Inc.'s First-Ever Entrepreneur of the Year: Michael Dell, 1989
Editor's Note: To celebrate Inc.'s 35th anniversary, Inc.com is showcasing highlights of our coverage of incredible innovators, risk takers, company builders, and thought leaders since 1979. Here, an article from our archives.
Announcing the winners of Inc.'s first national company-building achievement awards
Emerging Entrepreneur of the Year
Louis Krouse, National Payments Network Inc.
Jimmy Jam Harris and Terry Lewis, Flyte Tyme Productions
Johnny Imerman, Mindis Recycling
Michael Dell must be sick to death of people reminding him that he's running one of the fastest-growing personal-computer companies in the country while he's only 24 years old.
Too bad, Michael. Such are the celebrity costs of precocious achievement.
What Dell has accomplished in the past five years is impressive. A company that didn't exist six years ago now makes what the critics say are some of the best PCs on the market and in the fiscal year ending January 27, 1989, sold $258 million worth of them. But the story of how Dell started the company at age 19 and built it to one of the 10 largest PC producers in the United States is somehow less instructive than it might be if the builder had been someone else. What Dell has done is obvious. How he has done it is not. And Dell himself, for all the publicity, remains an entrepreneurial enigma.
As a kid in Houston, Dell learned a lot about computers from hanging around computer stores. Unavoidably, he also learned something about retailing. What he knew about computers got him into the business. What he learned about retailing persuaded him that there had to be a better way to sell them.
"Let's say," Dell begins his story, "that you buy a computer from a retail store, and you pay $4,000. The retailer sends $2,500 of that back to the manufacturer and keeps $1,500. The question I asked myself was, what was the retailer doing to earn his $1,500? Was he adding $1,500 worth of value to that machine for me, a knowledgeable computer buyer? The answer was no."
Dell reasoned that like himself, a growing number of customers would not need the kind of help that retailers provided -- or, in many instances, only promised to provide. Further, even if these same people could still use the after-sale services that retailers were supposed to deliver, there had to be a better way of providing it.
So, the conceptual heart of what Michael Dell set out to create was not a company based on selling an alternative computer -- one of a growing number of IBM-PC clones -- but a company based on selling through an alternative distribution channel. He began with direct response advertising, added telemarketing, and later still hired a direct sales force to go after large corporate clients.
For a couple of years that was Dell Computer's business: selling good computers cheap, direct to business and individual end users. The computers were stripped-down IBMs to which the company added options it purchased at wholesale from, many times, the same vendors who sold to IBM.
Dell Computer went from zero to $69.5 million in three years. That doesn't break any records. Compaq Computer Corp. did $111 million in its first year, but Rod Canion was a veteran of Texas Instruments Inc. and an old man of 37 when he and his partners started Compaq. No, what's mind-blowing about Dell Computer is -- sorry, Michael -- that Dell built it so large at such a tender age, and that still begs the question: how did he do that?
If Michael Dell knows how he built Dell Computer, he doesn't say.
No one at the company's Austin headquarters actually uses the G-word to describe Dell. If they did, that would make the explanation of Dell Computer's meteoric growth simpler somehow. Geniuses often don't understand the process by which they do something. In fact, if they concerned themselves with process, geniuses would be as earthbound as the rest of us. They would agonize like normal mortals over painful decisions, maybe revisit and reexamine them.
But if you choose to believe Dell and the people who work for him, the ongoing decision-making process has been simple for the young founder. There are no stories about time spent agonizing over direction, strategy, or tactics. It's deciding what to do and how to go about doing it that gives most entrepreneurs sleepless nights. And yet that's just the part that Michael Dell does apparently without great effort. In any case, he makes it look easy.
"Michael can assimilate in an hour what might take you or me a semester," says Sid Ferrales, the recently arrived vice-president of human resources, adding, "He's a good listener."
"He has a remarkable faculty," says chief operating officer E. Lee Walker, who looks to be about twice Dell's age with four times the business experience, "for getting to the nub of a problem quickly. He's a big believer in the collegial approach, but as a participant in that he's quicker than most to get to the heart of the issue."
Dell himself often uses such words as "obvious" and "clear" -- as, for instance, in explaining how in late 1985 he made the decision that the company should stop selling stripped-down IBM machines and start designing and making its own. "It was obvious from what I'd seen . . . that we'd have to learn how to do lots of things. I knew we'd have to get people, systems, executives. It was pretty clear to me." And so it was, but the marvel is that Dell seems to achieve in real time the kind of clarity that comes to most of us only in hindsight: it only becomes clear what we should have done.
