What Enables Dell to Maintain Competitive Advantage - Case Study Example

Dell Inc, an example of leading through responsive direct sales Introduction Although responsiveness is recognised as one of the four important factors for gaining competitive advantage, it is not until one explores and perceives by nature the concepts of competitive advantage and customer responsiveness and their true inter-relationship that the true importance and the extent of influence of the notion of customer responsiveness emerges. It is understood that functional level strategies that focus upon the company’s ability to attain superiority in terms of Efficiency, Quality, Innovation, and finally Customer responsiveness lead to increased utility derived by the consumers from the product by able active differentiation, creation of greater value through creating a lower cost structure that enables same quality at lower prices or vice versa compared to rivals and thereby succeeds in achieving competitive advantage (Hill and Jones, 1995). So, it is recognized that gaining competitive advantage for any organization crucially depends upon generating the ability of providing the customer with relatively greater utility in the product. Again, customer responsiveness is defined as “giving customers what they want, when they want it, and at a price they are willing to pay - as long as the company’s long-term profitability is not compromised” (Hill and Jones, 1995). The most important elements of customer responsiveness are essentially, the ability to customize goods and services according to the individual requirements of the customer, fast order response times, superior quality and design as well as superior after sales service and support (Hill and Jones, 1995, p.110). Therefore if we interpret gaining competitive advantage as attainment of success in gaining and maintaining a status as forerunner in the race to provide the customer with greater utility we see how intrinsically related it is to the success in gaining customer responsiveness and how mutually dependent these two concepts are. It has been in fact realised that customer responsiveness is ultimately the most important basis of attaining and maintaining competitive advantage especially in the modern times characterised by intense multidimensional competition the extent of which keeps on surmounting by the day. The other factors of competitive advantage, i.e, efficiency, quality, innovation essentially contribute in enhancing the effect of customer responsiveness and service provided by the organization through improving the value for the customer (Muller, 1991). The main pillars of Customer Responsiveness as have been identified by Hill and Jones (1995), are as follows: a)      Quality b)      Customization c)      Customer order response time d)     Superior design e)      Superior service f)       Superior after-sales service and support Dell, Inc. is the organization that I have chosen to illustrate the extent of contribution that superior customer responsiveness has in attainment and maintenance of competitive advantage. The objective of the present endeavour is to examine how the organization of Dell, Inc. is able to maintain competitive advantage through a very strongly customer centric policy that centres on service responsiveness and customization. In what follows therefore we shall briefly first look at the working policy of Dell in light of the requirements of customer responsiveness we have just identified and its present status in the market to justify the citing of it as an example and then move on to explore the mechanism that enables Dell to maintain such efficient and strong customer responsiveness to enable proper perception of the economic and market oriented factors that Dell has internalised to reach its present high position on the success ladder before concluding by summarising the lessons that are to be learnt from Dell’s overall policy structure for other organizations that strive to attain such dominance in their respective fields. 2. 1 A brief overview of Dell Inc. Dell Computer Corporation as founded by Michael Dell in 1984 has phenomenally grown from a small set up run out a university dorm room to a $3.5 Billion-a-year global giant with nearly 7,500 employees. Dell initially began by selling upgrades of IBM-compatible PCs and from 1985 onwards began to sell PCs of its own brand. Dell grew rapidly and in the mid-1990s, its sales soared from $3.5 billion in 1994 to $25 billion in 1999 when it became the number one PC seller in the United States, and was number two worldwide Dell was the joint global leader in home computers and the leader in the US market up to 1999 (Kraemer and Dedrick, 2001).However presently since the 2004 it has out competed HP, its nearest rival to emerge as the global leader in the PC market. In spite of the plummeting prices that have reduced profits very significantly for its major competitors and often led to losses, Dell has thrived in the environment of stifling competition and in fact has been able to achieve a growth in sales of 28 percent very recently which out paces the overall growth rate of the industry itself in the face of the turmoil faced by the market itself mainly due to raised competition and the racy pace of technological developments that lead to fast obsolesce of erstwhile technology implying huge depreciation costs. Although this is not as high as the 50 percent growth rate as it had achieved in the mid 1990s, it still is a very strong achievement in light of the tumultuous times being faced by the PC market presently. What is it then that has allowed Dell not only to remain afloat but achieve heights that certainly are stunning when one thinks of the very modest roots of the organization that it started of with in the face of enormous competition? The answer, I believe, also lies in these very roots. 