An American Business Success Story

...The Rest of the Story

In a departure from most topics covered here this is a story of an American business success. The story that’s told. And the rest of the story that’s not told.

I learned of the beginnings of Dell computers at the University of Texas in the mid-1980’s. This link is to a sanitized version of how Dell began.

The story calls it the "gray market" of IBM clones. But what Michael Dell *really* did was a littlelot different than the story is told.

While a student at UT, living in an off-campus dorm, he saw the opportunity to use the IBM wholesale system of sales incentives to profit on the difference between what retailers would make on bonuses for hitting sales targets and buying the computers at wholesale from the retailers in the volume needed to hit those bonus targets. Sort of like arbitrage.

He'd go to the computer retailers around town at the end of the month or quarter and ask the retailers how far from the IBM sales target they were. He'd offer to buy enough units at wholesale to allow the IBM retailers to hit their target, and still make a very nice bonus.

What Michael Dell then did in his dorm room was scrape off the IBM logos and put his own Dell logo on the computers instead. Same exact computer, unaltered inside. Then he sold them to other students at deep discounts from what they'd have paid to a retailer. Win-win-win.

Michael Dell did this for awhile. Then he started reinvesting that money into making small upgrades to the stock IBM's to differentiate them from the stock units.

Eventually IBM caught on to the "gray market" Dell had been capitalizing on and restructured their bonus system to eliminate the opportunity. But IBM had been burned. And figured they lost millions in sales. So they sued Dell for infringement and other unfair business practices.

By then Dell had grown large enough to be manufacturing their own computers, have a corporate staff, attorneys who could delay trials, accountability. Eventually Dell was ordered to pay IBM several million dollars in losses for Michael's practices in his dorm room in its early years. But, by then, Dell was a multi-billion dollar company. And a few million dollars was chump-change.

And the rest is history. An American business success story. And now you know the rest of the story.

Good day!