To satisfy that segment of the PC-buying market that Dell had identified, the company had to produce a more sophisticated machine, Walker says, and Dell saw that and understood it. That's why he didn't agonize over the decision. "If someone is that naturally in tune with their endeavor," Walker asks, "then what is there to talk about? What Michael Dell does is so natural to him and flows so spontaneously from him that it does look as if he takes a low-key approach. He has so clear a vision of where he is headed that he can rise above the background noise and avoid the pitfalls that typically take entrepreneurs down."
While acknowledging -- no, celebrating, as we are -- Dell's astonishing accomplishments to date, it is reasonable to wonder whether he can keep it up. He says he intends to try. "My goal is to be CEO for 60 years, but if for some reason that's not in the company's best interest, I'll find something I can do that will add value. For now," he adds, just in case someone should ask, "I think I'm doing a pretty good job."
Some executives who have left the company accuse Dell of being reluctant or unable to delegate, of being difficult to work for. "All my friends laughed," says Glenn Henry, when he told them he was giving up 21 years with IBM to join a start-up, especially one run by a 23-year-old. But Henry, who heads Dell's research and development, had his own logic. "I came because of Michael, not in spite of him. Lots of start-up companies are run by people just like me. I didn't want to work for people like myself. I'm really looking for a world-class person."
When he was growing up in Houston, Dell says he would look at the modern, shiny buildings going up alongside the Interstate-610 loop and imagine that one day he would have a business in one of them. "I've never imagined myself not doing something significant," he says.
Company Name Dell Computer Corp.
Founded 1984, in a University of Texas dormitory room
Product or Service Manufacture and direct sales of personal computers and PC accessories
Location Headquarters and factory in Austin; subsidiaries in United Kingdom, West Germany, France, and Canada
Equity Capital Started with $1,000 personal savings; $21 million private offering in third year when sales had reached nearly $70 million annually; raised $30 million in IPO, July 1988
Financials ($ thousands)
|Net owners' equity||$75,257||$9,457||$2,957|
America West Airlines Inc., Phoenix
Guess which major airline -- now the 10th largest in the United States after just six years of operation -- is the only offspring of deregulation to survive the devastating shakeout and murderous merger activity still intact and independent.
Guess which is the only airline to survive with its exemplary employee-training, cross-utilization, and equity-participation programs still working. Guess which one had the best on-time record when the FAA started keeping score in 1987. And which one still serves free cocktails and palatable meals?
America West Airlines hasn't reached its final cruising altitude yet, but founder and CEO Edward Beauvais has piloted the company through choppy weather and kept it climbing far longer than most experts wagered he could. Revenues in 1988 topped $775 million, an increase of $200 million over 1987.
Re/Max International Inc., Englewood, Colo.
Say you knew a way to run a sales business that would attract only the best salespeople in your industry, a commission system that would almost guarantee that mediocre performers wouldn't apply. Say you did that and ended up owning the second largest real-estate brokerage business in North America. You'd be Gail and Dave Liniger, who own and run Re/Max International, which employs some 25,600 sales agents working in 48 states and every Canadian province.
Re/Max agents retain 100% of the commissions they earn on sales and pay only their share of office expenses plus a management fee. Consequently, the Re/Max system attracts more experienced agents who are confident that they can generate the incomes required to cover their monthly fees. And Re/Max grows and profits as new offices and agents join the system.
George N. Hatsopoulos, Thermo Electron Corp.
Item: Thermo Electron Corp., founded by Greek immigrant George N. Hatsopoulos in 1956, develops and manufactures things ranging from electroplating machinery to medical instruments to industrial cogeneration systems. Its next product: a battery-powered human heartñassist device.
Item: In 33 years, no Thermo Electron employee has left the company to start a rival business.
These two observations alone suggest that George Hatsopoulos runs a company that, remarkably, has not shed its entrepreneurial characteristics -- its ability to innovate and make money -- while growing far beyond the age and size that most entrepreneurial firms achieve: $500 million in sales in 1988. Sales for 1989 have been estimated at $575 million.
Hatsopoulos offers two explanations. First, he says, he founded the company to exploit an entire discipline -- mechanical engineering -- not any particular technology. Second, he created an organizational structure that promotes creative thinking and encourages risk taking. On these two points, as others, Hatsopoulos's experience with Thermo Electron is rich in lessons for other companies and entrepreneurs.
