Michael Dell on How the Board Can Help
from
January/February 2002
by Catherine Fredman
Anyone looking for some perspective on what terrorism has done to business could do a lot worse than talk to Michael Dell, 36, the founder and chairman of Dell Computer Corp. That’s what Catherine Fredman, who co-wrote Dell’s 1999 autobiography, Direct From Dell, did on behalf of
Corporate Board Member
. Dell had this to say about the future of his corporation and its industry—and the role seasoned directors can play in helping any company survive volatile times:
What will be the top issues affecting the computer industry in 2002?
Certainly a big issue is what this new wartime economy is going to look like and how the September 11 tragedies will affect the timing and nature of an economic recovery. My sense is that the near-term reaction is probably negative for large capital-intensive projects. The results we’ve seen so far have shown a pause and reflection in the case of large-scale purchases. I think that’s because we all had our own construct of how the world operated. When that was changed in a very dramatic way, we wondered what would happen next and started reexamining a lot of things. Not being able to put those things in a familiar context has shaken a lot of people, so they put off large investments for a while. But as life gets more predictable again, as there’s more definition around who did this and why and what’s going to happen next, as there’s more definition around the safety and security of our country’s infrastructure, I think investments will resume.
There’s a consensus that in a perverse way, government spending brought about by this tragedy will probably generate a faster economic recovery than we might otherwise have seen. Generally speaking, we were already in a period where people were pushing out or delaying expenditure. But they can’t do that forever, because productivity is fundamentally driven by technology. So as the economy comes back, spending in the high-tech sector is likely to come back. What also happens in periods like this is that weak companies get weaker and strong companies get stronger, and you see industry consolidation.
We’ve already had signs of that with the proposed merger of Hewlett-Packard and Compaq.
Yeah, isn’t it great? One analyst said about the HP-Compaq merger that this is the dumbest deal of the decade, and there’s still nine and half years left.
What will the increasing consolidation mean to the industry overall, and specifically to Dell?
In one sense, the effort to consolidate that you’re seeing by a number of companies is reflective of their inherent inefficiencies. It’s not at all clear to me that two struggling companies will be able to solve their problems any faster by combining. The problem for our competitors is that by and large, they don’t have the right cost structure. Our cost structure is about one-half of our competitors’, and as a result we have leading market share, leading profitability, and leading growth.
Does consolidation imply that the computer business has become a mature industry? How do you see the computer industry evolving?
We may be at an early stage of consolidation, but while that shows some level of maturation, I don’t think of this business as being mature. I think there’s still a lot of aggressive development of new technologies that will drive huge change and turmoil in the industry. And the underlying technologies themselves are powerful enough to create a great potential for new applications.
Even though we can’t necessarily think of all those applications today, we know that creativity and uses for computing tend to expand to fit whatever computing power is available. That’s been the case forever. Ten years ago nobody knew how much computing power there was going to be in the new millennium, or what we were going to do with it. And we don’t know now how things will be 10 years from now.
But we do know that there will be incredible increases in power, and people will figure out how to use it. Broadband is happening, and it’s definitely a stimulus to demand. If you look at all the computers in the world as one big network, the bottleneck has been the connection. As broadband links become more widely available, people will start using richer forms of data—sound, video, music, pictures.
How can technology companies protect and preserve themselves for the future?
You do the kinds of things you do in a slowdown: focus on your core business and jettison activities that aren’t critical. It’s an opportunity for strong companies to continue their investments and perhaps even expand into new areas, so that when the market comes back they’ll emerge even stronger. Weak companies may need to look at becoming part of another company.
People have said to us, “Gee, your market went away.” That’s not really true. An estimated 140 million computers will be sold in 2001. Maybe the growth went down dramatically, but the market didn’t disappear. You can still grow quite a bit by capturing market share from other companies, by expanding into new geographies and new customer segments, and by refining costs and services. But it’s definitely a time to refine our competitive advantage.
Dell and other computer companies were built on PCs, an industry with ever-smaller profit margins. Do you see the industry eventually evolving to exclude PCs?
This is part myth and part reality. Our business continues to earn operating margins of about 7%. My view is that with a market this large, the market isn’t going to go away at all, and if you have the right cost structure, as we do, you can be quite profitable, as we are. You can never have too many computers. The fact that our competitors can’t make a profit making them—that’s not my problem.
New opportunities often arise from chaotic situations. What new opportunities might emerge in the high-tech industry as a result of September 11?
Consider the question of security. Before the tragedies, there was a lot of talk about privacy. Privacy is very important to a lot of people, but what some fail to realize is that if you have complete privacy, you have no security. Giving up a little bit of privacy to gain some security is a trade-off that many more Americans are willing to make at this point. The systems that ensure that we have both privacy and security are fairly data-intensive. National identity cards and that sort of thing are IT-intensive applications.
How can a board of directors protect a company during difficult times?
It’s certainly worth having a board that has some experience in dealing with challenges. If a company is having problems, the role of its board becomes greater. Many board members may have seen recessions and downturns more closely than the people who are operating companies today. Because most managers have probably not been through something like this, the board can provide perspective. It certainly took us a while to figure out how to adjust to and deal with a period of much slower growth, and what that meant in terms of cost controls. Our board helped with that.
How is Dell’s board of directors suited to volatile times?
We benefit from lots of different ideas. We have people on our board who understand technology, but quite frankly, we have a deep understanding of technology inside our company, so we don’t look to our board to give us that. We do look for broad insights that come from outside our industry. Don Carty [chairman and CEO of American Airlines] brings an understanding of an industry that can go up and down pretty rapidly. Klaus Luft [founder, owner, and president of Match, a German company that provides sales and marketing services to high-tech outfits] brings a global perspective and is particularly good at delivering insights about Europe. We have some specific competitors in Europe, so we talk about those and what we can do to succeed in specific European markets, like Germany. Klaus also works with Goldman Sachs, so he has good insights on what’s going on in developing technology. [Former U.S. senator] Sam Nunn has some good insights on the Department of Defense and our challenges in public diplomacy. Michael Jordan also has some defense background from his experience as chairman and CEO of CBS/Westinghouse.
Should a company change the composition of its board of directors to meet shifts in the economic and competitive landscape?
If you were putting together a board, you wouldn’t put it together for a particular moment in time. You would put together one that would do the best job over the next 10 years. You don’t know what’s going to happen tomorrow, and you can’t change directors every time you turn on CNN. You want people in place with broad perspectives, who have been through a number of challenges and seen a number of things. For us, that means having board members with a global understanding, with some understanding of the government, of the financial world, and of the legal world. Most important, you want people who have been leading large, complex organizations and can serve as a check and balance on our strategies and ideas—people who can tell us when we’re doing a good job and when we’re not.
