Dell_Group 10

DELL STRATEGY GROUP NO. 8

About the Company• Dell Computer is arguably the most successful business

among those established within the last thirty years

• A classic example : principles of strategic management have been used to translate an innovative vision into a successful and sustainable enterprise

• IT has been used not only to create competitive advantages at the operational level, but also for strategic information management.

• Dell also appears well positioned to extend its brand name beyond mainstream computer products by leveraging its reputation as an e-commerce leader.

1984Started by Micheal Dell, under the name “PC’s Limited”

1988

Changed name to “DELL Computer Corp”. Expanded globallyDominant player in mail-order marketFocus on sales force and value added resellers

1991First notebook modelHigh focus on marketingForayed into retail marketing-abandoned in 1993

1985Advertised in national computer magazines – implemented the direct selling strategy for an upgraded version of Dell’s PC

Late 1990’sGlobal expansion and high growthOpened online superstore9% market shareForayed into servers

Heritage

Competitors

HP• Founded in 1939• Ranked 4th in

global PC market share(1997)

• Strong reputation with corporate clients

• Partnered with Intel for product innovations

• Sold through resellers

Compaq • Founded in 1982• Ranked 1st in

global PC market share(1997)

• Sold through resellers, PC retailer and distributors

• Had large inventories

• Used M&As to grow in the late 1990’s

IBM• Founded in• Ranked 2nd in

global PC market share(1997)

• Main strength laptops, corporate clients, software application and service

• Commanded premium prices

• Allowed resellers to custom build PC

Gateway • Founded in 1985• Not in the top 5

(1997)• Built to order and

sold direct• Market leader in

education segment

• Went global in early 90’s

Need for strategy• Competing in a narrow margin segment of the computer industry—

hardware manufacturing

• Dell has been leading the pack with execution and innovation unmatched by its competitors.

• Business expanded rapidly from 1989 to 1993,followed by a loss.

• Loss of focus: Dell had neglected its most profitable customer segments and placed too much emphasis on the retail channel.

• Dell then redirected its attention to the most profitable segments - corporations, and pulled out of its retail channel.

Strategy

• To Achieve market leadership through Virtual Integration of Dell's business with its supply partners and customers & focusing on delivering the best possible customer experience.

• Blue ocean created from within a red ocean

• Direct selling, from manufacturer to consumer, was a key component of this strategy

Strategy

• To Collapse margins through out the PC Market

• Build & strengthen customer intimacy & loyalty

• Low cost to company & differentiated product for customer

This need was fulfilled by

Direct to Customer business model approach DELL DIRECT

Supporting Trends

• Corporate customers were becoming sophisticated - personal selling by salespeople was no longer required

• Individuals had become savvy and experienced technology

users

• Monitor, keyboard, memory, disk drive, software became standard modules, permitting mass customization in PC system configuration.

Dell’s Direct Selling

• New Value Chain: Dell had no in-house stock of finished goods inventories unlike competitors using the traditional value chain model

• Pull Mechanism: It did not have to wait for resellers to clear out their own inventories before it could push new models into the marketplace (typically operated with 60-70 days stock)

• Personalization: Customers got the satisfaction of having their computers customized to their particular liking

Traditional “build to stock value chain”

ComponentManuf.

PCManufactu

rer

Distributor /Reseller

Corporate customer

Order

Product Product

Forecast

Component

Components

MicroAge,CompuComp

DELL Direct Model

Component manufacturer

DELL CompCorp

Distributor

Final customer

Components

Order

Product

Dell Direct • Dell Computer’s direct model departed from the industry’s historical rules on

several fronts:

The company outsourced all components but performed assembly.

It eliminated retailers and shipped directly from its factories to end customers.

It took customized orders for hardware and software over the phone or via

the Internet.

It designed an integrated supply chain linking Dell’s suppliers very closely to its assembly factories and order-intake system

EXECUTION

Build-to-Order Manufacturing and Mass Customization

• Workstations, servers were made to order No Inventory

• Dell customers could order custom-built servers and workstations based on the needs of their applications

• “Cell manufacturing" techniques reduced assembly time by 75 percent and doubled productivity per square foot of assembly space.

• Assembled computers were tested, loaded with desired software, shipped and delivered within five to six business days of the initial order.

Partnerships with Suppliers• To partner with few outside vendors and stay with them as

long as they maintained their leadership.

• Dell committed to purchase a specified percentage of its requirements from each of its long-term suppliers

• Dell shared its daily production schedules, sales forecasts, and new-model introduction plans with vendors.to help suppliers meet JIT delivery expectations

• Some of the vendors had plants or distribution centres within a few miles of Dell's assembly plants and could deliver daily or even hourly if needed.

JIT

• Suppliers allowed Dell to operate with only a few days of inventory for some components and a few hours of inventory for others.

• Dell supplied data on inventories and replenishment needs to its suppliers at least once a day—hourly in the case of components being delivered several times daily from nearby sources.

• In a couple of instances, Dell's close partnership with vendors allowed it to operate with no inventories.

