Hi everybody dell and ibm are two of the most iconic companies in the computer revolution of the world and while most of us see them as just another computer company very few of us know that dell and ibm were involved in an iconic business war that changed the computer industry forever.
While on one side there was ibm with a revenue of 4 billion dollars way back in 1984 itself on the other side at the same time dell was a baby company that was founded by a 19 year old kid with just one thousand dollars in investment but in the next 14 years something extraordinary happened and you know what in just the first half of 1998 dell.
Reported operating earnings that were greater than the personal computer earnings of compaq gateway hp and ibm combined and by 2001 dell also became the largest computer manufacturer in the world the question is how did a 19 year old kid end up beating a giant like ibm what was so special about this business strategy.
And most importantly what are the lessons that we need to learn from the iconic case study of michael dell this video is brought to you by zest money but more on this at the end of the video this is a story that dates back to late 1970s during this time personal computers were relatively alien to the american society but by 1981 small.
Startups like apple and radioshack started recording a decent amount of sales in the market this is when ibm being a pioneer in the computer industry decided to tap into the market and launched its first personal computer in 1981 and just two years later it was already dominating the market with a 42 market.
Share with a world-renowned corporate sales force and service organization ibm even commanded 61 of the market for mainframe computers and produced many of the components for its mainframes but while launching a pc however ibm purchased many of its confidence from outside the organization it bought the.
Operating system from a startup called microsoft and adopted the microprocessor architecture designed by a company called intel and in the next two years ibm used its huge sales force to sell personal computers to large corporate accounts soon enough the computer market started catching fire in the b2b space and since.
Ibm sales people had very strong relationship with the industry ibm was undoubtedly the first choice to buy computers in the business to business space and then to serve small businesses and customers ibm built a robust supply chain to reach every nook and corner of america this was executed through a.
Network of distributors and dealers who were known as value-added resellers these resellers not only sold pcs to the customers but also guided them through the purchase of what was still an unfamiliar product to the society this way ibm had established a full-fledged widely accessible supply chain to sell its personal computers now.
The catch over here was that the market of personal computers was growing so rapidly that if you look at the charts from 1982 to 1984 the computer market almost tripled in just two years to 12.8 billion dollars from just 4.5 billion and by 1988 it was already a 20.6 billion dollars market and because of such an explosion of a.
New fund product in the market even ibm was not able to cater the demand of pcs this is the reason why soon enough other companies began to offer something called ibm clones this is where compact came in and it entered the market with a low priced portable clone in 1982 and merely by capitalizing on a small gap compact made 100 million dollars in.
Revenue in the very first year itself this is how rapidly the computer market was growing and one of the many many clones of the market was none other than a baby company called dell computer corporation which was incorporated in 1984 and just like ibm all the makers of ibm clones built the same supply chain of going.
Through resellers and retail stores to reach the customers but you know what guys dell was no ordinary clone and like i said before within the next 14 years dell beat every single player in the market to become the most profitable computer company in the industry now the question is with so many.
Competitors and giants like ibm and compaq in the industry out of nowhere how the hell did dell become a market leader well this is where michael dell’s business acumen comes into play michael was a curious and opportunistic boy whose first computer was the apple ii and the first thing he did when he got.
The computer home was to open it up and see how the computer was made back then the architecture of computer was fairly simple but very few people were actually educated about computers soon enough dell started reading and became proficient enough to take an ibm pc dismantle it and started buying parts to enhance pcs like more memory disk drives.
Bigger monitors and even faster modems within some time he even started selling it at a profit and started placing bulk orders with distributors to reduce the cost and to increase the profits and people look at the passion that this guy had way back in 1982 barely in the age of 17 this guy skipped school to visit the national computer conference to.
Understand the computer industry properly this was an eye-opening experience for him when he got the macro picture of the entire computer industry including the latest tech in the market and the sales prices of different components in the market and that is when ladies and gentlemen michael dell found three market indicators that.
