CEO Michael Dell founded Dell Computer Corporation in 1984. Dell claims to be
the #2 computer systems maker in the world. (We question that statement - IBM
and Compaq surpass Dell in both sales and employees). Mr. Dell started the company
while still in college, selling PCs out of his dorm room. Since then, he has
built the company into a $25+ Billion powerhouse. Dell has refined the direct
sales business model to the point where it has become the model for the industry.
Dell's original product set was desktop computers, choosing to build strength
in one market before moving to another. After desktops came notebooks, followed
by servers. Dell holds the #5 market position for notebooks, but its real success
has come in servers. In 1996, Dell had a market share of approximately 3%, today
its US market share is approximately 25%. Dell has achieved this tremendous
growth through a combination of pricing, delivery, and refinement of the direct-sales
model. Dell's largest product segment is desktop sales at 58% of its revenue,
servers account for 17% of its revenue. It is primarily a product-focused company,
deriving less than 10% of its revenue from services.
competes anywhere an Intel-based server is found: enterprise computing, client/server
environments, small offices, web sites. Although Dell has historically focused
on the Windows NT environment, it recently instituted Linux as a factory-installed
choice on its servers. This gives it a jump on Compaq and IBM, its nearest market
share competitors both above and below. One area where Dell is not a serious
competitor is the UNIX market. (Linux is a variant of UNIX, but the two markets
are considered to be separate). Because it eschews the UNIX market, and sticks
primarily to Intel-based systems, we still consider Dell to be a niche player.
revenues for 1999 are estimated at $25.2 Billion, with income of $1.86 Billion,
giving a growth rate of approximately 38% for revenues, but only 27% for income.
Recent chip and display supply problems have caused an expected shortfall for
the current quarter. Dell has also blamed customer Y2K slowdown/concerns for
part of the shortfall.
Strategy and Trajectory
is working to be the US and worldwide market share leader for both PCs and Intel-based
servers, also called PC servers. It presently holds the #1 share in the US for
PCs, but is still #2 worldwide (WW). In PC servers, it is currently #2 in both
US and WW shares. However, it has been gaining on Compaq (presently #1).
has accomplished this through a number of strategic decisions:
Sell direct, and do it well by refining the supply chain to an-almost-unheard-of
2) Form a tight relationship with Intel (for hardware).
3) Leverage the Internet for sales and support.
As mentioned above, if you consider Intel-based systems a niche, then Dell is
presently a niche player. (A very big niche, but a niche nonetheless.)
Unlike IBM, HP, and to a lesser extent Compaq, Dell has not yet tried to expand
much beyond the Intel market. Part of the reason for this is that IBM and HP
had a successful non-PC business before PCs took over the world. It was therefore
easier for them to become and remain total systems houses. Compaq expanded beyond
Intel through acquisition, and so it has been more difficult for them to match
the IBM/HP fully-rounded product offerings. Although "Intel only" has been a
successful strategy for Dell to date, we expect they will want to expand their
admire Dell's single-mindedness regarding products. It has latched onto something
it does very well, and has stayed with it, constantly refining the business
model. One high-tech Chief Scientific Officer has likened Dell to a car lot,
because of the common view that Dell is just a distribution channel for Intel
Corporation. Although we see the validity in the statement, we also point out
that this "car lot" has been far more successful than most of its competition,
including the above-mentioned CSO's company.
will continue to focus its investment on delivering products for which it believes
there is a very large market. For example, Michael Dell has stated that UNIX
is losing market share to Windows NT, so Dell Computer will not pursue an aggressive
UNIX strategy. For those markets where there is significant, but not tremendous,
revenue potential, we believe Dell would form strategic alliances where necessary.
For the most part, acquisition is not part of Dell's game plan. However, we
can envision circumstances under which purchasing a company or technology will
has been very strong in the product cost and product functionality categories.
