Dell Direct

Summary of the case

This case is about how Dell changed the personal computer industry through its business model. The company’s sales grew at an annual rate of 49%, jumping from $3.5 billion in 1994 to over $25 billion in 1999, while profits increased at the rate of 62% per year. Dell was able to grow into a largest player in the personal computer industry due to its innovative distribution strategy as well as lean supply chain and manufacturing strategy.   Dell used Direct Model to sell its personal computers. Dell Direct Model was so successful to create value for the company and well as for its customers.   Dell was able to analyze the computer industry and made strategic changes in the personal computer value chain. This enabled the company to cater according to changing market trend and Dell was able to dominate the PC market in United States and other markets.

Since Dell was selling directly to customers it offered customers the choice in system configuration and was offering customized products according to customer choice.  It also established 24-hour hotline support services and also gave guaranteed shipment of replacement part to customers. It was also possible for the company to sell the personal computers at cheaper price, as the company was saving the distribution cost by cutting out the retail middleman. This Direct selling strategy was also giving the company a wealth of market data which it used to forecast demand trends and allowed it to segment the market according profitability and focus the efforts on the lucrative segment.

Dell’s success is also a result of the far-reachingmanufacturing and supply chain strategy. The company adopted virtual integration strategy by developing long-term relationships with selected component manufacturers and made it mandatory for them to establish inventory hubs near Dell’s assembly plants. This just-in-time inventory model reduced the time it took for Dell to bring new PC models to market and resulted in significant first mover advantage as well as cost advantages over the competitors like Hitachi, Sony and Fujitsu who used traditional stored-inventory method. Dell was able to use scientific approach into manufacturing and was able to produce custom-built PCs in a matter of hours. It used information technology to directly control its value chain, set quality measures and monitor in real time how material is flowing throughout the chain.

Dell started out selling direct to customers and used mail-order system in the beginning. With the emergence of internet, the company developed online sales platform which made it possible for the company to reach wider audience and increase sales volume. The company developed www.dell.com for its transactional customers and www.premire.dell.com for its corporate customers. It also developed an extranet, valuechain.dell.com for its suppliers in which both parties share real-time information about Capacity, quality metrics, costs customer demand, product quality and technical customer requirements Dell’s direct model, lean manufacturing, Just-in-time inventory and use of internet was imitated by companies like Compaq, IBM, HP, NEC etc., but they were overpowered by complexity and conflicts between its traditional indirect sales channels versus direct sales. Moreover, it was difficult for Dell’s competitors to put together an entirely new delivery system. This resulted in Dell to have competitive superiority over its competitors.

Reasons for the failure of Japanese companies in US

The Japanese companies like Hitachi, Sony and Fujitsu saw a rosy picture in the US market and were confident that they will be able to capture the market due to strong brand name in consumer electronics. They thought that since they build many of the components used in PC like monitors, audio equipment, CD-ROM, DRAM etc. themselves, they have tremendous advantage over American competitors who have to buy everything from outside. But the Japanese companies learned a hard lesson and were selling far less PCs than they have anticipated.  They spent huge money trying to capture the US PC market but the gain was marginal. The main reason why Japanese companies failed in US market was due fact that local competitors like Dell had far superior business model. Moreover Japanese companies failed to understand the dynamics of the US market.

The Japanese PC manufacturers were selling products were based on proprietary architectures as they make much of the components themselves. When they develop an architect they produce it in bulk. But the same types of components were being made by more than 20 companies.  The PC industry was moving rapidly with frequent innovations and this made the product life cycle of personal PC very short.  Local competitors like Dell were now using vertical integration strategy and purchasing best quality components from the new innovator and were supplying the computers with new technology much faster in the US market.  Due to this fact Japanese companies were stuck with the old technology and were taking more time to launch new technology in the market.  Geographical constraint between the manufacturing plant and the US market also added to the problem.Local competitors like Dell were using the direct sales approach and this resulted in minimal cost whereas Japanese companies were using indirect approach by selling through intermediaries. This gave the local companies cost leadership advantage and they offered Personal computers at 15% lower price than Japanese brands. 

