Dell Inc.s Application of the Direct Sales Model - Case Study Example

Matching Dell (B): 1998 – 2003 Case Background The case of Dell Inc., developed by Rivkin and Giorgi (2004), proffered issues on the exemplary success exhibited by the organization, as compared to its competitors in the personal computer industry. It focused on the direct sales approach that competitors have been trying to match unsuccessfully. Michael Dell, the founder and chief executive officer of Dell, has acknowledged that competitors failure to emulate Dell’s business model was primarily due to the reason that “Dell is a company that - from the ground up, from the design, from the manufacturing, from the sales, from the support - started with a very distinctive and different way of doing business” [Riv04]. In this regard, the study aims to address the following concerns by responding to the questions and issues below: I. Current Situation A. Current Performance Dell, Inc. was revealed to exhibit exemplary financial success in terms of substantial increases in revenue and net profits from 1998 to 2003. Exhibit 4a shows that the market share for Dell in the US PC industry was the highest at 27.6% in 2002 and in worldwide perspectives, Dell’s market share was also indicated to be the highest from among its major PC competitors at 17.1% for the first quarter of 2003 ([Riv04]. The financial and operating performance of major PC manufacturers, shown in Exhibit 5, show that although IBM and Hewlett Packard (HP) surpassed the Dell’s revenues in 2002, their financial ratios, particularly profitability ratios manifested through returns on asset, investment, and equity all exceeded those posted by all of its major competitors. Further, the net profit margin of IBM was only 2.1% greater than Dell’s 6.3%, as five year averages ending in September 2003. Dell’s overall sales growth over a five-year period was the only one posted at more than 20% (at exactly 23.5%) which was significantly greater than any of its major competitors, particularly IBM which only exhibited a five year growth in sales of 0.7%. Case facts indicate that Dell was ranked fourth as the most admired American company by Fortune magazine due to the direct sales model that they applied and was identified to be instrumental in catapulting Dell into unparalleled heights. Dell’s direct sales model is simply described as the key to the organization’s financial success. The approach enabled the organization to be a producer of personal computers using the most minimal costs and pave the way to dominate the PC industry known for falling prices, which was actually exhibited during the period from 1997 onwards, and low profit margins. The crucial element for the model was strategically developing and designing the computer systems only after they were ordered by phone or over the Internet. By deciding not to maintain retail stores, the company was able to strategically lower its costs. Likewise, producing the personal computers based on demand also allowed the organization to avoid products that were not fast moving or in demand. As a result, Dell was able to avoid an oversupply of parts inventory while availing of price reductions from high-volume advance orders for parts. The direct sales approach also required Dell to professionalize and systematize its procurement and logistics system by enabling suppliers to view their parts inventories and requirements online and enable them to address the needs effectively. The case facts revealed that “Dell overhauled its procurement and manufacturing processes further in 2000, shifting 90% of its purchases entirely online. Suppliers could monitor what parts Dell needed and how many units of each part Dell expected to need in the coming weeks” [Riv04]. A review of the strategies employed by Dell’s major competitors indicate that their attempts to imitate the direct sales approach proved to be ineffective for diverse reasons. In IBM’s case, for instance, the move to apply the direct sales approach was partially implemented with retention of resellers deemed appropriate to cater to the needs of smaller buyers. This strategy failed to enable IBM to realize substantial costs savings from using the ‘build-to-order’ model completely. As revealed, the model was offered to only 14 of its largest accounts and cost-cutting measures were focused on selected variables (redesigning products to use industry standard parts instead of customized ones, moving from two-color printing to one-color, simplified its product line by cutting 70% of desktop PCs, and eliminated manuals in PCs shipped to many corporate customers) [Riv04]. In the case of Hewlett-Packard, their strategy almost paralleled IBM that retained the reseller channel to cater to other products and market segments. Gateway, did not apply direct sales approach at all and opted to focus on developing partnerships with over 200 resellers in 2011 [Riv04]. Further, the procurement and logistics system implemented by Dell was not at all enforced. Overall, Dell’s rivals had manifested difficulties in applying the direct sales approach with the systematization of procurement and logistics system, due to the variety of other computer products and peripherals that they offer in vast channels and segments. The necessity to retain their reseller channel for other products and for defined target markets divided their focus and ineffectively captured the potentials and savings that could have been generated solely from the direct sales model. Since Dell pioneered on the direct sales model for the PC industry, the approach was perfected after integrating all relevant facets of producing, marketing, and even addressing the procurement and logistics functions. By initially focusing on the PC as its main product, prior to delving into other peripheral computer products, it was able to concentrate its strengths, used and evaluated the right about of resources, and analyzed external factors (suppliers and distribution system) to maximize their potentials of the approach. The cause of confusion for Dell’s major competitors was how to handle products other than the PCs that they carry; and how to find the appropriate mix of using both direct sales and reseller channels. In the process, their strategy failed to increase market shares and profitability for its major competitors. II. Scanning of the external environment of Dell – the PC industry 1998 – 2003 Porter’s Five Forces and Dell’s Responses to this Environment A. Rivalry The PC industry is dominated by three major producers, but participated in by many rivals totaling 10, excluding the white box, where various resellers market PCs or server without a registered brand name (Exhibit 4). It can therefore be deduced that rivalry is fierce as the industry is faced