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CEO OF THE YEAR 2001

In 1984, a 17-year-old freshman dropped out of college to build a startup biz – and turned PC retail upside down. Seventeen years later he’s still surprising us.

Nothing about Michael Dell so much as whispers tough. Soft-spoken and affable, he comes across as more Mr. Nice Guy than ruler of the cutthroat PC hawking business. But don’t let that boy-next-door grin fool you, the 36-year-old CEO of Dell Computers can do ruthless.

If a track record of edging out competition and racking up annual sales increases as high as 80 percent doesn’t prove the point, just look at the bloodletting his latest strategy-a full out price war announced in January-has inflicted on rivals in the sluggish PC market. Pressing its advantage as the lowest-cost vendor, Dell opted to take a margin hit to build market share. The move successfully catapulted the Round Rock, TX-based company past Compaq to snag the No. 1 slot in worldwide PC sales-but the aftermath has been gruesome.

Compaq, IBM, Gateway, and Hewlett-Packard among others have since had to grapple with a lose-lose dilemma: concede market share to Dell or lower prices at the expense of already-flagging profitability. Even Dell hasn’t come out of its own onslaught unscathed. The company recently announced plans to lay off 4,700-plus employees and posted flat first quarter earnings, causing critics to question the share-grabbing move. “A lot of people are scratching their heads, saying they don’t know why Dell is doing what they’re doing,” says Roger Kay, director of PC hardware at research firm International Data Corp (IDC). “Starting a price war hurts everyone else, but it doesn’t help them much. They can’t hope to come out a monopoly.”

But Dell may have just enough clout to narrow the field. “There’s a musical chairs game going on and one of the chairs has Michael Dell’s name on it,” says Charles Neff, a senior managing director at Bear Stearns. “Dell has the best balance sheet and the best cost position in an industry about to go through a consolidation period. Why give your competitors oxygen if you don’t need to?”

Clearly, driving troubled Gateway out of PC sales or into the arms of a buyer is one potential coup. Prompting IBM to pull out of the desktop PC business would be an even bigger win for Dell’s CEO, whose nice guy reputation off the field doesn’t preclude a zest for playing hardball on it. “Michael is a very competitive guy,” says former Dell vice chairman Mort Topfer, who has worked with Dell since 1994 and now serves as counselor to the CEO. “Personally he’s very warm and approachable, but those are two separate things. The drive for market share gains and competitive pricing is Michael-driven, not driven by other people.”

“Because he’s so soft-spoken, you might think he hasn’t got a lot of competitive juice, but he has a very competitive instinct,” adds Kevin Rollins, Dell’s co-president and COO. “When we win, it’s high fives and excitement all around.”

But perhaps more telling is Dell’s reaction when the company falters. The success side of the Dell story is well known. In a twist on the quintessential entrepreneurial success tale, Michael Dell morphed a good idea into a start-up venture while the rest of the freshman class at the University of Texas was sleeping late and doing the frat party circuit. He quit school and built Dell into a $32 billion business by relentlessly pursuing a direct sales model with supply chain efficiencies (see sidebar, page 34). As Intel Chairman Andy Grove notes, “Michael Dell is one of only a few people who have seen through the evolution of their company-from a dorm room start up to a multi-billion dollar enterprise. Michael presided over that process every step of the way, showing a dynamic range of management capabilities that is exceedingly rare.”

Nestled among the usual suspects-essential capabilities like financial acumen, market savvy, strategic vision, and raw intelligence-are a few hallmark Dell traits rarely found in the ranks of founder CEOs. And it’s these that have enabled his company to skirt-or climb out of-the same pitfalls that continue to plague its adversaries.

“A lot of entrepreneurs are megalomaniacs; they think they can do everything themselves,” says Rollins. “Michael doesn’t have an ego that’s exploding all the time. He was willing to admit that he didn’t know how to do certain things and found people who could.” Rollins, a former Bain & Co. partner, would know; he’s one of Dell’s experienced finds. Together he and co-President and co-COO James Vanderslice, recently recruited from IBM as a replacement for soon-to-retire Mort Topfer, share the CEO office with Dell. Dell entrusts the two to oversee the company’s day-to-day operations-freeing him to focus on strategic direction.

“I don’t know of anyone else who has built a multibillion dollar company who has done that,” says Rollins. “Gates kind of did, but the rest either lost the company or didn’t do so well. He’s hung in there because of that capability.”

