A Direct Threat to the
Status Quo
An Analysis of the PC Industry and Dell, Inc.
Eric Lalonde
I. Personal Computer Industry Summary
a. Industry Profile
b. Typical Industry Competitive Strategy
c. Porter Model Evaluation
d. Globalization of the Industry
e. Importance of I/T to the Industry
II. Dell, Inc.
a. Dell Company Profile
b. Market and Financial Performance
c. Competitive Strategy Statement
d. Significance of Information Systems
e. Strengths and Weaknesses of Dell, Inc.
III. Structured Analysis of Information Systems Use
a. Strategic Option Generator
b. Roles, Roles and Relationships
c. Redefine/Define
d. Significance of Telecommunications
e. Success Factor Profile
IV Final Analysis
a. Success of Business Strategy and I/T Use to Date
b. Have the Above factors Positioned Dell for the Future?
Objective of this paper
A thorough analysis of the PC Industry yields a unique look at the most dynamic
market arena in the last 25 years. This analysis paper seeks to offer just that: an in depth
view of what it takes to succeed in this marketplace. While focusing on the international
end-user and corporate markets, important topics such as threats, tactics, and future
trends of the core market players will be scrutinized. Further, we offer an in-depth look at
how Dell Inc., one of the market’s most successful players, deals with these threats and
competition.
In section I, an overview of the industry, its major players, and recent historical
performance will be examined in order to offer a firm understanding of the PC Industry.
Further, recent and upcoming trends in this market will be explained. An examination of
the industry’s competitive forces, using Porter’s competitive model, will be used in order
to properly understand the threats facing the vendors within the industry.
Section II will feature a company perspective and report on Dell’s leadership,
competitive strategy, and market performance. Finally as we compare Dell’s tactics to
those common throughout the industry, a review of Dell’s strengths and weaknesses will
complete this section.
In section III, a report on the role of information systems at Dell will be included
in order to understand an extremely important contributor to Dell’s success. This report
will include a strategic option generator and summary, a look at the roles of senior
management and relationships between managers, a detailed view of the major
information systems within Dell, and the significance of telecommunications to Dell’s
overall success. Finally, a success factor profile will be used to conclude the major
strengths of Dell’s business model in the computer hardware industry.
In its conclusion, this paper will cover a final analysis of Dell’s success in the
computer hardware industry and how the company’s business strategy and IT use
contributes to their competitiveness. These perspectives will help motivate an
understanding of why Dell is postured for a future of success in the PC industry.
Section I: The Computer Hardware Industry
a. Industry Profile
The computer hardware industry has evolved in a dramatic fashion over the
decades, as market players are forced to shift strategies and product lines in order to focus
where the market demand is most concentrated. This can be easily seen from the
transition of mainframe supercomputers in the 70’s, to examples abounding today:
increasingly fast personal computers, mp3 players with gigabytes of storage, and PDA
cell phones. This is an industry whose players have had to adapt quickly in order to
match the constantly changing market demand.
Financial success within the PC industry has historically depended heavily upon a
vendor’s ability to market computing technologies at a high quality for consumer and
enterprise customers. While quality is certainly still a factor in today’s computing
markets, recent trends in aggressive price competition have shifted vendors’ focus on
entering or creating new PC peripheral product markets. Further, this increased global
competition between international vendors has made market dominance, here in the U.S.,
a difficult standard to maintain. The demand for new peripheral tools and technologies by
end-users and enterprises alike has introduced new opportunities for vendors to increase
their profits and revenues; Along with such opportunities comes risk, as businesses invest
heavily in retooling their focus into becoming suppliers of more diversified technologies.
Dell and HP are the two international PC market leaders who exchange the top
spots in total shipments on a quarterly basis; Fujitsu, IBM, and Toshiba round out the PC
market’s major worldwide corporations. As the table below illustrates, there was a sharp
decline during the economic downturn during 2001. After the negative market
performance that reigned in 2001, the PC market was described as having “nowhere to go
but up”1. Indeed, some gains were seen in 2002, and the industry in 2003 surprised
analysts with its large increases in major vendor sales growth and total units shipped.
