| VNS TECHNOLOGY WATCH: [Mike Taylor, VNS Correspondent]
===================== [Littleton, MA, USA ]
WHY DELL IS A SURVIVOR
{Forbes October 12th 1992}
Dell more than doubled its revenues in its Aug. 2 quarter from the
equivalent period last year, closing at close to $2 billion.
Far from ignoring Dell, its competitors are paying it the ultimate form
of flattery by adopting Dell's direct-to-consumer marketing, bypassing
retailers. In the face of this stepped-up competition, Dell's (800)
lines are ringing off the hooks. Calls to Dell's order line have swollen
by about 40% since a June announcement that Dell was introducing an even
cheaper line of computers.
Dell's factory is running overtime, cranking out nearly 3,000 machines
a day to keep up with orders.
Dell, however, is going to have to work a little harder for its money.
Its after tax net margin dropped from 6% in the fiscal year that ended
last February to a shade under 5% for the most recent quarter, with
revenues continuing to grow faster than net profit.
Dell's selling and administrative expenses eat up just 14 cents of its
sales dollar, against 24 cents at Apple and 30 cents at IBM. Even after
its massive layoffs of last year, Compaq's marketing overhead costs are
still taking 20 cents out of the sales dollar.
Economies of scale work in favor of the Dell distribution system. To
the extent that its sells directly to consumers rather than to
retailers, Dell has merely to add additional telephone sales people in
Austin as demand increases. That's how Dell took selling and overhead
that were 20% of sales last year down to 14% in the last quarter.
Most people have assumed that Dell sold on price alone. It did in the
beginning, but no longer. Those who attributed Dell's success to
price-cutting have missed an important point. Although it sells almost
entirely by telephone, Dell has managed to maintain a level of customer
satisfaction at least equal to that of competitors who sell through
stores. "We're not the low cost supplier," Michael Dell says. "Compaq
and IBM are assuming that price is the problem. The problem is that the
dealer channel has fundamentally failed at servicing customers."
It helps to understand Dell if you realize that Michael Dell is not so
much a computer entrepreneur as he is a marketing pioneer. His
forerunners are not Steve Jobs and Bill Gates but Ray Kroc and Charles
Schwab.
Dell took the fears and uncertainties out of mail-order computers. Dell
has astutely positioned his company at a middle point on the
cost-and-quality curve.
By the mid-1980s Michael Dell realized that while selling on price
might be a good way of breaking into a market, it was no way to build a
future. Someone else could cut prices a percentage point lower. Dell
needed a different edge - reliability. So he offered such amentities as
unlimited calls to a toll-free technical support line, a 30 day
moneyback guarantee and next-day, on-site service through independent
contractors, free for the first year of ownership.
Compaq was the first to hit it big with first-class IBM clones. But
soon others were putting together clones that would match the IBM PC's
performance, and suddenly there was extreme ease of entry into what had
formerly been a highly technological business. Dell correctly saw the
only way to get an edge in what was fast becoming a commodity business
was through marketing innovations.
Most retailers thought customers would pay a substantial retail markup
in return for being able to go to a store and feel and touch a machine.
Some did and still do. But fewer of them than the establishment
expected, especially not when a lot of the buyers are old-time users
coming back for their second or third machine.
The retailers were stunned when they saw how quickly the Texas upstart
could deliver customized products - in substantially less time than it
would take them to place the order and wait for the manufacturer to ship
it.
Suddenly, everyone realized what he had wasn't just a product, it was a
process.
While IBM, DEC and the others copy an outfit that they once considered
little more than a nuisance, Dell is pushing its telemarketing strategy
a step further. This fall Dell should start sending out DellWare, a
catalog that will offer PC games, software packages like Lotus 1-2-3 and
computer peripherals like modems, printers and disk drives. Dell hopes
to become the mail-order equivalent of the computer superstore and is in
the process of signing up scores of suppliers. "We intend to put the
reseller out of business," Michael Dell says.
More important, as Dell deeps potential customers out of computer
stores altogether, the catalog will marry them more to Dell. Already
Apple Computer has announced it will be starting a similar catalog.
The Dell factory has changed somewhat since the days when assembly was
done by three men, each sitting at a 6-foot-long table. Today in the
Austin factory an order for a half dozen machines mingles with one for
200 traveling down the assembly lines. But it remains virtually a
screwdriver operation, with little automation and an almost job-shop
approach to manufacturing. This both keeps capital costs low and permits
great flexibility. The disk drives might be on the top or the bottom of
the base or be absent altogether, if that's what the customer wants.
Because it buys most of its components, Dell supports its near $2
billion in sales revenues with just $55 million in land, property, plant
and equipment. That's about $33 of sales for every dollar of fixed
assets. The comparable figure for IBM is $2. Even WalMart gets only $7
of retail revenue for every dollar of fixed assets. Dell uses its
capital chiefly to finance inventories, which it currently turns over at
a rate of more than eight times a year. Return on equity like that of
IBM in its heyday - an annualized 29% in Dell's latest Quarter.
{contributed by Alan Maltzman}
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<><><><><><><><> VNS Edition : 2728 Thursday 17-Dec-1992 <><><><><><><><>
|
| Copyright � 1993 Dow Jones & Co. from Wall Street Journal
Inside Track:
Dell Directors Give Vote of Confidence to Battered Stock
----
By Warren Getler
Staff Reporter of The Wall Street Journal
The battered stock of Dell Computer Corp., hovering near its 52-week low,
isn't being completely snubbed.
