Changes in the IT Industry by Dell Computers Inc - Term Paper Example

This report identifies critical changes in the IT industry as instigated by Dell Computers Inc under the leadership of Michael Dell. It identifies how over a period of less than 10 years the IT industry moved away from a 'one size fits all' approach to genuine customer relationship management providing individualised selection of the components of a personal computer (PC). In particular it details the organisational strategy Dell Computers Inc put in place to ensure that it would be - and remain - the foremost provider of PCs in the industry. Critical Changes in the IT Industry 1996-2006 Until 1984, PCs were manufactured, distributed and sold in much the same way as other appliances - as washing machines - via the Indirect Value Chain. Figure 1 - Indirect Value Chain Source: Kraemer & Dedrick (2001) Manufacturer held considerable inventory offering limited configurations. Value was created by differentiating along the value chain. Porter (1980) explained the importance of focusing on cost leadership and product differentiation to gain competitive advantage - producing an excellent product which is a complete solution to a perceived need. It will then use system lock-in to sustain its competitive edge - locking in complementary products, maintaining a proprietary standard whilst locking out potential competitors. Between 1996 and 2006 the PC industry underwent two major revolutions. Firstly the way in which PCs were ordered changed with the commencement of e-commerce and secondly the methodology for manufacturing PCs altered radically with the introduction of lean manufacturing and supply chain management. Dell started out building to order in 1984 through a mail-order method. PCs could be built, tested and shipped within 7 days. Figure 2 - Comparing Different Value Chains Source: Supply Chains: A Manager's Guide by David A. Taylor (2004) According to Pearlson and Yeh (1999) this gave Dell a huge competitive advantage over its much larger peers: 1. Eliminated resellers. 2. Direct customer contact. 3. React quickly to market changes. 4. No time, money or staff required to manage/track products. 5. Just-in-time manufacturing. 6. Information systems ensured that orders were correctly routed - eliminating waits, backlogs, and losses. E-Commerce Strategy 1996 Dell began selling on-line in 1996 recognizing the importance of having an encompassing e-commerce strategy. By 2000 its on-line sales were $50m/day. Dell became the largest manufacturer of personal computers in the world in 2001. Strategy guru Michael Porter (Porter, 2001) has said: Many have argued that the Internet renders strategy obsolete. In reality the opposite is trueit is more important than ever for companies to distinguish themselves through strategy. The winners will be those that view the internet as a complement to, not a cannibal of, traditional ways of competing. Porter has described the manner in which the Internet influences the five forces of competitiveness (see below). As Porter explains: The great paradox of the Internet is that its very benefits - making information widely available; reducing the difficulty of purchasing, marketing, and distribution; allowing buyers and sellers to find and transact business with one another more easily - also make it more difficult for companies to capture those benefits as profits. (Porter, 2001) Figure 3 The Five Forces Source: Porter(2001) Being online increases competition. However there are opportunities there - particularly the removal or reduction of barriers to entry, and potentially equal access to consumers. Dell has no research and design costs thus increasing its advantage. IBM had already shown that marketing and distribution skills were more important than the latest technological innovation as the market for low cost PCs matured faster than anticipated. Dell simply adopted IBM's strategy: Advanced design Open source software Multi-channel distribution Low-cost manufacturing Aggressive pricing Supply Chain Management Strategy Taylor (2004) puts the case succinctly: The way you manage the supply chain can make or break your company. Some of the most spectacular business successes over the past 20 years have come from finding more effective ways to deliver products to consumers if your company touches a physical product, it is part of a supply chain and your success hangs on the weakest link of that chain. Why Because the nature of competition is shifting away from the classic struggle between companies. The new competition is supply chain vs. supply chain. Taylor claims US companies spend a trillion dollars annually (10% of US GDP) on storing and moving inventory. However the best performing 25% of US companies average 4.2% of spend on supply chain management