DELL: FROM INNOVATION TO SURVIVAL

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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.

REFERENCES

http://insight.kellogg.northwestern.edu/article/a_new_channel_strategy_for_dell

http://www.infoworld.com/article/2627812/techology-business/the-ignominious-fall-of-dell.html

http://www.wikinvest.com/stock/Dell_(DELL)/Data/Revenue/2003

http://www.theguardian.com/technology/blog/2010/jun/29/dell-problems-capacitors

http://www.dailyfinance.com/2010/06/30/how-dell-destroyed-68-billion-in-stock-market-value-in-a-decade/

http://www.reuters.com/article/2013/10/29/us-dell-buyout-idUSBRE99S0VQ20131029

http://www.pcpro.co.uk/news/education/373150/dell-we-re-no-longer-a-pc-company

http://www.cnet.com/news/dell-changes-its-sales-strategy/

http://www.marsdd.com/mars-library/case-study-dell-distribution-and-supply-chain-innovation/

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10 thoughts on “DELL: FROM INNOVATION TO SURVIVAL

  1. I think that the notion of going directly to consumers and cutting out major retailers is becoming more appealing as the costs and unnecessary complexity of doing business with retailers such as Coles and Woolworths is increasing. Clearly it worked for Dell, obviously it could not work for all products, however from a consumer perspective there is obviously merit in going direct to consumer as it reduces cost of business and has the potential to divert the retailers / resellers mark up and put it directly into price. Good move and I think more companies should consider this in the context of consumers more comfortable with e-ordering and has the potential to reduce the power of major retailers…..

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  2. I remember that Dell used to have kiosk in shopping centres to show its products to consumers (although the purchase was still need to be made online). Nowadays, you can only find the products in major electronic stores and they are limited.
    By going direct to consumers, they manage to cut costs . However, with the increasing number of competitors, it is difficult to survive with just a single distribution channel. If you were in a market for a new computer (and currently without one), it would be difficult to go online and order one. Well, you can use tablet or smartphone to access the internet, but navigating through Dell’s website is not as easy as using a computer!
    Apple sees the importance of having its retail stores and the strategy is working. This is what Dell has failed to provide to its customers. The ability to experience the products before buying. Dell obviously should re-think its distribution strategy.

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  3. Nowadays, Apple has been a dominate force in enterprise. On Apple’s most recent earnings call, CEO Tim Cook rattled off a list of statistics showing just how badly the company is crushing the competition among business users. Apple has a unique distribution strategy by setting up it’s own stores. Apple has 453 retail stores in 16 countries and an online store available in 39 countries. The other company, like Dell, will have a long way to go.

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  4. Thanks for the Post. I wondered what happened to Dell. It made me reflect on how I became aware of their product and distribution service. It was because my workplace decided to buy Dell and as staff we had an opportunity for a corporate rate – online of course. I wonder if without that would I have been aware that I could purchase a Dell online. Makes me think if Dell neglected to invest in its Brand to complement their distribution channel – like Apple.

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  5. Agree with @sharpym and your observations – Dell certainly missed an opportunity to reach out to grow it’s brand and consumer advocacy and not just focus on one distribution channel. It probably had an opportunity to get really close to customers in the direct channel and might have seen the writing on the wall had it done more to look around at the changing consumer landscape – the trends towards laptops back in 2005 was an area where Dell didn’t react immediately and couldn’t compete as well in cusotmising things that were important to customers like screen size. Dell was an early causalty of the start of the trend towards mobile computing that would be dominated by tablet manufacturers in the years to come (who now have the larger PC manufacturers on the hop).

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  6. I think it was a good option adopted by Dell to directly reach out to its customers and cut out on the middle men. Direct selling comes with many advantages such as strong customer relationships, coordination with other business strategies, price and cost control and access to more customers.
    Although as correctly stated by @ccunnin it may not effectively work for other companies but it is worth giving this strategy a shot.
    Good move by Dell though!

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  7. Dell’s strategy of direct sales certainly has cut out retail markup. It eliminated the need for inventory or middlemen and gave itself a built-in price advantage, which it in part keeps as profit and in part passes on to customers. However, one of the disadvantages is that customers are not able to touch and feel the product, which is a large ticket purchase. Dell then found itself in a situation where its directly-only sales model was no longer able to provide the competitive differentiation it had previously enjoyed. Currently, Dell had a change in strategy and began to embrace third-party channels, launching an entire indirect sales organization with supporting programs and distribution partners to drive incremental business. It now has a leveraged sales model in place, including both direct and indirect sales channels. Apart from strong competitors such as Apple, I think the reason why Dell failed to achieve success is that it was building on the direct model and it was not possible to quickly adjust without significant investments.

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  8. Thank you the contribution~
    Dell has develop in nowadays, this success is base on Dell’s successful marketing strategy, which is direct sales as the main strategy and distribution strategy following.
    I search some information about Dell’s innovation marketing strategy.
    Dell’s use of innovative forms of online marketing, there are three reasons about the success online marketing. Firstly, Dell’s direct sales network, significantly reduce cost and it will be a good grasp consumers demand, it will product customization. Secondly, full use of internet technology, the company offers a lot of information network from customers, it will help customers to understand now products, play a very good role in promoting. Thirdly, using the internet to provide services and technical support, improve service and increase customer loyalty.

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  9. The competition between PC industries is very intense; especially Apple is the biggest competitors in this kind of market; Dell should think about how they can attract the customers by the distribution. Yours blogs dig out an awareness of the PC industry; I start to do the research about Dell; this is interesting news. Thank you for your sharing.

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  10. Great blog. Dell are so interesting because their strategy is to provide custom systems straight to the consumer. In reality the products aren’t custom but at least the customer isn’t restricted to straight out of the box selling like Harvey Norman or Jb hifi. The costs upfront might be more for dell to setup their own chain, however costs are reduced by not having to sell through a retailer and then putting a margin ontop. This makes happier customers with better products for less the price

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