Strategy and Operations Management of Dell Inc - Essay Example

STRATEGY and OPERATIONS MANAGEMENT” Choose a private sector company and identify its generic strategy. Using evidence, discuss the key activities that underpin the chosen generic strategy The company chosen for this essay is Dell Inc. Dell, is a multinational computer manufacturing company. Dell was founded by Michael S. Dell who is currently the chairman and CEO of the company and has a market share of 11.5 percent in its fourth quarter of the year 2009 (Magee, 2010) (Refer to Appendix A to see how market share for Dell and other players changed in the US computer industry). This essay will shed light over the company’s strategy and how it aligns its various processes to support that strategy. Dell has a long list of brands in its computer product line. Each brand provides a unique blend of performance, reliability, and aesthetics to its customers. Some of its brands, such as the Vostro, Latitude, Precision, and N series are high end performance systems that are targeted towards small, medium, and large businesses. Other brands such as Inspiron, Studio, XPS, Alienware and Adamo cater to home users with different set of requirements. Apart from computers, Dell also manufactures electronic devices such as LCD monitors, keyboards, mice, USB drives, and so on, in support of its computer range. Dell has adopted a combination of Cost Leadership and Differentiation as its generic strategy. The world is becoming an increasingly technology dependent place. Companies throughout the world spend a great portion of their budgets towards Research and Development to offer the customers great value, at the lowest possible price. Dell has been pursuing the same objective as well. With its highly integrated network of suppliers and customers, Dell has been able to sell directly to customers, reducing cost through eliminating wholesalers and retailers from its business model. This had enabled Dell to provide customers with products at the lowest possible prices. However, cost cutting is not the only objective in Dell’s strategy mix. The company constantly strives to provide its customers with high quality, reliability, convenience of purchase, and outstanding after sales service (Treacy & Wiersema, 1993). All these factors, add some value to the customers and, when put together, enables Dell to differentiate its offerings from its long list of competitors. Through its streamlined processes, Dell manages to not only cut costs and charge less from the customers, but also provides them with differentiated, customized computer systems that only few competitors, today, have managed to deliver. All activities of Dell work in collaboration to facilitate its generic strategy. Through technological solutions, Dell has eliminated all boundaries between its supply chain members. This makes the whole of supply chain work in collaboration towards achieving the generic strategic goals of adding greatest amount of value to its customers, depending on their needs. (Joan, 1998) The main aim of any strategy is to add value to customers. Perceived value of a brand is what makes customers choose a certain brand over others. Therefore, as Dell aims to provide values of low prices, high quality, reliability, and exceptional after sales service to differentiate its brand, it ensures that all activities in the business are aligned and work towards the same goal. Streamlined Processes To facilitate the generic strategy mix, Dell comprises of a completely streamlined and lean supply chain, a direct online model, Just-in-time manufacturing methodologies, and a build-to-order production scheme. It is evident that through all these approaches, Dell manages to cut down its costs, and deliver to its customers, highly differentiated products. (Treacy & Wiersema, 1993) Customer Relationship Management Dell maintains strong customer relationships. Michael Dell himself says that the only way to recognize customer perceived values and deliver them, is through constantly keeping in touch with your customers and understanding their needs (Joan, 1998). Quality Control Maintaining quality standards is given a very high priority at Dell. At Dell, components and other supplies are carefully monitored to ensure that they are at par with the quality standards expected by the customers. Also, thanks to its customer relationship management framework, Dell can easily spot what is demanded by the customers and what is not. For instance, Dell uses Intel microprocessors in its computer systems because it knows that Intel processors have a higher demand than AMD processors. Customized Computer Systems Dell does the final assembly of the computer systems itself (Kraemer & Dedrick, n.d.). This not only keeps a check on the build quality, but also enables customers to pick and choose the components for their systems themselves. This customized configuration facility for every computer system adds a great amount of value to the customers. Just-in-Time (JIT) Approaches The need for Just-in-Time methodologies in technology firms is felt because technology becomes obsolete at a rapid pace, especially in today’s era. Dell ensures that the freshest, latest technology, in its highest quality, is delivered to the customers, and that is why it follows a JIT manufacturing, as well as a JIT inventory system (Kraemer & Dedrick, n.d.). Packaging Packaging of products also helps in creating a differentiating factor in the eyes of the customers. A shabby product, packaged in a very aesthetically pleasing manner might appeal to a consumer. Similarly, a high quality product with cheap, unsafe packaging might put off a customer. To ensure that the quality of the product is aligned with its packaging, Dell uses strong, durable, aesthetically pleasing boxes to package their computers. These boxes have detailed information about the product printed on them. Use this evidence to undertake a value chain analysis of the business Sales Activities Dell has adopted a direct method for selling (Manataki, 2007). It communicates directly with its customers through its website, takes orders, prepares computer systems, and delivers them. There is no wholesaler or retailer in this model. As a result, the profit margins that are to be paid to intermediaries in the distribution channel are reflected in reduced overall cost of