Sunday, March 25, 2012

Dell: Revitalizing the Business of Computer Purchasing

Our readings for this week emphasized the integration of both a company’s strategy and its business model in capitalizing on the long-term profit potential of an industry. In synthesizing a great deal of research on the trends in successful companies’ strategic planning processes, the two articles from the Harvard Business Review1,2 offered specific, tactical suggestions for how others might extend these best practices to their own business. I would like to add to the anecdotal examples of the authors that of one additional company: Dell Computer Corporation.

As described in an article by Joan Magretta in the March-April 1998 Harvard Business Review,3 Chief Executive Officer Michael S. Dell implemented a business model for his company back in 1984 that considered each of the components laid out by Johnson, et. al in “Reinventing Your Business Model:” the customer value proposition, the profit formula, the key resources, and the key processes. In so doing, Dell took his company from a small enterprise in his parents’ garage to a renowned $12 billion corporation in only 13 years; today, 28 years since its founding, it is worth $61 billion.4 Dell Computer changed the mix of the competitive forces and thrived for a long time in an industry dominated by major players by operating in a unique niche, quite similar to the niche of Southwest Airlines and Apple, Inc. in their respective industries.

Customer Value Proposition (CVP)

Much like Ratan N. Tata of Tata Group, Michael Dell’s inspiration for Dell Computer’s business model stemmed from consumer needs he observed in everyday life. Companies around the world, and government organizations in particular, had a specific need for many highly-customized computers and IT support. Companies needed to order these computers in large quantities, have access to knowledgeable service technicians, and be able to upgrade their system to keep up with changes in technology over time and with little hassle. As Johnson, et. al suggest, Dell Computer found a way to meet these related needs and initially focused on only these needs. The value that Dell Computer brought to the market, then, was the ability to highly customize bulk orders of computers and provide superior IT customer support for businesses. As time progressed, Dell Computer began serving individual computer-savvy customers who were interested in a customized setup. Dell structured his business model so that everything his company did created value for the customer.

Profit Formula

Dell’s “direct business model” had three primary components that affected profit: suppliers were brought in-house to work as partners within Dell Computer’s facilities, the company hyper-segmented its potential market, and products were sold directly to the customer. With the suppliers in-house, the company could keep its inventory low and change orders quickly. This meant that Dell Computer’s resource velocity was quite high, but it made up for this in its revenue model, cost structure, and margin model. All three were positively impacted by Dell’s decision to sell only to high-margin markets in high volume. In 1998, 70% of Dell Computer’s sales were “to very large customers that buy at least $1 million in PCs per year.”3 By selling directly to customers, Dell Computer retained control over its cost structure and avoided fees associated with reseller services. It also kept prices reasonable for the end-user by avoiding reseller markup.

Key Resources

Just as part of Southwest Airlines’ competitive advantage in the airline industry stems from its use of one type of jet, Dell Computer gains its competitive advantage from its unique association with its suppliers. Dell Computer uses suppliers to manufacture each component of a computer, but Dell does not consider this “outsourcing,” as each supplier performs its work in a Dell Computer factory and the company maintains very long-term relationships with many of its suppliers. It ingrains the suppliers in the culture of service to the customer. Another key resource are Dell Computer’s trained “sales-account managers,” who are assigned to each customer and whose job it is to understand that customer’s specialized needs. These managers are tasked with developing a customized package to specifically match that customer and will walk them through the entire order process, from interest to delivery.

Key Processes

Several processes are key to Dell Computer’s business model and differentiate it from other manufacturers. The first is what Dell calls “virtual integration,” which is the term for the coordination between Dell Computer and its suppliers. It also incorporates the focus and specialization that Dell Computer achieves through its supply chain. The second is Dell Computer’s high turnover, for which it is so famous and from which it derives much of its profit: in 2008, it turned over its inventory 30 times per year and had a holding period of only 11 days.3 Dell Computer also offers its business customers specialized intranet sites to re-order computers, purchase additional components, or request technical support. Finally, Dell Computer stays ahead of the curve and fosters innovation in the workplace by hosting “forums to ensure the free flow of information with the customer on a constant basis.”3 This allows businesses to express their needs and work with Dell Computer engineers to formulate a solution for these needs. The meetings are the embodiment of Dell Computer’s commitment to its customers, now and in the future. By listening to its customers, Dell Computer can accurately forecast demand for its product and maintain its profitable inventory turnover.

Today

Michael Dell built his “direct business model” with the core idea that he would integrate the supply chain, “sell directly to consumers,” and “build products to order.”3 But Johnson, et. al state that “business models need to have the flexibility to change.”2 Therefore, Dell is in the process of re-thinking his model. As #41 on the Fortune 500 list and #3 in the “Computers, Office Equipment” industry (behind Hewlett-Packard and Apple), Dell Computer still has room to grow. CNN Money reports that Dell Computer has an interest in “emerging markets.”4 What markets do you think it should tackle? How do you think it should alter its business strategy to accommodate the modern marketplace and still retain its competitive niche, so reminiscent of Southwest Airlines?

1Kaplan, Robert S., and David P. Norton. "Using the Balanced Scorecard as a Strategic Management System." Harvard Business Review July-August (2007): 3-15. Print.

2Johnson, Mark W., Clayton M. Christensen, and Henning Kagermann. "Reinventing Your Business Model." Harvard Business Review December 2008 (2008): 3-13. Print.

3Magretta, Joan. "The Power of Virtual Integration: An Interview with Dell Computer's Michael Dell." Harvard Business Review March-April (2008): 72-84. Vitro. Autodesarrollate, Mar. 1998. Web. 25 Mar. 2012. .

4"Fortune 500 2011." CNN Money. Web. 25 Mar. 2012. .

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