Dell uses a direct sales model via the internet and the telephone network to sell all its products, both to customers and corporations. The company practices a just in time (JIT) inventory management system; this approach utilizes the “pull” system by building computers only after customers place an order and by requesting materials from suppliers as needed. Since customers can order online and by telephone, it is convenient for customers to contact Dell directly (Source: Soul of Dell).
* No inventory build up: They don’t have inventory, all the items are ordered as needed.
* Industry leading growth: Well established, renowned brand name
* Cost efficiency: they are using cheap labor
* Direct to customer business model: the system cuts out the retailer and supply directly to customers
* Customization of computers, a unique strategy
* Internet sale leadership
(Source: Soul of Dell)
* High dependency on suppliers: component recalls can cause Dell embarrassment
* Unable to switch to large supply: they don’t have many choices
* They don’t own the product because they are not making anything, they are just assembling (Gross)
* Consumer desires for one-stop shopping
* Diversification strategy: introducing many new products
* Strong potential market in other countries such as Europe, China, India, etc.
* Competitive rivalry: competitors have stronger brand name and strong relationship with computer retailer
* New entrants to the market
* Being global in its marketing and operations can cause fluctuation in the world currency market. (Byrnes and Burrows)
Last month, Michael reclaimed the CEO title at Dell, his own founded computer company. The board fired the previous CEO, Kevin Rollins because of his inefficient leadership. Dell’s performance in the past two years under Rollins has been unsuccessful. According to a study done by Goldman Sachs, Dell is losing share in business spending for PC, while Apple is gaining. In 2006, Hewlett-Packard’s worldwide market share grew to 18.1%, while Dell’s share dropped to 14.7%. Dell stock shares fell 45% in two years. All of the unsatisfied results indicate that Dell’s got a huge problem in its management (Lee).
Dell’s internal problems
Nothing lasts forever, whether in sports or in business. Records don’t often go unchanged. Especially, in the high-tech world, Dell as a corporation has been celebrated for its supply chain success. The core of Dell’s problem is in the way they think about their business and relay too much on their so call “soul of Dell”-the direct to customer strategy. When your core competency is built around just one factor, any signs of weakness in that area leave you in a danger situation. For a while, Dell’s competitors, with their traditional retail channel of destruction, learned their way by squeezing more and more efficiency. Other companies, like HP have figured out how to make and sell PCs as cheaply as Dell. Now, two decades later, the company is no longer alone when it comes to supply-chain efficiency. Sure, Dell’s competitors went through some painful conversions as they observed the traditional sales channel and direct-to-customer businesses. Its supply-chain story is no longer the competitive advantage that it once was (Where Dell Went Wrong?).
The second problem would be Dell’s spending in R&D and innovation. This corporation has hardly been in the product innovation or quality improvement. Instead, Dell put most of its money in improving manufacture and supply chain distribution. It’s not just rivals who acknowledge this fact; even retail customers know that Dell is not Apple, Hewlett-Packard or IBM. As a result, this direct sales strategy following company was completely tied to its supplier Intel; whatever Intel offered, Dell had to wait. Dell is incapable of doing what IBM and HP were doing, which leaves Dell so weak in innovation and product quality improvement.
Although Dell has left Intel and partnered up with AMD but it is still the same concept: You won’t have the unique product because you are sharing the same suppliers as your rivals do. Moreover, it is hard to control the quality of the components from your suppliers. For Example: Dell had to recall 4.4 million notebook computer batteries due to battery failure, which was from another big supplier Sony. This really hurt Dell’s corporate image. If the company had made the batteries themselves, it would be easy for them to solve the crisis. They would not wait so long to take action and recall the batteries, and solve the problem as fast as possible.
The corporation put so much focus on manufacturing and destruction that it forgot to spend money on making really good products, or creating good customer experiences. Rivals such as Apple and HP now have better products and experiences and Dell has fallen behind. The third problem is Dell’s after sale service, in other words customer service offered by the company. The customer service is not efficient, people have to wait a long time before their problems get solved or even heard. Therefore, Dell’s customers do not have a good after sales experience and they’re not happy about it. The company has forgotten that customer satisfaction is a key factor in a company’s success in today’s world. (Gross).