costs, whilst the average is 9.8%. He demonstrates that the gap between the best and the rest can only increase since a 5% reduction in costs gives the same benefit as increasing sales by 50%: Figure 4 Supply Chain Costs and Profit Source: Taylor (2004) However there are other drivers which make supply chain management critical in the manufacturing field: shorter product life spans; faster product development; globalized sourcing; increased demand for customization, and quality initiatives such as the Six Sigma program. Dell's secret is that it focuses on removing time and cost from the supply chain. Dell ensures that internally and externally everyone in the supply chain works as a team. Further Dell has always had a financial advantage over its competitors of a negative cash-to-cash time-it receives payment on order. This combination of inter-locking strategies allows Dell to claim 5 percentage points of profit advantage over its competitors, an unassailable advantage in a commodity market. As Pearlson and Yeh (1999) point out: The philosophy of central planning with local implementation supported the direct model principle. This philosophy enabled the organization to grow at its breathtaking rate because it provided the capability of build to order for all parts of the organization and all business processes needed to run the corporation. Dell transformed the simplistic Direct Value Chain into a Direct Value Web as shown below: Figure 5 - Value Web Source: Kraemer & Dedrick (2001) Prior to launching Dell.com Dell was ahead of its competitors in shaping demand by providing advisories to corporate IT buyers, educating them about alternatives and persuading them that it could offer a better return on investment in IT, and lowering total cost of ownership (TCO). For example, as part of its custom-built approach to hardware Dell's sales advisors were provided with compatible, easily available parts, which they would cross-sell to clients. (McWilliams, 1997). As Dell's products were only available by direct order it was able to take advantage of just-in-time manufacturing - seeing a 6% profit advantage over competitors. Dell insisted that components used in its machines were warehoused within 15-30 minutes of its manufacturing line (Kraemer and Dedrick, 2001). From the beginning Dell used the Internet to build on those strategic advantages. The Internet became one of its most effective communication techniques to build its brand, eliminate the middleman and segment its market. It brought both clients and partners inside the business, locking them into the Dell philosophy - no other major computer hardware manufacturer was offering a similar service. The Internet is at the heart of how Dell manages its support operation. It outsources support to business partners who keep in touch through extranets and e-mail. The Internet interface allows partners to share data. A similar method of operation allows Dell to have tight integration with its suppliers. Once an order is placed automated workflow routines flag up inventory requirements, preferred shipment dates, etc. The supplier and Dell can tell at a glance if there is going to be a delay in shipment. This allows Dell's Account Managers to proactively manage the relationship with clients - relaying information in a timely manner - and improving forecasting. Technology has allowed Dell to become the 'middleman', co-ordinating the flow of information from client to supplier, ensuring quality and control. One of the advantages of moving its logistics online was that Dell was able to cut its suppliers from 204 companies in 1992 to just 47 by 1997, forcing its suppliers to conform to its vision of streamlined logistics; at a time when Dell's competitors were waiting 12-48 hours for components. Dell also saved on freight - monitors are shipped direct from supplier to client. As Dell had started out as a mail-order operation its clients were already used to purchasing through credit cards and electronic payments allowing sales to convert to cash within 24 hours (McWilliams, 1997). Such rethinking of operations lets Dell operate more efficiently than any other computer company. Its total inventories amount to 13 days of sales, vs. 25 days for Compaq. If this sounds like much ado about nothing, consider this: For every new dollar of capital investment last quarter, Dell shareholders got $1.54 back in profits, compared with 59 cents for Compaq and 47 cents for IBM. (McWilliams (1997)) An advantage Dell had over its competitors in the early days of e-commerce was that it did not need to re-engineer its business processes and organizational routines, as its entry point in e-commerce was already close to its existing business (Teece, Pisano, & Shuen, 1997). Due to its reliance on a direct seller model Dell had an intimate