Ironically, that ability to call in experienced corporate talent, coupled with Dell’s own lack of corporate experience, has imbued his company with a unique competence-the ability to fail well. When the company hit its first roadblock (a net income decline in 1993 of more than $100 million), Dell called Bain for counsel, prompting a flight to Austin by then-consultant Kevin Rollins. “Michael said, ��I want you to tell me what’s wrong with my company, and fix it at the same time,’ ” recounts Rollins. “I told him that we generally diagnose the problems first, then afterward figure out a solution and then go and implement it. He said, ��No, do those concurrently.’ So we did, and that started Dell Time, where a quarter is a year in most people’s lives.”

Picking a Winner – The Dell Difference

Every year, choosing a standout CEO from a field crowded with market innovators, fiscal performers, and managerial wizards seems to get tougher. All eight CEO of the Year finalists made the grade in terms of CE‘s selection criteria, which suggest that the best CEOs go beyond excelling at traditional measures-outstanding and sustained financial performance, managerial excellence, and leadership vision-to demonstrate more elusive skills that are wider in scale.

In comparing the finalists, judges look at external benchmarks, but also consider capabilities like the ability to inspire loyalty and to innovate and adapt to change, both skills that enable a CEO to not only help his or her firm excel, but to sustain that performance.

CEO of the Year Michael Dell evidenced all the above. “It was a very tough selection,” says Bob Nardelli, CEO of Home Depot. “But Michael stood out as a formidable force in the industry-a real game-changer who had demonstrated a level of innovation and creativity and had a proven track record of predictable and sustainable performance.”

His entrepreneurial verve also won respect. “Michael built an extraordinarily successful business from scratch,” adds Wells Fargo CEO Dick Kovacevich, “that has thrived through massive changes in technology, distribution, and competitive threats.”

“Michael has single-handedly changed our notions of manufacturing and inventory control,” agreed James Copeland, CEO of Deloitte Touche Tohmatsu, “while leading a fledgling company to a position of world leadership.”

Reputation, both in and out of the boardroom, also factored heavily. “Not only is he smart and runs a good business, but he’s a good person, which exemplifies what a CEO should be,” says Autodesk CEO Carol Bartz. “I’ve seen him with high school seniors surrounding him and he always gives them time and answers their questions with a smile. There isn’t a bone in his body that yells ego.”

While shareholder value played a significant part, agrees Nardelli, “Michael got tremendous marks in giving back to the community, to the employees-and conveying his values not only in his company but across the industry.”

-J.P.

 
Another wrong move-Dell’s foray into retail stores via chains like Staples and CompUSA-was deep-sixed with similar expediency. “We were losing a ton of money and our P&Ls showed that one of the places was our retail business,” says Rollins. “Our analysis said that not only was the business itself bad, but even if we did everything else right it would still be bad.”

There was a slight hitch. At the time, retail accounted for a hefty 10 percent of the company’s sales and it was the fastest-growing new arena in the computer space. Abandoning it would hurt. But, as evidenced by today’s price war, Dell understands short-term pain for long-term gain. “Most companies would have pussyfooted around and said, okay, let’s get out over the next two years,” Rollins says. “We presented the analysis to the executive team and in 10 minutes they said, we are getting out and we are getting out tomorrow. The market looked at that and thought we were nuts. But it worked out just fine.”

Redefining time and rules-along with PC distribution systems-has become a Dell trademark. “Michael has never been at a company other than Dell so he doesn’t know corporate politics and bureaucracy,” points out Rollins, who credits that same corporate innocence in part for the open-door policy that’s become an integral part of the company’s culture. “He doesn’t think anything of talking to the most junior person or the most senior person and listening to everyone’s opinion. So there’s a very open culture here where anybody can send e-mails to anybody on the executive team anytime they want.”

In fact, Dell makes a point of making himself accessible, holding Town Hall meetings with employees during the frequent plant and office visits he makes around the world, as well as monthly “brown bag” lunches with groups of employees randomly selected by human resources. In the face of the company’s recent rash of layoffs-its first ever-and its current stock price-languishing at $25.90 from a 52-week high of $54.67-those forums have taken on greater import.

“Any time you have rapid change, whether it’s positive or negative or in between,” says Dell, “people just want to know what’s going on. What are we doing? Why are we doing it? And what are we going to do next?”