Dell’s external problem
Many multinational corporations expanded their operations into other global markets such as McDonald opening several fast food restaurants throughout the world. Dell also tried to expand their company by entering into China. Unfortunately, Dell’s unique strategy worked only in the U.S. in the past, but it failed in China, the second largest and fastest growing computer market in the world.
When Dell expanded its operations in China, it used the same strategy: Direct sales to customers online and selling in low cost computers. Even though Dell was manufacturing in China, side by side its competitors, it had lost the race. Dell tried hard to keep their costs low but still one of its competitors, Lenovo, Chinese computer giant, was able to sell an entry level computer for 25% less than Dell (Dell: The Problems Began in China).
It was less expensive for Dell’s competitors to get product to customers than it was for Dell, therefore this U.S. based company had to retreat from the Chinese PC market. Additionally, relatively few Chinese customers use credit cards and those who do aren’t accustomed to buying over the phone or the internet. Finally, Dell never even tried to sell anything else in China. Since their supply chain had failed to deliver the most competitive price in computers they did not bother to try it on anything else (Dell: The Problems Began in China).
1. Innovation and R & D.
Dell should now shift some of its focus on innovation through Research and Development because it could provide lots of benefits. For example, through increased emphasis on R & D, Dell may be the first to introduce products to market and establish first mover advantage since Dell already have a well known and reputable brand name which will allow Dell to expand into new products and most probably create barriers to entry for its competitors. However, more focus into R & D would force the company from its direct sales model to a different model, as new products require multiple distribution channels to ensure they are available to customers as quickly as possible. The benefits will for sure outweigh the disadvantages that come with the strategy shifting (Holahan).
2. Expansion in consulting service and outsource its repairing service
If Dell moves into business consulting service, a new business segment for Dell would open a potentially new revenue stream. Given the firm’s internal success at manufacturing and supply-chain efficiencies, Dell would have a respected reputation as a consultant. Movement into the services business places Dell against large competitors. While Dell’s specific knowledge would help it enter a new market. Moreover, outsourcing its repairing service to companies that have repairing locations around the world will free up Dell’s energy and focus on the consulting service to business customers.
3. A modified Strategy in China
Dell’s direct sales model has several limitations in emerging market such as China. For obvious reasons, the model does not work well in China where customers do not have access to the internet or credit-cards as compared to North Americans. And the cost leadership strategy that Dell used in the past has to be abandoned; instead Dell will need to focus on quality because it was unable to be cost competitive against the Chinese competitors. Therefore, it makes sense for Dell to expand its use of retail locations or showrooms in China.
Moreover, to achieve success in China, the corporation must combine its direct sales model with its learned experience from the past. Since the Chinese are not used to shop online without trying the products, Dell needs to develop showrooms in which displays are available for customers to test and use products before they place an order. Once a customer has decided to purchase an item, they may use an in-store phone or internet connection to place their order. As in the traditional Dell model, customers may customize their product during this process. This tactic allows Dell to bring its product to customers in China while still maintaining its direct sales business model.
Catherine Holahan. “What Dell Should Do?” July 21, 2006 Business week
“Dell: The Problems Began in China” February 02, 2007 http://hardware.seekingalpha.com/article/25861
Daniel Gross. “Is Dell Dying? What’s wrong with America’s greatest computer company?”
Aug. 30, 2005, http://www.slate.com/id/2125297/
“Dark Days at Dell” August 24, 2006 Business week
Louise Lee. “Dell’s Doubtful Turnaround” March 2, 2007 Business week
Nanette Byrnes, Peter Burrows, “Where Dell Went Wrong” Business Week 19 Feb. 2007
Soul of Dell: Dell Inc. February 24, 2007 from http://www1.us.dell.com/
“Where Dell Went Wrong” 02 19, 2007 Business Week. http://www.businessweek.com/magazine/content/07_08/b4022074.htm