Worldwide PC Sales
180000
Units Shipped (in thousands)
160000
140000
120000
100000
80000
60000
40000
20000
0
1975
1980
1985
1990
1995
2000
2001
2002
2003
Year
PC shipment sales from 1975-2000.2
In 2003 a record 156.2 million PCs were shipped worldwide. This is over 15
million more units than the year previous. However, due to a much higher degree of
competition within the industry, prices were slashed and buyers gained more value for the
“PC Market has Nowhere to Go but Up” ©2001 Jupitermedia Corporation
http://cyberatlas.internet.com/big_picture/hardware/article/0,1323,5921_960231,00.html
2
“Personal Computer Market Share: 1975-2002” ©Pegasus3d.com
http://www.pegasus3d.com/total_share.html
1
systems they purchased. The result of this competition is that the total value of PC
shipments in 2003 was $51 billion less than in 2002.3 This has an enormous significance
to vendors, and has motivated many of the tactics today’s market competition.
Due to aggressive pricing tactics, most vendors were forced to into diversifying
their product offerings with PC-related peripheral components, in order to maintain longterm stability and growth.
Worldwide Annual PC Market
Share (1999-2003)
Pct. Market Share
20
15
HP
Compaq
10
Dell
5
IBM
0
1999 2000 2001 2002 2003
Year
Trends over the last five years tell the story of Dell’s increasing market share, at
the cost of its competitors. This degree of competition prompted a merger between HP
and Compaq in 2002, which accounts for HP’s apparent explosion in PC sales in the
graph above. On a quarterly basis, HP and Dell routinely trade the #1 spot in PC
shipments. IBM has refocused its priorities to lucrative corporate customers, and other
vendors such as Fujitsu and NEC focus primarily on the portable notebook market.
In 2003, the PC industry grew 11 percent as a whole. HP's slight edge on Dell in
the global market was largely driven by the company's success in the consumer market in
Europe. Dell has no physical outlets and thus tends to sell fewer total units than its largest
competitor during the holiday season. Despite differing focuses, all players saw an
increased demand by consumers for new systems.
b. Typical Industry Competitive Strategy
The primary tactic for vendors in the global PC market is price leadership. While
supporting strategies such as marketing, support, and innovation may play into a vendor’s
overall approach, the end-goal for every market player is to have the lowest priced
product:
 Price leadership: All corporations in this industry seek to offer very low-cost
computing models, in order to pronounce the affordability of a new PC to
“Record PC Shipments in ‘03” © 2004 TheRegister.co.uk
http://www.theregister.co.uk/content/51/34478.html
3
customers. This includes special discounts and instant or mail-in rebates. Other
options such as leasing or financing are used to increase product affordability.
Further, vendors often advertise discount PCs, when they are purchased with a
signed year-long or multi year PC-related service contract.
 Establishing strong relationships with suppliers: Often this includes signing
exclusive long-term agreements with suppliers of PC components or peripherals.
Vendors who employ this strategy can see a drop in bottom-line cost for the most
expensive of PC components from purchasing in bulk quantities. This savings is
then used to drop product prices and gain market share.
 Diversification into PC-related technologies and becoming a “one stop shop” for
all customers PC needs. The offering of PDA’s, printers, copiers, faxes, high
speed internet access, and other home or small-business technologies has allowed
many PC vendors to drop prices in main models, and recover this revenue through
these related peripheral sales.
 Alliances and joint ventures: Vendors often Sign deals with software vendors in
order to bundle their products with PC systems. This software can be installed as
a free or free-trial product, which increases the perceived value of the PC
vendor’s product.
 Outsourcing: Various product construction and customer support processes are
shipped to developing countries where lower employee wage requirements allow
companies to reduce overhead.4
 Deals and trade-ins: Older model product trade-in programs allow vendors to
refurbish and resell PCs, while offering discounts on newer models. As a bonus,
the company is able to promote its environmental responsibility leadership.
 Corporate contracts: While highly lucrative, the signing of exclusive agreements
with enterprise customers to supply and support their IT computing needs is
extremely competitive. These agreements are signed at discounts for both parties
involved, and aims to form a mutually beneficial financial relationship between
firms.
 Aggressive marketing tactics: To increase brand awareness, PC Companies tend
to market hard to end-users via television. This has become a necessity as prices
and product models change quickly.