Good question. Topping the current agenda is a move to leverage Dell’s strength in PC sales into the server, storage system, and Internet services businesses. While critics suggest Dell neglected these higher margin sectors and is now playing catch up, the company counters that it’s merely been biding its time. “The company’s latest articulation of its model is that they bring operational excellence to a business just as it’s commoditizing,” says Roger Kay. “Their skill comes when there is an industry standard that they can knock off and deliver better than anyone else. They come in not necessarily late but not first, grow faster than the early entrants, and eventually take over.”

That’s a polite way of saying that Dell is more follower than market innovator, a philosophy that can perhaps be traced back to its business-minded CEO. Unlike founding tech CEOs like Jobs and Gates, technologists who fell into entrepreneurial ventures, Dell started out first and foremost looking for a commercial opportunity. “I was sort of looking for a business, I didn’t really know exactly what the business would be,” recalls Dell, who launched his first successful venture, a stamp auction, at age 12. “What I saw was a real opportunity in the way computers were being sold.”

That entrepreneurial instinct may account for his ability to make tough calls when profits are at stake. Where a CEO like Jobs might cling fervently to a flawed product-witness the infamous Cube-Dell will do the math and pull the plug. “Companies tend to hold onto things and pour good money after bad,” says Kay. “They say, ��It’s core to our business; we need to have it.’ Dell has a tendency to correct and learn from mistakes.”

Todd Kort, a principal analyst at IT research group Gartner Dataquest, agrees, citing the company’s aborted WebPC, Dell’s uncharacteristic effort to join the early race to develop a viable, low price Web appliance. Dell was among the first to abandon the much ballyhooed market sector, which never got off the ground. “They haven’t stumbled often, but when they have, as with both the retail situation years ago and the Web terminal last spring, they quickly realize it,” he says. “They don’t keep pouring money down a rat hole.”

Such decisions, simple in hindsight, are gut-wrenching in the moment. “I try to take the emotion out of decisions and just look at the facts and be rational about things,” says Dell, reflecting on a dreary chapter in the company’s history when it had to withdraw from the fast-growing notebook computer market in 1993. “It sounds easy looking back because it was clearly the right decision, but it was trying for us. If you got wrapped up in the emotion of, ��Oh my God, what are we going to do if we don’t have notebooks?’ you might have come to a different decision.”

It’s that dispassionate side of Dell-the CEO as pragmatic businessman-that has his competitors fretting. Ceding the desktop PC market, for most a break-even prospect at best, to Dell wouldn’t be so bad. But as soon as Dell has its PCs on the desks of corporate accounts, it’s sure to target higher margin arenas. “It’s a scary proposition for IBM, H-P, and Compaq because they see someone so efficient and calculating coming after their business,” says Kort. “Once he gets Dell’s foot in the door and understands a customer’s needs, it becomes a much easier proposition to take over the entire account-services, storage, as well as supply 100 percent of its PCs rather than 30 percent.”

It’s a strategy Dell’s CEO isn’t shy about evincing. “Our priorities today are very much around servers and storage, where we see incredible opportunity to gain share,” he asserts. “Compaq has already lost server leadership in the U.S. and we’re absolutely determined to win it worldwide.”

But coming to the party late has left Dell with some catching up to do. Despite logging sales growth of 37.5 percent, Dell remained No. 5 in worldwide server sales in 2000, according to IDC, with revenue of $3.3 billion vs. market leader IBM’s $13.6 billion. Similarly, a 31 percent boost in storage systems sales in 2000 still left Dell a distant No. 6 in the category, with worldwide sales of $1.07 billion. “They’re playing at the low end in both storage and servers,” notes Kort, “but they’ve made a lot of progress coming out of nowhere.”

Gaining ground in overseas markets may well prove an even bigger hurdle. While the company has made significant inroads in select countries, including Canada, Sweden, the UK, and Ireland, it’s struggled for share in markets like Germany, Italy, and Japan.

Some blame a cultural dissonance that’s endemic to Dell. “There’s tremendous resentment of Yankee imperialism-and the Texas cowboys with their particular swagger have a tone that exemplifies that-around the world,” says Kay. “They have a visceral negative reaction to it.”

Another-and more distressing-view is that Dell’s direct sales model, the driving force behind its U.S. success, may not play overseas. “Europe is relatively socialist in its viewpoint and cutting out the middleman-well, the indirect model allows Uncle Luigi to make money,” Kay adds. “In places like Italy and Spain, I think they’re working against a cultural thing.”

