 to a packed house of Sloan, LFM, and SDM students. LFM ’03s were in the audience, back on campus for the week for Midstream Review, for which Dell’s presentation served as keynote address. LFM-SDM Operating Committee members were also in the audience. It’s estimated that more than 400 people were in attendance. View and listen to the entire presentation at MIT World.

Sponsored by the Sloan School of Management and the Leaders for Manufacturing program, Dell’s five-minute presentation was followed by an hour-long Q&A session.

"We are very pleased with the LFM program," said Dell. "It’s been a great help in our quest for operational excellence and supply chain efficiency. A lot of the things that have made Dell successful have been tremendously influenced by the graduates of the LFM program." (Dell has employed 15 LFM alumni and has consistently sponsored internships.)

Here are some highlights from the Q&A session (questions have been restated):

Q: How do you plan to differentiate your product in the future?

A: About 30 or 40 percent of our profits come from desktop computers, so our business has actually shifted quite a bit into other areas. But, interestingly enough, even in desktop computers, which most people would agree is a commodity, we actually have quite a profitable business making commodity profits because we’re the low-cost provider. And we’re happy to continue to do that as long it is about whether people will continue to buy these things. I happen to believe that they will, particularly if they want to use such things as the Internet. I don’t think the PC is going to go away. It continues to change form. Increasingly, the product we sell is a mobile machine or a wireless machine, and certainly, we’re selling a system, which means we’re selling the server, application, and the software and the storage that goes along with the whole capability. A lot of our customers are saying, "You know what? I’m buying all of these products but I don’t really want a product. I want a service. You take care of this stuff, you manage the service, you move them around, you install them around, you take them out, you refresh them. And I’m going to go and do the thing that I do best which is what I’m really supposed to be doing." It’s kind of a managed services business. So the business is definitely evolving.

Q: How did you decide to enter the printer market and what is your approach on going forward?

A: What’s the last innovation that you have seen in printers? All-in-one? Infrared? Blue Tooth? There is some innovation in printers, but if you look at the big market for them, there’s just not a whole lot of innovation. And a lot of what is billed as research and development in printers is really [a way] to protect the propriety franchises that exist in printers around propriety ink and cartridges where all the profit is.

This is a bit of a radical notion today, but let’s think 15 or 20 years from now. What if you had industry-standard cartridges in the printer market? The cost of ink and printers would go way, way down. Now, we don’t have that today, and it may be a while before that happens. [Or] it may never happen. But we think there is an opportunity to drive the cost of printing and imaging down pretty significantly. We [have] already sold, in the last year, two million printers, and it’s obviously an adjacency in the computer systems business and so that’s a market that we’re going to be entering as well. There are other markets. We entered the digital projector market. Our cost structure is simply better than our competitors. TI has this great technology called DLP. We can take TI’s technology, translate that into a projector, and deliver it to customers who already have contact with Dell on a regular basis. The same customers buy these also from Dell, by the way, because they have all of the peripherals. It’s fairly easy for us to translate that into new opportunities.

Q: How do you so rapidly and so effectively replicate your customer service across the world?

A: First thing I’ll tell you is we’re not perfect and it’s not always rapid and effective. But that’s certainly our objective, so thank you for that endorsement. [Because] we align ourselves directly with our customer, we segment our business into groups that target different kinds of customers. In the United States, we have about 14 or 15 different customer segments that serve unique, distinct customer markets. For example, we have a group that all they do is serve the higher education market…[and] think about understanding the requirements for that market in terms of product, services, capability. We have a K-12 market, we have a state and local government market, a federal market, a small business market, a global customer market, healthcare.

Another thing we have at Dell is what we call "the customer experience." We have a real focus on the customer experience, which is sort of an all-encompassing experience that goes from buying, owning, using, end of life, to service. We have a set of measurements and metrics that are common across the company, globally, so we can go into any operation around the world [and] look at and compare customer service metrics. In fact, as part of our incentive system, those are the things that drive our teams to progress. We have a "Best of Breed" process that encourages all of our businesses to achieve that same kind of success. So, for example, we have metrics called First Time Resolution…or the On Time, First Time Fix, [which] becomes a pervasive focus to the organization and part of the culture.

Q: What’s the difference between your business model and the others, and why hasn’t anyone else imitated it?

A: I would’ve expected by now that somebody would’ve copied our business model. I’m actually quite surprised that it hasn’t happened, particularly given that this has been a conversation that has gone on for at least 10 years. And our competitors have been trying for at least 10 years. If you look at the economics in terms of what is the result and difference among different computer systems business, Dell’s operating expense ratio to sales is less than 10%, whereas most of our competitors’ is more than 20%. I think what we’re coming to believe is that it’s very, very hard to make these changes. Dell is a company that, from the ground up — from the design, the manufacturing, sales, support — started with a very distinctive and different way of doing business. And it continued on that path, and it continues to refine it and improve it and make it better. Other companies are kind of trying to change and copy and revise, and that’s proven to be very difficult. I don’t know how long that’s going to go on, but I’m sure enjoying the process.

