Jul 28, 2022

How Dell dethroned IBM

  • 1984: IBM earned $5 bn and a 19 yr old Micheal Dell incorporates Dell with $1000 of funding.
  • 2005: Dell earns $9 bn in profits while IBM's pc div is sold to Lenovo.

In the 1970s personal computer was was an unfamiliar idea with the American people. Only businesses and universities used computers. IBM dominated this arena with 60% market share.

As the personal computer market emerged in the early 80s, IBM was the time-tested, obvious choice for most consumers. It had a massive supply chain consisting of resellers and distributors to reach every corner of America. But their situation in the pc space was quite different:

  • In the mainframe-sector they built their own components, and wrote their own software.

  • But for PCs, they outsourced the chip design to Intel and bought the OS from a startup called Microsoft.

The pc market grew so fast, even IBM couldn't keep up with demand. Because of the massive demand, the dealers had trouble managing inventory and would often over-order and over-pay. To compensate for their loss, the dealers started selling the extra pc's for dirt cheap: The IBM Grey-market.

Soon enough, clones of IBM started popping up. One of these clones was Dell. But Dell was no ordinary clone.

Dell obsessed over computers. Took them apart, modded them, and even resold them for a profit. While messing with computers, he realised that the components of IBM pcs cost between $600-$700. But the pcs were being sold at a huge markup of $3000.

A large chunk of the $3000 went to the resellers. But the dealers didn't really understand pcs. Most of them sold gadgets like stereos and stuff, and sold pcs cuz they seemed like the next big thing.

• IBM couldn't make PCs cheaper cus of their reseller network • But Dell knew the actual cost of the parts and knew where to buy them.

While Dell realized that resellers were a cash-sink, most clones just blindly copied this from IBM. He had spotted a golden opportunity.

Phase 1: Without having to pay resellers, Dell could massively undercut the competition.

Word of his cheap, well performant pcs got around. Soon enough, professionals from nearby cities started coming to Dell for their pcs.

But without e-commerce how did Dell reach the lengths-and-breadths of America?

Phase 2:

• Dell established a dedicated sales team instead of relying on resellers.

• Different teams for B2C and B2B. Set it up such that a sales person's background matched the client's field. The sales team could then collect inputs and feedback for the engineers. Driving an iteration-feedback loop.

As the scale of operations grew, Dell deployed the Just-In-Time model. This reduced their waste, improved cash-flow, and maximized profits.

Dell's obsession over the industry enabled him to discovery key market insights that others simply glossed over. Enabling him to avoid the simple, small mistakes that toppled IBM.

About 25 years after entering the pc market, IBM's pc division was sold to Lenovo.


• Obsess over your industry. Discover the flaws in the market-leader's plan. • Compete with the best in your market. • Read about emerging market. The fields that are growing so fast that big players can't cater to the demands.

Thanks for reading!

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