Bobby R. Inman and two other directors of the Austin, Texas,
personal-computer maker have been buying Dell shares despite severe
price-cutting within the industry and recent turmoil at the company,
Securities and Exchange Commission filings show.
Mr. Inman, an influential Dell director and former deputy director of the
Central Intelligence Agency, purchased a total of 25,000 shares in late June
at an average price of $19.87 a share, SEC data indicate. Mr. Inman's
investment of nearly $500,000 -- his first open-market purchase of Dell
stock since joining the board in 1987 -- increases his holding in the firm
by 22% to 137,500 shares.
"I got a superb buy from purchasing the stock under $20," Mr. Inman said in
a phone interview from Colorado, where he's vacationing. "I consider it
right now to be a good $30 stock."
Dell's stock was at $17.75 a share, down 50 cents, in national
over-the-counter trading yesterday.
Mr. Inman said he plans to hold the 25,000 share block until Dell's shares
fetch $40 and "then invest the proceeds back into my investment pool." At
the beginning of the year, Dell's stock was trading just below $50 a share.
But a series of problems at the company, including troubles with its line of
notebook computers, subsequently eroded investor confidence in the computer
highflier.
Dell, Mr. Inman said, had succumbed to internal expectations of
"hypergrowth," which have been quickly dashed. The company, buoyed by sales
of its desktop computers, was always expecting to grow at a blistering pace
"such that when it didn't expand at that rate, the impact was much more
severe. The reason it couldn't go on at that rate was the failure in the
portable notebook area."
Acknowledging that Dell is still having a rough year, Mr. Inman, who chairs
the board's audit committee, said the nation's fourth-largest computer maker
should experience a turnaround beginning in the fourth quarter.
"You don't get out of these problems overnight," he cautioned. "I don't want
to leave the impression with prospective investors that they would double
their money in 60 days" by snapping up Dell shares at current levels, which
are near he 52-week low of $14.625.
"But, as is obvious from my own investment, I'm very optimistic about the
company's performance over the longer term. That confidence is in part based
on the additional talent that's been added to management," he said,
referring to the hiring of a new team assigned to oversee product
development and manufacturing at Dell.
"The key is new products and getting better control of their information,"
said Andrew J. Neff, an analyst with Bear, Stearns & Co. "It's a very tough
environment generally, with a particularly challenging environment in
Europe, a price war in Japan and the prospect for an acceleration of the
price war in the U.S."
But, Mr. Neff said, Dell has it within itself to turn itself around. "The
company has a very strong brand image and strong marketing, which is what
you need to pull it out."
Joining Mr. Inman in accumulating Dell shares were two other board members:
Michael H. Jordan, who became chairman and chief executive officer of
Westinghouse Electric Corp. on June 30, picked up 2,000 Dell shares in late
May at $24.50, and Paul O. Hirschbiel bought 500 shares in mid-June at
$19.38. Neither director could be reached for comment.
Not all the inside action at Dell has been on the buy side, however. Its
chief technology officer, G. Glenn Henry, trimmed his stake by 16% through
the disposal of 2,000 shares in late June at $20 a share. SEC data show that
he continues to hold more than 10,000 shares and has options that are
exercisable for the purchase of 11,500 additional shares.
Through a Dell spokeswoman, Mr. Henry said the sales were for personal
reasons only, namely to help finance his son's college education. Mr. Henry
had been in charge of overall product development at Dell before recently
being reassigned to his current lesser post.
For the three directors who snapped up Dell shares, their purchases do not
seem all that prescient in the short term: They came just weeks before an
announcement earlier this month that sent Dell's stock reeling. Buffeted by
internal control problems and a slowdown in Europe, Dell said on July 14
that it expected to report a loss for its second quarter ending Aug. 1, its
first-ever quarterly loss. That news sent Dell stock sharply lower, plunging
30% on the day in OTC trading to $15.875.
The company said at the time that the expected loss would come in around
$1.65 to $1.85 a share and would be the result of a $75 million to $85
million charge. That charge covers continuing problems in the company's
notebook-computer business and the costs of fixing an internal forecasting
system that has caused Dell to overestimate demand, particularly in Europe.
Dell also said the expected loss could force it into technical default on
some terms of its $130 million line of revolving credit. But Mr. Inman said
the line was secure for now. "I don't expect any problems with the line of
credit. If we weren't having the booming performance in the desktop and
file-server computer lines, it could be different."
Mr. Inman, who has invested in a number of technology start-up companies
over the years, said Dell was making a point of shifting toward conservative
accounting practices and performance expectations. He suggested that the
company's decision to move offshore its production of notebook computers was
a "disaster" that did not need to happen.
"The charge for the second quarter is a move to very conservative
accounting," he said. Asked if the move reflected some personal intervention
on his part, he said: "The chairman of the audit committee probably has more
impact now, as troubles have developed, than earlier." People familiar with
the company said that Mr. Inman was involved in the departure of the former
chief financial officer, James R. Daniel.
The Dell director said that the wave of price-cutting that has been
hammering the industry is not likely to intensify. "I don't see any impetus
for another surge in price-cutting." He predicted that investors' attention
will turn to the introduction of the "next family of products" from computer
hardware companies, such as Dell, and to the new technology emerging from
semiconductor firms.
Mr. Inman's optimism about Dell's prospects notwithstanding, most analysts
now expect PC sales to slow by year end because of slack corporate spending
and a lull in product cycles.
|