(FORTUNE Small Business) – When Michael Dell was just a high school student in Dallas, he came across the product that would change his life: the personal computer. While his peers tossed footballs and swigged beer, Dell started the business that would lead him to fame and fortune two decades later. The young Dell started buying his own computer parts, assembling cheap machines, and selling them to his classmates. He made a pass at college but dropped out of the University of Texas after freshman year to officially launch his company: Dell Computer. Nearly 20 years later the 37-year-old Dell remains CEO of his firm, which posted sales last year of $31 billion and employs 36,000 people. In the second fiscal quarter of 2002, Dell Computer's worldwide product shipments grew 18%, while the rest of the industry shrank 4%. Michael Dell's success has made him a legend in his own time: He has revolutionized the computer industry, proved that e-commerce isn't always a dirty word, and built a small empire, all before his 40th birthday. How has Dell been able to maintain fast growth and steal market share? The company has a unique business model: It builds a computer only after a customer orders one. That keeps inventory costs down, allowing Dell to undersell the competition. The company also keeps close tabs on the market. By dealing directly with the customer either by phone or online, Dell gathers valuable data on purchasing habits that allow it to quickly change its products and services. Says Dell: "One of the great things about our business is we have immediate information. We don't have to wait a week or a month or until the end of a quarter for information. We get information about our customers every single day." That's proved to be a tough business model to beat. Here's his story. --Brian Dumaine

"My parents first sparked my interest in business. We lived in Houston. My mother was a financial advisor and my father an orthodontist. When I was a kid in the 1970s, we'd sit around the dinner table talking about inflation, the oil crisis--that sort of thing. When I was a second-grader I started my first business, selling candy. In third grade I applied in the mail for a high school equivalency degree. I saw this thing in the back of a magazine, and I thought, 'I'll try that.' A few weeks later this woman knocked on the door and said, 'Is Mr. Michael Dell there?' And my mother said, 'What is this in regards to?' And the woman said, 'We're from the so-and-so company, and we'd like to talk to him about high school equivalency.' And my mother said, 'Well, he's taking a bath right now, but I'll get him.' So I came out in my little red bathrobe. As soon as the saleswoman saw me, she decided that was the end of her sales pitch.

A few years after that I created a stamp auction business. And it was kind of a direct-mail thing, where I was getting people who wanted to consign stamps together with people who wanted to sell stamps, and then getting them to bid on stamps.

In high school I bought myself an Apple II computer, which was the PC of choice at the time. I took it apart, learned about how it worked, what was inside, and how to upgrade the machine. That kicked off my whole interest in computers. I set up a bulletin board system, and I was upgrading computers and reselling them at a profit to my friends.

When I was 16, I had a summer job doing phone sales at the Houston Post. And they gave me a big long list of phone numbers to call and say, 'Hey, I'm from the Houston Post. How'd you like to buy the newspaper?' I soon realized that there were two kinds of people who were buying newspapers: people who had just moved and people who had just gotten married. That seemed logical enough. So then I asked, 'Is there any way I can find all these people who are getting married or have just moved?'

And it turns out that in the state of Texas, when you get married you have to apply for a marriage license. When you apply for a marriage license, you put an address of where you want the license sent. And that's usually where you're going to live. So it's not that hard to figure out what to do next: Go to all the counties in the surrounding area, start gathering up all these names of people, and send them direct-mail offers. All of a sudden I had thousands and thousands of people who wanted to buy the newspaper. I made $18,000 in commissions and went out and bought more computers. I bought a car, stereos, basically anything a 16-year-old would want.

Then I went off to the University of Texas to be premed. My freshman year I started selling computers out of my dorm room. I was doing what I had done in high school, but my parents weren't around to force me to study, so I could do a lot more of it. As I got further into this computer stuff, I realized that the industry was incredibly inefficient. There were dealers like the now-defunct ComputerLand that bought from manufacturers or distributors and then sold the machines to the public. When you opened up a $2,000 PC, you'd find only about $600 worth of parts inside of it.

And it took about a year from the time the part was available till the time it actually got to the customer. That meant that your computer, to put it kindly, wasn't the latest technology--if you want to be extreme, you could say it was obsolete. I would read in the industry publications that Intel had this new superfast processor, but the best one that I could buy in the store was only half that speed. It was just gross inefficiency in the inventory and supply chain.