Hatsopoulos started Thermo Electron as soon as he got his doctoral degree from MIT. "My idea," he says, "was a broad-based technology company that would work simultaneously on lots of ideas that were risky but, if any one of them worked out, would be profitable." It's the venture capital investment theory applied to product R&D: if one of 20 pays off, the rest don't matter. And the product mix only appears strange to someone looking at Thermo Electron from the outside, Hatsopoulos says. "They all have a certain relationship with mechanical engineers -- people who deal with metallurgy, thermodynamics, fluids, etc." That is to say that insofar as they both present similar mechanical engineering challenges, the large industrial cogeneration systems and tiny human heart assists that Thermo Electron designed and manufactures aren't so different from each other. The Thermo Electron engineer who developed the company's bomb-detection device started on air pollution instruments, then went to blood gas analysis, and figured that if he could measure nitroglycerine in such tiny amounts there, maybe he could measure it in the air as well. "Our products," says Hatsopoulos, "are based on the broad capabilities of the people we have." And, he adds, on the company's strategic orientation. A company focusing on making computers, for instance, will produce different products from a company that's interested in process logic. Thermo Electron is more like the latter.
Organizationally, Thermo Electron may be -- it's a dangerous word to use because it's so abused -- unique. The company's form and function are closely related. They would have to be, Hatsopoulos says, with so many people working on so many R&D projects, and so many different commercial products going out the door. Engineers may see the connection between industrial process equipment and biomedical devices, but salespeople do not, and neither do investors.
"This," says executive vice-president Robert Howard, "is a very complicated company for its size. Analysts have a hard time understanding what business we're in. And we're not a pure play." That was one reason why, in 1983, Hatsopoulos and his executive team started the process of breaking Thermo Electron into smaller subsidiary companies, many of them publicly traded in their own right. In every case, to be sure, Thermo Electron is the majority shareholder and dominates the board. Yes, it's complicated, but the advantages of such a structure compensate for the drawbacks.
It does, for instance, allow investors to buy a piece of a biomedical products business without at the same time having to put money into a company that provides industrial heat-treating services. Furthermore, it lets Hatsopoulos fund expensive R&D without demolishing the profits, and thus the stock price, of Thermo Electron itself or its other subsidiaries. And it exerts pressure on and provides incentives to the entrepreneuring managers heading up these spin-offs. The incentives are easy to understand and appreciate. If the new company does well, the people who started it will grow wealthy on their stock options. But Hatsopoulos says there's another, subtler reason for taking the subsidiaries public. If they weren't, the performance of the people running them would be judged solely by corporate line managers, who may have personal axes to grind and their own career interests at heart. "Investors," he says, on the other hand, "have no ax to grind. They just want to make a lot of money." And, of course, Thermo Electron start-ups don't have to reinvent their own wheels -- accounting systems, public relations, personnel manuals. That's all done and easily adaptable. "I believe in small companies and in big," Hatsopoulos says, "and I'm trying to create something that has the advantages of both."
To keep the innovation flowing, Hatsopoulos says, there are no a priori rules about what projects the company will fund -- no quantitative hurdle rates an idea must promise to meet. "People," he allows, "can always cheat on numbers; intuition is better." All he asks is that the potential market be large, which itself is a subjective measure, and that the engineers at Thermo Electron be better equipped than anyone else to develop the product or service.
Hatsopoulos and Leslie Otten of Sunday River Ski Resort (see page 52) share something that explains their persistence and longevity at one firm. Both began with a dream, but neither defined it in terms of company size or dollar value. It was, rather, a quality of process they wanted to build; their dreams were to do, not to have done.
A few years ago, Hatsopoulos got an attractive offer to sell out, according to his brother John, the company's CFO. The suitor told George he could stay on to run the business. "But if I sell," said George, "it'll be your company and dream I'm fulfilling, not mine." Hatsopoulos has created a organization and a process for perpetuating innovation. At age 62, he still has his dream, as long as he wants it.
George N. Hatsopoulos
Company Name Thermo Electron Corp.
Product Or Service Company and its spin-off subsidiaries develop and manufacture biomedical, process control, environmental, instrumentation, and power-generation products; provide metallurgical heat-treating, water quality engineering, and analytical laboratory services; and perform contract R&D
Location Headquarters in Waltham, Mass.; locations in 17 other states and Canada, United Kingdom, France, Japan, West Germany, Holland, and Hong Kong
Equity Capital IPO 1967; several of Thermo Electron's majority-owned spin-off subsidiaries have also gone public, bringing additional equity into the company
Financials ($ thousands)
|Net owners' equity||$181,509||$161,808||$145,767|
Mercury Stainless Corp., Wheeling, Ill.