the product. This results in lower prices, and therefore, higher value for money for the customers. Accounts and Billing As discussed, Dell follows a JIT system in its manufacturing and inventory management. This, although adding value to the customers in providing them with the latest, freshest components, disturbs the accounting process of the company. In the JIT methodology, the producer charges the customer before placing the order for the components from the supplier. However, the payment processing, itself, takes 5 days to finish, so Dell ends up paying to the supplier without getting the money for the order. Therefore, Dell has to bear the consequences of a payment fraud from the customers’ side. Customer and Material Information Processing Dell’s streamlined supply chain network helps it stay connected its downstream and upstream members of the channel. This is made possible through using inter-company technological solutions. Dell uses an Enterprise Resource Planning (ERP) system for this. The ERP system results in free flow of information and all the required information about the customer’s order and the material in inventory is available throughout the channel in real time. Moreover, the customer’s order is directly dealt with by the manufacturer. There are no retailers or wholesalers in between. This makes collaboration much simpler. As the customer places the order on the website, his/her order details become visible through the supply chain. The warehouse and inventory department checks to see how much of the components needed to complete the order are available in store, and the procurement department orders the rest of the material needed, to the suppliers. This efficient, streamlined system that Dell incorporates minimizes lead time and on time delivery is given to the customer, as promised. Procurement and Distribution of Goods/Services As discussed, procurement is done through the ERP implemented. If the required components are not available in the warehouse, the procurement department is automatically notified of the amount of material to be ordered from the suppliers. Again, this happens in real time and reduces lead time, adding value to the overall service given to the customer. Store Management Dell follows a direct online selling approach. It does not have retail stores. The online store, however, is managed by IT professionals and is continuously monitored for any glitches. Temporary Resource Management Dell follows a JIT inventory system, in which piling up of inventory is avoided (Crystal, 2003). However, in reality, Dell chooses to keep some level of inventory in hand to ensure that there are no hold ups in its production process. In fact, some times, Dell chooses to keep truck loads of material in its inventory to cater to demand fluctuations. Nonetheless, Dell is persistent that some level of inventory should be maintained to ensure timely delivery to the customers, even if that comes with a cost. Design Dell had been known to focus more on reliability and performance, than on design and aesthetics of the computer systems. However, as time changed, Dell realized that many of its competitors had started emphasizing a lot on the design of their machines. Therefore, the newer models, introduced by Dell, such as the Inspiron and the XPS Studio, have been designed to be much more appealing to the customers. Customer Support Service Dell provides excellent customer support. There are properly trained customer service representatives online to help and guide the customers. They are available through a 24 hour online chat as well. Similarly, very qualified sales representatives are present on the field as well, and are capable of trouble shooting and fixing any problem that might arise in the machines. Moreover, to ensure quality service from the Dell representatives, the company follows a performance based pay system for them (Customer satisfaction Scores, n.d.). Also Dell surveys about 24,000 customers in a month to get their feedback on customer service (Whitson, 2006). Discuss how the added value creates a distinctive competence and leads to competitive advantage All activities in Dell’s value chain add value to the customer in some way or the other. As discussed previously, Dell operates a very streamlined, collaborative approach to its processes where all channel members are linked to one another through intercompany technological solutions. This integration was very different from the traditional type of integration. It gave rise to the concept of “virtual integration”. This is what Dell had pioneered in doing, bringing all channel members to a common platform and collaborating in all processes of the business, such as sales activities, managing accounts and billing, customer order processing, procurement, distribution, store management, resource management, designing, and customer support service. Under the concept of “Virtual Integration”, Dell made three very important integrations. Firstly, it linked Dell to its suppliers and enabled them to form a close bond with each other. Secondly, it linked the customer directly to the manufacturer, without the need of going through wholesalers and retailers. Thirdly, it enabled the customers to be in close contact with professional help in the form of customer service representatives. All three of the integrations helped Dell streamline its processes and maintain free flow of information through its value chain. As a result, Dell gained significant competitive advantage against its competitors and quickly helped Dell gain market share. (Cloisters) The three main competitive advantages to Dell were: 1. major cost cuts, 2. shorter lead times and faster delivery times, and 3. a finished product of much higher quality. For instance, between the year 1995 to 1998, Dell was able to trim down its total number of suppliers from 204 to 47 just through virtual integration. It now knew exactly which suppliers were needed and what was the pattern of demand from the customers’ side and therefore, was able to make its procurement process leaner by cutting down on the number of suppliers. Moreover, it gave the customers freedom to customize and tailor their own computer systems. This also benefited Dell as it saved them time and money in manufacturing. (Cloisters) By giving customization facilities to the customers, Dell is able