Case Study of Dell Computer Corporation

Case Study of Dell Computer Corporation

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Case Study of Dell Computer Corporation


Michael Dell founded Dell Computer Corporation in 1984 with a simple vision and business concept – that personal computers can be built to order and sold directly to consumers. Michael believed his approach had two advantages: (i) by passing distributors and retail dealers eliminated the markups of resellers, and (ii) building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components and finished goods. Its build-to-order and sell-direct approach proved appealing to growing numbers of customers in the mid 1990s as global PC sales rose to record level. In 1998, it was already the 3rd manufacturer in the United States with a 12% share of PC market and a nearly 6% share worldwide. The company’s fastest growing market for the past several quarters was Europe. Even during the Asia economic woes in the early 1998, Dell’s sales in Asia rose 35%. Its sales at the Internet Web site were about $5 million a day and expected to reach $1.5 billion annually by the year-end 1998. Since 1990, Dell’s stock price had exploded from 23 cents per share to $83 per share in May1998 with a 36,000% increase and was the top performing big company then.

Dell’s principal products included desktop PCs, notebook computers, workstations, and servers. Its products and services were sold in more than 140 countries. The sales of desktop PCs alone accounted for about 65% of Dell’s total revenues while the rest accounted for about 33%. In early 1988, the company has 16,000 employees.

Dell’s Background and Vision

Dell Computer was first known as PCs Limited in 1984, selling PC components and PCs under the brand name PCs Limited. Dell’s strategy was to sell directly to end users; by eliminating the retail markup, Dell was able to sell IBM clones at about 40% below an IBM PC price. By 1985, the company was assembling its own PC designs and had about 40 employees. Sales had reached $33 million by the year ending 1986.

Michael Dell sought to refine the company’s business model, add needed production capacity, and build a bigger, deeper management staff and corporate infrastructure while at same time keeping costs low. It first international offices were opened in 1987 and was renamed Dell Computer. In 1998, Dell became a public company, raised $34.2 million in its first offering of common stock.

Michael Dell’s vision was for Dell Computer to become one of the top three PC companies.

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In 1997, it created an internal sales and marketing group dedicated to serving the individual consumer segment and introduced a product line designed specially for individual users. By late 1997, it became the industry leader in keeping costs low and wringed efficiency out of direct sales and build-to-order business model. As Dell’s financial statement shown in 1998, it had made net revenue of $12,327,000, a big jump from $2,873,000 in 1994. In the same year, its global market share rose to 7.9%, US share to 11.8%, and unit shipment were 1.6 million units. In laptop PC, Dell moved to 3rd place in US ands 5th place worldwide. It also climbed into 2nd place in servers and Windows NT-based workstations.

Q1. Why has Dell managed to achieve its current status in the PC production area?

Dell Computer achieved its status due to its competitive advantage as an integrated PC manufacturer by selling its PCs directly to customer according to their specifications and requirements. Dell employed a shorter value chain, bypassed retailers to eliminate markups, time and cost associated with distribution. It also reduced the high costs and risks associated with carrying large stock of parts, components and finished parts. Dell was able to custom made PCs for individual owners who were buying their 2nd and 3rd computers by providing powerful multiple features they desired. These individuals did not need much technical support chose Dell because of the convenience of buying direct, ordering what they wanted and having it delivered to their doors within a matter of days. Dell even set up an internal sale and marketing group dedicated to serve the individual consumers segment and introduced product line designed especially for individual users.

Michael Dell himself is a charismatic leader with an instinct for motivating people and winning their loyalty and respect. He delegated authority to his subordinates, believing that the results come from turning loose talented employees to do what they are supposed to do. With an aggressive and extremely competitive risk-taker personality, the people Dell hired were aggressive and competitive as well. These traits had translated into an aggressive, competitive, intense corporate culture with a strong sense of mission and dedication.

Q2. What are the key elements of Dell’s strategy?

