Chapter 2: Place the Customer at the Epicenter of the Business Model

Overview

From the start, our entire business—from design to manufacturing to sales—was oriented around listening to the customer.

—MICHAEL DELL, founder & CEO, Dell Computer

Being in touch with customer needs is ... always important. But perhaps more important when needs are changing—and generally that occurs during an economic downturn—you want to understand those better than any other company.

—MICHAEL DELL

What Would Michael Dell Do?

In the seat of the CEO: You are the CEO of a $30 million company that produces consumer products for the home. The company, founded by your father in the 1960s, was a pioneer in producing air-purifying products for home use. Two years ago your father retired, turning the business over to you. Your first moves involved modernizing the company by installing a state-of-the-art computer system (including a company web site) for both backroom operations and order procurement. As a result, today more than half the company's orders are processed via the Internet.

All went smoothly for the first 6 months. After that, though, things went downhill. Although the company's first products were air humidifiers and dehumidifiers, the firm's number one product for the past 4 years has been an airpurifier (the AirPure 4000). When the company first introduced the product, it was an instant hit. But new competitors have entered the market and are practically destroying you. If things continue at this pace, within 6 months you will have less than a quarter of the market share you enjoyed only a year ago. To make matters worse, you have a growing inventory problem, since demand has fallen so dramatically. If things don't turn around, you will have to write off more than a million dollars in excess inventory.

Since the product has not changed, you cannot understand what is going on. To counter the new competition, you followed your father's advice and launched a new marketing campaign. This effort included dozens of print and radio advertisements, as well as a huge promotional mailing of fliers offering unbelievable discounts. Already, the verdict on that campaign is clear: The new advertising and direct-mail campaigns were expensive, and they didn't work.

You're stumped. Your product is priced competitively and gets high grades on quality surveys. It even comes with a 100 percent guarantee. What do you do now? Is there any way to turn things around? What moves might you make to stop the plunge in market share of your number one product?

What would Michael Dell do?

When Michael Dell was 12, he issued his first product catalog. It was called "Dell's Stamps," and he advertised it in a local trade journal. By going directly to the ultimate user, the young entrepreneur learned his first lesson about developing a direct relationship with the customer.

After spending a good part of his high school years fiddling with computers and hanging out at the local Radio Shack, Dell—like lots of other 19-year-olds—went off to college. But that's where his life stopped following the common path. Within months, Dell had turned his dorm room into a personal-computer laboratory. Before long, he was selling personal computers. In 1984, he made it official, registering his business as Dell Computer Corporation.

Just 4 years later, the company went public, raising $30 million in its initial public offering. At age 27, Michael Dell was the youngest CEO of a Fortune 500 company. Dell Computer Corporation emerged as a true phenomenon. It was the number one stock of the 1990s, soaring almost 90,000 percent. According to Michael Dell, the key to his company's success was the customer:

From the start, our entire business—from design to manufacturing to sales—was oriented around listening to the customer, responding to the customer, and delivering what the customer wanted.

While Dell's words sound almost like platitudes in today's competitive world, at that time building an entire business by placing the customer at the epicenter was anything but common. Dell's direct model is based on a one-to-one relationship between the company and the customer—there are no intermediaries, no middlemen. (On one occasion, Dell experimented with an indirect model—a product sold through computer stores—but the effort failed, and Dell vowed never again to waver from the company's original vision.) This was a case of philosophy converging with necessity:

We started the company by building to the customer's order. And interestingly enough, we didn't do it because we saw some massive paradigm in the future. Basically, we just didn't have any capital [to mass-produce].

Like other great success stories, Dell's direct model of "mass customization" was not born of any desire to revolutionize an industry. Instead, it was forged through a "bottom-up" strategy based on customers' needs and preferences. The lesson is clear: Managers hoping to create successful brands cannot do it by imposing their own views (or, worse, the management committee's views!) on the marketplace. Somehow, someway, there needs to be a mechanism in place whereby the company learns to make the products that its target customers actually want.

Dell says that while other companies guess what their customers want, his company knows. Through hundreds of thousands of calls, emails, and faxes from customers, the company gets vital information about the features that people will pay for in a computer and what capabilities they might be looking for (and, again, paying for) in the future. And this information is closely tied to the company's manufacturing strategy: Unlike its competitors, Dell does not even build the product until after the order comes in. In addition to heading off inventory backlogs and cash flow problems, this method has the advantage of ensuring that customers' needs are met precisely. In the mercilessly competitive computer industry, that knowledge advantage affords the company a decisive edge:

As a natural extension of customer contact, the direct model allows us to take the pulse of whatever market we move into and provide the right technology for the right customers. The direct model has become the backbone of our company and the greatest tool in its growth. It all evolved from the basic idea of eliminating the middleman.

With no middleman intervening, the company is able to get a constant flow of unfiltered information from its customer base. The lesson of the direct model is clear: To duplicate Dell's success, other companies must find ways to develop a relationship with the end users of their product, even if their business models do not resemble Dell's.

Here are three things that managers can do to cultivate closer relationships with end users while also garnering key information and product feedback:

• SPEND MORE TIME WITH CUSTOMERS. Whether you are a CEO, a director of sales, or an account manager, there is simply no substitute for frequent face-to-face meetings with customers. Many top CEOs report that they spend upwards of 50 percent of their time with customers, and they add that this is often the most important part of their day.

• INVITE KEY CUSTOMERS IN TO SPEAK TO KEY UNITS. An alternative to visiting customers is having customers visit you. Create a forum where they can speak with your key people, either publicly or in smaller groups. This will not only provide key information and insights, but also send an important message to those customers.

• USE THE INTERNET AND OTHER NONINTERMEDIATED MEANS TO CREATE AN ONGOING CUSTOMER RELATIONSHIP. While technology should not be used as the sole means of staying in contact with customers, sending email "blasts" to customers informing them of new product updates, etc., can be effective. Make sure, however, that the communication is not strictly one-way. Getting customers' feedback is a crucial step in the process.

Delivering exactly what the customer wants is one of the ingredients of Dell's success. Price is the other. Dell became successful not only by fulfilling customer needs with high-quality products, but also by doing so at rock-bottom prices. With no distributors requiring their own margin, Dell is able to pass substantial savings on to its customers:

We're in the business of dramatically reducing the cost of distributing technology. To do that, we are going to get closer and closer to our suppliers and our customers.

This is an important lesson for companies that operate in ultra-competitive, price-sensitive markets. Whenever such an organization achieves some meaningful cost advantage, it does best when it passes at least a significant percentage of those savings on to consumers. This does not mean that a company should not maintain healthy profit margins, but squeezing every penny of profit out of a transaction may ultimately lead an otherwise healthy company to falter.