The Egoless Corporation

Introduction

To most of us, a person as successful as today's guest holds a certain fascination and curiosity. We expect to hear that a man like Michael Dell is really somehow very different from us.

We expect to hear that at the age of six months, although barely able to sit upright, Michael Dell was dressing himself and tying his own shoes.

We expect to hear that by the age of five, Michael Dell's first lemonade stand was so successful that he franchised; that today there are thousands of Michael Dell lemonade stands being run by millions of five-year-olds the world over!

We expect to hear that the character Horatio Alger was loosely based on the life of Michael Dell.

We expect to hear these things because it's the only way we can justify the fact that this man has made hundreds of millions of dollars before hitting 30, while the rest of us are still waiting for our lottery ship to come in. Either you make up some myths about the guy or you go crazy.

Well, the remarkable thing about Michael Dell is how closely his life does resemble the traditional 'Anyone can make it in America' myth.

Mr. Dell grew up in Houston. Like many other boys and girls, he delivered newspapers. For most the story ends here. But Michael, always eager to find new marketing ideas, hired some friends to go to the county court house to copy down the names of newlyweds. He then targeted these couples through direct mail with special introductory offers of free delivery for two weeks. By the time he was 17 he had made over $18,000 delivering newspapers.

In college, he began buying personal computers from the excess inventory of local retailers. He would soup these up, as if he were turning old Chevies into hot rods, and sell the new, high-powered product through ads in local papers. He made $50,000 a year, and left school to run the business.

In 1984, he founded Dell Computer Corporation. His goal was to offer high-performance, competitively-priced personal computers to businesses. Sensible enough, since his competition was just a couple of lightweights: IBM and Compaq.

In its first seven years, Dell Computer's sales grew from $6 million to more than $546 million. Analysts are projecting that this year's sales will reach $1.9 billion. Amazing! But let me add a few more numbers: Fortune magazine recently ranked Dell the 77th fastest growing company in the U.S. With sales growth averaging 56 per cent per annum in the last three years, annual earnings growth was a mere 35 per cent. Oh yes, and this year to date sales are up 120 per cent while earnings almost doubled, and the return on equity was greater than 25 per cent.

There's a saying that the great thing about being young is that you're not experienced enough to know that you cannot possibly do the things you're actually doing.

Michael Dell obviously took that to heart.

Ladies and gentlemen, please join me in welcoming a man whose record suggests he'll never grow old.

Michael Dell

Good afternoon ladies and gentlemen. I am honoured to be here today and would like to thank The Empire Club for the invitation.

It's always a pleasure talking about doing business in the 1990s and beyond, and I hope my comments will have some relevance for your businesses, regardless of industry. After all, we're all facing increased competition and our customers are all becoming more challenging to please.

It is a battle to please customers--no matter what industry you're in--but in the PC industry it's more like a war! And Dell fired the first shot back in 1984 when we challenged the traditional distribution model and began selling computers directly to end users. Today's computer war comprises many small battles and is symptomatic of a shakeout that will change the PC manufacturing landscape forever.

In any war there are winners and losers, and I'm absolutely committed to making sure that Dell emerges as one of the winners. Dell's future success, like yours, will depend on our business model.

What is the right business model for survival and for prosperity? At Dell, one of our senior executives coined what I think is an appropriate term to describe what we're trying to maintain that term is "survival."

How do we go beyond surviving recessions and price wars, and become thriving businesses despite these conditions?

It's no secret that the computer industry has witnessed unprecedented challenges over the past 18 months. The market has changed dramatically. Competition in the PC industry has never been fiercer and there is no shelter anywhere for the inefficient in today's global market. I really think that those who finally win this war will be a new breed of technology companies--companies with different "looks" and different attitudes about our industry and our customers.

These winners will be fast, flexible and focused on the customer. And they'll grow rapidly thanks to this new character. Last month, Fortune magazine published a report on America's 100 fastest growing companies and Dell was again among them. In analyzing what these 100 companies had in common, Fortune has quoted Alan Webber, editorial director of the Harvard Business Review. Webber called this new breed of organization the egoless corporation.

According to Webber, the egoless corporation is wholeheartedly focused on the customer. It listens and then responds to customer wants, rather than thinking they, management, know what's right.

