Dell Case Study
Emily Diemer, Diana Trachuk, Gunnar Braaten, Stefan Anderson, Tyler Linnerooth
Introduction: This report will explore the characteristics of the personal computer industry,
which has resulted in its notoriety for low profitability, by delving into the strategies employed
by Dell in order to differentiate and succeed in a challenging industry that is fueled by rapid
innovation and fierce competition. It will then conclude with an assessment of Dell’s direct
model strategy, focusing primarily on the extent to which Dell can sustain this competitive
advantage and maintain an irreplaceable foothold in the personal computer industry.
Profitability in the personal computer industry: The personal computer industry is a difficult
industry to be profitable in. Ever since the PC was introduced into the market, it’s rapidly
evolved. Within a matter of decades, PCs went from weighing multiple tons to something you
can hold with one hand. This caused depreciation of computer manufacturers’ products, and
required them to constantly improve, replace, and buyback products. PC manufacturers spent an
average of 2.5 cents on every dollar on buybacks alone. This, and the capital required to improve
products, greatly reduced profit margins. Although household PC ownership levels were around
50% in 2000, intense competition greatly hindered the industry. Many organizations cloned
companies such as IBM and Dell, and they used retail stores to reach customers, thus expanding
the overall market and driving prices down. Companies began using contract manufacturers in
Asia to assemble components leading to a competitive global market for PC parts and assembly.
The decrease in parts for PCs declined roughly 1% every week in 1998, causing the competitive
overall market for PCs to decrease as well, leaving thin margins for a majority of companies.
Dell’s Strategy: Dell’s success has come from their direct model strategy. They use an assemble
to order model, where they build computers specific to customers’ orders and ship them directly.
Their competitors choose to sell their products to retailers; Dell on the other hand has only 5% of
system purchases being from resellers. This sets them apart from competition and allows them to
build personal relationships with their customers, thus resulting in a higher retention level. They
hired customer sales representatives to ensure that all questions are answered in a reasonable
amount of time and leave consumers satisfied with the service. They also divide their consumer
base into detailed categories, and divide sales by regions within countries. This has enabled them
to meet the specific needs of each customer base. In addition to maintaining strong customer
relationships, Dell has also established strong supplier relationships. They have agreements with
suppliers for just in time delivery of parts, so the warehouses don't become overcrowded and
waste isn’t being produced. Additionally, they encourage suppliers to build warehouses near their
own manufacturing sites. Within the company’s internal environment, they use an integrated
system approach, where all departments must be in close communication with each other to
make certain that the production process runs smoothly. They also use five person manufacturing
cells, which allows them to produce their PCs more efficiently and with fewer defects. Finally,
the key part of their strategy has been remaining true to the foundation in which the company
was built. When they attempted to expand into the retail chain, it led to financial losses.
Management was disciplined enough to recognize these losses, and quickly returned back to
growing their direct model approach.
Sustainable Competitive Advantage: Dell is able to sustain a strong competitive advantage
over its competitors because of their assemble-to-order model, allowing for customizable options
for consumers and lower on-hand inventory (only 7 days worth in 1998) to reduce cost as price
differentials in the industry narrowed. In addition, Dell achieved a form of cost leadership
through co-locating warehouse and production facilities, resulting in economies of density and
industry-leading processing and delivery times. Finally, the extensive customer service network
available to Dell customers builds loyal consumers, enhancing the sustainability of Dell’s
competitive advantage within the niche category of direct channel personal computers sales.