2.2 Dell’s customer centric business strategy and its advantages Dell Inc has been able to hold on to its position as a leader both locally as well as globally owing to its very customer centric marketing policy which epitomises the notion of customer responsiveness and this policy actually has remained the prime building block of the organization since days of its inception. Dell started operating on the basis of a direct sales model from the beginning, taking orders over the phone from customers and building customized PCs according to their individual specifications. To this day, the major company products and services are sold directly according to placed orders and Dell caters to large corporate houses, the government, healthcare sections and education accounts, as well as small and medium businesses and individual customers. It is this very direct sale, build-to-order (BTO) type strategy that actually has fuelled the already noted phenomenal growth of the concern (Kapuscinski et al., 2004). Although the direct sales framework was conceived as suitable for a small business concern that participated mainly in the market of home users through hobbyists and experienced individual PC users, it is this direct approach that provided Dell the momentum to make inroads into the corporate market. The direct sales approach won the favour of the management information systems (MIS) departments of large business houses as they often did not need the various services provided by the corporate resellers (Kraemer and Dedrick, 2001) and this led to a successful infiltration in to a segment of the market erstwhile dominated by established IT vendors such as HP, IBM and DEC. This strategy allows Dell to generate much higher value in its products as well as enjoy significant profitability through the reduction of supply chain linkages the presence of which not only contribute to increased risks of value degeneration but also raise costs very significantly. While the typical reseller has to manage about three backward and one forward linkage(s) (see figure 2), for Dell it is one backward linkage and one forward linkage. Such linkage reduction not only contributes considerably to fall in potential inefficiencies but also enhance the personalisation of the relationship with the customers themselves and helps greatly in raising the customer responsiveness of the product. Perhaps most important of the benefits is those which Dell gains from the direct customer relationship. Unlike indirect vendors who generally do not have the advantage of knowing their final customers as the channel partners generally do not reveal who the final customer is, Dell has the benefit of knowing exactly who the end user is, where he is located, and more importantly what the equipment it is that the final user has bought from Dell. Dell also knows the exact amount the customer has spent with the company. Dell can thus use that information to offer supplementary and complementary add-on products and services, to coordinate the maintenance and technical support for that specific order, and to provide help to the customer in planning the PC replacement and upgrade cycles. With many of its customers, Dell has become what it calls a “PC outsourcer,” taking responsibility for managing part, or a customer’s entire PC inventory, from purchase to disposition (Kraemer and Dedrick, 2001).Dell is probably the only concern that has taken personalisation of service to this level and this is the primal source of the marked advantage that it enjoys in the market over its rivals. Dell has brilliantly capitalized on the inherent advantages that were a direct resultant of the direct sales customer centric strategy. A major advantage of this strategy is that it disallows the inefficient accumulation of expensive inventory. A BTO operating policy thus prevents building up of costly inventory within its supply channels which potentially entail losses by losing value due to obsolesce. As a result new products can be brought into conception without the hindrance of having to clear out the inventory channels first. Dell maintains a inventory turnover rate of 60 times per annum the extent of which can be understood when one thinks about the 12-15 times per annum average inventory turnover rate that is observed by most indirect vendors (Kapuscinski et al., 2004). Dell’s customer centric strategy direct sales strategy also allowed it to cash into benefits of e-commerce. The first Dell website was launched in 1994 and many of its business activities were shifted to the Internet way ahead of its major rivals. Dell with its direct model had the advantage that unlike indirect vendors such as Compaq, HP, IBM, and Apple, it