I love this idea of the egoless corporation because it's a good model for any company that intends to be successful in virtually any industry--mine included.

Although the computer industry is a relatively new industry, it has matured quickly and a lot of companies have already assumed an old style of doing business. By that I mean, they have let themselves become complacent and arrogant. They are overly protective of the old ways of doing things and past triumphs. They're parochial about technology, they have little contact with their customers, they have a high cost base and they have an out-of-date and inefficient business model.

These organizations should try and learn from the egoless corporations.

So, how is the egoless corporation built?

If the egoless corporation is characterized by a customer focus, then companies have to look at how close they are to their customers. I'm sure we all know companies that are adopting this closer-to-the-customer strategy.

But even going direct or getting closer to the customer is no guarantee you will successfully navigate dangerous water. Dell's direct business strategy, for example, is underwritten by a huge investment in our customer relationship, research and development, information systems and, above all else, terrific people. For Dell, direct is not a religion. Direct is a strategy. Customer satisfaction is our religion. Direct is the best means we know of satisfying our customers--therefore, we've embraced it.

But some think that implementing a tactic like direct marketing or, another popular tactic, like total quality management (TQM), will be the end of their problems. It won't happen. If you're not customer-driven, even the slickest tactical program or strategy will fall flat on its face.

Direct marketing or TQM are simply a means to an end. They don't solve problems by themselves. Dell is built around the efficient delivery of technology solutions that, thanks to our direct relationship with our customers, is well targeted and difficult to duplicate.

And, as I've said, we are not blindly committed to the direct channel. We are fixed, however, on customer satisfaction.

A second principle of the egoless corporation is that it listens first, acts second. If the creed of retail is "location,' location, location," the creed of the egoless corporation is "listen, listen, listen!"

Dell's innovation was as much in PC marketing as it was in technology or product quality. Listening to customers, identifying their needs and acting to meet those needs is our basic approach. Not a revolutionary concept.

Our secret, however, was that we listened better than the competition. We identified a better way to sell to customers--by getting closer to them and listening to their wants.

One important thing we learned from all this listening is that customers' needs do not change, their priorities do. The year 1991 saw the death of premium pricing for PCs, as users placed a higher priority than before on overall value. Price relative to performance has become a major driver for customers, but it's not the only one.

And this is where many of Dell's "direct" competitors have got it wrong.

Customers of any product or service are knowledgeable enough these days to know what they are paying for. They understand the difference between "purchase price" and "cost of ownership." What they buy is a certain core competence from a PC manufacturer; and price is not a core competence.

To survive into and beyond 1993, you have to offer more than just low prices. You have to have clearly identifiable, valuable, competence--competence that a customer can see, weigh and invest in.

Another requirement of the egoless corporation is that it be internationally cost competitive. The North American Free Trade Agreement (NAFTA) and the emerging European trading bloc are changing the way all companies compete.

For many businesses, the challenge is to reduce costs or die.

I am sure you've all done the equation. As prices fall, the only way to maintain your margins is to reduce operating costs. Cost control is a way of life.

I can certainly tell you it's a way of life for us. Dell's results for the second quarter of the current fiscal year show that operating expenses represented approximately 16 per cent of revenue, down more than eight percentage points from operating expenses in the same quarter last year, and down more than two percentage points from the first quarter of this fiscal year.

This decrease in operating expenses has substantially offset lower gross margins that resulted from our aggressive pricing actions. And we aren't planning to stop at 16 per cent; we have plenty of other ways to keep those operating costs down.

The same quarter also saw our inventory drop to record low levels--just 6.3 weeks of supply. Compare this with the 12 weeks of some other manufacturers. Dell can do this because of our direct relationship with customers--we know what they are going to buy and we build every system to order. It's a simple and very efficient formula which gives us a real operational edge.

Bottom line: If it doesn't add value for the customer, then don't do it. Don't have a glamorous corporate headquarters and fleets of cars. Don't have too many layers of management. In other words, act small. Act like small, flexible companies act.

There are no corporate secrets about controlling operating costs; for some companies it may require a change of attitude, but it is an opportunity that anyone can take advantage of.

