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In 1984, Michael Dell founded a company selling personal computers from his student room at the University of Texas. In 1999, his company had become the largest seller of personal computers in the USA and, in early 2006, it had the largest share (some 18-19 per cent) of the worldwide personal computer market. How did Dell achieve such phenomenal success?

There are several important elements.

• While most large computer manufacturers, such as IBM and Hewlett-Packard, sold via retailers or their own shops, Dell developed a direct-to-consumer sales model – initially mainly by telephone, later via the Internet. In that way, Dell ‘cut out the middle man’, shortened the supply chain and saved itself the retailer’s margin.
• The Dell computers are assembled from standard components, but customers can order their own configuration of these components. That allows Dell to capture the benefits of standardization (of components), while offering its customers choice (of computer configurations). Dell can therefore very closely match its product offerings to consumer demand.
• Dell practices just-in-time assembly by building the computers only after customers have ordered them and taking the components from suppliers as needed. It is a pull system of lean production that economizes significantly on inventory (of both components and end products).
• As a consequence, Dell receives payment for its computers from customers before it has to pay its suppliers for the necessary components. That is called a negative cash conversion cycle. Together with low inventories, that means Dell needs only very low levels of working capital.
• Dell has captured the benefits of the Internet faster than its rivals – for example, economizing on ordering procedures. It has also led the way in establishing call centres for customer support and outsourcing.

In all these ways, Dell has been able to build a low-cost business model that offers consumers a range of choices for an unprecedented low cost. As the Internet became available to more and more households across the world, the target market for Dell expanded accordingly. Moreover, it was also able to penetrate the market of corporate customers and expand its range of products to include servers, printers and televisions.

In 2004, Kevin Rollins took over as CEO from Michael Dell, who remained chairman of the Board of Dell Inc. In February 2005, Fortune magazine awarded Dell first place in its annual ranking of ‘Most Admired Companies’, but soon thereafter cracks were appearing in its business model:

• by the second quarter of 2005, Dell was missing revenue and earnings targets and that remained the case in subsequent quarters;
• operational problems surfaced, such as faulty capacitators on the motherboards of some models costing over $300 million to address;
• customers complaints doubled in 2005, mainly about levels of service received from Dell’s customer support;
• Dell started losing market share in personal computers as of 2006 and was overtaken as market leader by Hewlett-Packard;
• Similar problems became manifest in other parts of the product range, such as servers and televisions.

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