Dell's direct sales model and impact on the computer industry

Dell

Overview & brief history of Dell

Dell was founded in 1984 by Michael Dell. According to a profile for the company it is involved in their manufacture, design, marketing, sale and support of services and computer systems throughout the world. This company credits itself on providing services and products that allow businesses and individuals to develop an internet structure. Dell's product line includes laptops, mobile workstations, handhelds, printers, projectors, servers, peripheral products, software and notebook accessories (Dell Profile). The company also has several services that it offers consumers including deployment services, managed lifecycle services and client support services (Dell Profile). The company also provides asset management services and financial services (Dell Profile).

In addition, Dell sells products directly to government, healthcare and corporate entities in addition to small businesses.

The company operates primarily in America, the Middle East, Africa, Europe and Asia. The company's headquarters is in Round Rock Texas (Dell Profile).

Dell is not relay that unique in the services and products that is offers, however the company is unique in the manner in which it conducts business. The company's direct selling methods have transformed the manner in which people purchase personal computers. According to Fields (2004)

Dell Computer has emerged as one of the most innovative firms of the current period on the basis of a process for producing, buying, and selling. This process-oriented route to profit, in turn, rests on three fundamental elements: (1) a different relationship with the customer that involves the practice of selling direct, absent intermediaries; (2) the notion of customization for the specific needs of end users and building customized products in high volume; (3) the use of the Internet by Dell to reorganize not only its system of direct sales but, more significant, the procurement and assembly operations underlying mass customization (Fields 2004).

As it relates to business in general and the computer industry specifically, Dell has had a significant impact on the financial market in the United States. This impact is often referred to as the Dell effect and this effect will be explored further in the next few paragraphs.

Problems with Dell now (present) including competition

Over the past year Dell has faced significant problems that have put into question the stability of the once indispensable company. One of the first setbacks came with the recall of the Sony batteries that powered 4.1 million of the company's laptop. This recall occurred because the batteries were a fire hazard and a few had even caught on fire (Rotham, 2006). This recall affected 15% of all Dell laptops that were sold in the last two years and it cost the company millions of dollars to replace the batteries (Rotham, 2006). This is the largest recall in consumer electronics history (Rotham, 2006).

In addition to the recall of the batteries, the company also suffered a reduction in profits and recently the company was placed under investigation by the SEC. Like many other large American corporations the SEC has called into question the accounting methods of Dell (Schneiderman, 2006). According to an article published by Forbes the investigations were called because there was some indication that in prior periods the financial reports were misstated (Schneiderman, 2006). These misstatements are said to include accruals, reserves and other balance sheet items that might influence Dell's financial results that were reported previously (Schneiderman, 2006).

In addition the article points out that the United States Justice Department and Dell's board of directors audit committee are also investigating these issues (Schneiderman, 2006). In fact the Justice Department has subpoenaed documents associated with Dell's financial reporting beginning in 2002 (Schneiderman, 2006). Evidently this announcement caused Dell shares to decrease by more than 4% (Schneiderman, 2006). Dell also released a statement explaining that the company is cooperating with the SEC investigation and doing everything that it can to resolve these issues. Dell also asserts that it will take any corrective action necessary to ensure that these problems are remedied (Schneiderman, 2006).

Additionally, the company has suffered as it relates to the level of its customer service. Dell has received numerous complaints about slow customer service and the company withholding information from consumers. This has also taken a toll on the manner in which the public views the company and its products.

In addition to the aforementioned problems, the company also has problems associated with the competition. A prime example of this is Hewlett Packard. HP has long been a stable force in the computer industry. In recent years HP merged with Compaq and this merger along with HP's competitive prices has caused HP to gain a greater share of the market. HP is now the largest PC manufacturer in the world.

Causes of such problems

There are many reasons why Dell has encountered such problems. As it relates to the battery recall, the company may have overlooked certain safety measures when testing the batteries. In addition Dell is able to keep its prices low because they are able to get computer components at a cheaper price than many of its competitors. The drive to keep these prices low may have driven the company to overlook some very important safety measures.

As it relates to the SEC investigation, the results of the investigation are not yet known. However, many successful companies have been found guilty of engaging in accounting practices that are illegal or at the very least dishonest. If this is the case with Dell, the company may have been attempting to hide the loss of profit as to not alarm shareholders.

As it pertains to customer service, like other American businesses a great deal of the company's customer service is outsourced to foreign countries. It can be frustrating for American consumers to have a customer service representative who speaks with a heavy accent or a representative that does not seem eager to assist them. Overall it seems that in order to keep the company's prices low Dell believed it could reduce costs by going overseas. However, in the long run it may cost the company a great deal because customers will switch to another brand if they feel that they are not receiving the treatment that they deserve.

Finally as it relates to the competition, it seems that Dell underestimated the threat that the merger between HP and Compaq would pose. HP has long been a respected computer brand and Compaq also had a decent share of the market prior to the merger. Together the companies have become a force to be reckoned and although HP has experienced some of its own problems recently, these problems have been internal issues that have not really affected the company's performance as it relates to profits.

