Marketing Management

Summary
on
Matching Dell
Case Study

Bakhtawar
Mehfooz
Memoona Kausar
Sana Irshad
Iqra Izhar
Hina Khalil
Sehrish Abdul
Ghaffar
Sehrish Shaf

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 frst company to launch its PC in 1981 and soon
held 42% share 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 specifcations. 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 specifc 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 fve 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 proft
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, an 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. 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 confgured PC's
to these distributors who in turn completed the confguration according to
customer specifcations. 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 to replace suppliers to
smoothen the flow of goods.
Compaq in 1994 became the world's largest manufacturer and had a large

range of distribution networks. But in order to counter the direct sell

strategy of Dell, it moved from a production system in which it relied on
forecasts made by channel partners. But this type of a system proved to be
too slow because of high inventory and long lead times before delivery to the
customer. Consequently in order to smooth out the inefficiencies of the
supply chain, the company introduced an optimized distribution model under
which the PC's were built only after orders were received. Compaq also
introduced standardization in their production processes with standard
machines built to order in its plants. In 1998 the company introduced the
direct plus program offering PC's to small and mid size companies via
telephone and the internet with a lead time of around 5 days. But high
degree of resistance from the resellers and distributors made sure that
Compaq's movement to online sales was quiet troublesome.

HP had a reputation for high quality and performance, offering a

comparable range of products as Compaq. They also had a wide distribution

network of suppliers and resellers. In 1997 the company introduced an
extended solutions partnership program which was aimed at building
customized solutions for large corporate offices. Their supply chain
comprised of ten channel partners. The company hoped to considerably cut
costs, reduce inventories and minimize defects through this program. The
company also tried to imitate Dells' online selling strategy by introducing a
web service known as HP shopping village through which customers could
make purchase PC's directly from the website.
Gateway adopted a similar model to Dell but served different needs as

Dell. It focused on home and small office users aimed at the PC server
business. But they couldn't manage a rapid change from individual and small
business customers to a wider product range and consequently was forced to
refocus on its original market of small business. It also tried to smooth out its
supply chain by introducing divisions like Gateway Partners.
Thus we can say the competitors of Dell were unsuccessful in imitating Dell's
direct sell strategy because they had inefficient capabilities and resources
like inefficient customer service, lack of quality suppliers which can ensure
smooth movement of products along the supply chain, inefficient supplier
relationships, and lack of understanding and knowledge of the value chain.
Also it was not easy for them to eliminate distributors, retailers and resellers
who once were a part of their core competencies. The case mentions that
70% of their business came from distributors and resellers.
A major concern for Dell is to be a continuous improvement frm. It has
to indulge in systematic innovation so that it does not fall under the category
of Schumpeterian rents as happened with IBM. The reason for this is that the
direct model of selling is difficult to imitate but over the time, its competitors
will be able to catch up and since it is a low proft industry, the pressure of
growing and improving simultaneously could cause it to loose its competitive
advantage. Dell needs to improve its range of customers thus moving from
business and individual customers to educational institutions thus targeting a
new segment.
As the competition in the US market increases, Dell will have to look to
expand internationally. But the company needs to understand the basic
dynamics of customer relations before introducing the direct model to every
market. For example in most Asian countries customers are still do not rely

on internet buying because of security and thefts of information over the

internet and somewhat unreliable purchasing mechanisms and are still
dependent on retailers and resellers for purchasing specifc items such as
computers. A good example in this regard is the Walmart store in Germany. It
did not understand the market dynamics and hence was a failure. lso with
advent of software solutions in every aspect of business like health care,
production and manufacturing, the onus would shift from being just a
computer manufacturer to a company which provides a total solution. This
could be a major threat for the company. For that Dell needs to vertically
integrate with companies providing such solutions so that its products can be
projected as a total package rather than just any other computer.

CONCLUSION
Also Dell needs to concentrate on the design and styling of its new products
and hence focus on it being in the status symbol in addition to its high
performance product symbol. That is an important part of systematic
innovation.
Finally it needs to continue its excellent supplier relationships looking to
identify and work with new suppliers who would be a solid value addition to
its value chain.
In order to have a sustainable competitive advantage, Dell needs to focus on
satisfying its internal i.e. its employees as well as its external customers to
achieve organizational leverage and be a continually improving frm.