by increasing competitive pressures but with high concentration ratio of more than 50% (market share of the combined four major PC manufacturers in the US total 58.7%) manifested by the four major PC manufacturers shown in Exhibit 5. Further, changes in strategies are made in response to innovative techniques and changes applied by any of the major players in the industry which affect the industry’s schemes, programs and prospects on the marketing mixes: products, price, promotions and place. Further, as initially revealed, the PC industry was divulged to be characterized by falling prices and low profit margins, therefore players devise ways and means to survive and sustain operations in this competitive environment. When there was slow demand and growth manifested in the industry, Dell’s response was to cut prices, which they can afford to do, as revealed: “Dell's pricing during the 1998-2003 period was sharp, especially after a late-2000 decision to slash prices. "It was advantageous for us, actually," explained COO Kevin Rollins, "because in periods of slow demand component prices drop, and, unlike our competitors, we can pass those savings on immediately to customers” [Riv04]. The move exhibit’s Dell’s competitive advantage over its major competitors through enabling consumers to avail cheaper computers at perceived high quality. B. Threat of Substitutes The presence of resellers marketing PCs and servers without brands and have been seen to capture a large share of both the US market (25.7%) in 2002 and 37.1% in PC market shares worldwide for the first quarter of 2003 (Exhibit 5) shows that the there are intense threats of substitutes and price is significantly affected by these. Dell’s response was to join the bandwagon and get into selling white box computers through resellers. This is another strategy that was effectively employed. By opting to use resellers, it enabled the organization to get a chunk of the market share from white box computers and not compromise their brand image. C. Threat of New Entrants There have been no clear indications of increased threats of new entrants or barriers to entry in the PC industry as proven by the viability of offering white box computers which are not branded, but are being purchased and patronized by consumers. Besides, Dell has exhibited leadership in the manufacture and marketing of PCs that new entrants do not pose eminent threats to the organization. D. Buyer Power PC buyers were identified to be categorized into the following traditional types: (1) home; (2) small- and medium-sized businesses (SMB); (3) corporate; (4) education; and (5) government. Purchase behavior was noted to be influenced by diversity in preferences ranging from a combination of service and price strategies (businesses); cost and software availability (education); cost, features and network capabilities (home). For Dell, their customers were classified into Relationship and Transaction buyers, where “sales and marketing efforts were organized not only around the Relationship / Transaction distinction, but also around market segments (e.g., large corporations, educational institutions, individual consumers)” [Riv04]. Appropriate strategies are thereby designed depending on the classification and the market segments. E. Supplier Power Dell has acknowledged the importance of its supplier in defining strategies for pricing and in the success of their direct sales approach. The virtual integration with suppliers that was initially applied in the 1990s, necessitated improvement through the “development of Valuechain.Dell.com (that) improved procurement and logistics in the late 1990s,enabling top suppliers to retrieve data on how they measured up to Dell standards, what orders they had shipped, and how they could best ship to Dell” [Riv04]. Further, the new software “symphony” was also a response for the need to monitor inventory levels and enable suppliers to “estimate how a specific component might change the build time. Time information was updated in the Symphony system many times a day. Symphony gave salespeople an estimate of how long it would take to build each machine as well as information on how profitable each would be. The system would show, for instance, how upgrading a laptop carrying case from the standard model to a Kenneth Cole leather edition would affect profit margins” [Riv04]. The effect of this system is to provide opportunities for suppliers to forecast and prepare for future demands on parts and components, depending on consumer behavior and preferences. III. Reaction of Competitors Although Dell’s major competitors tried to parallel the direct sales approach implemented by the organization, the presence of more products and other channels of distribution diffused the effectiveness of the model. As revealed, in the case of IBM, despite institution of measures to cut costs and focus on direct sales, their financial performance exhibited a rollercoaster ride, indicating that the strategy was not 100% effective on their operating system and performance. For Hewlett Packard, since their product portfolio was intricately diverse and the company was deemed to be reorganized “into five business segments: imaging and printing, enterprise systems, personal systems, HP services, and HP financial services” [Riv04], the direct sales model was likewise acknowledged to be inappropriate. As revealed, “in September 2002, HP abandoned the "hard deck" policy of selling directly only to large customers and targeted small and medium-sized businesses with a new catalog that offered the options of ordering through HP or through an HP reseller. HP explained the move as a need to respond to fundamental changes in "the economics of the PC industry"”[Riv04]. Finally, for Gateway, their strategy required veering away from thinking out of the box and reverted to “back to basics” strategy. However, also in response to the increasing market share of Dell, Gateway had to respond by decreasing “prices to match Dell's, reduced the number of components required to assemble a computer, and reduced the number of available product variations from 23 million to 1,000” [Riv04]. The responses of the major competitors indicate their drastic moves to imitate the direct sales model to no avail. After realizing the ineffectiveness of the strategy to their own corporate experiences, these competitors designed and applied strategies deemed to work and adjust to the demands of the changing PC environment. Conclusion The case of Dell, Inc.’s application of the direct sales model that served to be the key to their financial success has proven that one’s corporate formula for victory could not necessarily work in other corporate environments, regardless of the similarities in products being offered. Read More