The case of Dell Computer Corporation

Superior profitability. What great businessmen and retailers have in common, or how a company really makes money.

You don't need to have a postgraduate degree in business to understand the idea of superior profitability! If you graduated in "marketing", you will see the world from the perspective of "marketing". Or could you have a diploma in finance and accounting? But universities do not yet teach common sense. So my question is: How can we solve this problem?

Just ask retailers how the profit is made and in 5 out of 10 answers you will get to the heart of any business, big or small. Profit margin multiplied by inventory turn. The faster goods rotate, the faster stocks rotate, the more "10 percent." The superior profitability is not just based on having a supplementary price, or having tremendous sales volumes. Additionally, and more importantly, relatively light assets are required.

There are a multitude of factors that determine the specific composition of your company's assets. What is important to remember is how to have the least amount of tangible assets possible, since many of them, on your balance sheet, will cause a drop in profitability. Furthermore, in our new economy, known to many as the knowledge economy, it is the myriad of intangible assets of a company, such as the quality of the business mindset, the brand, customer relations, the capacity of employees, and innovative business design taking advantage of paradigm shifts in the market, the fundamental factors of today's successful business cases.

Dell Computer Corporation is the best example of how assets, particularly the rapid turnaround of assets, can take profitability to astronomical dimensions. Michael Dell founded his company from his college dorm in 1984. He started by buying old IBM and DEC computers, fixing them up with new parts and selling them at prices 15 percent below market prices. Not exactly a retailer like you will be able to do something similar. But Dell's idea is in many ways similar to others. Young Michael Dell gave what they wanted to consumers who were looking for the cheapest possible price and extremely profitable in the computer industry back then. In 1988, when Dell Computer Corp. went public, it sold more than $ 150 million in computers.

Where big players like IBM, Apple, Tandy, and Commodore took on a customer likeness for too long, Dell acknowledged that they were changing significantly. He realized before the big competitors that most users became computer savvy. When they once needed vendors who could explain the mysterious world of RAM and ROM and floppy disks, the growing market of customers knew what kind of computer they wanted, and they wanted to buy it conveniently and at a low price. Were customers satisfied? Dell simply, like successful retailers, looked closely at customers to see if they liked their computers, which one sold the most, and whether their preferences changed over and over again.

Dell changed the rules of the PC business and the paradigm of how computers would be manufactured and sold. Equating changes with market conditions with new opportunities to make a profitable business, he calculated that users would sacrifice face-to-face sales relationships in exchange for low prices and customization. Instead of buying one of the preconfigured machines that a merchant had "in stock," Dell gave customers the ability to choose what items their PCs would have.

Like Nike, a pioneer in outsourcing, Dell understood that the focus on key activities along the value chain could triumph over the vertical integration pattern that existed in the PC industry for so long. Dell was the first company to rely solely on assembly and dispatch of finished products. And what's more, as a result of a close relationship with its suppliers it has eliminated the need to have inventory stocks that the company rotates 52 times per year. Compare this to Compaq or IBM, which rotate their inventories only 10 to 15 times.

Ford Motors, a company from another industry, was able to recoup the investment of the time it takes to buy raw materials, manufacture, market, and sell, only once a year. Remember, that profit margin multiplied by the inventory turn results in your actual profitability; for Ford it is a meager 3%. A car designer for an automobile company certainly likes to design great cars. But why does he need to know how his company makes money? Because what if you design a great car, technically speaking, but the company's profit margin on that car is close to zero? You should find out if there are other ways to design that car with a better profit margin, perhaps changing the paradigm as Michael Dell did in the computer industry.

With Dell, the production process begins once the customer places the order (“built-to-order”). This is a Coperniquian revolution in the history of business. Dell's direct sales model compressed the value chain by avoiding the traditional distribution channel. The company sells over the phone and over the Internet directly, allowing it to sell cheaper than others. Additionally, Dell captures a large portion of added sales, such as accessory products. Therefore, Dell is able to control sales, service, and support, thereby establishing superior customer relationships. The company has not been stagnant in recent years, establishing its position as a leader in desktop and laptop computers;Dell recently redefined its business and has now become a leader in corporate workstations and servers.

A retailer must earn a living every day, every hour. You must constantly ask yourself if you have bought too much or insufficient merchandise and if you have bought the correct variety. For him, it all depends on how quickly the merchandise leaves the shelves. A retailer has small profit margins, but can earn a very high return by selling everything he buys every day. Jack Welch once said of his leadership at General Electric that "it feels like having a country store," this is because business greats intuitively understand what is at the heart of any business. They analyze the numbers, fundamental in financial reports, and the relationship between each one: income, sales, profit margin, assets, and cash generation.They deeply analyze their customer base, if they are satisfied, if they are profitable, if they buy again, and the base grows, and they define their business in ways elastic enough to see growth opportunities where others talk about mature industries and markets. saturated.