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The pragmatic radical

CEO Michael Dell is about to apply his tried-and-true business formula far beyond the PC. Is he worried? Don't count on it.

Michael Dell, the chairman and CEO of namesake computer maker Dell, certainly knows how to fit his image to his company. Dell, the computer maker, is known as an execution marvel, which turned the lowly distribution channel into a key source of competitive advantage. Dell, the man, delivers the vision with admirable dispatch, carefully stripped down to essentials.

But Dell--man or company--is not one to take on the lofty goal of remaking the technology industry by introducing radical new ideas, a la Steve Jobs. Rather, Dell is content to engineer changes that customers want, making computers and systems that are more cost-effective.

In a roundtable discussion with CNET News.com's Editorial Board, the 38-year-old Dell, who has led his company since its founding in 1984, was tight-lipped about naming management gurus or companies he aspires to emulate. He was far more comfortable talking about Dell's strategic moves into new markets and his disdain for competitors' grandiose visions of things such as utility computing.

Q: You're crossing over into consumer electronics. Is it a stretch from your core competency in PCs?
A: About 85 percent of our business is businesses, institutions and governments that buy computers from us. About 15 percent is consumer. So with consumer electronics we're talking about a subsegment of 15 percent of our business. We sell more LCD monitors than anyone in the world, 70 percent greater than the No. 2 company. More customers are using those in multimedia capabilities, like in TV tuners. In Japan, 50 percent of consumers are using their PC as a television. These are emerging requirements. We started developing LCD monitors with tuners in them. I don't see it as a complete departure as much as a natural extension. All of our strategy emanates from computing, whether it's MP3 players or the millions and millions of customers using Dell Musicmatch.

Are you beefing up R&D to make your consumer products more unique, or is it more the case of using your distribution muscle?
We have 3,600 folks in our R&D division and spend half a billion dollars a year, similar to the amount Apple spends. We don't think percentage of revenue is a good measure of success in R&D. We look at it as--what do we need to spend to accomplish what we need to accomplish?

But you feed off Microsoft and Intel R&D.
Our strategy for development is different than Microsoft's or Intel's. Those are ingredient companies. We're a computer systems company. We have a higher return on R&D than any other computer systems company, about five times the profit for every R&D dollar spent. A lot of companies say they're better than us because they spend more on R&D. What are they better at? A lot of the R&D spending is actually spent to protect things that are proprietary, of no benefit to the customer. We only do the kind (of R&D) that benefits the customer. We don't try to reinvent things that other companies have (invented).

What have you done specifically on the R&D side that you're proud of?
We've made products easier to use and service. We've innovated in time-to-market. Who had the first color notebook powered by batteries? It's Dell. There's this misnomer that companies that spend more on R&D are somehow better and more successful, but there isn't a lot of data to support that.

If you look at innovation, it doesn't just occur in the lab. Comdex is the place you go to show things that nobody knows what to do with, because they haven't found a market yet. We don't develop things nobody knows what to do with. We develop things people want to buy--and buy in volume. Innovation can occur in supply chain and logistics, manufacturing and distribution, and sales and service. We've made computing products far more affordable. If you look at the cost of computers 20 years ago versus now, we've caused the whole industry to get more efficient.

How do you see your role in terms of design? Would you rather let someone like Apple take the lead?
We spend about as much as Apple in R&D. Just because we sell a whole lot more doesn't mean we're bad. I thought that was part of the objective.

How do you see the battle playing out between the PC and consumer electronics companies?
Increasingly they're the same companies in both categories. In the digital home, people want to hook things together. I'll give an

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Michael Dell, CEO, Dell
example: If you look at digital cameras two years ago, most had proprietary methods to connect with the PC--special cables, special interfaces. The user said, "Forget that, I want USB." What's really winning here is the PC. It continues to be the major point of influence in the use of this information in the home, whether it's music or pictures. I think you'll see the same thing happen with video. I'm not suggesting that consumer electronics companies will go away. I'm just suggesting that all companies in this digital home are going to be forced to fit into this framework where consumers want things to hook together.

Certainly there are enormous opportunities in this market for Dell. We launched this consumer business in 1997 and went to like 30 percent share in five or six years. Plenty of people said you can't do that, you've got to have retail stores. The fact that there are skeptics who don't believe we'll succeed in another market--take a number.

The basic PC hasn't changed all that much. How do you see it evolving?
When you talk to users, you continue to hear the focus move away from memory-processor into other things--video, media, networking. We as an industry have to make our products more reliable, safer, more productive, more entertaining. If we don't they won't buy it. There were 160 million computers sold this year. Apparently somebody likes them.

Will there be anything radically new?
There's a lot to do in man-machine interface. If you think about the power in the computer and power in the brain, you've got very low bandwidth in the interface between the two. But those are not problems that will be solved quickly. There's ample room for invention. The notion that we've reached a plateau in creativity is total nonsense. It will continue to evolve. Our role is to understand customer requirements and bring together solutions in the most effective, efficient manner on the planet.

You'd rather be pragmatic than revolutionary?
Yeah, sure.

HP, Sun, IBM have embraced utility computing. What does utility computing mean to Dell?
At a primary level we're committed to what saves customers lots of money. If we felt utility computing would save customers lots of


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money, we'd immediately have utility computing. But we don't believe that's the case. There are a lot of schemes that companies come up with to lock the customer in to a proprietary mechanism. This is one of them. I'm hard-pressed to see customers say we save a whole bunch of money by doing it. We just haven't seen it.