Presented a game-changing opportunity for dell computers the first thing he found were the anomalies in the sales and markup of the machines he saw that an ibm pc was typically sold in store for three thousand dollars but the components could be purchased for just six hundred to seven hundred dollars and the best part was that the.
Technology was not even owned by ibm secondly the resellers were operating in the computer stores didn’t even know much about personal computers in fact they had previously sold stereos and cars and just happened to sell computers because it was apparently the next big thing so the dealers used to pay 2 000 for an ibm pc and sold it at three.
Thousand dollars making a crazy profit of one thousand dollars per machine on top of that they offered little to no support to the customer and yet they were making tons of money because people really wanted to buy computers at that point michael was already buying the exact same components that were used in these machines to upgrade his computers.
And that is when he realized that he could directly compete with the computer stores not just on the basis of price but also on the basis of quality and third and most importantly ibm was selling a six hundred dollar machine at three thousand dollars not because it wanted to make hefty profits but because a major chunk of this money actually.
Went to the resellers and the retailers and that is how based on these market insights michael dell built a revolutionary supply chain that changed the computer industry forever this model was called the dell’s direct model to tell you about it here’s how the phase one of the direct model worked out like we saw before ibm and ibm.
Clones were selling their computers through resellers so they couldn’t bring their price of the computers below two thousand dollars but michael dell knew the cost of all the parts and the perfect vendors to buy them from and he already had customers whom he could sell it to so he literally assembled the computer for six hundred.
To seven hundred dollars and seemed to have sold it within a bracket of one thousand to two thousand dollars which was impossible for ibm or others to reach and because of this huge price difference the world starts spreading out and within some time even business people attorneys and doctors from that.
Area started buying from tel by this time michael realized that he was ready to get into this business full time so on 2nd of january 1984 he officially incorporated the company with pcs limited and rented a small place hired a few people to assemble the pcs and within a few months they were already selling 50 to 80 000 a month of.
Upgraded pcs and add-on components now the question is michael was selling 50k worth of pcs that was fine but ibm was a national player right and they were using resellers to reach the lens and breadths of the country then the question is without e-commerce without resellers how did michael dell sell to the entire country of america.
Well this is where the second phase of dell’s direct model comes in and again just like the previous phase it was based on some very deep market insights that very few people paid attention to number one dell noticed that as the computer market started growing rapidly ibm was again not even close to meeting the demand in addition the distribution.
Of these pcs had led to a tremendous imbalance in the demand and supply for example a dealer would order 100 computers and would receive only 10 so the next time to get what he wanted he would order 1000 pcs and he would get 633 but during that time he would have needed only 100 pcs and because of this massive mismatch of inventory and supply.
The resellers would often end up paying just for the excess inventory as a result they started selling these extra pcs at a dirt cheap cost and this is what then became to be known as the ibm gray market so you know what dell purchased all these computers that dirt cheap cost upgraded them and started selling them.
Again in the market secondly the chipset technology became accessible and affordable enough to enable smaller players like dell to make their own computers and lastly in the race of meeting the exceeding demand ibm and compact were engaged in selling to the masses so much that they started moving far away from their customer disability.
As in they used to make computers that they thought were best suited for the customers and they just expected the sales to pick up and since the market was so huge the sales actually picked up but michael understood that this would result into a deviation from what the customers actually desired and most importantly it left a huge untapped.
Market for customized computers that would be needed both for businesses and individuals and based on these three insights ladies and gentlemen michael dell began the second phase of the dell corporation that turned dell computers into the largest manufacturer of pcs in the world with over 1 billion dollars in sales and.
They deployed the following strategies to achieve it number one instead of going by conventional challenge for sellers they set up a highly talented sales team that could cater to the exact needs of different types of customers they set up two types of teams for that the first team would cater to the business to business segment and the.
Second team would cater to the ordinary customers and in the business segment the sales staff were specifically hired based on who had a background of the client’s domain for example one department was an expert in dealing with federal and state government the other was a specialist in dealing with.
