1984- Micheal Dell Founded Dell ComputersThe company started off by using the direct sales model for upgraded versions of IBM-compatible PCs. However, within a year it was selling its own brands of PCsBy 1990, Dell had captured a significant share of the corporate PC market. Dell briefly augmented its direct sales by using a retail channel for marketing and distribution, but this was abandoned after a business downturn. 1994 It gained a first-mover advantage by setting up its first Web site in 1994, a year in which its total revenues were US$ 3.5 billion. By 1998, its Internet sales accounted for more than half of the firm's total revenues, which by then had surged to more than US$ 20 billion.
a distributor/reseller such as MicroAge, Vanstar,CompuCom or InaCom purchased PCs directly from the manufacturer and distributedthem to corporate customers. The reseller customized the PC to the customer’s requirements, installed components or software as necessary and often provided additionalservice and support.
Dell pioneered a new business model that focused on speed of execution and minimuminventory. To this end, the company bypassed the dealer channel, selling products directlyto customers over the phone. This eliminated the reseller’s markup and the costs and risksof carrying large finished good inventories. The Dell direct model was characterized by high-velocity, low-cost distribution, direct customer relationships, build-to-order, Just-In-Time manufacturing, and products and services aimed at specific market segments.
whereby a team of workers operating at a group workstation (or cell) assembled an entire PC according to customer specifications.
Partner with reputable suppliers of PC parts & components than backward integration get into parts and components manufacturing
In the computer industry, inventory can be a pretty massive risk because if the cost of materials is going down 50 percent a year and you have two or three months of inventory versus eleven days, you've got a big cost disadvantage. And you're vulnerable to product transitions, when you can get stuck with obsolete inventory
They can be classified as “transactional” or“relationship.” Forty percent of customers, mainly large corporate accounts, are classified as relationship, 30%consisting mainly of consumer and small businessesastransactional, and the remaining 30% as a mix of the two.
But what was unique about Dell's latest incarnation of its strategy was how the company was using technology and information-sharing with both supply partners and customers to blur the traditional arm's-length boundaries in the supplier- manufacturer-customer value chain that characterized Dell's earlier business model and other direct-sell competitors. Michael Dell referred to this feature of Dell's strategy as "virtual integration
eg Dell sales and support contacts , detailed product descriptions, software's ,service and warranty records, pricing, technical support
For instance, it was critical to track vendor progress in making longer-lasting batteries because battery life was important to the buyers of portable computers
Boeing, which had 100,000 Dell PCs, was served by a staff of 30 Dell employees who resided on-site at Boeing facilities and were intimately involved in planning Boeing's PC needs and the configuration of Boeing's network
DELL STRATEGY GROUP NO. 8
About the Company• Dell Computer is arguably the most successful business among those established within the last thirty years• A classic example : principles of strategic management have been used to translate an innovative vision into a successful and sustainable enterprise• IT has been used not only to create competitive advantages at the operational level, but also for strategic information management.• Dell also appears well positioned to extend its brand name beyond mainstream computer products by leveraging its reputation as an e-commerce leader.
Heritage 1991 First notebook model High focus on marketing Forayed into retail marketing- 1985 abandoned in 1993Advertised in nationalcomputer magazines –implemented the directselling strategy for an Late 1990’supgraded version of Dell’s Global expansion and highPC growth 1988 Opened online superstore 9% market share Changed name to “DELL Computer Forayed into servers Corp”. Expanded globally Dominant player in mail-order market Focus on sales force and value added 1984 resellers Started by Micheal Dell, under the name “PC’s Limited”
Competitors HP Compaq IBM Gateway• Founded in 1939 • Founded in 1982 • Founded in • Founded in 1985• Ranked 4th in • Ranked 1st in • Ranked 2nd in • Not in the top 5 global PC market global PC market global PC market (1997) share(1997) share(1997) share(1997) • Built to order and• Strong reputation • Sold through • Main strength sold direct with corporate resellers, PC laptops, • Market leader in clients retailer and corporate clients, education• Partnered with distributors software segment Intel for product • Had large application and • Went global in innovations inventories service early 90’s• Sold through • Used M&As to • Commanded resellers grow in the late premium prices 1990’s • Allowed resellers to custom build PC
Need for strategy• Competing in a narrow margin segment of the computer industry— hardware manufacturing• Dell has been leading the pack with execution and innovation unmatched by its competitors.• Business expanded rapidly from 1989 to 1993,followed by a loss.• Loss of focus: Dell had neglected its most profitable customer segments and placed too much emphasis on the retail channel.• Dell then redirected its attention to the most profitable segments - corporations, and pulled out of its retail channel.
