Dell Case Study

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2. Why has Dell been so successful despite the low average profitability in the PC industry?

Dell’s success can be attributed to the use of a direct sales approach, keeping inventory low, and segmenting and targeting a large customer base. A user friendly website, that collected essential data also helped forecast demand. The “cell” system kept manufacturing lead time short while close monitoring of processes kept production lean. Close relationships along the supply chain meant lower transportation costs and quicker outputs. By sourcing for labor from overseas markets cost was kept minimal.

When Dell entered the industry, she realized her high market commonality and high resource similarity with other firms. Software and hardware components that made up a PC were readily available. Given such industry conditions, Dell was pushed to take a different approach from other PC firms.

As Dell’s competitors were already leading in retail, Dell realized the need for a new marketing and distribution strategy. She came up with the Direct Model – bypassing the middleman to provide high performance PCs to consumers at relatively lower prices. The demand for Dell’s PCs rose. Dell was able to customize and ship out a PC to a buyer’s specifications within one and a half days. This allowed Dell to have the lowest inventory in the industry, despite a large order volume, and subsequently led to substantial cost advantages. As the first mover, Dell’s market share and revenue increased significantly. Dell’s competitors saw the benefits of the direct model and tried to copy but were unable to execute the logistics as efficiently.

Dell’s customer base was large and diversified – from businesses and government institutions, to home and small offices users, to educational institutions. Dell also divided potential customers into two groups to be serviced differently. For the first group, relationship buyers, Dell had a team of external and internal sales representatives aimed at maximizing customer satisfaction. For transaction buyers, Dell made sure their online sales and marketing channels were user friendly. Dell soon discovered highest gross margins with relationship buyers and committed more resources to them. Subsequently, Dell subdivided its customer base into smaller categories to recognize unique opportunities and economics and for better management to improve its operations and services.

Dell then launched its website to provide customers with an online service catalog, product information, and a channel to place orders and track shipments. Dell also designed custom premier pages for relationship buyers to minimize ordering difficulties. A database of customer purchasing data, good backend support, and a team of highly trained staff, allowed Dell to better match demand and supply and maximize profits

Dell also mastered the system of efficiencies that competitors did not realize. She discovered higher quality control if the different components and hardware of the PC were assembled in separate “cells” instead of in an assembly line. The re-ordering of the different parts became more efficient, and manufacturing lead times shortened, resulting in higher profits.

Dell monitored her days of inventory by product component, ensuring as lean a process as possible. Dell’s receivables and payables were monitored closely; she ensured that payments are collected five days before paying suppliers. Managers tracked important data such as profit margins by customer segment, product and geography as well as return on invested capital. This allowed Dell to respond quickly to changes and evaluate her performance.

Dell built close relationships with her suppliers to coordinate just-in-time delivery of components to minimize the days of inventory. She reduced the number of suppliers to maintain close links, which enabled Dell to direct some suppliers’ shipments to customers to decrease waiting time and reduce costs. Dell maintained communications with her suppliers on an hourly basis for its parts replenishment needs to ensure smooth and reliable production. Dell worked with suppliers to create close geographical proximity of warehouses, production facilities and assembly lines; transportation and manufacturing lead times were reduced – costs were lowered and profits rose.

Dell carried out her business operations in several different overseas markets such as China and Austin, to source and secure supplies, tap into new markets and to seek for low cost inputs such as cheaper labor. This strategy helped create a cost advantage over her competitors.

There are several measures that Dell can look into when moving forward. Dell can look at improving its customer service by providing more personalized services for customers such as customized designs, one-to-one services with trained personnel and on-site visit with internal service personnel. Instead of promoting sales through retail channels, Dell could strengthen her direct sales approach by training sales staff and engaging in social media. Dell can invest more in R&D to provide rapid product upgrades and quick product innovations, which in turn provide customers with more customizable options online. Dell could continually redesign their PCs to better suit the needs and taste of consumers. Lastly, Dell can engage in mergers or joint ventures with other companies to gain access to new technologies to develop new innovations and products more quickly.