connection with its clients. Dell was able to use the information it had on its clients to target customers for selling added-value third-party products and to tailor its service and support levels to each client's requirements. Clients outsourced their PC procurement and support operation to Dell (Kraemer and Dedrick, (2001). To support this, Dell used the Internet to provide 'premier' pages for its corporate clients. Each corporate client had a 1-to-1 relationship with Dell and was able to customize its ordering, service and support and configuration needs online, whilst being able to keep track of expenditure. At the time this was highly innovative. It allowed Dell to lower the TCO to its clients and lower the cost of doing business with those clients. Clients benefited from being in control of the ordering process, being able to see at a glance where its shipments were and so forth. Dell benefited in being able to cut its technical call centre sales and support teams as its online interface meant that clients were able to resolve many of their questions without interaction with a Dell employee. According to Dick Hunter (2005) vice president, Dell Americas Manufacturing & Distribution Operations: Our primary focus with suppliers is around continuity of supply. We organize around that concept and focus on the velocity of inventory throughout the entire supply chain. Virtual integration, rather than vertical, gives us the crucial ability to focus on our core competency and leverage those of our suppliers, such as their R&D investments. As such, we are able to keep operating expenses low while focusing resources on areas where we can truly add value for our customers. Regarding inventory, it's clear that the technology industry is headed toward a zero inventory model. This is primarily because the value of that inventory declines rapidly over time -- 25% per year on average or 0.5% per week. Dell's inventory philosophy stands in contrast to the industry paradigm of inventory equaling service. Inventory equates to cost, since no matter how much inventory you have, it's usually the wrong material. The focus on continuity of supply means that Dell has 3 clear advantages over the competition: 1) Focus on continuity of supply ensures consistent global supply, 2) Response to client needs - there is no guessing what demand will be for a particular item in its range; and 3) Efficiencies translate into consistently lower costs - material cost savings are pass on through its forward pricing techniques. Sustaining Competitive Advantage Hunter considers Dell's "supply-chain efficiencies as one component of a perpetual success engine -- it allows us to pass savings on to our customers which drives demand and market share and subsequently helps our suppliers drive their business." Figure 6 - E-commerce value creation drivers. Source: Amit & Zott, 2001 In order to compete, Dell's peers - such as Apple Inc - have developed more tightly integrated research and development (R&D) operations with consumer requirements, creating a stronger feedback loop. In 1996 the giant of the IT industry was Apple Inc. Yet by 1997 Apple Computer was losing $1 billion a year - on the verge of bankruptcy. Radical surgery on its supply chain saved the company. Apple shed 15 of its 19 products, moved to a just-in-time production methodology, revamped its sales forecasting system, and focused on minimizing inventory. By 1999 the value of its inventory dropped from $437 million to $25 million. This was a reduction of 94% and gross margins improved by 40%. Microsoft and IBM took a different approach - quickly moving to their 'core competencies'; in Microsoft's case providing operating systems, application software and consultancy, preferring to forge an alliance with Dell than attempt to compete, whilst IBM moved out of operating and hardware system development altogether over a period of time, focusing on 'middleware' consultancy. But there is more to Dell than its well-respected supply chain management. Another important factor is the point of distribution which, according to Teece (1986, p292) is where the profit and power exist. As part of his argument Teece demonstrates how through encouraging the development of complementary products and creating complementary networks an organization - which is not perceived to be the dominant standard - can outperform organizations which are true innovators in their field. One only has to compare/contrast the fate of Apple versus Dell to appreciate the point. Signalling effects can impact on the size of the market share of a product. The ordinary man is loathe to understand the complexity of technological innovation, relying on the opinions and advice of 'experts' assist him in differentiation. Their 'signal' as to what is 'hot' impacts on his final choice. The