Local Companies were also far superior to Japanesecompanies in terms of business model and management style. Local companies were competitive due to high-velocity production, low-cost distribution, direct customer relationships, Just-In-Time manufacturing, and products and services aimed at specific market segments. Japanese style of management, production technology, product made for mass simplyetc.couldn’t close the gap.

Spartan Approach of Dell in PC selling

Dell and his company maintained their Spartan approach in doing business. The Spartan approach is to have simplicity, efficiency and agility in business process and to pursue goals rigorously but in disciplined manner. Dell had a simple selling function in which customers can order their PC through the website and can also ask for customization as per their need.  The company also kept 24/7 service stations for the ease of the customers. Dell increased efficiency by using direct model which made it possible for the company to interact directly with customers to figure out exactly what they want before the product is made. Listening to the customer at the time of taking order takes the guesswork and wasted resources out of the equation altogether. It showed that the company has pragmatic approach and values customer-focused philosophy. It sees every sales order as a personal quest.

In addition to this of Dell used specific and innovative strategies on improving customer service, cultivating supplier relationships, and achieving vertical integration. This made the company more agile as it was able to capitalize the new technology much faster that the competitors. Similarly the company’s lean manufacturing and Just in time inventory ensured that the customer orders are met in short time span. Thinking strategically about the business helped the company cut cost and increase profits, all the while improving on the Spartan approach.

Dell’s Direct Model as an effective approach to gain competitive advantage in distribution and manufacturing process

Competitive advantage can be gained through two processes a) cost leadership and b) product differentiation. Dell succeeded in doing the both through its Direct Model. Dell’s Direct Model was the outcome of the company’s search for a customer centric approach to offer customers better quality at a bargain price.

The company focused on cutting operation costs by eliminating the intermediaries allows the company to sell products at cheaper price than competitors i.e. to have cost leadership and to provide customers with customized PCs as per their needs. This made Dell competitive than others with indirect model as they were selling in higher prices than Dell. Dell’s direct model also ensured that it did not have massive inventory like other competitors, Inventory costs were kept at a minimum and obsolete products were minimized. They had their supplier open inventory house close to their factories. Furthermore, Dell also had scientific approach of manufacturing and was focusing on productivity through space utilization and Just-In-Time manufacturing. This significantly added to the ability of keeping the costs lower than competitors.

Direct model also helped the company differentiate its product. Customers were dealing with the company directly and this instilled the sense of belief to the customers who wouldn’t have trusted the intermediaries. Customers were also able to customize their order according to their need.   Due to lack of intermediaries, Dell has shorter delivery time. In addition to this the company was providing 24/7 customer service. This was hugely different for the competitors who were making the products on bulk and selling for the mass. Dell's adoptation of the direct model has huge competitive advantage to the company to become successful in both the US and overseas markets.

Benefits to Dell from the efficiency of internet

Before the emergence of internet Dell was using telephone to receive orders from customers. This was a tedious job for the call attendant who had to describe the features of the products and note down the requirements of the customers. It took long time to secure the order and there was high risk of the call attendant missing out the key requirements of the customers.

The establishment of www.dell.com opened up the company's product to a greater number of potential customers. Dell customers could configure and order their PC online, get technical support, and download updates to their software. Dell’s Direct model had outstanding success because customers now were able to order the PCS through the website. It reduced overheads because online shop costs less to set up and run than a physical store. Internet enabled the company to have automated order and payment processing.

The internet helped the company improve its business cycle and process.  Customer can access troubleshooting information and configuration diagrams customers can configure and price systems within Dell's entire product line; order systems online; and track orders. The company’s institutional customers, who are scattered throughout the world, use premier.dell.com to do business with the company.  Furthermore, Dell is also able to share information with its suppliers for range of topics, including product quality and inventory through its extranet, valuechain.dell.com. Dell is able control its customer lifecycle, selling life cycle and flow of information to subsidiaries through the use of Internet.

References

Pearce II, J. A. & Robinson, R. B. (2011). Strategic Management: Formulation, Implementation, and Control. (12^th ed.). NY: McGraw-Hill.