Dell's Business Model

Back in the old days pc makers were relying on retailers to sell their products (see exhibit 1). Dell, however, created a cost-efficient way to sell their pc's by bypassing retailers and distributors and offering their computers directly to customers (see exhibit 2). As a result Dell is able to lower its inventory costs and marketing costs by a significant amount and pass these cost savings on to their customers.

Traditional pc makers assemble pc's using parts they have in stock. Hence they needed a warehouse with three to four months of pc parts inventory in the distribution channel. Dell on the otherhand is able to produce a pc only when a customer orders and pays in advance. Basically, these funds are used to buy the pc parts from its suppliers and in the end Dell is able to cut down on its financing costs and thus creating a negative cash conversion cycle.

Due to fast technological developments in the pc market, the prices of computer parts erode at a fast pace. Therefore it is essential for a pc manufacturer to keep low volumes of inventory in stock over a long period of time. If someone would choose to buy a pc from either IBM, HP or another rival in a shop, it is likely that that computer parts have been in stock for some months. A pc from Dell will cost less because it was assembled from parts that were bought at their current market price. Because of their pile of stock many pc makers need to wait a couple of months to introduce new models. Dell on the other hand, can bring a new model on the market within some days - by avoiding the lenghty retail channel - and will not be confronted with losses like its rivals as a result of obsolescence.

Another key element of it's business model is the tailor made option they offer. Customers can configure their own pc and are therefore more than willing to choose a firm that offers them convenience and flexibility. In essence, customers no longer have to buy a one-size-fits-all pc at a retailer, but they can actually get the pc they wished for

If the IBMs and HPs of this world would try to take a bite out of Dell's success by simply duplicating its business model they would fail. The reason is that these rivals rely on the traditional distribution channel (see exhibit 1) and as a result direct selling to the customers would ignite conflicts with resellers and retailers. However they could create a niche whereby they offer customers the option to buy their products over the internet. This is not a divergence from their supply-driven model, but just resetting the boundaries of its markets.

On the other hand a new firm can adopt the strategy of demand-driven production by facilitating the process of order intake, payment, communication and customer service through the internet. But the cutting edge of Dell's business model is the way it has been able to establish a