Computer Engineer

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9-710-442
FEBRUARY 14, 2010

JAN W. RIVKIN

Revitalizing Dell
From the early 1990s until the mid-2000s, Michael Dell and his company thrived in the tumultuous personal computer industry. Revenue of Dell Inc. rose from $3.5 billion in 1993 to $55.9 billion in 2005, making Dell the world’s largest producer of PCs, while net income climbed from $149 million to $3.6 billion. In many of those years, Dell earned more on PCs than all of its main rivals combined, and among top vendors, only Dell consistently reported positive margins on PCs.1 Dell owed much of its success to its vaunted “Direct Model”: While competitors sold primarily through distributors, resellers, and retailers, Dell took orders directly from customers, built computers to customers’ specifications, and shipped machines straight to customers. Rivals studied the Direct Model and copied many of its elements, leading one observer to comment that “everyone in PCs wants to be like Mike.”2 Yet to the puzzlement of industry experts, including Michael Dell himself, no competitor equaled Dell’s performance through the mid-2000s. In July 2004, at age 39 and with a net worth of more than $14 billion, Michael Dell stepped down as CEO, handed day-to-day operations of the company to his hand-picked successor, and became chairman. In subsequent years, Dell Inc. largely continued to follow its traditional strategy, but its growth stalled, its net margins dropped sharply, and Hewlett-Packard (HP) eclipsed Dell’s global market share in PCs. In January 2007, with the value of Dell’s common stock off by 40% since the management shift, Michael Dell returned as CEO. Additional moves, including an effort to sell PCs indirectly through retailers and a major acquisition of an IT services company, met a mixed reception. By December 2009, Dell’s stock value was down an additional 60%. How might Michael Dell revitalize a company that had long defined success in its industry?

The Personal Computer Industry
History The personal computer industry was born in the late 1970s, with startups such as Apple Computer offering consumers the first PCs. Established firms, including Texas Instruments, HewlettPackard, Zenith, NEC, Xerox, Sony, Olivetti, and DEC, soon joined the entrepreneurs and began to produce PCs. IBM arrived relatively late to the market, launching its first PC in 1981. With a worldrenowned sales force, IBM commanded 61% of the market for mainframe computers and produced many of the components for its mainframes.3 In launching its PC, however, IBM purchased many components. It commissioned a young software firm, Microsoft, to write the operating system for its ________________________________________________________________________________________________________________ Professor Jan W. Rivkin prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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Revitalizing Dell

PC and adopted a microprocessor architecture designed by Intel. Publishing the main specifications for its PC system, IBM established an “open architecture” to encourage software developers to write programs for the IBM PC and to spur other firms to make compatible peripherals such as printers. Most of the industry rallied around IBM’s standards. By 1983, IBM held 42% of the PC market, and IBM-compatible products accounted for most of the rest of the market. IBM used its huge sales force to sell PCs...
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