Going Direct Business Model - Dell Inc - Essay Example

? MANAGEMENT …………………………………… College/ ………………………….. ………………………………………….. Word counts: 3054 Table of Contents Table of Contents 2 Introduction 3 Dell Inc: An Overview 3 Going Direct Business Model 5 Operational efficiency through cost advantages and flow of information 6 Own-store Retailing and additional advantages 9 Supply chain and Build-to-order business operation 10 Mass Customization process of Dell 11 Service processes at Dell inc 13 Conclusion 14 References 14 Introduction No matter whether a business manufactures some products or provides some services, the operations of the business organization comprise of all those activities that are closely related to accomplishing the main purposes of the organization. In both the manufacturing and service business types, certain inputs such as materials and labor are converted to certain outputs that are either products or services. Operations, quite differently from other major organization’s functional areas such as financing, marketing, accounting etc, are more directly related to an organization’s day-to-day quest of its main business (Summers, 1998, p. 1). Operational efficiency and effectiveness are critically important two terms in the contemporary business literatures, not only since they are of greater importance in strategic management but also they represent the most reliable aspects of growth and profits. This report chooses Dell Inc and describes examples of its strategic managerial and operational activities for critically analyzing the operational efficiency and effective systems to explain how they are aligned to deliver its performance objectives. Dell Inc: An Overview Started as a very small lucrative business in 1984 by Michael Dell, the company has now grown to become one of the largest computer manufacturer and multinational companies with strong strategic vision and operational emphasis on ‘going direct business model’, supply chain and build to order process, virtual integration and customer focus. As Holzner (2006, p. 5) noted, Dell was placed as 25th in the list of computer manufacturers in 1990s, but eventually, its operational efficiencies and technology advantages helped the company prospered while all other 24 companies have gone out of the list. It also achieved significant place in fortune 500 companies in 1992. With more than 63,000 employees, Dell Inc operates in more than 150 countries holding considerable market share in almost all the countries it markets its products and services. With a view to eliminate middlemen markups, it has created a strategic formula of direct marketing to help it maintain substantial cost advantages (Magretta, 1999, p.193). Michael dell has long been concentrating on operation efficiencies to be attained through strategic emphasis on ‘going direct’ model, effective supply chain process, virtual integration and customization process etc. As shown in the depiction above, Dell in 2011 has been placed as third largest PC maker and marketer in the world just behind HP and Acer. Dell represented 12 percent market share in the worldwide PC market. Dell, though the recent market share and business performance has been accounted as quite below as compared to its previous years’ records, has been fostering on innovation, technology and efficient operation that in turn helped the company maintain a sustainable competitive advantage. When it comes to the business operation and operational objectives of Dell, it is very evident that the company has implemented superior managerial operation and most effective supply chain technique that have ever worked for Dell (Bozarth, 2005, p. 22). Various operational techniques such as going direct model, supply chain, customization, customer focus etc are analyzed below to review how these are deployed in Dell to achieve its organizational performance objectives. Going Direct Business Model For Dell Inc, the going direct marketing model has long been the backbone of its business (Holzner, 2006, p. 1). In setting up and establishing the ‘go direct model’ Michael dell has integrated computer as well as internet technology to haze the traditional limitations that most businesses find in between suppliers, manufacturers and customers (Thomas and Housden. 163). From the very beginning of Dell’s business story, Michael Dell realized the operational advantages as he was going to be different by selling direct. As Landrum (2004, p. 323) noted, Dell has been certainly gaining a real productivity advantage by depending on the going direct model because of its unique way the sales cycle works. The company has maintained considerable costs advantages and generated remarkable profits that it couldn’t have done by the other way. Not only that Dell’s computers were less expensive in the market, but also that they were marketed directly by eliminating retailers and other third party sellers, Dell prospered a cost as well as competitive advantages over its major competitors in early years. The Direct marketing model implemented by Dell Inc has not just a means to avoid retailers and maintain cost advantages, but was the core to the business strategy to benefit advantages such as control over pricing, no retail mark ups and sales force dedicated to its very own marketing etc (Bossidy and Charan, p. 478). Each and every phone call that Dell received and customer’s visit that Dell’s website attracted have been used for adding advantages of better information sharing, tracking customers changing requirements and keep on developing newer models of computer as well as software products to be marketed through direct model business process. As Holzner (2006, p. 5) observed, the direct marketing technique that Dell implemented for years has helped the company beat many of its competitors. For instance, when IBM and Compaq charged $500 for a PC, it was just $450 for Dell’s computers. Operational efficiency through cost advantages and flow of information The direct selling model has had far reaching implication for Dell’s operational efficiency since it could build to order. In contrast to the business models that were until then implemented by major market players, Dell hasn’t filled a retail channel with inventory and moreover it used internet for tracking real-time information about orders flow, customers varying requirements in relation to PC’s configuration and features, demand trends etc. Dell’s business objective was to achieve sustainable competitive advantage through operational efficiency and greater marketing potential. In order to make it possible, Dell focused on ‘direct marketing’ model because of that it can provide greater efficiency, speed in operation, cost advantages, elimination of inventory wastages, elimination of manufacturing defects, greater flow of information and use more effective