Tell that to Dell, and you get a bemused chuckle, and semi-veiled words of warning. “I find it a little amazing that people are still questioning whether it works or not,” he says, with a flash of that winning grin. “But I’m glad that they do. I hope our competitors keep believing that.”

A Look Behind the Curtain

The likes of GM, Procter & Gamble, and Ford Motor have all flocked to Round Rock, TX, in search of the factory-dependent firm’s version of Mecca-better known as the Dell Direct method. And who can blame them? The prospect of cutting inventory to five days and building a profitable e-commerce business is a powerful draw.

It’s also not something Dell did overnight-as anyone who’s toured a Dell factory would quickly discover. First you’ll spy a fleet of supplier trucks, stocked with every component necessary for a custom assembly, backed up to the facility’s loading dock 24-7. Then you’ll hear the soft whir of a positive force ventilation scheme that ensures dust doesn’t infiltrate the factory. Then you’ll begin to understand.

“Dell basically tells its suppliers, ��We require you to keep your trucks loaded with components on pallets ready to go backed up to our factory,’” says IDC’s Roger Kay. “We won’t take title to your components until they are on our factory floor.”

To ensure ample supplies, when a truck begins to run low, the supplier is expected to have another idling nearby. “They don’t own any front-end inventory,” says Kay. “It’s the same thing at the back end. They ship it, generate an invoice, and technically the customer owns it at that point.”

A 1996 shift to e-commerce sales enabled Dell to parlay this inventory management prowess into an even more formidable information management capability. With half of the company’s total business now coming via the Internet, Dell is able to keep close tabs on who is buying what when, and tailor its marketing efforts accordingly.

“They allocate their client retention expenditure to the value of the customer,” says Kay. “Someone who buys one PC rates a tickler that spits out a catalog mailing after three years, which is when they might think of getting a new computer, and you escalate from there. For the Navy Marine Corp, which has 360,000 units, you have two Dell guys living on site in Hawaii.”

Sound good? Well, sure, but the devil is in the details. “You look at it and say, ��What’s behind the curtain, is it a little man or is there actually a wizard of Oz?’” says Kay. “Michael Dell likes to give the impression that there’s a wizard of Oz. But Dell is a really a great edifice built of many little bricks-it’s not magic.”

-J.P.

Downturn Debate

After years of phenomenal growth, the tech sector is in a slowdown. How long can we expect it to last?
When people see these patterns they tend to extrapolate. It’s going up, therefore it will always go up. It’s going down, therefore it will always go down. It doesn’t really work that way. The replacement cycle tends to be three years for PCs, and a compelling set of technologies and features also motivates replacements. In the second quarter of 1999, there was a real peak in buying in anticipation of Y2K, so a lot of machines will turn three come 2002, which aligns nicely with Microsoft’s introduction of Windows XP later this year. All together that makes for a pretty powerful replacement cycle.

Dell recently announced plans to lay off more than 4,700 employees. How are you coping with that?
It’s hard to make decisions like that, but ultimately we have to think about the remaining employees and the health of the company. We had anticipated dramatic growth this year, and it hasn’t materialized to the extent we thought it would. While it’s a challenging thing to do, I would argue that if you don’t make those kinds of decisions fairly quickly, you find yourselves in a more difficult situation. Look at the past 10 years in Japan, where the lack of aggressive measures in the economic system has caused what many people described as sort of a lost decade.

What are you doing about morale?
Communicate, communicate, communicate. It’s very important to be active in communicating, to get out, walk the halls, and be as visible as possible.

How has your role changed as Dell evolved from a startup to a complex, multibillion dollar business?
It’s shifted more and more to strategy and thinking about the organization. I always try to think about the point of impact that I can actually have, and it changes as the company grows. For example, as we’ve become more of the industry’s capacity, we have to do some careful planning about multi-year capital investments and ensuring that the capacity is in place for our needs.

I’m fond of saying that they didn’t teach this stuff in my high school. I always tried to say, “What are the things that I’m able to do, but what are those things that we really need help with?” So I’ve learned the hard way, but also tried to get the best talent I possibly could to help us lead the business and not repeat all our mistakes and those others have made.

What mistakes have you made?
The biggest was probably our foray into retail, which was both a violation of our core business strategy and incredibly confusing to our organization. It was just a bad chapter of the company’s history. But what’s interesting is that when we corrected it, there was almost a galvanizing force on the culture and on the strategy of the company. Because it became crystal clear to everyone what the strategy was and how we’re going to execute, and it was reinforced with great success and growth.

