Internet Marketing of Dell - Essay Example

Overview Dell has been lauded by both the computer industry and analysts for its proactive use of the Internet to grow market share and offer new products and services to its clients. This essay examines the underlying technology, some of the management issues and some of the benefits involved in Dell's e-commerce strategy. Underlying Technology The Internet like all other means of communication is prey to 'information overload'. A nave user who was searching perhaps for 'a computer for my kids' on google.com on 2006-02-16 would receive over 91m hits: Note that Dell placed top in the sponsored links on the right hand side of the page, which is no mean feat given the monies being spent on sponsored search. In 1997 this Texas based company was converting every $1 invested into $1.54 - well ahead of IBM who could only offer $0.47. (McWilliams, 1997). Today (2006-02-17) it's stock opened at $31.99 with almost 40m trades. In his book Direct From Dell Michael Dell describes his moment of epiphany. In the first 6 months of 1993 the company made a $65 million loss from inventory write-downs partly due to an industry wide price war started by Compaq. At this time it had moved from its original direct sales model to a retailer model (Kraemer and Dedrick, 2001). Dell subsequently returned to a business model for minimizing inventory and maximising return on investment. Dell complemented this with its vision of a 'virtually integrated business' in which information is more important than assets. Dell used the Internet to bring customers and suppliers into the business. Dell already provided its clients and partners with a time-conscious, customer-centric approach. It was this low-cost, fast-paced customer-centric business model philosophy which Dell translated to the Internet and which ultimately led to increased dividends and market share. This is the key point; it is not enough simply to add technology - it must be evaluated to ensure that poor processes and practices are not replicated. Bringing in technology is an opportunity to re-engineer poor processes and practices. Failure to do so will mean that the same mistakes will be replicated at the speed of light. The Internet brings the added risk that potential clients and business partners will be able to see at a glance that an organization is not able to meet its needs due to internal structural weaknesses. Before the Internet was opened up for commercial use in 1995 Dell employees were accessing financial reports, customer data, technical and product information as well as HR data across the corporate intranet, which was known as Dellnet. By 1995 essentially Dell used the Internet to offer the same tools to its clients and business partners as it gave internally to its sales team. This 'value web or the virtual corporation' (Kraemer and Dedrick, 2001, page 9) allowed Dell to expand its business without increasing its overheads. Prior to launching Dell.com Dell was already 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 their IT dollars, and lower their overall cost of ownership. For example, as part of its custom-built approach to hardware Dell's sales advisors were provided with compatible but also easily available parts, which they would then suggest to clients who invariably agreed with the 'expert' sales team. (McWilliams, 1997). As Dell's products were only available by direct order it was able to take advantage of just-in-time manufacturing where it was able to see a 6% profit advantage over its competitors. Dell also 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. In particular it brought both clients and partners inside the business, locking them into the Dell philosophy at a time when no other major computer hardware manufacturer was offering a similar service. The Internet is also at the heart of how Dell manages its support operation. It outsources support to business partners and they keep in touch through extranets and e-mail. The Internet interface allows partners to share data even though the back-office systems may not actually be compatible. 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 and so forth. Both the supplier and Dell can tell at a glance if there is going to be a delay in shipment due to a supply problem elsewhere. This allows Dell's Account Managers to proactively manage the relationship with clients - they appear to be on top of what is happening and can relay that information in a timely manner. In this manner Dell is able to better forecast demand and supply, keeping its clients informed along the way. E-commerce was an obvious progression for Dell's strategic managers. By tying its back-office infrastructure to a Web interface, it was able to automate much of the administration, technical information and support requests that the call centres dealt with and release its sales team to focus on marketing its goods and services. It runs its business on its own servers with Intel processors, and 3 core operating systems - Windows, Linux and Novell. Intriguingly technology has allowed Dell to become the archetypal 'middleman', co-ordinating the flow of information from client to supplier and ensuring quality and control while others actually make and supply the goods and services to Dell's specification. Management Issues There was resistance to Dell's online business from within its empire. Managers and sales representatives rely on commission, and saw online sales as a threat to this. Dell altered its commission structure to take this into account, allowing its managers and sales representatives to earn commission from each account, regardless of whether the sale originated from a face-to-face meeting, over the telephone or across the Internet. (Kraemer and Dedrick, 2001, page 9). In the early days of e-commerce Dell had to spend considerable resource selling the concept to its clients. Then, as now, there were concerns over the security of online transactions. The Internet was not yet ubiquitous and it took time for clients to understand how to interact with Dell through its online interface. According to Kraemer and Dedrick up to 20% of Dell's online transactions were incomplete as clients had not entered their credit card details and required follow-up from a Dell employee(2001, page 11). Taking its mission critical applications online had an unforeseen impact as transactions increased. Dell's IT departments could not keep up with the demand for maintaining its web pages and this led to each department trying to control its own content. Dell Online was initially separated from IT to free it from IT's shackles. Intranets were springing up all over.... But it led to chaos, with no overall structure or management.... Dell Online needs to have more discipline and a better structure while IT needs to have more of a business focus. (Interview with Kevin Baker, Dell Online Japan, cited by Kraemer and Dedrick, 2001, page 20) An Internet solution however does not suit all of Dell's market. There are regions which cannot take advantage of online transaction processing. Kraemer and Dedrick give examples such as Japan where multiple signatures are required and China where small businesses and consumers do not readily have credit cards for online purchasing and local transportation routes are not as well developed as they are in Europe and the United States. (2001, page 20-21). Hence as Dell has expanded globally it has also had to fine tune its goods and service offerings dependent on local market conditions. Benefits 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 costs by having monitors 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-think its strategy or 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). Further due to its reliance on a direct seller model Dell already 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 effectively outsourced their PC procurement and support operation to Dell, relying on it to provide the specification through to removing it when it became obsolete (Kraemer and Dedrick, (2001). To support this, Dell used the Internet to provide 'premier' pages for its corporate clients. Each corporate client effectively had a 1-to-1 relationship with Dell and was able to customize its ordering, service and support and configuration needs online, whilst also being able to keep track of its expenditure in a timely fashion. At the time this was highly innovative. It also allowed Dell to further lower the total cost of ownership 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. Conclusion Dell has been able to use e-commerce technologies to create a value web improving its communications and logistics with suppliers and customers and to provide its employees with better resources and information. It has generated large cost savings for the organization and allowed it to transact a greater volume of business than it was able to do prior to 1995. Dell's adoption of E-commerce has also led to changes in the job descriptions of its staff, for example staff in the IT department have had to become more business orientated as Dell's online applications are now mission critical whilst Dell has had to alter commission structures for its sales team to ensure that they derive benefit from managing e-commerce transactions. As the Internet becomes more 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 References Dell, M., Fredman, C. (2000). Direct From Dell. HarperCollins. NY. 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 Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic Capabilities and Strategic Management. Strategic Management Journal, 18 (7), 509-533. 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. Read More