The success story of Michael Dell is like no other. Always having had an inclination towards technology, he started out as an 18-year-old pre-med student college student offering hard-drive upgrades to corporates from his dorm room. By 1985, his company was offering services to make built-to-order computers and generated about $70 million in revenue. In 5 years, sales had climbed to $500 million and in a decade that number was topping $25 billion. By the 2000s Dell was challenging IT giants like IBM and Apple in their own game. Though this spectacular success can be mainly credited to innovations in supply chain and manufacturing, equal credit should also be given to a unique distribution strategy.
Michael Dell was once quoted saying that “The way things have always been done wasn’t the best or most efficient way to run things”. While most major IT players were fighting over shelf space and market visibility, he challenged it by selling directly to the consumer and cutting out the middle men (retailers and wholesalers) whose mark-up was making personal computing far more expensive than it should be. The move worked flawlessly because it allowed him to convert the reseller’s mark-up and pass it on to the customers in the form of lower priced built-to-order PCs. Abandoning the traditional distribution channels allowed Dell Inc. to capture customized PC market that IT giants have never been able to fully capitalize upon. In the early days, the lack of cash reserve to start his own manufacturing line forced Dell to offer superior choice in system configuration at deeply discounted prices mainly because cutting out the middle men led to additional savings. This model of direct internet driven sales also generate tremendous amounts of market data that the company used to forecast demand trends and carry out effective segmentation strategies. This data also drove the organization’s product development and provide value to the customers while staying ahead of the demand curve in the rapidly evolving PC market.
Also instrumental was Michael Dell’s foresight and vision in technological advancements. Before the internet had gone mainstream, Dell Inc. was already integrating online order status updates and technical support for customer facing operations. Even on the manufacturing side, Dell followed a system they called “Virtual Integration”- that allowed them to form long-term relationships with select PC parts manufacturers and required these partners to establish inventory hubs near its own assembly plants. This ‘just-in-time’ low cost inventory reduced the time it took Dell Inc. to bring a new PC to the market was a masterstroke in a business where technology fell into obsolescence every few months. The assembly floor itself was integrated into “Manufacturing Cells” where workers built entire PCs according to customer specifications and reduced assembly times by 75%. Dell Inc. established its entire work ethic around its revolutionary distribution channel combined with operational and process integration to unprecedented customer value and tremendous cost savings. And the results spoke for themselves, with the company earning $4 million per day by 1997 and turning over revenues of over $50 billion by 2006.
By then the PC market dynamics was beginning to shift with a lot of underlying factors such as competition beginning to catch up on the technological front, customers preferences shifting from customized PCs to off-the-shelf products, rise of Apple as major IT force etc. making a significant impact on the sales. Also the sealed lawsuit against Dell that the company had knowingly sold machines with faulty capacitors between the years of 2003-2005 ending up costing the company a significant drop in customer value and $300 million in recalls and repairs. All these issues resulted in a continuous drop in the stock prices between 2005 -2008 forcing the company to admit that some strategic changes in the distribution and sales model was in order.
By 2007, in light of the previous drop in sales revenue, Dell Inc. was moving in a new “Hybrid” distribution channel model that involved tie ups with Wal-Mart and Gome Electrical Appliances Ltd. to supplement sales in all major cities in China apart from its traditional direct sales online order platform. Founder Michael Dell even admitted that the PC market was changing faster than anticipated and some changes in strategy were necessary. The new hybrid distribution was a Leveraged Sales model incorporating both direct and indirect sales channels and currently attributes 36% of its commercial revenue to the newly adopted indirect sales channels. Independent top-tier PC manufacturer Alienware was bought out by Dell in an attempt to grab a bite of the premium high-end PC market. At the same time Dell Inc. started some moving towards newer emerging technologies like Enterprise IT coinciding with the market shift from traditional datacentre to cloud-based delivery models. This was a move that Hewlett-Packard (HP) tried and failed miserably with a 44% fall in revenue and firing of the then CEO Leo Apothekar. The organization finally gained some stability after it decided to go private in 2013 and was bought out by private equity firm Silver Lake Management LLC for $25 billion.
Dell Inc., an organization that pioneered in manufacturing best practises and a world leader in direct Sales strategy seeking to provide the consumers exactly what they needed at the click of a button, almost lost 75% of its market value in a decade just because it got so engaged in perfecting its own distribution and business strategy that it lost track of the priority- Creating value for the customers. While only time can tell if the organization can ever make it back to its former glory, other companies can avoid the same fate just by making sure that irrespective of the profit you make it is always a bad idea to rely solely on a single distribution channel strategy because at the end of the day it just does not have the same market penetration or reach of a multiple channel strategy.