SONY Monitors

• Supplier of monitors was Sony.

• The monitors Sony supplied with Dell name already imprinted were of dependably high quality which required no testing or separate shipment

• Shippers picked up computers from its Austin plant, then pick up the accompanying monitors from the Sony plant in Mexico, match the customer's computer order with the customer's monitor order, and deliver both to the customer simultaneously.

Direct Sales

• Customer-driven system allowed quick transitions to new generations of components and PC models.

• Quickly detected shifts in sales trends and getting prompt feedback on any problems with its products.

• If similar complaints, the information was relayed immediately to design engineers.

• When design flaws or components defects were found, the factory was notified and the problem corrected within days

Segmentation

Dell had made more homogeneous categories to serve every customer well

• In 1998, 90% sales were business or government institutions and of those 70% were to large corporate customers

• Sales representatives called on large corporate and institutional accounts

• Sales to individuals and small businesses were made by telephone, fax, and the Internet.

Segmentation Chart

Segmentation

• 1 call centre in the United States with toll-free lines

• Internationally, Dell had set up six call centres in Europe and Asia that customers could dial toll free.

• The call centres were equipped with technology that routed calls from a particular country to a particular call centre.

• Internet sales were equally divided between sales to individuals and sales to business customers.

Customer Service• Service became a feature of Dell's strategy in 1986

• It provided free on-site service for a year after sale

• Contracted with local service providers to handle customer requests for repairs

• On-site service was provided on a next-day basis

• Technical support via a toll-free number, fax, and e-mail.

• If a customer preferred to work with his or her own service provider, training & spare parts were provided

Customer Service• Corporate support and service was charged

• Contracts with third-party providers to make the service calls

• When a customer with PC problems called Dell, the call triggered two electronic dispatches—one to ship the needed parts from Dell's factory to the customer sites and one to notify the contract service providers to prepare to make the needed repairs as soon as the parts arrived.

• The service providers sent the bad parts back to Dell.

• Problems relating to faulty components or design were passed along to the relevant supplier to improve quality control procedures or redesign

Virtual Integration and Information-Sharing• On-line communications were used to communicate inventory levels and

replenishment needs to vendors daily or even hourly.

• Dedicated on-site teams of Dell employees for corporate accounts

• Regional forums were used to stimulate the flow of information back and forth with customers.

• Platinum Councils composed of its largest customers in the United States, Europe, Japan, and the Asia-Pacific region.

• Customized intranet sites called Premier Pages were developed for its 3,000 largest global customers

• Gave customer personnel immediate on-line access to purchasing and technical information about the specific configurations of products

Virtual Integration and Information-Sharing

• The Premier Pages contained all of the elements of Dell's relationship with the customer.

• The company also gave its large customers access to Dell's own on-line internal technical support tools, allowing them to go to www.dell.com and gain immediate access to the database and problem-solving information that Dell's support personnel used to assist call-in customers.

Demand Forecasting• Forecasting was viewed as a critical sales skill.

• Sales-account managers were trained on on how to lead large customers through a discussion of their future needs for PCs, workstations, servers, and peripheral equipment.

• Distinctions were made between purchases that were virtually certain and those that were contingent on some event.

• Salespeople made note of the contingent events so they could follow up at the appropriate time.

• With smaller customers, direct telephone sales personnel's would steer customers toward configurations that were immediately available

R&D• Talked to customers frequently about "relevant technology,"

needs and problems to identify the most cost-effective solutions.

• About 1,600 engineers worked on product development to improve users' experience with its products—including incorporating the latest and best technologies, making its products easy to use and devising ways to keep costs low.

• Quality control and streamlining the assembly process was of prime importance.

• Tracking all the new developments in components and software to ascertain their usefulness to computer users.

CRITICAL SUCCESS FACTORS

Direct Sales• No wholesalers or retailers to support, dealer mark ups were avoided. Channel

cost was 2% in comparison to 13-15% for indirect sales

• Also ,the company did not have to compete for valuable shelf space.

• Dell's overhead costs (selling, general and administrative expenses) in both 1999 & 2000 were less than 10% of its total revenues versus industry norms of 15-17 %.

• Dell is able to channels its resources into its increasingly efficient procurement, manufacturing and distribution network, thereby minimizing product obsolescence.

• A totally customer-driven system that allowed quick transitions to new generations of components and PC models.

• The company is also able to maintain and support a customer relationship database that provides immediate feedback from clients and helps to shape product offerings.

Direct Sales Model

Minimum Inventory

DELL Carries 11 Days

Inventory

HP Carries 80 Days

Inventory

Inventory Depreciates

at 50 %

That’s 1 % a week

roughly

So Dell Has A 10 % Cost Advantage

On HP

Minimum Inventory• Each computer chip carries a 4 digit code eg 97-23 means this chip

was made in the 23rd week of 1997

• Obsolescence rate in components is very high.