Strategy• To Achieve market leadership through Virtual Integration of Dells business with its supply partners and customers & focusing on delivering the best possible customer experience.• Blue ocean created from within a red ocean• Direct selling, from manufacturer to consumer, was a key component of this strategy
Strategy• To Collapse margins through out the PC Market• Build & strengthen customer intimacy & loyalty• Low cost to company & differentiated product for customer This need was fulfilled by Direct to Customer business model approach DELL DIRECT
Supporting Trends• Corporate customers were becoming sophisticated - personal selling by salespeople was no longer required• Individuals had become savvy and experienced technology users• Monitor, keyboard, memory, disk drive, software became standard modules, permitting mass customization in PC system configuration.
Dell’s Direct Selling• New Value Chain: Dell had no in-house stock of finished goods inventories unlike competitors using the traditional value chain model• Pull Mechanism: It did not have to wait for resellers to clear out their own inventories before it could push new models into the marketplace (typically operated with 60-70 days stock)• Personalization: Customers got the satisfaction of having their computers customized to their particular liking
Traditional “build to stock value chain” Product Product Component PCComponent Distributor Corporate Manufactu Manuf. /Reseller customer rer Order Forecast MicroAge, CompuComp Components
DELL Direct Model Product ComponentsComponent DELL Comp Finalmanufacturer Corp customer Order Distributor
Dell Direct• Dell Computer’s direct model departed from the industry’s historical rules on several fronts: The company outsourced all components but performed assembly. It eliminated retailers and shipped directly from its factories to end customers. It took customized orders for hardware and software over the phone or via the Internet. It designed an integrated supply chain linking Dell’s suppliers very closely to its assembly factories and order-intake system
Build-to-Order Manufacturing and Mass Customization• Workstations, servers were made to order No Inventory• Dell customers could order custom-built servers and workstations based on the needs of their applications• “Cell manufacturing" techniques reduced assembly time by 75 percent and doubled productivity per square foot of assembly space.• Assembled computers were tested, loaded with desired software, shipped and delivered within five to six business days of the initial order.
Partnerships with Suppliers• To partner with few outside vendors and stay with them as long as they maintained their leadership.• Dell committed to purchase a specified percentage of its requirements from each of its long-term suppliers• Dell shared its daily production schedules, sales forecasts, and new-model introduction plans with vendors.to help suppliers meet JIT delivery expectations• Some of the vendors had plants or distribution centres within a few miles of Dells assembly plants and could deliver daily or even hourly if needed.
JIT• Suppliers allowed Dell to operate with only a few days of inventory for some components and a few hours of inventory for others.• Dell supplied data on inventories and replenishment needs to its suppliers at least once a day—hourly in the case of components being delivered several times daily from nearby sources.• In a couple of instances, Dells close partnership with vendors allowed it to operate with no inventories.
SONY Monitors• Supplier of monitors was Sony.• The monitors Sony supplied with Dell name already imprinted were of dependably high quality which required no testing or separate shipment• Shippers picked up computers from its Austin plant, then pick up the accompanying monitors from the Sony plant in Mexico, match the customers computer order with the customers monitor order, and deliver both to the customer simultaneously.
Direct Sales• Customer-driven system allowed quick transitions to new generations of components and PC models.• Quickly detected shifts in sales trends and getting prompt feedback on any problems with its products.• If similar complaints, the information was relayed immediately to design engineers.• When design flaws or components defects were found, the factory was notified and the problem corrected within days
SegmentationDell had made more homogeneous categories to serve everycustomer well• In 1998, 90% sales were business or government institutions and of those 70% were to large corporate customers• Sales representatives called on large corporate and institutional accounts• Sales to individuals and small businesses were made by telephone, fax, and the Internet.