supply chain as well. As depicted below, the direct marketing technique deployed by Dell helped the company establish a different supply management system by maintaining just-enough inventories with a view to satisfy the customers at any time. From the worlds of Magretta (1999, p. 199), many companies were facing inefficiencies in their management and marketing operation since there was a time delay of 90 or similar numbers of days between the points of demand and supply. But Dell did it its marketing differently. there was no such considerable time delay between market’s demand and supply. All other companies anticipated demand and supplied before the real demand arises, but Dell supplied only when there was real demand for its PCs. In a highly competitive market environment, pricing and competitor’s decision regarding price are critically important elements that can influence the competitive rivalry. Price differentiation is one of the most effective marketing strategies that a marketer may be able to achieve competitive advantage with. For making the products competitive, Dell thought of reducing costs by eliminating the costs and profits margins that are more likely to be added by middlemen such as retailers, wholesalers and other third party sellers. Dell’s Just In Time (JIT) delivery system was meant to increase operational efficiency by avoiding stocks handling in retailer’s as well as wholesaler’s warehouses (Paley, p. 374). Just-in-time manufacturing was an important breakthrough in the manufacturing philosophy pioneered by Japanese companies as an integrated set of activities to achieve high volume of production using minimal inventories that arrive at workstations only when they are needed (Jacobs, Chase and Aquilano, 2009, p. 16). When most of Dell’s competitors introduced different types of computer machines to the customers, Dell didn’t actively involve in the consumer markets in the initial years. Its competitors were teaching customers about various models of personal computers while Dell concentrated on more profitable areas. An organization will be able to achieve operational efficiency if it can identify or discover a newer marketing opportunity, establish a market of its own by designing and developing products accordingly. When it comes to manufacturing sectors, this concept seems to be extremely important. It is quite similar to the concept of product differentiation, because discovering a newer marketing opportunity by designing the product differently and creating demands is the underlying concept of product differentiation. Rather than developing product in different styles of features, Dell realized a hidden market opportunity of ‘selling direct’ to customers. It thus create a market of its own by directly approaching its very own customers through phone contacts or internet. The communication in both these ways also have helped the company take advantages of advertising and greater flow of information. As Holzner (2006, p. 7) emphasized, picking up a phone call or answering a fax have played critical roles in Dell’s direct marketing technique. The lesser the distances between distribution channels, the higher the accuracy and usefulness in information being transferred. There were relatively less numbers of middlemen in the distribution channel practiced by Dell and therefore the company could take advantages of accurate, useful and reliable information as compared to the information gathered in indirect marketing model (Magretta, 1999, p. 199). The channels that Dell used for its communication such as fax, telephone, email, website etc provided means for gathering useful information about customers, their demands, their specific as well as common requirements, their feedbacks about various products and services offered by Dell and so on. Among all these, customers feedbacks were of greater usefulness to understanding customer satisfaction and areas that need improvements. Dell’s website offered more convenience to customers to search for information before taking purchase decision to move to more interested areas for customization or for studying further about its products or services with a view to take more accurate purchase decision. Initially, Dell received one phone call for each one website visit, but after 1997, the company received 3.5 website visits for every one phone call (Bidgoli, 2004). Own-store Retailing and additional advantages Dell didn’t have its own stores, but it marketed its computers directly to customers. Operating own-stores can significantly add greater advantages to the operational efficiency of direct model business process. For instance, Apple inc has launched its own retail stores and facilitated varieties of customer services from its own stores. If Dell had launched its own retail stores, covering major cities or market hubs and facilitating all relevant customer services and repairing or troubleshooting arrangements whereby customers can enjoy using computer, playing software or gaming etc, it could have highly benefited the company. Supply chain and Build-to-order business operation What makes supply chain a very significant strategic approach these days is that many companies are achieving competitive advantages by the way they arrange their supply chain. Jacobs, Chase and Aquilano (2009,p. 358) described Dell as an illuminating example for effective use of supply chain process for ensuring operational efficiency. It skipped the distribution and retail steps and took orders for its computers from customers and manufactured computers for its customers to these orders. One of the key element and strategic attribute of Dell’s supply chain model was that the company aimed at fuller visibility over sales and production systems linked to suppliers to enable them supply components just-in-time (Mangan and Lalwani, 2008, p. 54). From the operation management perspectives, supply chain is a powerful technique that gives greater attention to the facilities that have an impact on costs elements and it can play significant roles in making the products or services ultimately conforming to varying customer requirements (Simchi-Levi and Kaminsky, 2004, p. 2). Basic to supply chain idea, it is a total system approach to managing the flow of information, materials, services from the suppliers of raw materials through factories, plants and warehouses to the ultimate customers (Jacobs, Chase and Aquilano, 2009, p. 17). Major impacts of Dell’s supply chain process and manufacture-to-order are listed below: Inventory Costs: By adopting direct model and strategic supply chain model based on build-to-order process, Dell has been able to reduce inventory costs by eliminating inventory handling and by aggregating them in a few geographic areas. There was relatively less time delay between the point at which an online order