The Way To Match Dell

The Way to Match Dell

Introduction of PC Industry

The personal computer (PC) industry first began to take shape in the early 1980s. The founding companies manufactured most of the components themselves--disk drives, memory chips, mother boards...As industry develops fast, in the early 1990s, computer makers such as Compaq, IBM and Hewlett-Packard began to abandon vertical integration in favor of a strategy of outsourcing most components from specialists and concentrating on efficient assembly and marketing their brand of computers. They adopted the build-to-stock value chain model, keeping arm's-length transactions between specialist suppliers, manufacturer, distributor, retailers, and end users. This scale manufacturing resulted in low average profitability. As a result, the PC industry inevitably became a red ocean. However, in the mid-1990s, Dell Computer Corporation made a miracle in creating a blue ocean by employing a shorter value chain model, selling PCs to customers directly and eliminating the time and costs. Dell's great success arouses the competitors' immediate steps to the new blue ocean.

Dell's Successful Direct Sale Strategy

Michael Dell said: "It was too late to challenge the technical standard and the dealer network had been done already." Therefore, Dell introduced the direct sale by offering computers to customers directly with the latest technology at a very competitive price.

* Online and telephone ordering system. Customers are given the option to customize their machines to their likes. This way eliminates wholesale and retail dealers and greatly cut down the time and cost. As a result, Dell sustains high profits though at a price 40% lower than IBM.

* Standardized technologies deliver the best value to customers.

* A highly efficient supply chain and manufacturing organization. Suppliers are encouraged to locate warehouses and production facilities close to Dell's assembly operations. Furthermore, they can share the demand information by electronic links with Dell. In this way, Dell can direct some supplier's shipments straight to customers.

In order to clarify Dell's competitive advantage after adopting the direct sale strategy, this report makes a comparison between Dell and Compaq in serving a corporate customer as follows:

Dell Compaq

Purchasing Channel: Online or hotline Distributor/resellers

Price: $2,555 (96Q1) $3,077(96Q1)

Average Delivery Time: 7 days after placing the order 34.2 days

Services: Promptly after-sale service No direct after-sale service

and technical support

SG&A/Sales in 1998: 9.8% 16.0%

Response from Dell's Rivals

Dell's success of the direct model attracted the intense scrutiny of its competitors who launched a series of initiatives similar to the Direct Sale.

* IBM adopted an Authorized Assembly Program (AAP), which delivered customized PCs rapidly without holding large amounts of inventory. In1998, IBM opened a website, referring business customers