Will Dell need to come up with a brand strategy competing with HP's Adaptive Enterprise, IBM's On-Demand and Sun's N1?
It's so complicated even they don't understand it. As we sit down with customers, they want practical solutions. If you look at the market-share data, I think they want Dell. They're not buying the buzzwords. They're buying savings and value. At the most cynical level, some of these things look like really expensive financing. We'll loan you $150 million at a 28 percent interest rate for seven years. You outsource your savings too. There are times when it makes sense to work with a partner, but you really have to understand what you're buying. You won't want to outsource architecture decisions and other things critical to long-term success.

Is the scheme of optimizing hardware a good idea?
Creating better ways to utilize your resources and having capability for peak capacity is different than the grand vision of utility computing. We fully embrace the notion of optimizing servers. We work with VMware on virtualization, a great way to help customers take advantage of their installed base of servers.

This issue of services versus boxes has become a critical one in the industry. Where does Dell stand?
We have a pretty extensive services business. We have embedded services that go along with the product. Then we have the discretionary services, the professional consulting, SAN (storage area network) design and deployment, application development, managed services--it's about a $2.6 billion business for us and growing at roughly double the rate of our product business.

Do you agree the battle will turn on services? Does it make sense to acquire capability?

There's a lot to do in man-machine interface.
We haven't been a superacquisitive company. We like to grow organically and will probably continue to do so. That doesn't mean we eliminate the possibility of acquisitions, but I wouldn't hold your breath. We're very happy with the growth rate of our organic business. We've got this goal to grow to $62 billion in revenue. We're well on track for that.

Have you put a time frame on that?
That's a subject of debate. We haven't put a specific date and time on it. Based on our growth rate, it's a couple of years away.

2005 would be a fair assessment?
Most of the analysts have it in 2006. If you look at the last two years, the industry grew basically zero and we increased our market share by 40 percent. And we did it growing our profits too.

Our growth has been pretty rapid and relatively uninterrupted. We grew 80 percent per year for eight years. We grew 60 percent per year for six years after that, so we're slowing down now. But if you look at the dollar growth it's still pretty hefty. We started with zero percent of the market, now we have 70 percent or something like that. In the United States we have more share than the No. 2, 3 and 4 companies combined.

Is the big growth era over for the IT industry?
One of the problems we face from a revenue standpoint is this commoditization (of computer products). The market grows to correct some of that, but it doesn't correct all of it. It's bad news for the proprietary companies; it's great news for the customer because they get a lot more value, and it's great news for us. Our business model is based on those things.

How do you see the overseas market shaping up?
China's already become the second-largest market in the world. We're the largest nondomestic company in China, after Legend.

Is that still true after Scott McNealy's announcement on Sun's deal with China?
I don't know what we're going to do (laughs). We're just going to have to close up shop now that Scott's there. He just continues to amaze.

You don't believe him?
Of course I don't believe him. Do you believe him?

Of course I don't believe (McNealy). Do you believe him?

Do you have contingency plans for the Linux momentum?
We have a great Linux business. We're No. 1 in the United States. We have a great relationship with Red Flag in China, SuSE in Germany, and Red Hat here in the United States. So Linux is fully embraced by Dell.

How do you see the client market shaping up?
We're very happy to sell Linux on the client if there's a demand for it. We haven't seen a lot of demand.

Is that a significant threat for Microsoft?
When a computer goes down the line, it doesn't really care what operating system it has. And neither do we, so long as it's the one the customer wants.

What does that do to your relationship with Microsoft, if you're the No. 1 seller of Linux?
If they want to sell more products, they can work with us and we'll help them be more competitive.

How do you decide at what point to enter a market, such as tablet PCs?
It's a combination of factors. We look at our bandwidth, how much we can reasonably expect to do. We may not be ready to take on additional things. Then we look at adjacent markets. It's an allocation of resources and strategic priorities. There are plenty of markets we won't go in. We have some partners we work with on tablet PCs, but it's thousands of units as opposed to tens or hundreds of thousands. The gestation period is going to be longer.

What keeps you up at night?
It's not easy executing a business like this. We're focused on growing our organization, our leadership capacity. We're building alliances, enhancing our systems management capability, building geographic presence in China and Asia, ensuring we have continuity of supply, building the new printer business. There are plenty of things to keep us busy.

Are there companies you look to as examples?
We talk to General Electric; we talk to Wal-Mart; we talk to eBay. We try to learn from all the best ideas out there. We have our own business model, but we try to expose our team to lots of ideas and learn from the best that are out there.

How do you hold your executives accountable in terms of execution?
We have metrics and agreed-to goals and objectives. There's a great amount of focus and attention on customer experience and efficiency, and how we're doing time-to-market and service levels. We have a process called BPI, business process improvement, which any employee can be involved in. If five workers on the production line see something that isn't working, instead of complaining about it, they have BPI. They form a team, they go solve it and it becomes a BPI project in a global database. We're saving $1.8 billion with this kind of process.

How have you changed as a manager?
I don't spend a whole lot of time thinking about that. I'm probably doing a lot more on strategy rather than operations, spending more time asking questions and teaching as opposed to telling.