• Dell Carries 11 days inventory as compared to Compaq with 80 days inventory

• Hence, Dell can launch any new product 69 days faster than Compaq

• Shelf stock loses 50 % the moment a new computer is launched

• If components lose 50 % a year i.e. 1 % per week and Dell carries 11 days inventory compared to 80 of a competitor, this is a cost advantage of 10 %

• Top end Suppliers cuts down the need for Inspection costs and time

Flexible Manufacturing• By customizing orders - product tailored to customer’s desires while Dell

saved money and time on manufacturing.

• Allowed Dell to integrate production schedules with sales flows, assemble all parts of the PC on site, and install the specific software that the customer requested.

• These manufacturing interactions sped up the final products completion time to thirty-six hours.

• Assembly times reduced by 75 % and productivity per square foot of assembly space doubled.

• Assembled computers were tested, then loaded with the desired software, shipped, and typically delivered within five to six business days of the initial order.

Flexible Manufacturing

• Quickening the delivery time.

• Suppliers preferred Dell because there inventory levels rarely pilled up as inventory turnover was 60 times per year.

• Chain of integrations added value to the customer’s product, while also adding value to Dell as a corporation.

• Reduced its working capital requirements by operating on negative cash conversion cycle - receiving payment from its customers before it pays its suppliers for components.

Role of Internet• Dell Computer could extend the reach and scope of the direct sales model

at a relatively low marginal cost.

• Ideally positioned to take advantage of the Internet because of its distinctive supply chain.

• Unlike its major rivals, Dell did not face any channel conflict with resellers or distributors by going online.

• With a build-to-order manufacturing process already in place, customers could easily configure their own products online, just like they were already doing over the telephone.

• Nearly 1.5 million people visited Dell's Web site weekly to view information and place orders, about 20 times more than called to talk with sales representatives over the telephone.

Targeting & Segmenting• Strategically targeted only the customers they wanted.

• Their customers did not need to go to a retail store to gain knowledge about their product.

• Customers were categorized into Relationship buyers, large businesses and institutions, and Transaction buyers, small business and home PC users.

• Corporate customers tended to buy the most expensive computers, Dell commanded the highest average selling prices in the industry—over $1,600 versus an industry average under $1,400.

Segmenting Customers

• On site teams - customer could focus their time and energy on the core business rather than PC purchasing and servicing issues. Eg Boeing

• Integration of Relational and Transaction buyers into business system helped – Quick repeat purchases – purchasing history could be consulted,– Follow up customer service was able to be more effective.

Evading Price War• Dell combated failing into the trap of a price battle by making a PC that

was a better product than the competitors, yet near their competitor’s price.

• There costs were able to stay competitive while delivering an exceptional product because their business kept internal costs low, thus showing the effectiveness of “virtual integration.”

• The average selling price of a Dell business PC was close to $100 more than the average price of an HP business PC which was its closest competitor.

• Dell was able to evade a price war because its customers were aware of the technological value in a Dell PC.

Quick response• Respond quickly to emerging problems and avoid costly refunds

and service calls.

• Dell responded rapidly when Intel shipped faulty Pentium chips to PC makers in the mid 1990s.

• Dell knew exactly where the problem chips were and could easily help customers to replace them.

• Rivals had to stop their production and ask their channel partners to find the problem chips that had already been sold or distributed.

• Dell's quick and efficient response attracted many new customers.

Financial indicators• Since 1995, Dell had been gaining market share quickly growing

about three times the 16% average annual rate of global PC sales.

• Dell overtook Compaq as the U.S. sales leader in the third quarter of 1999 & IBM during 1998

• In 2001, Dell Computer was the PC market leader in the United States, with a nearly 18 % share, Compaq 15%, Gateway 9%, Hewlett-Packard with 8% and IBM with 7%.

• Year ending January 31, 2002, Dell Computer posted revenues of over $31 billion, up from $ 3 billion in 1994 -- a compound average growth rate of about 50 %.

Financial Performance

Working Capital Turnover Ratio = (Net Revenue/Working Capital)*100 = (1215/12327)*100 = 9.8%This means that for every $1 of working capital, $10 of revenue is generated. This best exemplifies Dell’s successful business strategy.

Activity Map

Demandpulling

Low prices

Sales force

Direct selling

R&D

JIT

Customer service

suppliers Supplier logisticcenters

Market-ing

Sales pattern

Recogni-tion

Strategic alliances

Mass Custom-ization

Forecast-ing

Low inventory

Low margins

RECOMMENDATIONS

Recommendations • Foray into consultancy services

• Invest more into R & D activities – A more focused approach towards the portable device market (ex: handhelds,

tabs, Mobile phones)– Conduct surveys and then build desired models

• Consider offering online data back-up capabilities

• Follow a hybrid approach of direct and In-Direct selling in developing markets– Virtual model apt for developed countries which had a 2nd or 3rd purchase on

hand– Introduce intermediaries between market and Dell (retailers) for developing

markets – Some customers need to touch and feel the product

• Reduce dependence on Intel by adding more suppliers in the processor domain– Ex: AMD

THANK YOU

Adhiraj SinghAkshay AnandDipika Misra

Nalini JainNikhil SinghRamit Gulati