An entrepreneurial late bloomer, Dietrich Gross spent 20 years working for other people in the steel business before launching his own steel processing company in 1973. He ran that for 10 years before resolving to turn his company, Mercury Stainless, into the country's only fully integrated stainless producer and distributor.
Lately the growth decisions have started to come faster. Next will come a European service center says Gross, himself a German native. It's not the direction that most American firms are moving in, but Gross's moves have usually violated conventional wisdom -- to his profit, we should add.
Mercury Stainless, which is 100% owned by Gross, has been consistently profitable, with 1988 sales of $190 million.
Stew Leonard's, Norwalk, Conn.
Probably no single-store proprietor has been more admired and celebrated than Stew Leonard, who 20 years ago stopped delivering the milk his cows produced and opened a store to sell it. And no proprietor has gotten more publicity. Leonard needs a clipping service just to keep track of the books that cite him and his two-step business credo: "Rule 1. The customer is always right. Rule 2. If the customer is ever wrong, re-read Rule 1."
Tom Peters loves him. "If you really try," he said in a TV special, "you can make any product special. Leonard has proven it better than anybody I know." His store, called just Stew Leonard's, had sales of $98.6 million in 1988 -- or $2,976 per square foot, a slightly astonishing figure that's approximately five times as large as the average independent supermarket's.
Leslie B. Otten, Sunday River Ski Resort
There are two reasons that you can't call Leslie B. Otten a turnaround artist.
The first is that he's only done it once. For the past 16 years, Otten, age 40, has had only one job -- no, two. But both of them were running the Sunday River Ski Resort, situated 170 miles north of Boston in out-of-the-way Newry, Maine. He likes it there.
The other reason you can't call him a turnaround artist is that what he's done at Sunday River consists less of art than of dogged execution. "Les has a good grasp of the basics" is the kind of thing people who know or work for him tend to say. There has been less short-term brilliance in what he has done at the now much-expanded ski resort than long-term determination.
So maybe Leslie Otten isn't an artist, but the turnaround he has engineered on this mountain that one of the best companies in the industry abandoned is nothing short of astonishing.
Otten used to joke that he first had to ruin the business so he could buy it cheap. But he stopped telling the joke, worried that people might take him seriously. When he first took charge of Sunday River, though, it did belong to someone else.
That was in 1972. Otten, in his mid-twenties, had graduated from Ithaca College and worked a year for Sherburne Corp. (now S-K-I Ltd.), the company that owned and operated Killington Ski area in Vermont. The company dispatched Otten to run the little mountain in Maine it had recently bought, although there wasn't much to run -- a couple of old T-bar lifts -- and Sherburne, for reasons that make sense to Otten now, was stingy with expansion capital then.
"He was stuck in the back of nowhere," says Otten's wife, Chris, "and people [at Sherburne] paid little attention to him. . . . Every spring he'd say, 'We're outta here,' and we'd write up a new rÈsumÈ. But then he'd stay around to paint the chair lift." Along about 1976, says Chris, when her husband saw that Sherburne wasn't likely to do anything with Sunday River, he started talking about what he'd do "if this were my place." In the fall of 1980 he bought it the only way he could -- with virtually no money down. Sherburne took back a note for the entire $840,000 purchase price. In the fiscal year that had just ended, Sunday River had lost $240,000 on revenues of $541,000. All Otten could do was cut his costs, hang on, and plan his strategy. That winter he managed to bring the loss down 60%.
The turnaround plan Otten made for Sunday River was simple: he would concentrate on developing the product -- working on the steak, not the sizzle. In the ski business that means providing the best possible snow conditions and enough uphill transportation to get people to it and not worrying about the peripheral amenities. Other New England ski areas, says Burt Mills, now Sunday River's mountain manager, concentrated on "frills and ambience, the aprËs-ski . . . but product was our priority number one." Otten couldn't guarantee outstanding conditions, but he wanted to convince the market that on any given day skiing there would be as good as, if not better than, skiing any place else in the region.
