How failures drive billionaire Michael Dell

There is a product in the office of Michael Dell, founder of IT giant Dell, that will never see the light of day.

Not because it’s too revolutionary to release, or because it’s too expensive to develop. The reason you’ll never be able to buy this product is because it’s a dud.

Dell says he keeps it in his office as a reminder that of the value of experimentation and the fact that things don’t work all the time.

“I thought it was a great product,” Dell says a little ruefully.

Now, when a Dell executive comes to Michael Dell with a failed product, Michael Dell likes to bring out his own. “I pull out this thing and I say ‘you failed? Check this out.’”

Michael Dell was relating the story at a conference organised in New Delhi for the winners of Dell’s small business awards. As part of the conference the award winners and a few journalists got to spend just under an hour with Michael Dell in a Q&A session.

Michael Dell is one of the superstar billionaires of global business. Dell has annual revenue of $US53 billion and was recently ranked number 37 on Forbes magazine’s list of the richest people in the world with a fortune of $US13.5 billion.

Yet in some ways, Dell and its founder are under a little bit of pressure. While the fortunes of Michael Dell’s fellow IT superstars – Bill Gates, Larry Ellison, Google’s Sergey Brin and Larry Page – jumped by at least $US5.5 billion last year, Michael Dell’s fortune was up by a much smaller $1.2 billion and he dropped from number 25 on the Forbes list to number 37.

Dell’s share price is down about 3.5% in the last six months and analysts have expressed a number of concerns about the company’s recent results, including narrow profit margins, the fact that Acer has now passed Dell as the world’s number two PC company, and even the potential impact on PC sales from the launch of Apple’s iPad (although Dell is set to launch a slate computer of its own).

Following the release of its latest results in February, 17 analysts in the US downgraded their earnings estimates for Dell’s next financial year.

Both Morgan Stanley and Credit Suisse lowered their forecasts, although Citigroup was more positive and boosted its share price prediction to $US20, compared with the current level of just under $15.

Despite the issues – or perhaps because of them – Michael Dell’s message was very much focused on the need for entrepreneurs to accept risk and to experiment, even if it means the producing odd dud.

Here are few of his key strategy tips:

No matter how big you get, always try to stay entrepreneurial

Michael Dell admits this is a constant challenge for him. “I am entrepreneur and I am a person who has to start things and that sometimes puts you in an awkward position when you run a very big company. I am still thinking like an entrepreneur – let’s go fast, let’s do it now.”

The way to break free of what he described as “the machine” was to encourage, and accept, risk taking. Structuring new divisions or product lines as smaller business units also allows entrepreneurs to flourish within the wider group.

Make experiments a priority

In Dell’s direct sales model, its website is its key sales channel. Michael Dell tells his people he wants 100 experiments, or tests, run on Dell.com each day.

While many of these are subtle changes to the design of a page rather than completely new products, the point is that experimentation is important – as is the rapid correction of mistakes.

“Just try something,” he says. “The market will tell you if it’s a good idea or not.”

Consider the profit pool

When assessing the potential of a new product, Dell likes to use a theory it calls “the profit pool” – that is, exploring how much profit can be created through this new product.

While that’s hardly remarkable, what is a bit different is that Michael Dell says the company is willing to look at ways of making the profit pool smaller if they can find a way of ensuring that their share of the pool is going to be bigger than anyone else.

He didn’t elaborate on this too much, but it would suggest that Dell is prepared to drop its profit margin where it sees it can really control a new market. That’s quite different from the normal approach of milking a new product or market for all its worth.

Talent is the key

Michael Dell says his best piece of advice for growing businesses is to make sure you’ve got your talent in place.

“It’s the fundamental limiter or enabler. You can have these big ideas and big dreams but you’ve got to have the capacity.”

Facebook really, really matters

Michael Dell admits that he did look at Facebook and wonder if it would mainly be a way for 16-year-old girls like his daughter to communicate. Now that the site has more than 350 million users, he looks at Facebook a little differently.

“I think, that’s a lot of servers. Anytime you’ve got 350 million of anything you’d better pay attention.”

Dell is probably one of the leaders in using social media to generate sales and customer feedback and it’s clear that Michael Dell is closely monitoring this interaction – something, perhaps, all executives should consider.

James Thomson’s trip to New Delhi was sponsored by Dell.