Beyond Rock Bottomby
At the crack of dawn one Saturday morning in July of 1992, Dell Computer Corp. sales chief Joel J. Kocher and his top lieutenants sat mn a stage at the University of Texas basketball arena and had their hair cropped military-style. To the cheers of 1,500 mostly twentysomething employees--many clad in fatigues for the early-morning muster--Kocher declared "war" on IBM Corp. and cross-Texas rival Compaq Computer Corp. Both PC makers were adding low-cost models that threatened to erase Dell's longtime price advantage. Kocher wanted to make it clear that he was ready to do battle.
That was classic Dell--and classic Kocher (pronounced Ko-HER). Hyperaggressive and intense, he rose to become CEO Michael S. Dell's No.2 by driving Dell's young troops to match his maniacal work ethic. Former employees recall Kocher storming through the sales floor, berating the legions of telesales reps to work harder--even at the risk of their family lives. "My son is six weeks old, and I've only held him three times--that's how committed I am to doing what it takes," one former manager remembers him saying. Kocher says he would never say such a thing, then adds, with a laugh: "But it's true."
CATALYST. For most of Dell's 10-year history, Kocher's brand of supersalesmanship kept the Austin-based upstart on a superfast growth path--from $100 million to nearly $3 billion since Kocher arrived in 1987. At first, it was easy to grab market share from flabby giants such as Compaq and IBM, which had enormous overhead--including sprawling research labs--and relied on dealers to sell their wares. But starting in 1992, the big guys shed their flab and dropped their prices. "We saw this guy Michael Dell and went to school on his model," says Ross Cooley, Compaq's senior vice-president for North America.
So, even though Kocher's troops rallied to meet the IBM and Compaq challenge, Dell still has battles to fight. Now, Kocher says, the company must break into new distribution channels and broaden its product line with successful portables to survive the coming consolidation in the PC industry. "It's brutally simple," says Kocher, who is president of worldwide sales, marketing, and service. "Either we have 15% market share by the end of the decade and thrive, or we have less than 15% and die." Dell has only 3.2% of the world market now, according to Dataquest Inc., and Kocher figures if it doesn't expand dramatically, the company will be lost in the crowd of second-tier players.
In short, it's time for Dell to grow up--and plot strategies to deliver both revenue growth and consistent profitability. "We realize we need to go from hypergrowth to hyperprofits before we can step on the gas again," says the 36-year-old Kocher. "We're like a teenager adjusting to new responsibilities. It's like going through puberty."
Job One is staying profitable. After posting a $76 million loss in its second quarter, ended last July, Dell returned to profitability during the third and fourth quarters. But on Mar. 3, the company was expected to report its first full-year loss as a public company. Analysts estimated that the loss would be from $38 million to $53 million on $2.9 billion in sales--just shy of the $3 billion Dell had once projected. Part of the loss is related to last year's botched effort to crack the notebook-PC business. The company wrote down $20 million to kill off its old laptops and abort a new line that didn't look competitive. It also took $71 million in inventory write-downs and restructuring costs. As of Mar. 1, Dell's shares traded at 24 7/8, up from 16 last fall, but about half of what they were when Kocher held his war rally.
ANOMALY. This year's marching orders: continue to patch gaping holes in the product line and shore up the internal systems that haven't kept up with Dell's growth. Pursuing its single-minded strategy has made Dell an anomaly among top players (charts, page 82). And its concentration on desktop PCs and direct sales has become limiting. So as Dell engineers try to diversify the product line with new notebooks, Kocher will be pushing harder to diversify beyond direct sales.
Dell will also have to work on easing the pressure-cooker work environment if it hopes to stabilize management. In the past two years, as the stress increased, all but a handful of top executives left the company, either forced out or just exhausted by the frantic pace. Says a former manager, who says he pulled all-nighters at least once a week: "They haven't figured out we're in a post-yuppie world. You have young guys in positions of huge responsibility, and they don't have any compunction about how they treat human beings."
CEO Michael Dell, now 29, and Iocher say that the turnover is simply a consequence of Dell's hair-raising growth. "There's been lots of forced turnover," says Dell, who has hired veteran executives from Kraft General Foods, Apple Computer, and Ernst & Young to get control of things. "It's hard for people to grow this fast, and some have a hard time accepting a smaller role."
