or How To Make Billions

Michael Dell, American entrepreneur, born 1965 in Houston, Texas.  Founder and CEO of Dell Computer

Twelve years old he created a nationwide stamp auction via mail, which earned him some two thousand dollars. At age 16, he put together a method to sell newspaper subscriptions earning him $18,000.

1984, at age 19 as a freshman at the University of Texas, Michael Dell started to sell computers that he put together himself. His idea was to configure the system just they way the customer wanted it, and to use cheap parts that he could find by scrapping old computers and buying larger quantities of new parts. He had promised his parents to try the business out, and if it didn't work well, he'd focus on his studies. At the end of the year, he made between 50,000 and 80,000 dollars per month. He dropped out of college and never looked back. At age 27, he was the youngest Fortune 500 CEO in history. Today, Dell Computer have almost 40,000 employees and a revenue of $30 billion. 

This was the creation of an entirely new business model: Sell - Source - Ship

Up to that time, most retail and wholesale business models had been Buy - Hold - Sell. This means that you'd first buy the goods you want to sell, then you store it in a warehouse, and finally you make the sale. In order to get sales, you are forced to have large warehouses of goods with all possible options available. Or else you'd have to have a good excuse when the customer asks for it. This way, and especially when it comes to the PC market, it is easy to end up with unsold products, which is expensive. 

Sell - Source- Ship means that you first sell the goods, and cash the money. Then you source and build-to-order the product the customer bought. And finally you ship it. If you know your supply-chains, this means that you can get rid of the warehouses. You'll just need an assembly line, and a good JIT (just-in-time) order management system that can monitor availability of parts and weigh this against incoming orders. 

It is not hard to see which of these two business models that have most potential in increasing the margins in the PC market, don't you agree ?

What Michael Dell also realized was that the Internet provides an excellent way for potential customers to actually configure their own systems. All that is needed is a rule-based configurator. By clicking around themselves, the customers can price their own system and it will eventually end up in a list of parts that will have to be assembled.

Three ideas:

  • Sell customized system from cheaper parts
  • Sell - Source - Ship
  • Let the customers configure and place their orders themselves

made Michael Dell the richest man at his age, at least when the stock market were doing better. He owns some 300,000,000 stocks in the company, which trade in the high teens or so, and should be compared to almost $60 early year 2000.

Source: dell.com, biography.com, fortune.com