to integrate its production plan with the sales flow, manage assembly of the components itself, and install the particular software that the customer chooses. This integration brought down the manufacturing time of a system to just thirty-six hours. As a result, the lead time decreased and the delivery time was shortened, adding value to the customer. Moreover, it gave the suppliers an incentive to partner with Dell because of its efficient inventory management system. The collaboration between the various processes in the organization not only added value to the final product of the customer ,but also made Dell stronger as a company in the 1900s. (Cloisters) Furthermore, Dell could do something that other PC manufacturing companies did not even think of. Dell targetted only the profitable customers and did not focus much on mass marketing. Dell identified that the right customer for them was somebody who had knowledge about computer systems. This is because by targeting the knowledgable customers, Dell would not need to open up retail outlets so that customers could come and learn about their prodcts. Instead, Dell could easily adopt the direct model to sell its products, and customers could just customize and purchase the systems they desired. Since Dell had free of information, it knew more about its customers than any of its competitors at that time (To see a complete list of competitors, comparisons and relevant financial information, refer to Appendix B). Dell categorized its customers under two names: Relational buyers, consisting of large businesses, and Transaction buyers, which included small businesses and individual PC users. Relational buyers contributed in greater proportion to Dell’s business as compared to Transaction buyers. They, however, also had different needs as compared to Transaction buyers. Dell appointed a representative for each of its relational buyers to assist them throughout the buying process. This categorizing of customers enabled Dell to maintain contacts, make sales, and follow up with them with much ease. Also, it made repeat purchases quicker as customer service was much more customized for the different kinds of customers. It is evident that Dell’s business model, revolving around the concept of “virtual integration” made it possible for it to stand out amongst its rivals. (Refer to Appendix C for an illustration on likely factors that contributed to adoption of virtual integration by Dell). Its competitive advantages were a result of its highly efficient business processes that made it possible for Dell to fine tune its operations in great detail. Efficiency in production process cut down costs of the company and increases its profit margins. Even though the company stepped into the market at a time when competition was fierce, it made sure it stayed focused and kept delivering low priced PCs with a quality that was better than most of its competitors. It was only possible through the virtual integration in the company that Dell maintained its competitive advantage and kept delivering a product that was higher in value and lower in price. CONCLUSION Dell had adopted a generic strategy of Cost Leadership, coupled with Differentiation, as was required by the competitive nature of the industry. It achieved the goals of these strategies through streamlining its processes and incorporating the concept of virtual integration in the organization. Through this integration, all the processes of the business were collaborated and worked in pursuit of minimizing costs and delivering a high quality product to the customer. Also, this helped Dell in providing the customers with outstanding service, both before and after sales. Today, the computer manufacturing industry has become even more competitive, and Dell’s growth has been affected because of this increased competition. For instance, in the fourth quarter of 2009, Dell grew by 11.5 percent, 1.8 percent less than the growth of 2008’s fourth quarter. This means that, in today’s age, Dell is lacking somewhere. Perhaps, the direct, online business model has reached its saturation point and that the customers need to get a feel of their machines before they decide to purchase it. This limitation in Dell’s business model must be looked into by the company as, if not today, the need to open up retail outlets to give the customers a feel of the products, would be felt in the future. Dell did set up 10 by 12 feet kiosks in shopping malls (The Value Chain of Dell Computers, 2006), and also makes some of its models available in retail outlets, but still most if its sales are done through the website. Therefore, in future, Dell should look into setting its own retail outlets as well to come head to head with competition. BIBLIOGRAPHY Abebe, M. A. 2007. To integrate or not to integrate: factors affecting the adoption of virtual integration strategy in organizations. Business Strategy Series, 8(3), pp.196 – 202. Austin Business Journal. (2010, April 15). 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Center for Research on Information Technology and Organizations. University of California, Irvine. Magee, M. 2010. Dell Continues to Bleed Market Share. Tech Eye [Online] 14 Jan. Available from http://www.techeye.net/hardware/dell-continues-to-bleed-market-share [Accessed November 2, 2010] Manataki, A.(2007). A Knowledge Based Analysis and Modelling of Dell’s Supply Chain Strategies. School of Informatics. University of Edinburgh. Treacy, M. & Wiersema, F.(1993). Customer Intimacy and Other Value Disciplines. Harvard Business Review. v. 71. 1993. p. 84 - issn: 0017-8012 (2006). The Value Chain of Dell Computers. Private Writing. Available from http://img.privatewriting.com/1/samples/term_paper_bachelor_IT_16s.pdf [Accessed on 26 April 2010] Whitson, R.(2006). Dell: A Brand in Flux. Ezine Articles. Available from http://ezinearticles.com/?Dell:-A-Brand-in-Flux?&id=126816 [Accessed on 25th April 2010] (n.d.) Customer Satisfaction Scores. Survey Methods. Available from http://www.surveymethods.com/glossary/article_cust_satis_l.aspx [Accessed on 25th April 2010] Appendix A Dell versus Competitor Change in Market Share Source: Magee, 2010 Appendix B Dell Competition and Financial Comparisons Source: adapted from Capital IQ, 2010 Appendix C Adoption of Virtual Integration by Dell Source: adapted from Abebe, 2007 Read More