DELL INC. was founded in 1984 by Michael Dell at age 19 while he was a student living in a
dormitory at the University of Texas. As a college freshman, he bought personal computers
(PCs) from the excess inventory of local retailers, added features such as more memory
and disk drives, and sold them out of the trunk of his car. He withdrew $1,000 in personal
savings, used his car as collateral for a bank loan, hired a few friends, and placed ads in
the local newspaper offering computers at 10%–15% below retail price. Soon he was selling
$50,000 worth of PCs a month to local businesses. Sales during the first year reached
$600,000 and doubled almost every year thereafter. After his ...view middle of the document...
Dell Inc.: Changing the Business
Model (Mini Case)
J. David Hunger
This case was prepared by Professor J. David Hunger, Iowa State University and St. John’s University. Copyright ©2010
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in 2003 as a way of reflecting the evolution of the company into a diverse supplier of technology
products and services. In 2005, Dell topped Fortune’s list of “Most Admired Companies.”
Fiscal year 2005 (Dell’s fiscal year ended in early February or late January of the same calendar
year) was an outstanding year in which the company earned $3.6 billion in net income on
$55.8 billion in net revenue.
Soon, however, increasing competition and cost pressures began to erode Dell’s margins.
Even though the company’s net revenue continued to increase to $57.4 billion in fiscal year
2007 and $61.1 billion during fiscal year 2008, its net income dropped to $2.6 billion in 2007
with a slight increase to $2.9 billion in 2008. The “great recession” of 2008–2009 took its toll
on both Dell and the computer industry. Dell’s fiscal 2010 (ending January 29, 2010) net
income fell further to $1.4 billion on $52.9 billion in net revenue. Sales improved during
calendar year 2010 as the global economy showed signs of recovery. Net revenue for February
through July 2010 increased to $30.4 billion compared to only $25.1 billion during the first
half of 2009, while first half net income rose to $886 million in 2010 compared to $762 million
during the same period in 2009. Nevertheless, Dell’s net income was only 2.91% of net revenue
during the first half of 2010 contrasted with a much rosier 6.45% during 2006. (Note: Dell’s
financial reports are available via the company’s website at www.dell.com.)
9-2 SECTION D Industry One—Information Technology
Problems of Early Growth
The company’s early rapid growth resulted in disorganization. Sales jumped from $546 million
in fiscal 1991 to $3.4 billion in 1995. Growth had been pursued to the exclusion of all else,
but no one seemed to know how the numbers really added up. When Michael Dell saw that
the wheels were beginning to fly off his nine-year-old entrepreneurial venture, he sought
older, outside management help. He temporarily slowed the corporation’s growth strategy
while he worked to assemble and integrate a team of experienced executives from companies
like Motorola, Hewlett-Packard, and Apple.
The new executive...