The new guard could signal the end of the old shoot-from-the-hip Dell, where young managers had lots of latitude. "My five years at Dell were the best of my life," says former product-marketing manager Don McCord, 38, who recently left for IBM subsidiary Ambra Computer Corp. in Raleigh, N.C. "But with new layers of management coming in, it will never be the same."
Even Kocher admits that the new Dell isn't as much fun. A hotshot at Tandy Corp. who opened his first Radio Shack at age 24 and quickly became salesman of the year and regional manager of 115 stores, Kocher came into his own at Dell. "I'm bare-boned aggressive, and I like to pull the trigger," he says. Famous for his epic speeches on Dell's place in corporate history and game-show-like sales meetings complete with Mazda Miata giveaways, Kocher says he understands the disillusionment of some former employees. But the changes are vital, he insists: "Today, one creates advantage through execution. The margin for error is smaller."
CLOSER LOOK. So, rather than rush new models to market as quickly as possible, Dell now looks for profitable niches, such as outfitting corporate sales forces with notebooks. It hopes to cut costs by pushing preconfigured packages rather than building every PC to order. It's also measuring profit and loss for each product, geography, and customer segment and even has salespeople focused on profits: Commissions are now tied to gross profit.
Kocher's workday has changed, too. He still logs 16-hour days, but he has stopped working weekends. He spends less time plotting grand strategy and more on execution. Kocher and Chief Technical Officer Tom Thomas and Operations Vice-President F. Scott Flaig meet weekly to review all systems. One accomplishment: The time it takes to get each day's orders into the manufacturing system has dropped from seven hours to two. That has helped pare inventory turns from 85 days to just 35.
On the product front, Dell has jumped back into notebooks with a model built by AST Research Inc. It may follow up with subnotebooks made with Sony Corp. this summer. The company has also unveiled a new line of higher-margin PCs called servers, used for corporate networking.
But Dell is far from proclaiming a turnaround. Compaq and IBM renewed themselves by getting rid of excess resources. Dell never had bloated overhead. And it never had a lot of cash. That's still true, and as the company takes on a more complex business model, it could be a problem. Developing new distribution channels and keeping up with fast-changing portable-computer technologies will take money--more money than Dell's business now generates. The company's investment in research and development is one of the lowest in the PC industry. And the new notebook line won't help fatten profits much since Dell has to split the markup with AST, its manufacturer. Similarly, Dell will have to share profits with dealers as it expands beyond phone sales.
ALBATROSS. Another possible hitch: Near-term profits are earmarked to pay down $225 million in high-interest debt, acquired to stave off a cash crunch last summer. Rivals such as IBM and Compaq have little debt-service expense. "Dell must generate higher margins to pay for their higher cost structure, and it is not going to let them be the aggressive company they once were," says Compaq CEO Eckhard Pfeiffer.
While analysts say Dell is on the right track, it has yet to come up with answers to some thorny problems. Take its efforts to recruit PC dealers and other retailers, who sell 75% of all PCs. Dell moved into retail chains, such as CompUSA and Sam's Club, but sales have "slowed to a snail's pace in recent months," says David Goldstein of Channel Marketing Corp., a consulting firm in Dallas. Concedes CEO Dell: "We are not as pleased as we would like to be."
Efforts to woo PC dealers and distributors have been even less successful. Long lambasted by Dell as worthless middlemen, none wants to be first to make peace with the company. "It's an act of disloyalty to Compaq and IBM to take on Dell," says the CEO of one large chain. "Michael's going to have to get three or four of us to go at once."
Still, there are signs that Dell is maturing. The company has stopped poking fun at competitors in ads. And it's investing in internal systems to make sure costs don't spiral out of control again. "Don't ever bet against Michael Dell," warns G. Glenn Henry, who was the company's longtime technology chief before leaving in January to become the director of the PC division at MIPS Technologies Inc. "I don't think there's anyone other than Bill Gates who understands this business any better than he does."
As for Kocher, he's raring to launch Dell's next growth phase. "We haven't written the final chapter yet," he says. Maybe. But if he doesn't prove as adept at making profits as he is at making sales, it may not make fun reading.