Educational institutions and the other was specialized in dealing with hospitals and so on and so forth this way the sales staff didn’t have to keep beating on the bush trying to understand the intricacies of eight different industries and they could quickly and accurately solve the queries of the customers to complete the sale on.
Top of that the sales team was compulsorily asked to set up their own computers with the exact specification that they needed now although many people did not like it it gave them a real sense of what an uneducated customers would go through while setting up his system this is the reason why dell’s sales team.
Was one of the best performing sales teams in the industry secondly when the sales team started directly talking to the customers from different domains they started collecting important inputs based on which the engineering team used to work on to make the perfect pcs that could fit the requirements of different clients.
And this was applicable both for custom clients and mass customers thirdly they deployed the iconic just-in-time system to minimize the inventory and maximize cash flow and profits for those who don’t know while most companies often stock up thousands of pcs and move it out of the inventory as soon as the sale happens in the just.
In time system the pc starts getting manufactured only when the customer places the order this way the inventory cost is minimized and the overall cost of production comes down because of which there is less wastage and maximum profits and if you want to know more about it in depth do check out our video on toyota’s just in.
Time model and lastly no matter what happened because ibm was considered to be gold standards dell always tried to beat ibm with every single product just to make a name in the market as a result not so surprisingly dell started to build a supply chain that was a revolution in the computer industry.
And here are the numbers that blew my mind while ibm and dare started with more or less the same days of supply and inventory at 30 to 40 days because of the just-in-time system the days of supply and deals inventory started dropping drastically going from 35 days in 1994 all the way down to just about.
Five days in 1998 and during the same time compact was still at 34.2 days ibm was at 49.4 days and hp stood at 70 long days of inventory this is the reason why by 1998 the retail on invested capital of dell was absolutely crazy while ibm had a return on invested capital of 13 percent hp stood at 16 percent compact stood at 35 percent but dell was way.
Ahead with a written on invested capital of 186 percent soon enough dell computers started winning performance awards they began receiving five star ratings for quality support and service and all the key magazines began recommending dell for the best value and highest performance as a result by december 1996 dell sales.
On web reached 1 million dollars a day and by may 2000 the company’s online sales generated 40 million dollars in daily revenue which is about 50 percent of the total sales of the company this is how ladies and gentlemen dell set a world-class benchmark for other computer companies to follow and beat the giants like ibm and compact to become the.
Largest computer manufacturer in the world and this brings me to the most important part of the episode and that are the lessons from the iconic case study of dell versus ibm before we move on i want to thank our partner zest money for supporting our content now in case you’re thinking about buying a dell laptop or any other gadget for that.
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Moving on there are three lessons that we need to learn from the iconic rivalry of dell and ibm lesson number one no matter how young you are no matter how small a player you are in your industry if you keep learning about your industry your chances of finding an opportunity will keep increasing with each passing attempt but most founders don’t succeed.
Because they don’t obsess over learning about their industry but in our case michael dell in spite of being just 17 he had the audacity and curiosity to attend the computer conference to open his new apple ii computer to go and talk to the resellers and retailers and the insights that he gained through these interactions is what gave him the.
Foundations to build his billion dollar business lesson number two if you want to make a name for yourself always try to compete with the best in the market in this case while ibm clones were just trying to eat the breadcrumbs of the market michael dell went after the 4 billion competition ibm itself and slowly and.
Steadily he started raising his bar to beat his competition and lastly always keep reading about the emerging markets in your vicinity and keep a close eye on those markets that are growing so fast that in the biggest players cannot cater to the demand in today’s world those markets are the creator economy the b2b software space.
The renewable energy space the ai application space and even the fintech space because these markets will give you a wider scope to fail and rise up in spite of you not being the best in the market and before we say goodbye please listen to tim ferriss podcast episode with michael dell and read this wonderful book called direct from dell.
From the man himself that’s all from my side today guys if you learned something available please make sure to hit the like button in order to make youtube baba happy and for more such free business and political case studies please subscribe to our channel thank you so much for watching i will see you in the next one bye bye.
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