Dell Builds a Better Dot-Com Model

This week, when Dell Computer Corp. unveiled its plan to sell computers that manage networks and data storage technology online, the company once again demonstrated why it continues to be such a strong e-commerce player.

By adding “back office” technology to its offerings, Dell is hoping to cash in on one of the fastest growing segments of business computing in the new economy.

Moreover, if the Round Rock, Texas-based computer reseller is successful in the enterprise market, some analysts predict Dell could easily recapture the historic growth rates that made it a Wall Street darling for years.

Higher Growth Areas

Earlier this year, Dell warned investors to expect growth rates in the low 30 percent range. Part of the company’s problem is that the desktop market is somewhat saturated. By offering a line of server appliances that are reasonably priced and tailored to limited tasks, Dell is making the right move at the right time, say industry observers.

The appliance server market is expected to grow from $740 million (US$) market in 1999 to $11.5 billion by 2004, according to International Data Corp.

As Dell expands into the enterprise market, analysts expect the e-tailer to follow with an elaborate plan for providing a host of products to be used by small and medium businesses that are just beginning to build their Internet infrastructures.

ConvergeNet Acquisition Makes Sense

Dell’s latest strategy explains why the company gobbled up storage management software maker ConvergeNet Technologies Inc. in October. Dell’s uncanny ability to adapt itself and take advantage of the next big thing is one reason the company pumped out earnings of more than $1.4 billion in 1999.

More significantly, in an era when money-losing Internet companies such as Amazon.com are still elevated to pedestals by mesmerized analysts and stockholders, it makes sense to turn one’s attention from their losing ways to Dell’s winning model. From day one, Dell was in business to make money rather than to burn cash.

More Effective Distribution System

The company’s founder, Michael Dell, started college as a pre-med student, but found time to establish a business selling RAM chips and disk drives for IBM PCs. Dell bought his products at cost from IBM dealers who, at the time, were required to order PCs at large monthly quotas that frequently exceeded their demands.

Dell resold his stock through newspapers at 10 to 15 percent below retail, using his dorm room as a warehouse. By April 1984, Dell’s computer components business was grossing about $80,000 a month — enough to persuade him to drop out of college.

What Was His Secret?

By eliminating the retail markup, Dell was ultimately able to sell his PCs for 40 percent less than IBM brick-and-mortar dealers and still make money. Before long, Dell began selling his products online and the rest is history.

While Dell’s success formula is simple enough to be followed by most of today’s dot-coms, for some reason it just does not seem sexy enough to many of the twenty-something CEOs running the startups. They appear to be more interested in planning IPOs and personal exit strategies than in building online businesses that will turn profits for decades to come.

Still, no matter how many of them fail or bail, Dell will simply adapt to the next big thing and continue to thrive. That’s why I believe that Dell — not Amazon.com — is the dot-com model to emulate.