Dell Computer’s Drive to Eliminate the Middleman Historically, personal computers were sold either..

Dell Computer’s Drive to Eliminate the Middleman

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 Historically, personal computers were sold either through a
direct sales force to businesses (e.g., IBM), through company-owned stores
(e.g., Gateway), or through independent retail outlets and distributors to both
businesses and consumers (e.g., CompUSA). Retail chains and distributors
constituted a large percentage of the customer base of other PC manufacturers
such as Compaq and Gateway. Consequently, most PC manufacturers were saddled
with the large overhead expense associated with a direct sales force, a chain
of company-owned stores, a demanding and complex distribution chain
contributing a substantial percentage of revenue, or some combination of all
three. Michael Dell, the founder of Dell Computer, saw an opportunity to take
cost out of the distribution of PCs by circumventing the distributors and
selling directly to the end users. Dell Computer introduced a dramatically new
business model for selling personal computers directly to consumers. By
starting with this model when the firm was formed, Dell did not have to worry
about being in direct competition with its distribution chain. Dell has changed
the basis of competition in the PC industry not only by shifting much of its
direct order business to the Internet but also by introducing made-to-order
personal computers. Businesses and consumers can specify online the features
and functions of a PC and pay by credit card. Dell assembles the PC only after
the order is processed and the customer’s credit card has been validated. This
has the effect of increasing customer choice and convenience as well as
dramatically reducing Dell’s costs of carrying inventory. The Dell business
model has evolved into one focused relentlessly on improving efficiency. The
Dell model includes setting up super-efficient factories, keeping parts in
inventory for only a few days before they are used, and selling computers based
on common industry standards like Intel chips and Microsoft operating systems.
By its nature, the Dell model requires aggressive expansion. As growth in the
PC market slowed in the late 1990s, the personal computer became a commodity.
Since computers had become so powerful, there was little need for consumers to
upgrade to more powerful machines. To offset growth in its primary market, Dell
undertook a furious strategy to extend the Dell brand name into related
electronics markets. The firm started to sell “low end” servers to companies,
networking gear, PDAs, portable digital music players, online music, flat-panel
televisions, and printers. In late 2002, the firm began to sell computers
through the retail middleman Costco.

Michael Dell believes that every product should be
profitable from the outset. His focus on operating profit margins has left
little room for product innovation. Dell’s budget for new product R&D has
averaged 1.3% of revenues in recent years, about one-fifth of what IBM and
Hewlett-Packard spend. Rather than be viewed as a product innovator, Dell is
pursuing a “fast follower” strategy in which the firm focuses on taking what is
currently highly popular and making it better and cheaper than anyone else.
While not a product innovator, Dell has succeeded in process innovation. The
company has more than 550 business process patents, for everything from a method
of using wireless networks in factories to a configuration of manufacturing
stations that is four times as productive as a standard assembly line. Dell’s
expansion seems to be focused on its industry lead in process engineering and
innovation resulting in super-efficient factories. The current strategy seems
to be to move into commodity markets, with standardized technology that is
widely available. In such markets, the firm can apply its finely honed skills
in discipline, speed, and efficiency. For markets that are becoming more
commodity-like but still require some R&D, Dell takes on partners. For
example, in the printer market, Dell is applying its brand name to Lexmark
printers. In storage products, Dell has paired up with EMC Corp. to sell
cobranded storage machines. As these markets become more commodity-like, Dell
will take over manufacturing of these products. This is what happened at the
end of 2003 when it took over production of low-end storage production from
EMC. In doing so, Dell was able to cut production costs by 25%. The success of
Michael Dell’s business model is evident. Its share of the global PC market in
2003 topped 16%; the company accounts for more than one-third of the hand-held
device market. At the end of 2003, Dell’s price-to earnings ratio exceeded IBM,
Microsoft, Wal-Mart, and General Electric. Dell has had some setbacks, however.
In 2001, the firm scrapped a plan to enter the mobile-phone market; in 2002
Dell wrote off its only major acquisition, a storage-technology company purchased
in 1999 for $340 million. Dell also withdrew from the high-end storage
business, because it decided its technology was not ready for the market.

Case Study Discussion Questions

 1. Who are Dell’s primary customers? Current and potential
competitors? Suppliers?

 2. In your opinion, what market need(s) was Dell able to
satisfy better than its competition?

 3. How would you characterize Dell’s business strategy
(i.e., cost leadership, differentiation, niche, or some combination)? Give
examples to illustrate your conclusions.

4. How would you describe Dell’s implementation strategy
(i.e., solo venture, shared growth/shared control, merger/acquisition, or some
combination)? Give examples to illustrate your conclusions. Why do you think
Michael Dell selected this strategy? Explain your answer.

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