Dell high-end servers (for example, the PowerEdge 8450 and 6450) are price/performance
leaders in TPC-C benchmark testing. In the case of eight-CPU servers, Dell's
PE 8450 benchmarked about 1.3% lower in tpmC (see Glossary), but at a cost approximately
$95K lower than Compaq's ProLiant 8500, the next-best (in price/performance)
Intel server audited. This is not an isolated occurrence - Dell has performed
similarly in recent years.
Dell does not spend as much on research and development (R&D) as its main competitors,
their products continue to have competitive feature sets in terms of CPUs, density,
storage, and I/O capability. Dell servers are known as good products with few
(if any) deficiencies with respect to what customers want - a good product at
a reasonable price.
servers continue to be lower priced than their main competition. This is a function
of two key circumstances:
(1) Their supply chain is the most streamlined in the business, resulting in
lowered costs. As an example, the number of inventory "turns" is an amazing
50+ per year, resulting in near-zero inventory carrying costs. This performance
has led Compaq to try to emulate Dell's business model.
(2) The direct sales model reduces the ancillary sales costs, such as the cut
taken by Value-Added Resellers (VARs) as part of the channel strategy that most/all
of the competition uses.
It is also likely that Dell uses its clout to garner significant pricing advantages
from Intel and its other suppliers, but until recently that clout was confined
to PCs, so we think it less a factor in the server market, where Compaq has
Dell is a consistent winner in customer satisfaction surveys, including those
taken by Computerworld and Technology Business Research (TBR). Although customer
satisfaction is more an indicator of strength than an actual strength, it shows
that Dell consistently does what is necessary to keep customers happy. This
points to commitment by Dell, rather than reactive behavior.
Dell's earning have suffered lately (primarily from shortfall in the desktop
area), Dell has a very strong balance sheet, and its return on invested capital
is quite high. Dell occupies a lead position in most of the Intel-based product
markets. A recent survey from Technology Business Research shows that Dell leads
in customer satisfaction for Intel-based servers, among IT professionals who
purchase more than 500 PCs per year. Strong financials combine with high product
satisfaction means strong corporate viability.
Of the "Big Four" Intel server vendors, Dell spends the least on research and
development. As a percentage of revenues, Compaq spends three times as much
as Dell. IBM and HP spend more than four times as much (as a percentage of revenue)
as Dell. This lends credibility to the popular notion that Dell is merely a
distribution channel for Intel.
once relied on Intel for most of its Main Logic Boards (MLBs) and chipsets,
the heart of the server. It still relies on Intel to a greater extent than its
main competitor, Compaq. Although this reliance on the company whose name defines
this market might be seen as leading in technology, we believe that IBM and
Compaq have the edge here. This is for two reasons:
IBM and Compaq spend more money/effort on original R&D, leading to technology
differentiation from the "vanilla" Intel offering. Differentiators include things
such as "hot-plug" and "hot-add" PCI under Windows NT, in advance of the general
Although Intel still sets the standard for CPUs and some other technology areas,
they have had an increasing number of technology embarrassments recently (e.g.
"Saber" MLB not working perfectly with certain PIII Xeon "flavors", "Coppermine"
does not mean that Dell servers are poor quality - they are not. It just means
that Dell presently cannot use technology as a positive differentiator relative
to the other key Intel server players. We do not believe Dell can over come
this challenge without massive R&D investment or by acquiring a company whose
primary strength is R&D. We think each of these scenarios is unlikely (<20%
Service and Support:
Dell service and support had been viewed as lagging behind Compaq and IBM. By
contracting with IBM's service group to act as Dell's service arm (in addition
to the existing service agreements Dell has in place), we expect this perception
to change to the point where it is no longer a negative. Until that time, we
believe IBM has the edge in this area.
of Product Breadth:
Dell is an Intel house, first and foremost. Although this formula has yielded
tremendous success, the growth curve has been slowing for the past two years.
There are hints that Dell wants to become a systems house similar to the rest
of the "Big Four". One such is the purchase of ConvergeNet to beef up their
storage offerings. Dell will either need to buy or strike a deal with another
systems vendor to be able to expand beyond the Intel world. Dell's aversion
to acquisitions means a marketing alliance is much more likely (75% probability).