It worked. By concentrating on improving and developing the product -- and you only have to look around to see that it wasn't on the look or luxury of his base buildings that he's spent his money -- Otten has succeeded in making a real mountain out of a sold hill. Last year Sunday River attracted 350,000 skiers, more than any other Maine or New Hampshire ski area. The first year Sherburne owned the mountain, 20,000 skiers showed up. And since 1980, when Otten bought it, only one other New England ski area besides Sunday River has recorded a similiarly unbroken growth record.
Otten has, according to his managers, been single-minded in plowing every available dollar of profit back into the company. "We have been a business with a very clear mission," says Mills, who started with Otten as a lift operator.
In pursuing his strategy, Otten has differed tactically from many of his competitors. For instance, instead of squeezing maximum profits out of its real estate by building high-priced luxury condos, Sunday River used its development dollars to maximize the number of beds available in the area. They'd rather sell 50 units at $30,000 than five units at $300,000, says Art Marshall, in charge of hotel and condo operations, because that gives them more accommodations to rent. And, he adds, each unit was presold before it was built so Sunday River wouldn't tie up its capital in unsold inventory.
"The real profit here," insists Marshall, like everyone else who works for Otten, "is in the lift tickets."
"In 1980," says Otten, "I turned 31 years old, and I was ready for something. You could have put me almost anywhere, into almost any venture. The one thing that made Sunday River work was my realizing that I was ready to take the risk." Not the financial risk. "An entrepreneur's real risk isn't money," says Otten, who didn't have much of that to lose, anyway, "but that he's betting himself. My risk was that I was telling people that I was going to succeed where the best company in the business had not."
He's also perceptive enough to recognize that the risk and his challenge have changed now that Sunday River is solidly profitable and a major player in the New England market. The business has grown beyond the capabilities of any one person, no matter how talented, to run by himself. Otten is building a corps of managers.
"My biggest responsibility now," Otten says, "is hiring people."
"Les," says director of marketing and sales Bill Jensen, "wonders whether he's the president to lead the company through continued growth."
So, while the company is in better shape than it has ever been, the entrepreneur's risk hasn't ended.
Leslie B. Otten
Company Name Sunday River Skiway Corp., d/b/a Sunday River Ski Resort
Acquired In 1980 by Leslie Otten from Sherburne Corp. in exchange for $840,000 note
Product or Service Downhill skiing
Location Newry, Maine
Skier Days in the Year Prior to Purchase 40,000
Skier Days Last Year 350,000
Financial Performance Year Prior to Purchase $240,000 loss on sales of $541,000
Turnaround Financing Internal, using profits from lift-ticket sales and real-estate development
Financials ($ thousands)
|Net owners' equity||$9,255||$5,431||$2,305|
Vitalink Communications Corp., Fremont, Calif.
The investors -- venture capitalists -- had given up on Vitalink. Shut it down, they said in 1985. Hold it, said George Archuleta, the company's VP of marketing and sales. I have this idea.
Founded in 1980 to provide satellite transmission of data, Vitalink blew through $48 million in venture capital, but no amount of money was going to make the original idea work. Just give me $1.2 million more, he told the skeptical financiers, and we can use the company's expertise to launch a new business: linking big companies' widely scattered local area networks. If $1.2 million could get back $48 million, it was worth a shot. So the VCs cleaned the management house, gave Archuleta the money, and put him in charge. In 1988, just three years later, Archuleta and his crew earned $6.7 million on $37 million in sales, and Vitalink was well down the road that led back from oblivion.
Remington Products Inc., Bridgeport, Conn.
Who doesn't know that Kiam liked the razor so much that he bought the company -- which had accumulated $30 million in losses over the previous four years. Promoting himself in a bathrobe was just part of his corporate turnaround strategy -- the most visible maybe, but not necessarily the most important.
Kiam initiated management changes at Remington Products that brought pride back to a venerable company whose employees had forgotten what it felt like. Want to know how he did it? It's no secret, not since Kiam decided to tell all in a couple of books. Just look under K in the bookstore business section. The proof that it worked -- for him, anyway -- is that Remington has grown from $43 million in sales when he bought it to $268 million in 1988 when its profits, not losses, ran close to $19 million.
Louis Krouse, National Payments Network Inc.
About 30 million American households do not have checking accounts.
That's a problem -- and, of course, an opportunity. Louis Krouse spotted the opportunity and turned it into a company.
All these people without checkbooks are a problem, for instance, for utility companies. They've got to provide these customers with someplace to pay their bills. The utilities maintain a few branch payment offices, but mostly they contract with banks, which are, after all, accustomed to taking in money.
But these checkless people have become a problem for banks, too. While banks are trying to persuade their