Dell: Cutting Out the Middleman

The story

In 1984 Michael Dell was a freshman at the University of Texas at Austin. He had been upgrading IBM-compatible personal computers and selling them to people he knew. With $1,000, he started a company called PC's Limited. Business grew so fast that he left college after his first year to run it full time. One early model, the Turbo PC, sold for $795, and within months the young company was selling tens of thousands of dollars' worth of computers a month.

At the time, most people bought computers in stores. A computer maker built machines, shipped them to a store, and the store marked up the price. Computers could sit on store shelves for weeks, and because technology changed quickly, an unsold computer lost value every day. Dell's idea was to skip the store. Customers ordered directly from Dell, first by phone and mail, and Dell built each computer to the customer's choices and shipped it straight to them.

This direct model had several advantages. Dell did not have to share profit with a store. Because it built computers only after they were ordered, it kept very little inventory, the stock of parts and products a company holds, and so it was less likely to get stuck with outdated parts. And because Dell talked directly to its customers, it learned quickly what they wanted.

The company grew fast. It changed its name to Dell Computer Corporation and sold shares to the public in 1988, raising $30 million. In 1992 it joined the Fortune 500, and Michael Dell, then 27, was the youngest chief executive on the list. When the internet arrived, it fit the direct model perfectly. Dell started taking orders online in 1996, and that year its website was soon selling more than $1 million worth of computers a day. Dell passed IBM in PC sales in 1999 and Compaq in 2001 to become the world's top PC seller.

But a strong idea can be copied. Rivals adopted their own low-cost, build-to-order methods while still selling through stores, and some moved into services and software while Dell stayed focused on PCs and servers. Dell began losing sales to a revitalized Hewlett-Packard. Michael Dell stepped down as CEO in 2004 and came back in 2007. That same year, in a big break from its history, Dell announced it would sell two desktop models in about 3,000 Walmart stores.

In 2013, Michael Dell and an investment firm, Silver Lake, bought the company from public shareholders for about $24 billion, taking it private. He said the company's turnaround needed "more time, investment and patience" than public investors would give it. Dell later bought the data-storage company EMC for $67 billion in 2016 and returned to the stock market in 2018.

Dell's story has two lessons. First, a simple change in how you reach customers can beat much bigger rivals. Second, no advantage lasts forever. When others copy your best idea and customers change how they shop, you must be willing to change too, even if it means doing something you once said you never would.