Dell Computer’s strategy was built around a number of core elements: build to order manufacturing, partnerships with suppliers, mass customization, direct sales, just-in–time components inventories, market segmentation, customers service and extensive data and information sharing with both supply partners and the customers. With the above elements integrating into the Dell’s strategy, the company hoped to achieve the “virtual integration” – a stitching together of Dell’s business with its supply partners and customers in real time that all three will appeared to be part of the same organizational team.

Q3. What are the likely key policies, practices, support systems, and the management approaches Dell has used to implement its strategy?

Key Policies - Dell customized its computer, workstation, and servers to customers’ liking and pocketbook, and none of them were manufactured for inventory. Customers could order them based on the needs of their application, multiple features and configurations they preferred. This direct sales strategy meant that Dell had no in-house stock of finished goods inventories and did not have to wait for resellers to clear out their own inventory before it could push new models into the market place. In addition, direct selling gave Dell firsthand intelligence about customer preferences and needs, as well as immediate feedback on design problems and quality glitches.

Practices – Dell believed long-term partnership with reputable suppliers of PC parts and components made much better sense rather than integrating backward and manufacturing its own. Some of the advantages were, firstly, using branded name components and parts enhanced the quality and performance of Dell’s PCs. Secondly, Dell was assured of getting the volume of components it needed on timely basis even when demand exceeded the market supply. Thirdly, the partnership allowed feasibility to have some of the suppliers’ engineers in Dell’s product design team. Fourthly, Dell’s long-run commitment to it suppliers laid the basis of just-in-time delivery of suppliers’ products to Dell’s assembly plants. Just-in-time inventory emphasis yielded major cost advantages and shortened the time it took for Dell to get new generations of its computer models into the marketplace.

Support Systems – With much emphasis on service, virtual integration and information sharing with both its partners and customers, Dell began to provide a guarantee free-on-site service for a year with most of its PCs. Dell contracted local service providers to handle customers’ request for repairs, on site service and technical support. It also bundled service policies to win corporate accounts. By maintaining a close customer relationships had allowed Dell to be knowledgeable about customers’ needs and their PC network function. Dell adopted “virtual integration” feature by using on-line communication technology and information sharing with both supply partners and customers for easy inventory control and replenishment. Its used sales and support mechanism to stay close to customers to stimulate information flow with customers. Dell developed customized intranet sites to give customers immediate on-line access to purchasing, sales and support contacts, detailed product description, service and warranty records, pricing and available technical support in every country.

Management - Accurate sales forecasts were keys to keeping cost down and minimize inventories. By maintaining a diligent close relationship with large corporate and institutional customers, and by direct sales, it enabled Dell to keep a finger on the pulse of demand. Market segmentation strategy paved in-depth understanding of customers’ requirement and expectation. Dell passed that knowledge of forecast demand to suppliers so that they could plan their production accordingly. The management deemed that quality control and streamlined the assembly process to ascertain now new development in component can be used to PC users. Dell sorted out new technology and helped steer customers to options and solution most relevant to their needs. Management also believed the power of advertising and frequently espoused its importance in company’s strategy.

Q4. What problems do you see ahead of Dell?

There were a number of factors that could affect Dell substantially. The drops in components prices resulted in dramatically lowered PC prices. Dell had to re-price its PCs under $1500 range. The economic woes of Asian countries put a big damper on PC sales in Asia. Sharp appreciation of US dollars against Asian currencies had made US-produced PCs less affordable. Beside economic difficulties in Asia, market maturity was potential for PCs makers. These few factors resulted rival PCs makers to use PC sale as an entree to providing bigger lineup of other products.

There were stiff competitions from other competitors as they are shifting their business models to build-to-order manufacturing to reduce inventory and speed up new model to market. Other PC makers even come out a new policy of trading in the old computer for new computer system once every two years. With all the above coupled with the latest financing scheme of low monthly repayments plan targeting at individual and household provided by these rivals PC makers, this will affect the profit margin and the market shares for Dell. Dell will face a greater competition and challenges from competitors as well as the up and coming giant mobile phones companies like Ericsson, Motorola and Nokia, whom are incorporating the PC system into the latest range of mobile phones. To stay ahead of the competition, Dell’s strategy has to be differentiated in order to protect their market share.
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