Between 1994 and 1998, the revenue of Dell Computer Corporation rose from $3.5 billion to $18.2 billion, and profits increased from $149 million to $1.5 billion. The company’s stock price rose by 5,600%. During the same period, Dell grew twice as fast as its major rivals in the personal computer market and tripled its market share. In the first half of 1998, Dell reported operating earnings that were greater than the personal computer earnings of Compaq, Gateway, Hewlett Packard, and IBM combined.’ On Forbes magazine’s list of the richest Americans, Michael Dell, the 33 year old founder of Dell Computer, ranked fourth with an estimated worth of $13 billion. He trailed only Bill Gates, Warren Buffett, and Paul Allen on the list and was worth more than Gates had been at the same age.’
Dell Computer had pioneered the widely publicized “Direct Model” in the personal computer (PC) industry. While competitors sold primarily through distributors, resellers, and retail sites, Dell took orders directly from customers, especially corporate customers. Once it received an order, Dell rapidly built computers to customer specifications and shipped machines directly to the customer.
The success of the Direct Model attracted the intense scrutiny of Dell’s competitors. By 1997, headlines such as ‘Now Everyone in PCs Wants to Be Like Mike,” “Compaq Reengineers the Channel: Will It Be Enough to Slow Dell’s Momentum?” and “In Search of Greener Pastures, Gateway Moves on Dell’s Turf” peppered the PC trade press. By late 1998, virtually every major PC manufacturer had taken some step to match Dell’s approach.
The Personal Computer Industry
History. Electronic computers emerged from military research undertaken during World War II. In 1949, the magazine Popular Mechanics predicted that “Computers in the future may….perhaps only weigh 1.5 tons.” For the following three decades, large mainframe and minicomputers, produced by vertically integrated firms such as IBM and Digital Equipment Corporations (DEC), dominated the market. As late as 1977, Kenneth Olsen, founder of minicomputer maker DEC, opined, “There is no reason for any individual to have a computer in their home.”
However, electronic hobbyists were already purchasing mail-order and retail kits which allowed them to assemble primitive computers at home. These kits pieced together components that were either altogether new or newly affordable; microprocessors made by start-ups such as Intel, random-access and read-only memories, power supplies, and so forth. (A Glossary at the end of the case defines technical terms.)
Between 1975 and 1981, a series of firms began to offer increasingly integrated, preassembled personal computers. Start-ups such as Apple Computer and MITS, and midsize firms such as Tandy / Radio Shack and Commodore, led the early market, gaining popularity among hobbyists and educational institutions with easy-to-use machines for ordinary people. Established firms including Texas Instruments, Hewlett-Packard, Zenith, NEC, Xerox, IBM, Toshiba, Sanyo, Sony, Olivetti, Wang, and DEC soon joined the entrepreneurs and began to produce PCs.
IBM launched its first PC in 1981 and, two years later, held 42% of the market. With a world-renowned corporate sales force and service organization, IBM commanded 61% of the market for mainframe computers and produced many of the components for its mainframes.” In launching its PC, however, IBM purchased many components. It commissioned a start-up software firm, Microsoft, to write the operating system for its PC and adopted a microprocessor architecture designed by Intel. Publishing most of the 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 rapidly rallied around the IBM standards....