For instance, recently each department and international subsidiary within Dell came up with ideas for how we could reduce operating expenses. At Dell Canada, each department had a brainstorming session and each and every employee had an opportunity to provide input into their area or other areas of the company. The cost and way of doing business is different in each country and we encourage employees in each Dell subsidiary to influence how their organization is run.

Dell Canada recently reviewed and changed shipping methods and is saving $50,000 per month as a result. Using the customer database and faxing Dell announcements overnight has saved thousands in postage. Overall, Dell Canada has increased revenue this quarter over last by 70 per cent without increasing expenditures.

As I said a few minutes ago, it's my experience that customer needs don't change, their priorities do. That said, I think a real key to survival is the ability to constantly reinvent yourself as a corporation. Shifting customer priorities means that the successful companies are those that can quickly rise to the challenge of meeting constantly changing demands.

We're all moving targets. As the market grows in sophistication and customer groups segment, it is inevitable that, whatever you do well, someone will come along and do it more cheaply. And bang goes your business.

The solution is adding value, staying ahead by providing extra value through that core competence you have.

Dell is better positioned than most because we stay so close to our customers. I'd like to cite one example of how we added value by listening to customers. Customers complained that it was difficult to access the inside of big servers on the floor under the desk. So, we added wheels to the system and made the cards accessible from the top. This is not a major breakthrough in PC technology, but it certainly adds value as far as the customer is concerned. It also illustrates our ability to measure the pulse of customers by listening and acting quickly.

Listening to customers and soliciting their feedback acts as a kind of radar on which egoless corporations thrive. Radar, in the sense that it indicate shifts in demand, conflict, satisfaction or when a problem might be brewing.

Egoless corporations stay competitive by listening and acting quickly.

Working in tandem with listening to customers and acting quickly to meet shipping demands, is being accountable. So, the egoless corporation is the accountable corporation.

We are living in the age of the customer-driven company. It is time for an even newer commitment to customers. It is time to see some real accountability and some guarantees with teeth. Simply stated, what was considered outstanding customer attention a year ago is no longer enough.

That's why we recently announced service, responsiveness and compatibility guarantees to Dell customers--the first such guarantees in the PC industry. Since compatibility is specific to my industry, I'll expand on these responsiveness and service guarantees.

If a customer phones Dell's toll-free technical support line, Dell promises that a technician will be on the phone with that customer within five minutes. If the customer cannot hold, we promise that a technician will call back within the hour.

We don't just promise, we guarantee it. If we do not keep this promise, customers get a cheque for $25, or $25 off their next purchase. I'm pleased to say, that over the past few months, we've paid only 11 cheques--out of nearly 5,000 technical support calls per day we receive in the U.S. In Canada, we've paid only one cheque based on 14,000 calls in the past two months.

The same goes for the next business day, on-site service we promise. If a technician does not arrive on-site by the end of the next business day, we will make that call a priority and add one month of service, at our expense, to that customer's service contract.

The difference in the 1990s is that it's not enough to just make promises to customers. As corporations, we need to put our money where our mouths are and guarantee satisfaction or be willing to pay a price. It's a necessary commitment--one we feel is imperative to maintaining customer satisfaction and ensuring that we are a regular on Fortune's list of fastest growing companies.

I've talked a lot about the egoless corporation. Let me use an illustration to help define what it looks like. It is a wheel, with the customer at its centre. The customer is the focus of the whole organization. All the operating departments like marketing, finance, manufacturing and sales ring the customer hub.

This is a flexible model for success. Without layers of hierarchy it can move extremely quickly. People are empowered to act, to take initiative. Everyone is customer-focused. Today, I think that within companies that have this model, you experience a very different sort of management process, where the worker becomes the decision maker; the middle manager becomes the leader; and the leader becomes the visionary.

To sum up my vision of the egoless corporation of the 1990s, it will be:

Totally focused on and close to its customers Willing to abandon old notions--even successful ones

-100 per cent accountable to its customers for its products and services

-committed to listening, reacting and moving with great speed

-Ultra-efficient in every aspect of its operations.

A tall order, but our very business survival may depend upon our ability to become egoless corporations. Thank you for your kind attention.

The appreciation of the meeting was expressed by Harry Seymour, President and CEO, Pathfinder Learning Systems Corporation and a Past President, The Empire Club of Canada.