In May of '84, I dropped out of college and set up in a 1,000-square-foot office in Austin. At that time PCs didn't come with hard drives. But you could put together a kit to upgrade a computer with a hard drive. That's how the company got started, selling upgrade kits for computers.

And from there, we just kept growing. The funny thing is, there really wasn't one moment when the idea for the business came to me. It was a little more pragmatic and incremental than that. It doesn't sound like a story made for television, but it's true. I said to myself, 'If I can make $80,000 selling computers from my apartment, I can probably do $1 million a month with an office and a tie.'

We lasted only about a month in that office and then needed 2,500 square feet. We lasted about three months there, and then we moved to a larger space, with 7,000 square feet. We were like gypsies, always moving to bigger and bigger offices.

So we were growing, but I didn't have any capital, and I had to do a number of things to fund the business. I had customers paying by credit card when we shipped. I had wire transfers of money going back and forth. I had suppliers who would say, 'Well, I don't really know if you're going to be in business, but I don't have many customers, so I'll give you some credit.' And I would figure out how to make it work.

We screwed up all kinds of things, but there was so much inherent value in what we were doing that it masked all the mistakes that we made. Still, we didn't make a lot of the same mistakes over and over again. We learned from the mistakes and figured out how we could progress.

Even when we made mistakes, though, we kept to our core principles. From the beginning, there was definitely an ethic around the customers: How do we serve the customers? There was a philosophy in the company that we're going to do what's right, which is how my parents taught me to treat people as well as customers.

It was easy to communicate that philosophy. For the first couple of years, everything was all right there in one place. So we just spread our values through our actions every day. For example, you could be doing your job, and somebody would come in and say, 'Hey, what do we do about this problem this customer had?' That right there defines the philosophy of the company: We'll do whatever we have to do to get this customer happy.

But that doesn't mean you should give every customer everything he wants. You have to consider first of all what the customer is willing to pay for. If I say, 'I want seven-by-24 support, I want one-hour service, I want this and that,' am I willing to pay for all that? Because those things aren't free. Today we have a lot of tiered services. We have gold service and silver service and platinum service--a customer picks what he wants.

Our management, though, is not tiered. From the beginning, we've tried to create a management structure that doesn't have a lot of layers. This means first of all understanding the business model, being result-oriented, being speedy, and setting aggressive goals. It also means being self-critical and willing to talk about problems openly. For example, let's say somebody knows that there's a problem but he comes to a meeting and tries to pretend there isn't one. We just tell him right there in the meeting, 'That's not going to work.' The organization has such a well-honed culture at this point that if somebody shows up and doesn't drive for results and try to eliminate bureaucracy, the organization bypasses him. We're not going to pay attention to that person.

In the early days I found it helpful to have a board of directors, especially when we got into problems. Even when things were going well, the members would tell us what to watch out for. But they really helped us when we got into new territory and didn't know what we were doing. They helped us avoid problems that might otherwise have been very dangerous.

For instance, when we were about a $2 million or $3 million company, we had challenges with our financial controls. One board member, Don Carty, who was an executive vice president of American Airlines--he's now the CEO--knew infinitely more about this than we did. He spent time with us and helped us distill a culture of financial controls from an auditing standpoint that was extremely helpful.

We had to make cultural shifts too. In the early '90s we took a foray into retailing. That was a mistake. At the time the conventional wisdom was that direct sales was only a niche market, and we believed that. Then these wholesale warehouse clubs emerged, what became CompUSA and Sam's Club. It wasn't quite the dealer channel, it wasn't quite direct. And we said, 'Why don't we try this? It will be a great way for us to get to the consumer.' But it kind of violated a lot of the principles that had helped the company succeed. It destroyed the integrity of the customer relationship that Dell is really based on. The relationship became one between the store and the customer. Fortunately, it never became a very big part of the business, so we were able to shut it off quickly. One of the great things about our culture is that it's so used to changing and adjusting. You can say, 'Okay, now we're going to go do the Internet, now we're going to do servers, now we're going to do services.' People are preconditioned for change.

Why have I survived all these years? One, I'm having fun. Two, I think I've always approached my job by asking what the company needs to be successful. Whatever it is, I'm going to do it. And that means I have to change. For instance, we have a 360 process inside our company where employees are evaluated by those above and below them. I stood up before our executive team a few months ago and said, 'Here's my 360--here's what I'm working on improving.' The important message for our team was we all have to improve and we're all going to improve. And this is serious stuff. When we talk about growing new elements of our business, you can't say, 'I've been here ten years, so I don't have to do that.'"