Q: What are your thoughts on Microsoft’s X-Box?

A: I’d rather see Microsoft selling X-Boxes than Sony selling more Play Stations because the X-Box is closer to something that can aid and assist Dell. In fact there are a lot of discussions and strategies about how that code base can be used to assist in the gaming market in PCs. The game console business is really a business of royalties from the games, and there’s a loss on the console themselves. So that’s a great difference from our business from the structural sense. We’re looking at gaming. We think there may be opportunities in gaming. Certainly, a lot of gamers buy a lot of high-powered PCs as opposed to consoles.

Q: With regards to Intel, it seems as though you’ve had a pretty tight relationship with them. Looking toward the future, do you see a space for AMD as a provider for chips?

A: Has Dell every sold AMD processors? ("No," the audience says.) Wrong. Yes is the answer. When did it occur? When AMD’s processors were faster than Intel’s. That hasn’t occurred in a long, long time. We’re not a subsidiary of Intel or Microsoft. We do things for the benefit of our customers and our shareholders. And if they have great ingredients that help us deliver great solutions, then fine. If they don’t, we’ll use something else. We’ve sold a lot of Linux. Microsoft doesn’t ask us to sell Linux, our customers do. If AMD has great technology, or someone else has great technology, we’ll bring that to our customers, and if that’s what they want, we’re going to provide it.

Q: What is your opinion on the HP/Compaq merger?

A: These mergers are very hard to do. It has created a lot of opportunities for us. No question about that. It’s a hard thing to combine companies and achieve success. I’m not a big fan of financial engineering or conglomerization as a strategy for growth. Our growth has been organic and internal. At Dell, we have something very special in our culture that has been created, and, as founder of the company, it’s part of my job to protect and nurture it. I think you have to be very careful when you undertake massive changes like this. There are companies that are struggling on how to deal with these…The history of that does not point to a whole lot of success. But, certainly, [HP/Compaq] are a viable and strong competitor, and we have to deal with them every day.

Q: What are your thoughts on the Chinese market?

A: We’ve never seen a country grow faster than Dell China. It’s a very big market and it’s growing very quickly. We have a business in Japan. We’re the #1 non-Japanese business in Japan, which is pretty good in Japan. If we’re successful, we’ll have passed NEC in servers by the end of the year. In fact, our business in Japan is more profitable than the U.S. China represents almost 50% of the non-Japanese part of the Asian market. Japan itself is a huge market for us and is growing quite nicely. But those are challenging markets because of local competitors and also what I would characterize as "irrational business practices," companies that are willing to sell at a loss for a long, long time – decades. My view is that over time, those companies are gradually moving away from those business practices… As that occurs, we enjoy even more success because we are the low-cost provider. But there’s plenty of good competition in those markets. Legend is a great competitor of us in China.

Q: Why hasn’t Dell invested more money in R&D?

A: Dell invests about $500 million a year in R& D, and we have received close to 800 U.S. patents since the late ’80s. Dell has the highest return on its R&D of any computer system company in the world. We spend our R&D on things that add value and get a return. After all, that’s why you’re supposed to spend money. We don’t spend our money protecting proprietary interests and try to lock our customers into things. I think there’s a real fallacy that exists in the perception that all R&D is good. The reality is that too much R&D can hurt a company very badly, and we’re seeing that now with companies that have cost structures that are way out of whack. They are trying to invent everything themselves and, as a result, they’re failing because the customer is not willing to pay for it, the customer doesn’t value it, and the customer says, "I don’t want to be locked in to those things." We spend R&D where it makes a difference and customers will value it.

Q: How will you incorporate your manufacturing strategy in entering the PDA market and do you have any plans to look at companies to possibly acquire?

A: To enter a new product category, you don’t have to acquire a company. You guys are starting to sound like investment bankers! Buy this, buy that! Buy this, buy that! Just because you have $8.6 million in cash doesn’t mean you should buy things! We have a saying in Texas, "Nobody ever went broke having too much cash." The PDA market is still in a fairly developing stage. There’s lots of different products out there. We’re starting to believe that Pocket PCs are going to be a big part of the market. That doesn’t mean that all customers are going to want a Pocket PC. There’s an opportunity there, and we’re looking at that. But it’s not like it’s that complicated that you have to go and buy a company to get into the market.