Dell Computer Hits The Drawing Board

Information Processing

The mail-order clone maker is recasting itself as an innovator

Kevin Kelly in Austin, Tex.
Business Week

April 24, 1989

Few entrepreneurs would be unhappy with what Michael S. Dell achieved last year at the ripe old age of 24. When he expanded his mail-order computer business to Britain and Canada, sales boomed. Revenues for Dell Computer Corp., a maker of IBM PC clones, jumped 62%, to $258 million. Net income rose 54%, to $14 million. Dell, a University of Texas dropout, took his company public in June--and his 56% stake was worth $93.5 million on paper.

But Dell is a little down these days. Rapid success has brought growing pains. As inventories quadrupled to $104 million in late 1988, Wall Street lost confidence. Since November, the company's stock has tumbled 42%, to 7.

Now, with dozens of Asian PC suppliers vying for Dell's price-conscious customers, the five-year-old company is rethinking its strategy. It will still sell by mail order. But it is beefing up its technical skills to be an innovator--like market leaders IBM and Compaq Computer Corp. ''He's trying to become a major-league PC player,'' says Bruce Stevens, an analyst with market researcher International Data Corp.

NEW SCRIPT

The key character in this new script is Glenn Henry, a 47-year-old computer scientist recruited from IBM's nearby Austin (Tex.) laboratory. As senior vice-president of product development, Henry seems to have filled a role vacated by Graham Beachum. A former Tandy Corp. marketing executive, Beachum helped Dell formulate strategy for two years. But he suddenly left his senior vice-president's post a year ago after a falling-out with the boss. The difference is that where Beachum concentrated on marketing angles, Henry is focusing on technology.

The new strategy is no surprise, given the sophisticated customers Dell is attracting. Nearly half of its 1988 sales came from high-end PCs based on Intel Corp.'s 80386 microprocessor. And in February, Dell added its first multiuser computer system, which uses as its basic software the Unix operating system. Henry has still bigger things in mind. He plans to file applications for nine patents and may produce a clone of the IBM Personal System/2 this year. One of his first acts was to kill an earlier PS/2 clone that Dell announced a year ago but never built. ''It had too many parts and the wrong design,'' says Henry.

Under Henry, who oversaw Big Blue's development program for Unix PCs, the R&D staff has mushroomed to 150 from a handful a year ago. These engineers are designing custom chips, such as one that saves money by doing tasks that previously required several chips. Dell also is adding software specialists to develop Unix programs. And it's already working on machines based on the new Intel i486 microchip. Henry wants Dell PCs to incorporate advances such as video-quality graphics and natural language programming--before IBM does. His aim: ''To build the world's best computer.''

That's a tall order for a company that has no patented technology and no history of innovation. Dell has succeeded by establishing a reliable brand name in the otherwise no-name clone business. With his $7 million R&D budget, Dell is going up against the several hundred million dollars that IBM spends. ''It's right to be skeptical,'' says Daniel C. Benton, an analyst with Goldman Sachs & Co.

NEXT, DOWN UNDER

Even if Dell's long-range plans are achievable, moreover, the company still has to deal with its financial situation. Last October, only four months after an initial public offering raised $31 million, the company had no cash. By January it had only $2.3 million on hand and short-term debt of $27 million. ''Where did all the money go?'' asks Prudential-Bache Securities Inc. analyst Kim Brown.

The answer is plant and inventory. Before the IPO, Dell had been unable to meet demand. Deliveries stretched from 3 days to 35, and an $18 million backlog built up. Every spare dollar went into expanded capacity. Then, buoyed by high ratings for his machines from computer magazines, Dell overestimated fourth-quarter demand. That led to excess inventory, a problem he now says should be cleared up by July, though Wall Street doubts it. ''My focus isn't the stock price,'' Dell says. ''It's building my company.'' This year, for example, he plans to double capacity.

Dell's growth is expected to slow to about 20% this year. But that may still be faster than the PC industry's. Overseas expansion is the key. Dell expects its sales in Britain to double from last year's $40 million. Its Canadian operations, opened in October, are still booming. And the company's West German business is starting to break even. The next target is Australia.

Those are just a few of Dell's major-league plans. Eventually, ''we'll be one of the top three personal computer companies,'' he asserts, momentarily overlooking his 1.8% market share. It sounds like boasting. But then, nobody expected a kid who once sold mail-order from his dorm room to come this far.

Graph: DELL'S STOCK DECLINE Data: Bridge Information Systems Inc. CHART BY PAUL GRANGE/BW Photograph: MICHAEL DELL: ''MY FOCUS ISN'T THE STOCK PRICE'' PHOTOGRAPH BY MICHAEL L. ABRAMSON