market share of a product is one factor he will take into account. Lock-in takes account of how an organization is perceived by its value web and includes such things as its brand recognition and the costs of switching away from the organization to a competitor. E-commerce uses many of the strategies that are found in traditional bricks and mortar organizations - eg consumers will receive discounts or gift certificates. Some organizations have created novel dominant designs which are must haves for other organizations in order to improve their customer acquisition and retention; Verisign's SSL certificates come to mind. As the Internet becomes ubiquitous in commercial transactions, face-to-face customer relationships are becoming less important. Increasingly it is the ability to deliver a quality product in a timely fashion, and the ability to offer complementary ancillary services that clients expect from organizations. By making use of the network externalities inherent within e-commerce, established well-branded organizations can add greater lock-in - attracting and retaining consumers. The keyword is information. The more information each of the parties to the transaction have the better efficiencies they are able to derive. This impacts on operating cost, lock-in and network externalities promoting what Schilling (1999) referred to as the 'virtuous cycle'. Conclusion One never likes to make predications, but Dell seems to have faltered very little since its decision to move to lean manufacturing, supply chain management and an online presence. After its huge losses in 1996, Dell Computer Corporation saw extraordinarily growth in 1997: a 58% revenue increase and an 82% profit increase. Sales rose to $12.3 billion in 1997, profits to $944 million and the stock split for the sixth time in 1998. (Pearlson and Yeh, 1999). The company has been consistently strong at stating its value proposition, distribution and pricing points. It has also been strong at follow-through; ensuring it has a well-informed sales force and a strategy for collaborating with developers and makers of complementary products, as well as a strategy for client retention. It has always focused on what Lynch (2004) refers to as 'fit - the consistencies, coherence and congruence of the organisation. Specifically between objectives, strategies and identified elements of change" An organization's success also depends on its ability to communicate the usefulness of a product to its target audience particularly when its product is not part of the dominant standard. Dell has the positioning and marketing-spend to skew the market to favour its products, despite the fact that viewed objectively its products may not necessarily be the best of breed. References Abate, T. (1997). Dell surges past Apple for No. 5. January 27 1997. San Francisco Gate. Available at: http://www.sfgate.com/cgi-bin/article.cgif=/e/a/1997/01/27/BUSINESS8107. dtl&hw=apple+computer&sn =1295&sc=255 Amit, R. and Zott, C. (2001). Value Creation in E-Business. Strategic Management Journal. pp 493-520 Banker, Steve (2005): Dell Methodology May Not Be the Best Way to Run a Lean Supply Chain. Available at: http://www.arcweb.com/Newsmag/ent/dell-sc-120105.asp Dell, M., Fredman, C. (2000). Direct From Dell. HarperCollins. NY. Hunter, Dick (2005) How Dell succeeds in an increasingly competitive market. By Dick, vice president, Dell Americas Manufacturing & Distribution Operations Dec. 16, 2005. available at: http://www.industryweek.com/ReadArticle.aspxArticleID=1112 Lynch, R. (2006): Corporate Strategy. FT Prentice Hall. London. Kraemer, K. L. and Dedrick, J. (2001). Dell Computer: Using E-Commerce to Support the Virtual Company. University of California. Available at: http://www.crito.uci.edu/git/publications/pdf/dell_ecom_case_6-13-01.pdf. McWilliams, G. (7 April 1997). Michael Dell: Whirlwind On The Web. BusinessWeek. Available at: http://www.businessweek.com/1997/14/b3521131.htm) Otkinson, J. Marketing on the Internet. Available at: http://submit-your-articles.com/Article/Marketing-on-the-Internet/711 Porter, M. "Strategy and the Internet" HBR, March 2001 Pearlson, K and Yeh, R. (1999). Dell Computer Corporation: A Zero-Time Organization. University of Texas Taylor, D.A. (2004). Supply Chains: A Manager's Guide . Addison-Wesley. London. Schilling, M. (1999). Winning the Standards Race: Building the Installed Base and the Availability of Complementary Goods. European Management Journal Vol. 17, No. 3, pp. 265-274 Teece, D. (1986). Profiting From Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy. School of Business Administration, University of California, CA. pp285-305 Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic Capabilities and Strategic Management. Strategic Management Journal, 18 (7), 509-533. Read More