Segmentation• 1 call centre in the United States with toll-free lines• Internationally, Dell had set up six call centres in Europe and Asia that customers could dial toll free.• The call centres were equipped with technology that routed calls from a particular country to a particular call centre.• Internet sales were equally divided between sales to individuals and sales to business customers.
Customer Service• Service became a feature of Dells strategy in 1986• It provided free on-site service for a year after sale• Contracted with local service providers to handle customer requests for repairs• On-site service was provided on a next-day basis• Technical support via a toll-free number, fax, and e-mail.• If a customer preferred to work with his or her own service provider, training & spare parts were provided
Customer Service• Corporate support and service was charged• Contracts with third-party providers to make the service calls• When a customer with PC problems called Dell, the call triggered two electronic dispatches—one to ship the needed parts from Dells factory to the customer sites and one to notify the contract service providers to prepare to make the needed repairs as soon as the parts arrived.• The service providers sent the bad parts back to Dell.• Problems relating to faulty components or design were passed along to the relevant supplier to improve quality control procedures or redesign
Virtual Integration and Information-Sharing• On-line communications were used to communicate inventory levels and replenishment needs to vendors daily or even hourly.• Dedicated on-site teams of Dell employees for corporate accounts• Regional forums were used to stimulate the flow of information back and forth with customers.• Platinum Councils composed of its largest customers in the United States, Europe, Japan, and the Asia-Pacific region.• Customized intranet sites called Premier Pages were developed for its 3,000 largest global customers• Gave customer personnel immediate on-line access to purchasing and technical information about the specific configurations of products
Virtual Integration and Information-Sharing• The Premier Pages contained all of the elements of Dells relationship with the customer.• The company also gave its large customers access to Dells own on-line internal technical support tools, allowing them to go to www.dell.com and gain immediate access to the database and problem-solving information that Dells support personnel used to assist call-in customers.
Demand Forecasting• Forecasting was viewed as a critical sales skill.• Sales-account managers were trained on on how to lead large customers through a discussion of their future needs for PCs, workstations, servers, and peripheral equipment.• Distinctions were made between purchases that were virtually certain and those that were contingent on some event.• Salespeople made note of the contingent events so they could follow up at the appropriate time.• With smaller customers, direct telephone sales personnels would steer customers toward configurations that were immediately available
R&D• Talked to customers frequently about "relevant technology," needs and problems to identify the most cost-effective solutions.• About 1,600 engineers worked on product development to improve users experience with its products—including incorporating the latest and best technologies, making its products easy to use and devising ways to keep costs low.• Quality control and streamlining the assembly process was of prime importance.• Tracking all the new developments in components and software to ascertain their usefulness to computer users.
Direct Sales• No wholesalers or retailers to support, dealer mark ups were avoided. Channel cost was 2% in comparison to 13-15% for indirect sales• Also ,the company did not have to compete for valuable shelf space.• Dells overhead costs (selling, general and administrative expenses) in both 1999 & 2000 were less than 10% of its total revenues versus industry norms of 15-17 %.• Dell is able to channels its resources into its increasingly efficient procurement, manufacturing and distribution network, thereby minimizing product obsolescence.• A totally customer-driven system that allowed quick transitions to new generations of components and PC models.• The company is also able to maintain and support a customer relationship database that provides immediate feedback from clients and helps to shape product offerings.
Minimum Inventory DELL So Dell Has HP Carries Inventory That’s 1 % aCarries 11 A 10 % Cost 80 Days Depreciates week Days Advantage Inventory at 50 % roughlyInventory On HP
Minimum Inventory• Each computer chip carries a 4 digit code eg 97-23 means this chip was made in the 23rd week of 1997• Obsolescence rate in components is very high.• Dell Carries 11 days inventory as compared to Compaq with 80 days inventory• Hence, Dell can launch any new product 69 days faster than Compaq• Shelf stock loses 50 % the moment a new computer is launched• If components lose 50 % a year i.e. 1 % per week and Dell carries 11 days inventory compared to 80 of a competitor, this is a cost advantage of 10 %
Flexible Manufacturing• By customizing orders - product tailored to customer’s desires while Dell saved money and time on manufacturing.• Allowed Dell to integrate production schedules with sales flows, assemble all parts of the PC on site, and install the specific software that the customer requested.• These manufacturing interactions sped up the final products completion time to thirty-six hours.• Assembly times reduced by 75 % and productivity per square foot of assembly space doubled.• Assembled computers were tested, then loaded with the desired software, shipped, and typically delivered within five to six business days of the initial order.