Within the Intel space, Dell should consider working with Advanced Micro Devices
(AMD). Although Intel-only has gotten them this far, the recent earnings shortfall
indicates that having a second source for a fallback would help. It would also
keep Intel "honest", i.e., keep them from taking their relationship for granted.
Since AMD cannot presently support multiprocessing, a deal with AMD would not
affect the current server offerings. However, if AMD ever releases its Poseidon/HotRail
chip set - designed to support multiprocessing - this would provide Dell some
will continue to increase sales and revenue over the next five years. We expect
Dell to close the Compaq/Dell market share gaps for both US and worldwide markets
(75% probability). We do not expect Dell to pass Compaq in the server market,
although we believe they will throw a good scare into Houston. Now that Compaq
appears finally to have figured out that they need to do more direct sales,
Dell's advantage in this area will shrink. We believe it will take Compaq another
1-2 years before they "stabilize" the loss of share to Dell. Once this happens,
Dell will need to look for other ways to go after Compaq, but we expect they
have already started this process.
Dell's market share increases, someone's market share will decrease. We expect
that to be a combination of small players and HP. We expect Compaq will lose
a little, but will recover. We do not expect the small players to recover. We
expect HP will stabilize at a percentage slightly lower than its current share.
Michael Dell decides he is tired of "the game", we do not expect Dell to be
acquired by other vendors. We also do not expect a significant number of acquisitions
by Dell, no more than two or three in the next five years.
Dell to overtake Compaq in the Intel-server market, the following will need
Compaq completely blows their streamlined-product-delivery initiative, or
Compaq makes a mistake (or series of mistakes) of earth-shaking proportions,
Dell/Intel develops surpassing technology which Compaq is not able to meet or
we think #1 is more likely (30% probability) than either of the other two (<15%
probability), we do not think any of the above is likely. Theoretically, Dell
could pressure Intel to provide Dell-only technology, but we think Intel would
be foolish to do so - unless they plan to buy Dell (5% probability). We therefore
expect Dell to maintain a #2 market share, albeit a strong #2. We also expect
IBM will try to reinvigorate their Netfinity product line, which will apply
pressure on Dell from below.
of the relatively limited upside, we expect Dell to consider modifying their
market focus from Intel-only to multiple architectures. However, we do not expect
them to change in the foreseeable future. (80% probability of no change) When/if
Dell decides to expand beyond Intel, they should first "test the waters" by
forming a strategic alliance before making the major commitment of either an
acquisition or ramping up their internal R&D. As mentioned above, we believe
strategic alliances will be Dell's modus operandi (75% probability).
low price and price/performance sells are attractive to many customers, as is
obvious from their rapid market share growth over the last five years. Dell
has shown a willingness to do whatever it takes to win key accounts, especially
when they can displace Compaq. Current Compaq customers may want to use this
to their best advantage in negotiations either with Compaq or Dell.
interested in price/performance (especially for transaction processing) will
find Dell's high-end servers attractive, although the perception is that they
sacrifice a little reliability relative to IBM. Users must decide if the advantages
of price/performance and system density (i.e., amount of computing power per
square foot) outweigh the slightly decreased reliability.
planning to purchase Dell systems should also compare five-year operational
and service/support costs to those of other vendors, and negotiate accordingly.
Current (non-SCO) UNIX customers will find minimal interest in Dell's product
set, unless they are considering changing their infrastructure to Intel-based
needing servers for 24x365 operation should consider alternative vendors, but
this is related to the Windows OS, not the Dell hardware per se. We cannot yet
recommend Linux-based systems, because of Dell's lack of track record in this
area. However, based on Linux's robustness, we expect Dell to develop a track
record within the next 3-6 months. We also believe Dell has the lead on Compaq
and IBM in the Linux space, because of its decision to ship Linux as a factory-installed