Matching Dell From Its Early

Matching Dell

From its early beginnings as a literal bathtub business, the Dell Computer Corporation has practiced a direct model of business in which manufacturer and consumer conduct transactions independently of resellers, retailers, or distributors. What appeared to be a romantic pipe dream blossomed into a multi-billion-dollar business that effectively transformed the computer industry and forced competitor companies either change their approach or partially mimic the Dell model. In its early years, the dell Computer Corporation focused on offering large corporations "high performance PCs at relatively low prices," (184). The Dell direct model stood out not only because of its elimination of middlemen but also because each computer was custom-designed and made-to-order per the customer's needs. Most of Dell's competitors manufactured machines to suit the needs of their retailers, resellers, or distributors, who in turn interacted with customers. In the article "Matching Dell," authors Jan W. Rivkin and Michael E. Porter discuss the wide-reaching implications of the Dell direct model for the entire computer industry. Because Dell has enjoyed a competitive advantage and a burgeoning market share, the corporation has threatened to undermine years of hard work by industry stalwarts such as IBM and Compaq. "Matching Dell" illustrates how Dell capitalized on the changing needs of consumers and on the changing marketplace. The article also shows how competitors might learn from Dell's success to ensure and preserve their own market viability.

The structure and dynamics of the computer industry have changed rapidly over the past ten to twenty years. The industry initially bloomed through the efforts of a handful of manufacturers headed by IBM, which had the lion's share of the market throughout the early 1980s. PC manufacturers relied on large retail stores and "value-added resellers" to handle tasks like installation of hardware and software, network configuration, and servicing before individual computer users knew how to perform these tasks themselves and before businesses had enough computers to justify hiring in-house technicians (179). That would all change by the 1990s, when PC-use became more commonplace. The popularity of the Internet and email offered businesses and individual consumers "new reasons to purchase a personal computer," (181). Especially as Asian and European markets warmed up, the industry was forced to make some drastic shifts in its marketing practices.

IBM and IBM clone makers helped create the ubiquitous "Wintel" computer configuration, in which a personal computer ran a Windows-made operating system on top of an Intel-made microprocessor. By as early as 1991, up to 90% of all computers sold on the market were of the Wintel model; the rest used the Apple/Motorola combination (179). By 1998, the Wintel share increased to 96% of all computers sold and in spite of some competition from rival microprocessor maker AMD, Wintel remains an industry-wide standard (181).

Before Dell began to dominate the market, the computer industry was characterized by several key features. First, its marketing model consisted of classifying consumers into four main categories and relying on four basic channels of distribution and sales. Manufacturers also assumed costs associated with buying back unsold inventory, offering price protection and other perks to resellers. Many manufacturers also invested heavily in advertising. Additionally, the pre-Dell model meant that the computer was manufactured using assembly-line techniques and computers generally took at least a month to reach the end-user (183). All those things were about to change when Dell entered the market and took it by storm.

First, Dell changed the way it categorized consumers. Industry stalwarts like IBM traditionally divided consumers into four categories: large to mid-sized companies and governmental organization; small businesses and small offices; individual consumers; and educational institutions. Dell changed the way consumers were categorized. Initially, Dell did, and still does, make most of its revenue from large accounts: the corporate customers. In fact, early on, 77% of Dell's total sales were to corporate-level and governmental organizations, 18% of sales were to the small and home office sector, and 5% for educational institutions. The individual consumer had not even entered into the picture yet. Dell's consumer categorizations were basically binary: large accounts and small ones.

Similarly, the company included individual consumers into its marketing vision and created a bipartite division of its consumers: the "relationship" buyers and the "transaction" buyers. Relationship buyers consisted of large companies with repeat orders of multiple PCs (184). To cater to the needs of the relationship buyer, Dell assigned a specialized team of sales representatives to each account. Relationship buyers offered Dell its "highest gross margins," (185). Transaction buyers consisted of the small-to-mid-sized businesses and individual home users who placed small and irregular PC orders. Transaction buyers called a different telephone number to order from Dell and rather than have a personalized sales representative team, they would speak with an inside representative who would encourage the buyer to investigate more advanced systems (185).

As Dell grew, the need to refine customer categories grew. To tailor to the specific needs of each market segment, Dell divided its relationship buyers into further categories such as specific governmental sectors or "global enterprise accounts," (185). Dell developed sophisticated means of direct sales, such as its Premier Pages for select relationship accounts: corporations could log onto a special website that would enable them to view their entire transaction and order history and discover when they might need to update their systems.

Regardless of the specifics, Dell demonstrated a savvy knowledge of consumer needs and of customer service. Their ability to foresee, work with, and meet the needs of the large and small consumer alike propelled Dell into the forefront of the industry. Between 1994 and 1998, the revenue of the corporation rose from $3.5 billion to $18.2 billion, and its stock price rose an astounding 5,600%.

Its competitors have had to rise to the occasion and learn from Dell's lessons. Dell's long-term success depends on the following key features: direct to consumer sales; low inventory needs; shifting away from assembly-line production; rapid order processing; and responsive customer service. Dell's competitors such as IBM, HP/Compaq, and Gateway would do well to follow the Dell example.

For instance, Dell secures lower overhead costs than its competitors do by reducing inventory needs. Suppliers apply to a strict "just-in-time" parts delivery. Without excess parts on hand, Dell does not need to spend money on larger warehouse spaces. Moreover, "just-in-time" parts delivery ensures that inventory surpluses are rare, and that parts are state-of -- the art. Because PC technology changes so rapidly, state-of-the-art parts are essential.

In addition to reducing inventory space requirements, Dell has largely eased away from the assembly-line tradition, especially in newer plants and plants in developed nations. Rather than use the assembly-line, PCs are put together by small teams, usually of about five people. Small team manufacturing "cells" help create more reliable PCs with fewer tech problems in the long run. When tech problems do arise, each custom-made PC is tagged with a bar code for identification purposes. Dell has developed a reputation for offering solid customer support, which is essential in the PC industry.

Software is installed in a separate stage of the manufacturing process, and Dell offers specialized services for companies that require the installation of proprietary software. Companies like HP/Compaq would do well to hone the manufacturing process and shift away from the assembly-line. Customized "cell" production makes for a more stable system that is also tailored to the needs of the user.