is placed and the point to which the product is to be shipped. Facility Costs: Dell has been able to reduce facility costs since it had incurred only those costs that are related to manufacturing and part of warehousing. Transportation Costs: As compared to the indirect model of marketing and supply chain, the transportation costs incurred in dell’s model was more. Information costs: Though the costs incurred for arranging online facilities for data gathering and online customization etc, the benefits are relatively more worth the costs. Mass Customization process of Dell Mass customization is an emerging concept and strategic operation management approach that is used as a means to achieve sustainable competitive advantages. Mass customization refers to the ability of a company to deliver customized products and services to different customers around the world (Jacobs, Chase and Aquilano, 2009, p. 375). It is basically a process aligned to build-to-order strategy. Dell has become an example of mass customization since it provides its customers with online facilities whereby its customers can select a base model for personal computer and design the product he wants by selecting from various options related to its configuration and features. Mass customization is a more effective business process model that can ensure greater efficiency in operation. Mass customization is also considered as an alternative technique to product differentiation because the task of differentiating a product has been given to the customer until the latest possible point that he can be satisfied with (Jacobs, Chase and Aquilano, 2009, p. 375). The basic three principles of mass customization are described below; A product must be designed in a way that it consists of independent modules that can be assembled in to various product forms conveniently and with low costs Manufacturing as well as service processes need to be designed so that they can consist of independent modules that can be moved or rearranged to facilitate easier distribution. Positioning inventory, location, numbers, structure of service or manufacture etc should be designed so that it must be able to supply the basic products to the facilities performing customization and it must have responsiveness to take individual customers orders (Jacobs, Chase and Aquilano, 2009, p. 375-376). At the core of Mass customization, the marketing tactic is closely related to relationship and individual marketing. Dell has facilitated mass customization system (Liu and Mackie, 2011) whereby customers can choose a base model and select from varying range of features such as memory, color, capacity, speed, RAM, technology, brand etc. As Kumar and Craig (2007, p. 197) noted, Dell’s unique model of mass customization attracted large numbers of customers worldwide to log in to Dell’s website and to design their own computers to await until they arrive at their doorsteps. Along with this, the tracking facility provided by Dell gives more confidence to its customers. Its website that provides mass customization is a central database that Dell can always depend on getting accurate information about how many customers used to visit its websites, what specific features they are mostly interested in, what attracts them to a specific product, how many weeks they are ready to await the arrival of products and so on. Though the mass customization facility arranged by Dell is a way the company extended its direct marketing business process, this model seems to be one another important management and operation strategy to help it gain operational efficiency. Service processes at Dell inc Customer is the central point in business operation cycle because he is the focal point that all the decisions and actions direct at. Central to service process, customer is at the centre of things because the service, the system and employees serve the customer. The concept is illustrated in the depiction below. Dell has been thriving on virtual integration and customer focus strategies that can be considered as strategic approaches to its service processes. According to Magretta, Virtual Integration referrers to switching together a business with its stakeholders and partners who are treated as if they are within the company and they are integral part of the organization. At dell, the stakeholders are always treated as integral part of companies since the support systems and service strategy that a business takes can largely influence the customer, which is the central point of service processes. Holzner (2006, p. 51) found that virtual integration that Dell deployed has been meant to keep customers in the loop of business as customers and suppliers are brought together in to cooperation for both the virtual integration and to enhancing flow of information within the organization. With this operational strategy, the company has found outstanding opportunities for individual communication, dialogues, learning relationships and knowledge management etc (Gronstedt, 2000, p. 214). The virtual integration methodology of Dell has helped the company speed up business operation by linking suppliers and customers through internet (Dessler and Philips, p. 25). As far as customer focus strategy of Dell is concerned, Dell’s all other operational and management strategies such as direct marketing, build to order and customization can be considered as direct and more powerful means of its ‘customer focus’. All these techniques are meant to reach customers conveniently and ensure maximum customer satisfaction. The customer focus strategy that Dell approached is thus an important element to its service processes since customer is at the central point and that itself is the key element to influence major business decisions and directions. Conclusion This report has critically analyzed the operational efficiency of Dell inc in relation to various business process that the company deployed such as direct marketing, build-to-order, virtual integration and service processing. When it comes to Dell, the company has long been reputed for its ‘go direct’ model and it ensured greater competitive advantage to the company as it eliminated middlemen markups and risks associated with inventory handling. This report explains various concepts of operation management such as supply chain and service processing in relation to marketing, virtual integration and customer focus strategies of Dell inc. References Bidgoli. H, 2004, The Internet encyclopedia, Edition: illustrated, John Wiley and Sons Bossidy,L and Charan, R, 2003, The Gap Nobody Knows, Business Leadership, Jossey-Bass Business and Management series, John Wiley and Sons Bozarth, 2005, Introduction to Operations and Supply Chain Management, Pearson Education India, Dessler. G and Philips. 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