Future of Dell / possible solutions

It seems that the problems at Dell have come in rapid succession; perhaps these issues can be overcome and perhaps they can not. The ability to overcome these problems will play a significant role in the ability of the company to be successful in the future. The primary thing that the company has to evaluate is the safety and the dexterity of the products that it sells. The company can not afford to cut corners as it relates to the development and manufacturing of the machines that it sells. This means that the company needs to be certain that what is being produced is safe for public use even if it means that there has to be a slight increase in the cost.

In addition the company has to ensure that the accounting methods that are being used are not misleading to the public or to shareholders. Many companies have been found to alter financial statements to make it appear that the company is performing better than it really is and this has led to the downfall of many large multi-billion dollar corporations. If this is the case with Dell, it may mean the end of the company.

As it relates to customer service and competition, the company needs to pay more attention to the manner in which customers are treated and not underestimate the strength of its competitors. The company must et back to a foundation of putting the customer first. As it relates to the competition, there isn't that much that can be done. Many of Dell's closest competitors have developed similar approaches to business wherein they sell to customers directly but competitors also maintain a presence in popular brick and mortar stores such as Wal-Mart, Circuit City and Best Buy. In some ways this gives competitors an advantage because some customers enjoy building their own PC's online, while others enjoy having the ability to touch and tryout a machine in a store before they actually make a purchase.

How's Dell affecting U.S. financial market (present)

Currently the situation at Dell is not a positive thing for the economy. A scandal such as the one that Dell is experiencing affects the confidence of investors. Investors begin to question whether or not investing in a company is worth the risk of being lied to and the stock not actually being worth anything. This often causes people to place there money in safer investments and as such their can be a negative effect on the stock market.

It is critical for public corporations to have the support of investors in order to operate. When Dell and other companies conduct their business affairs in ways that are unsavory, it can affect businesses that are operating in a manner that is legitimate. With this being understood Dell has a responsibility to report things accurately, even if it does mean that the company may have to suffer certain consequences in the short run.

Overall the problems at Dell do not seem to have this effect on the overall financial market at this time. However, it may affect, in some ways, investor confidence in technology companies. With this being understood that particular segment of the market may feel some effect as a result of the problems at Dell.

If Dell goes bankrupt, effects on U.S. economy

It is unclear whether or not Dell is in enough financial trouble to file for bankruptcy. After all, the company has only had serious problems for the last few quarters. However there is always a chance that a bankruptcy could occur that could impact the American economy.

If for instance the SEC finds that Dell was dishonest in its accounting practices and this along with slow sales, forces the company into bankruptcy there could be some serious effects on the economy in the United States. According to Dell's official website, the company employs thousands of Americans and as such the unemployment rate in certain states would definitely increase.

Such a bankruptcy could also have a serious effect on the consumer confidence. This impact would be present because Dell has been a trusted brand for many years and people may be reluctant to purchase products from any computer company, fearing that other companies are also acting in ways that are dishonest.

As it relates to supply and demand, it is unclear whether or not HP, Apple and other computer companies will be able to handle the demand in the absence Dell being in the market. It seems that the demand for computers has leveled out and people are keeping their computers longer because technology is not changing as rapidly as it once was.

Merger between Dell & HP

Perhaps a Merger between Dell and HP is possible as both of the companies are well-known and already hold large shares of the total market. Such a merger could perhaps create an extremely powerful and influential business. As was stated previously in this discussion it is unclear just how much trouble Dell is in and how it will effect t the company's future business dealings. It is clear however that HP benefited greatly from its merger with Compaq. With this being understood, a merger between HP and Dell could also be beneficial based on the types of products and services that both of the company's offer.

As it relates to HP, the company has experienced some serious internal issues related to the actions of its CEO. However, the company has maintained its profitability. In addition HP has adapted some of the same business practices as Dell as it relates to direct selling through the internet. In any case it seems that each company could learn form the expertise of the other and work together to form a company that is successful and profitable.

The actual merger of HP and Dell is yet to be seen. If such a merger does occur it seems that the single company would have a great deal of the market share as it pertains to computers, servers, peripherals, cameras, televisions, printers and business services. Such a merger would be extremely beneficial for consumers.

How will the merger affect the U.S. financial market?

Such a merger would provide a boost for the financial market in the United States. The merger of these two publicly traded companies could prove beneficial to the health of the stock market. It is evident that Dell's current troubles have caused its current stock price to plummet particularly if we compare the current price of $23.87 to the company's closing stock price for FY 2005 when it was $41.06.

The merger of these two companies would potentially be beneficial to employees, particularly if the company does very little downsizing as a result of the merger. Both companies employ a large amount of people both in the United States and abroad. If the companies were to merge the employees could enjoy a greater level of job security because the company would have such a large share of the market.

Overall such a merger may be complex because there are so many skilled executives and workers at both of these companies. However, if the companies could find a way to merge their ideas, then such a merger could be beneficial for the company and for consumers. It seems that a merger between Dell and HP would spawn a whole new generation of products and technologically driven ideas. However, it is still to early to tell whether or not such a merger will ever take place as both companies are still doing much better than their competitors in terms of sales and profitability.

Quote stock prices summary from the past 5 years (Taken From "Dell at a Glance")

Annual Financial Highlights in millions, except per-share and stock price)

FY04

FY03

Net Revenue

Operating Income

Net Income

Earnings Per Share (diluted)

Closing Stock Price