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YoungBiz.com looks at Michael Dell, the founder and CEO of  Dell Computer.  Check out Dell's stock here:  DELL

You’ve probably heard of Dell computers, but you may not have heard of its founder, Michael Dell. Michael is also the Chief Executive Officer (CEO) of the Austin, TX based company he started in 1984 at the age of 19. Michael started his business career when he was twelve years old, although it was not selling computers. It was in stamps, and he made a profit of $1,000 on an auction he devised. He also sold newspaper subscriptions in high school. One group he thought might be open to his sales pitch were newlyweds who would be interested in seeing their announcements in the paper. The plan worked so well that he made $18,000 in his senior year of High School, and bought his first BMW with cash.

Michael’s advice for would be entrepreneurs: "Experiment. Try a lot of things; it's the fastest way to learn. Don't try to come up with a perfect plan; get out there and do something."

Michael continued his entrepreneurial pursuits when he went away to study biology at the University of Texas in Austin in 1983. He began selling personal computer upgrades out of his dorm room. About that time he noticed that computer salesmen often were less informed about the computers they were selling than their customers. Michael thought that he could provide better service and better prices over the phone than customers where getting in stores. By 1984 he was doing $100,000 a month in sales out of his dorm room. He decided that he wanted to quit school and begin selling computers full time. He discussed the decision with his father, and they both agreed that if he did not find success within one year, that he would return to school.

As you might have guessed, Dell never went back to the University of Texas. The company he founded, Dell Computer, had sales in excess of $15 Billion in 1998, and Michael’s personal approximately 17% stake in the company worth about $20 billion. That’s $20,000,000,000. That is a lot of money for a company that started out in a dorm room.

The fundamental idea behind Michael’s business plan was that many computer buyers knew what they wanted, and often knew more about the computers that stores were selling than the salesmen themselves. He believed that by assembling computers to order he could give customers exactly what they wanted at a price that was superior to what they might spend for a similar system in a retail outlet. An example of how this might work would be the following: You decide you want a computer. You go to a store and look at what is available. None of the systems on the shelves have exactly what you are looking for. You contact Dell via a phone call or the Internet. You tell them exactly what you want. They tell you how much the computer you want will cost. If the cost is right, you then pay for it (along with the delivery change) via credit or debit card. They then build the computer for you and send it to you by FedEx. The best part of this model is that since the customer is buying directly from Dell, Dell makes more on each unit because they do not have to build a distributor's markup into their sale price.

Another aspect of the Dell model was that since computers were built to order for paying customers, the company did not have a lot of pre-assembled computers on store shelves that might not sell if market conditions changed. This assembly and distribution model allows Dell to keep much lower inventory levels for components used to build computers. In the computer world, this is very important because the prices of components such as memory chips, modems, processors and storage devices fall rapidly. The key is to have on hand only enough components to assemble the computers you expect to build between parts shipments because it is very likely that prices for those parts will drop before your next shipment.

Imagine for example that you have decided to make lasagna for your prom fund raising luncheons on the first Monday of the month for the next six months. One pan of lasagna makes ten servings and you make five pans each Monday. You sell each serving of lasagna for $1, which gives you $50 per luncheon for a total revenue of $300. The school provides all of the ingredients except for the beef, and one pan uses two pounds of beef. Lets pretend that the market for beef is similar to that of computer components, and the prices can be expected to go down as time goes by. Today the price of beef is $3 a pound. As we are assuming that the beef market acts like the computer components market, we know that the price of beef will fall by some amount which we will say is 6%, or $.18 a pound per month. In six months, one pound of beef will cost $2.10. If you bought all of the beef you need for all six meals now it would cost you $180 and your final profit would be $120. If you instead bought the beef each month as you needed it, the beef would cost you only $153.00 and your final profit would be $147.

Obviously lasagna and computers are much different, but conceptually this is the way Dell buys components for its computers. Dell buys only what it needs because it assumes that it can get the parts it will need later for less than it would pay now. This model has worked extremely well for Dell for a long time. Because of this model, Dell experienced an enormous boost to its profit margins due to recent problems in Asia. As the economies in Asia had troubles, their currencies became weaker against the dollar which makes goods produced in those countries less expensive here. As a result, Dell was able to get its components for even lower prices than it otherwise would have had the Asian economies continued to boom.

Not that it has all been a picnic for Dell. In the mid 1990s the company had significant problems. They stemmed largely from its inability to cope with its rapid growth, currency speculation losses and a poor product offering in its notebook line. Dell, still in his twenties decided to bring in a team of seasoned veterans from other companies who had experience with problems similar to the ones Dell was experiencing. The heart of the problem was that the company had an outstanding business model, but it needed some seasoned management to help it make the transformation from a small mail order company to one of the worlds largest and most sophisticated computer companies. The management team that was brought on board made a variety of changes in the way the company operated and it scrapped the laptop line altogether in order to rebuild it from scratch. They have been successful beyond their wildest dreams, with Dell’s stock going up by 2,500% since 1995.

As if the business of running a Fortune 500 company were not enough, Michael Dell serves on the Board of Directors of various charitable organizations, including the United States Chamber of Commerce and the Computerworld/Smithsonian Awards. Michael was awarded the title "Entrepreneur of the Year" from Inc. Magazine in 1989. He was also named the 1992 "Man of the Year" by PC Magazine and "CEO of the Year" for 1993 by Financial World magazine. Through its Dell Education Alliance, Michael’s company provides curriculum, software and hardware products to school systems. Says Michael, "I think computerization in schools is incredibly important. This is the language of the future. All the evidence suggests that when you get children exposed to computers, they learn very early. It's their friend."

Michael’s advice for would be entrepreneurs: "Experiment. Try a lot of things; it's the fastest way to learn. Don't try to come up with a perfect plan; get out there and do something. Try a lot of different things and see what works. I think the computer industry provides great new opportunities for people to do things. I am sure that there will be many great new companies created out of ideas that are thought of not necessarily as in the mainstream."

This article was based upon a variety of sources from the web and articles in print.

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