Matching Dell

MATCHING DELL CASE ANALYSIS

This analysis describes the case of computer and peripherals industry especially the successful management of Dell Computer Corporation which grew twice as fast as its major rivals like Compaq, Gateway, Hewlett Packard and IBM. The main reason for the success of Dell was their "Direct Model" of selling computers which eliminated all traditional channels like distributors, resellers and retailers. Traditionally all its competitors like IBM, HP, and Compaq etc. used reseller, retailers and distributors to sell their computers to end users. IBM was the first company to launch its PC in 1981 and soon held 42% of the market. But the growth of IBM proved to be short lived as with Schumpeterian rents when it failed to take any proprietary competitive advantage and ceded rights of the microprocessor and operating system to Intel and Microsoft. Dell through its direct selling approach used to take orders directly from the customers, thus selling customized machines. This proved to be a revolutionary business strategy which would enable it gain cost leadership and competitive advantage in the PC market, enabling the company to eliminate wholesale and retail dealers that proved to be very expensive and wastage of time. It also provided for a cheap and efficient way of distribution and production of computers. Furthermore the direct model also provided a better understanding of customer needs.

This efficient system of distribution was possible only because the company was able to align its resources and capabilities with customer expectations. The company was able to build huge and highly integrated and efficient external as well as internal sales forces. The external sales force was entrusted with the responsibilities of understanding customer expectations and making sure that each and every aspect of the PC was build according to customer specifications. The internal sales force was assigned to take orders from customers. An important point to mention here is that the internal sales force also had an additional responsibility of creating customer loyalty and convincing them of buying the best available product. This also helped eliminate the roles of resellers thus proving to be a strong competitive advantage for the company. It also subdivided its customers into two large groups: relationship buyers and transaction buyers with specific sales group catering to each cadre of customers. This was a good market segmentation strategy as it helped the company retain customers. While sales representatives looked after relationship buyers, Dell serviced transaction buyers via telephone. The company also provided an intensive after sales service, both online and in call centers to improve customer satisfaction. The problems which appeared complex were outsourced to other companies. As its sales and customer base increased the company further divided its customers into businesses, governments, individual customers and educational institutions.

An important aspect of its capability which helped achieve competitive advantage was that it produced computers based on actual orders rather than demand forecasts. It was only possible because of the resources which it employed in assembling its PC's. It manufactured the PC's based on cellular manufacturing units which consisted of five employee manufacturing cells. This enabled to achieve fewer defects and zero inventory targets. Thus successful application of just in time manufacturing and just in time delivery provided Dell the ability to deliver products in one or two days after receiving an order. An good example mentioned in the case in this regard is that of the company shipping eight customized, tested severs within 36 hours when it received emergency orders from the NASDAQ stock exchange. The just in time delivery was also successful mainly because the company had sound relationships with its suppliers via close electronics links and thus communicating replenishment needs to them on an hourly basis. It also enabled the company to direct some supplier shipments such as monitors from Sony directly to customers which was a major cost advantage. Another important aspect of the logistics strategy adopted by Dell was that suppliers were encouraged to locate warehouses and production facilities close to its assembly operations to ensure smooth flow of materials across the value chain. This ensured that its value chain was capable enough to handle the largest of orders in smallest possible time frame. Through this value chain the company was able to introduce a wide range of products. All the above stated resources and capabilities decreased operating costs with enhanced customer service and thus helped maintain substantial profit margins through relatively low inventory and capital expenditures in comparison to the revenues. Thus if we talk in terms of the strategy triangle we can say that Dell had the resources and capabilities such as highly integrated sales forces, efficient supplier relations, a able leadership in Michael Dell, cross functional excellence and outstanding corporate culture, which eventually led the company to achieve its core strategy of direct distribution and selling and hence maintain a relatively high growth rate. I would also like to mention that to improve its systems and processes, Dell hired management experience from other companies like Motorola, Apple computer and Intel who focused especially on operations and manufacturing and thus focused on return on invested capital It is also important to mention here that the company had achieved a radical innovation in the industry as far as its direct model was concerned.

Competitors of Dell like IBM, Compaq and HP tried to imitate the direct sell strategy but faced a lot of issues to do so not only because of inefficiencies in their value chain but also because of deviations in their business strategies which they were following since many years. IBM which moved from a market leader to third position in the market tried to replicate the direct sell strategy in its own way by initiating programs like the joint manufacturing authorization programs and the enhanced integration and assembly programs with its distributors and resellers such as MicroAge, Ingram Micro and Tech Data thus shipping heavily configured PC's to these distributors who in turn completed the configuration according to customer specifications. Also to integrate the value chain, IBM set component prices such that total costs were same for channel-assembled and IBM assembled PC's. To combat clones, it launched division Ambra to produce low end PC's with direct selling available through phone, mail and later on website. IBM failed to show results because of inefficient customer service, higher operating costs. It was also not easy