had no channel conflict with resellers and distributors since it began its online selling. Further, from the customer’s perspective, with the BTO manufacturing processes being already in place, it was easy to offer the opportunity to configure products online to the customers just as they were previously doing on the telephone, but now Dell was offering it all in multimedia which caused the service to become further lucrative for the customers. Since then Dell has gone on making made its online service provision better by the day and that has significantly contributed to the stepping up in the company’s growth since the mid 1990s. 3. Value creation in the unique direct sales process The unique direct-sales, low-linkage supply-chain production and service policy has allowed Dell to achieve and sustain heights of the industry through effective and efficient value creation in its customer oriented BTO supply chain. Through by-example leadership, the concern has been able to build and sustain a company wide commitment to intense customer responsive service that serves in generating value at the infrastructural level. Customization has been the backbone of Dell’s manufacturing process and the efficient and unique direct sales oriented supply chain has allowed rapid response to customer orders. At the marketing level, as all manufactures and service provisions are customized and of the BTO type, all customers are known and products respond to their exact specifications. In the materials management section, the logistics of Dell are advanced and efficient enough to quickly respond to even unanticipated demands. In fact way back in 1987 Dell became the first PC organization to offer next-day, on-site product service. The integration of the customers in to the product management space through total customization, there is significant value creation that occurs in the space of research and development of the concern. The information systems section of Dell itself has been web oriented since the mid 1990s and that has also led to a considerable amount of value creation for the customer. So, we see all the prime requirements of gaining competitive advantage through value generation by becoming customer responsive have been very well met by Dell Inc and the success of the company actually proves the importance that customer centric strategies have for achieving and sustaining growth through attaining competitive advantage. 4. Conclusion Therefore what emerges from the study is that improving and specialising in customer responsiveness itself can be a strong enough strategy to enable value creation and strong profitability to ensure competitive advantage for a business concern. In fact given the extent of competition in the present days in all major markets for all types of products, to draw the customer and keep him/her, has to be addressed through unique and specific strategies. Dell serves as a very good example in exhibiting the true worth of customer centrism. It is not that Dell has not sought for superior efficiency, quality or innovation, but rather it has focused upon attaining these through customer oriented direct sale BTO policies and in pursuit of achieving this has ended up creating a very efficient supply chain that strive to focus upon all these dimensions but with only the pursuit of satisfying the customer’s exact needs perfectly. The lessons to be learnt from Dell are the process of focusing on the customer through demonstrating leadership that is able to effectively shape employee attitudes, the process of efficiency generation through internalizing customers into the company infrastructure and most importantly satisfying customer needs through customization by efficiently tailoring to the unique needs of customers groups. Satisfying individual needs requires racy response times which in turn require efficient supply chain management. This has been achieved by Dell since inception through its direct sales strategy which structurally terminates excess baggage in the supply chain (Kapuscinski et al., 2004). Thus Dell serves as a great instance of how a business concern can create value through customer centered production and service provision and how effective customer centrism can be achieved where the other tenets of competitive advantage actually serve in enhancing the benefits that are accrued from the customer responsive production design to gain and sustain competitive advantage References: Dedrick, J. and Kraemer, K.L., (2001) "Dell Computer: Using E-commerce To Support the Virtual Company" Center for Research on Information Technology and Organizations, Globalization of I.T, Paper 236. http://repositories.cdlib.org/crito/globalization/236. Dell, M. & Magretta. J., (1998) “The power of virtual integration: An Interview with Dell Computer’s Michael Dell”, .Harvard Bus.Rev.76(2)72–84. Hill, C.W.L., and Jones, G.R. (1998) “Strategic Management Theory, an Integrated Approach.” (4th edition); Houghton Mifflin Company, Boston, USA Kapuscinski, R., Zhang, R.Q., Carbonneau, P., Moore, R., Reeves, B., (2004) "Inventory Decisions in Dells Supply Chain" Interfaces, Vol 34 No 3, pp. 191-205 Müller, W. (1991): “Gaining Competitive Advantage through Customer Satisfaction”, European Management Journal, Vol. 10, No. 2 Read More