Flexible Manufacturing• Quickening the delivery time.• Suppliers preferred Dell because there inventory levels rarely pilled up as inventory turnover was 60 times per year.• Chain of integrations added value to the customer’s product, while also adding value to Dell as a corporation.• Reduced its working capital requirements by operating on negative cash conversion cycle - receiving payment from its customers before it pays its suppliers for components.
Role of Internet• Dell Computer could extend the reach and scope of the direct sales model at a relatively low marginal cost.• Ideally positioned to take advantage of the Internet because of its distinctive supply chain.• Unlike its major rivals, Dell did not face any channel conflict with resellers or distributors by going online.• With a build-to-order manufacturing process already in place, customers could easily configure their own products online, just like they were already doing over the telephone.• Nearly 1.5 million people visited Dells Web site weekly to view information and place orders, about 20 times more than called to talk with sales representatives over the telephone.
Targeting & Segmenting• Strategically targeted only the customers they wanted.• Their customers did not need to go to a retail store to gain knowledge about their product.• Customers were categorized into Relationship buyers, large businesses and institutions, and Transaction buyers, small business and home PC users.• Corporate customers tended to buy the most expensive computers, Dell commanded the highest average selling prices in the industry—over $1,600 versus an industry average under $1,400.
Segmenting Customers• On site teams - customer could focus their time and energy on the core business rather than PC purchasing and servicing issues. Eg Boeing• Integration of Relational and Transaction buyers into business system helped – Quick repeat purchases – purchasing history could be consulted, – Follow up customer service was able to be more effective.
Evading Price War• Dell combated failing into the trap of a price battle by making a PC that was a better product than the competitors, yet near their competitor’s price.• There costs were able to stay competitive while delivering an exceptional product because their business kept internal costs low, thus showing the effectiveness of “virtual integration.”• The average selling price of a Dell business PC was close to $100 more than the average price of an HP business PC which was its closest competitor.• Dell was able to evade a price war because its customers were aware of the technological value in a Dell PC.
Quick response• Respond quickly to emerging problems and avoid costly refunds and service calls.• Dell responded rapidly when Intel shipped faulty Pentium chips to PC makers in the mid 1990s.• Dell knew exactly where the problem chips were and could easily help customers to replace them.• Rivals had to stop their production and ask their channel partners to find the problem chips that had already been sold or distributed.• Dells quick and efficient response attracted many new customers.
Financial indicators• Since 1995, Dell had been gaining market share quickly growing about three times the 16% average annual rate of global PC sales.• Dell overtook Compaq as the U.S. sales leader in the third quarter of 1999 & IBM during 1998• In 2001, Dell Computer was the PC market leader in the United States, with a nearly 18 % share, Compaq 15%, Gateway 9%, Hewlett-Packard with 8% and IBM with 7%.• Year ending January 31, 2002, Dell Computer posted revenues of over $31 billion, up from $ 3 billion in 1994 -- a compound average growth rate of about 50 %.
Financial PerformanceWorking Capital Turnover Ratio = (Net Revenue/Working Capital)*100 = (1215/12327)*100 = 9.8%This means that for every $1 of working capital, $10 of revenue isgenerated. This best exemplifies Dell’s successful business strategy.
Activity Map Sales force suppliers Supplier logistic R&D centersMarket- Demand ing pulling Strategic alliances Low Sales JIT inventory pattern Recogni- tion Forecast -ing Mass Custom- Direct Customer ization Low selling service prices Low margins
Recommendations• Foray into consultancy services• Invest more into R & D activities – A more focused approach towards the portable device market (ex: handhelds, tabs, Mobile phones) – Conduct surveys and then build desired models• Consider offering online data back-up capabilities• Follow a hybrid approach of direct and In-Direct selling in developing markets – Virtual model apt for developed countries which had a 2nd or 3rd purchase on hand – Introduce intermediaries between market and Dell (retailers) for developing markets – Some customers need to touch and feel the product• Reduce dependence on Intel by adding more suppliers in the processor domain – Ex: AMD