Dells Failure In Retail Distribution

This rapid success of the Dell Computer Corporation has interested business analysts the world over. The paper from the Harvard Business School is an analysis of the meteoric rise of this company until 1994. It delves into the factors that made the company a success and the kind of strategic decisions that the management of the company needed to make at various junctures. One such strategic decision that the management made was to shift from its existing "Direct - Made to Order" business model to a more hybrid model that combined it with a retail presence. Yet, by 1994 Dell realized that it wouldn't be able to sustain itself and withdrew from the retail distribution channel.

Our paper will analyze the reasons behind its exit from the retail sector and why it failed where its competitors such as Compaq succeeded. It also delves into some of the expansion strategies that Dell should pursue in other countries.

We hypothesize that Dell's failure in using the retail channel can be attributed to the following:

* Conventional retail channels and pre-configured computer models did not allow the company to leverage its most effective competitive weapon: mass-customization of products. Moreover, Dell's stock configurations could not command their accustomed price premium while sitting on retail shelves because they were insufficiently differentiated from competitors' offerings.

* Dell experienced a sizable increase in its capital costs, as it had to maintain 60-day finished goods inventory for the channel, whereas before it needed no finished good inventory.

* Companies such as Compaq had existing relationships with retailers which Dell found difficult to emulate in the short time that it made its foray into the retail sector.

We shall now attempt to explain our hypotheses further with some cogent arguments.

Let us begin with a look at Dell's USP; its business model. Dell's Direct Model was based primarily on the following

* Direct customer relationships

* Build to order manufacturing

* Products and services targeted at distinct consumer segments

Dell could not command a premium price while sitting on retail shelves because its products were insufficiently differentiated from competitors' offerings. Dell charged a price premium of about 15% in direct sales for the simple reason that its products were customized for the individual. Yet, such customization was not possible when selling through the retail channel. In retail, its pre configured computers had to compete against the pre configured models of other companies such as HP, IBM and Compaq. Competitor pricing therefore forced it to keep its prices low. This was highlighted by its operating income margin of around 5% in direct sales as opposed to that of -3% within retail sales.

Furthermore, in 1992-93 USA, computers had begun to be seen as commodities and the existence of several big players triggered price sensitivity amongst end consumers. Companies like Compaq were undercutting Dell's prices by 30% and this made it even tougher for Dell to sustain such prices. In addition to this, its competitors had access to over 20,000 retail stores, which Dell could not match up to due to its tighter inventory level. As a result, the more established players continued to dominate the retail channel and Dell's limited sets of predetermined configurations could not gain a foothold.

Also, Compaq's pricing schemes prevented Dell from succeeding in the retail channel. One reason for Compaq's rather impressive sales through the retail channel could have been that the service it provided as well as other integrated systems provided by the retailers was preferred by the consumers.

The direct model did not justify Dell's employing retailers to sell its products. Unlike the other PC manufacturers, therefore, Dell did not engage the retailers in any of the post sale activities such as marketing, servicing etc. Dell's aim was to focus on customized orders made through mail and therefore it relied on its own sales support team for all post sale activities. Its comparative advantage was to be able to reduce costs through its direct sales model while continuing to provide the option of customization. Using retailers meant greater costs and was against Dell's objective.

In contrast, other companies such as IBM, trained their retailers to stock, sell and service the product. In addition to this, Compaq as well some of the other PC manufacturers recruited retail dealers to build a sales force upon their entry into the market. By promising retailers the full rein of the market, Compaq penetrated rapidly into the retail channel. As a result, several retailers had incentives to favour sales of other brands as opposed to Dell and this played a significant role in preventing Dell's success in retail.

The retail channel was the only channel for many of Dell's competitors such as Compaq, IBM and HP and this was not the case for Dell. Its preference for using the mail channel for the customized orders led to comparatively strained relationships with the retailers and this hampered the extent to which Dell could perpetrate sales through this channel.

Also, Dell's direct sales model demanded an average inventory turn of 12 times. Its competitors on the other hand had a turn of 6 times. This obviously meant that if Dell often found itself out of stock and when it replenished stock to serve the retail outlets then it ended up increasing inventory costs. This dilemma that it faced while maintaining this hybrid model was one of the main reasons for its exit from the retail channel.

Along with the above mentioned factors, it is critical to note that that Dell was not successful in targeting the fast-growing segment of small office and home (SOHO) buyers. This group preferred shopping through the retail channel because it gave them a chance to 'touch and feel' multiple brands prior to their purchase. Since Dell only had a limited range of preconfigured sets, it may not have been able to stand out amongst the numerous big players.

It turns out that Dell's decision to exit from retail has been a good one. However, a trend that has been noticed in overseas markets is that because of the inherent difference between customer preferences and maturity, the retail distribution channel works a lot better vis-Ðo-vis the direct model that works so well for the company in the