It also came in the face of incredible skepticism from outside. At the time, the conventional wisdom was that our company would be relegated to a niche. In fact, one of the things that benefited our growth is that our competitors actually believed that. But fortunately the niche became the whole market. So our focus on executing the business model after that misadventure turned out to be a powerful force for us.

What motivated you to deviate from the direct model in the first place?
We believed for a brief moment in time that we couldn’t reach all the customers we wanted to. At the time we had a few hundred million in sales, and it was pretty clear that if we didn’t become a $1 billion to $3 billion business, we’d be forgotten-like many other companies that we used to compete with that are now gone.

Some say the direct model won’t play in overseas markets.
In every market in the world last quarter we grew at some significant multiple of the industry. Our business in Asia is about the size all of Dell was seven years ago. So if you look at it by itself, or at Dell Europe, or at Dell Latin America, you’d say, “Wow, this is an amazing company.” It does get overshadowed by the U.S. But if you look country by country, it’s a good story.

That said, there are about five or six markets in the world where we have between 20 and 25 percent market share, and those represent about 45 percent of the market. In the other 55 percent of the market we have only about 5 percent market share, so geographic expansion is a big, big part of our growth.

What’s made it hard for Dell to build sales in markets like Germany and Japan?
Finding the right people, understanding the culture, and making the right tweaks to the business system. Every country’s different in terms of the way you approach the relationship with the customer. It takes time and it’s not always a precise process.

For example, when we run an ad or send out a catalog in the U.S., it’s common for somebody to pick up the phone and call us, or get on the Web site. In Germany, the contact is a little bit different. The customer initiates an expression of interest by filling out something on the Web site or faxing us. In other words, they would say, “Have somebody call me.” The culture wasn’t accepting of the idea of, I’m just going to call. But over time, the German buying practice has actually become more similar to the UK or the U.S. I think it’s just time and familiarity. Our business in Germany struggled for many years and now it seems to be on the right track.

You lead in worldwide PC sales, but competitors like Compaq and IBM are ahead in server and storage systems. What do you see as Dell’s position on the competitive landscape?
Compaq’s strength historically has been their No. 1 position in the PC and server markets. They’ve recently lost their worldwide PC leadership position and their leadership in servers in the U.S. Servers, storage, and related services are big expansion areas for us. I’m as convinced as I’ve ever been that we’ll lead in these enterprises worldwide. It’s just a matter of time.

Dell’s R&D budget is relatively small-$750 million in 1999 vs. H-P’s $2.46 billion-how do you compete in product development?
We don’t set our R&D budget in percents; we set it in dollars. So if we sell four times as much as our competitors, that doesn’t mean we have to spend four times as much on R&D. The real answer is not necessarily how much you spend, but how you spend it and how you leverage that spending.

This is not the nuclear arms race. We could spend another $3 billion on R&D pretty easily. But suppose our suppliers-companies like Intel, Microsoft, all the software and component providers-spend $10 billion in collective R&D. If we recreate the things that they created, then we’re not going to get any return. The hardest thing is to get the turnout. So we work to leverage what our suppliers are doing and only invent things that are truly unique and will have an impact.

What changes do you see on the horizon that will change the industry?
Products are becoming services. Today when you buy a product you take ownership of it and you pay for it. In the future, you might pay for it every month, every time you hit a key, by the bit or every time you plug in, or some other power-by-the-hour concept.

Is there any threat that could potentially derail your plans?
Our industry is famous for new technologies that come along and our job is to anticipate those and understand which ones will incrementally improve our existing business and which ones will fundamentally change it. Ownership of technology is not really the issue because within a couple of months everybody will have something of a similar nature. But there are big changes that have to be embraced. The Internet is clearly one that we embraced that has had a major positive change on the business. But if we hadn’t embraced it, we’d probably be somewhere else. So we have to sort through those and be prepared to embrace them before somebody else does and hurts our position.

When can we expect to see a handheld from Dell?
For all the press about handhelds, it’s still a relatively small volume market. We’re waiting until we see a large profit opportunity, and that has to be balanced against our other priorities.

Other firms say they’re building a brand presence now so they’ll be there when the market explodes.
Absolutely. And we’ll be there too.

In the meantime, you were given an iPaq by Compaq at the World Economic Forum. Do you carry that?
No. I use a Blackberry. I gave the iPaq to my son to play baseball with.

About Jennifer Pellet

As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.