“Dell Recalls Tech support after complaints” ©2003 EcommerceTimes.com
http://www.ecommercetimes.com/perl/story/32248.html
4
c. Business Strategy Model
A business strategy model is a useful tool for analyzing the various product
offerings within the PC industry that vendors compete with. Below is a chart representing
the various companies, market segments, and product lines that competitors in this
industry offer to the public:
Business Strategy Model
Top 3 Market Vendors
Company
Market Segment
Target
Dell
PCs
Dimension
Home / Small Business
Optiplex
Small Business
Precision
Small Business
PowerEdge
Enterprise Environment
PDAs
Axim
Power Users
Printers
A9XX
Home / Small Business
HP
PCs
Pavilion
Home / Small Business
Presario
Home / Small Business
DX00
Corporate Workstation
Proliant
Enterprise
Integrity
Enterprise
PDA’s
Jornada
Power Users
Printers
InkJet
Home / Small Business
LaserJet
Home / Small Business / Enterprise
IBM
PCs
ThinkCentre
Home / Small Business
IntelliStation
Corporate Workstation
eServer
Enterprise
pServer
Enterprise
iServer
Enterprise
Conclusions
The top three major vendors in the PC industry all have strengths in different
segments. For IBM, this is obviously the Enterprise environment, where the company’s
workstation and server offerings outclass Dell and HP in terms of options and features.
HP has the most elaborate printer line in the world, as this has been the company’s
historic dominant market. Dell focuses on a smaller overall product line, while competing
in more market segments. To do this, the company offers a few key products for each
segment at competitive prices. This concentration has allowed the company to reduce
overhead and often results in price leadership.
d. Porter Model Evaluation
Using the Porter model on the PC hardware industry allows us to gain a cohesive
view on the multiple threats and opportunities facing companies within this arena.
Analyzing the five major threat categories to any company within this industry is crucial
to understanding the offensive and defensive tactics by market players.
Porter Competitive Model for the PC Hardware Industry
US Market
Intra-Industry Rivalries
The PC hardware industry represents one of the most competitive markets today.
Fierce competition between the major players has caused deep price discounts and even
revenue losses in the quest for increased market share. In the third quarter of 2003, HP
CEO Carly Fiorna admitted her company had slashed their product line’s prices too
deeply as she announced H-P’s Personal Computing division had lost money for the
quarter. The fierce competition between Dell, HP, and others for consumer business even
motivated a mega-billion dollar merger between HP and Compaq. This is an industry
where the failure to adequately plan a long-term strategy can cost a vendor huge
percentages of market share.
The Bargaining Power of Buyers
In the corporate and government markets, customers tend to have considerable in
negotiating product prices with PC vendors. In these cases, product quantities are
generally large, and deals expensive. It is customary for customers purchasing in this
category to receive substantial discounts when as few as 50 machines are being
purchased. However, as major corporations and governments usually have much higher
IT system requirements, their purchase volumes often number in the thousands. This
scenario allows customers to demand steep cuts in the price of hardware.
The Bargaining Power of Suppliers
The major suppliers within the PC market rely heavily on the parts that are
supplied to them in order to build machines for sale. In most cases, PC vendors
manufacture no actual parts to the PCs they ship. Instead vendors focus on component
interoperability and branding each product uniquely for marketing to the end user. This
dependence on component manufacturers and suppliers can potentially lead to artificial
shortages created by component suppliers. Further, the power component manufacturers
have in demanding long-term contracts can force vendors into using one company
exclusively for a given component. While such a long-term agreement could cost the
vendor less as they purchase by volume, it is often not to a vendor’s advantage to do so.
One supplier’s video card today may indeed be the top-rated product. However there are
certainly no guarantees this will forever remain the case.
Threat of New Entrants
At a casual glance, the threat of new entrants may seem relatively benign due to
the recent consolidation of even the most heavy industry players, HP and Compaq.
However, due to the continual rise in performance / price ratio for any given PC on the
market, a niche market for product differentiation has arisen as end-users desire a more
customized appearance and personality for their machines. This effort started in the late
1990’s with computer case modifications or “case-modding”, as a hobbyist community.
Yet in recent years this community has grown into its own niche industry with small to
medium-sized custom PC suppliers like AlienWare. Even component manufacturers have
moved into the PC customization arena in an effort to increase the price of components
like cases, motherboards, and even system fans. This niche market is steadily growing; in
the future users are likely to demand more of an aesthetic quality to their machines as
prices continue to drop, and users’ purchasing power rises. Expect that in 3 to 5 years,
simple beige or black colored machines are not likely to suffice the end user’s demand
for PC personalization. If the major market players fail to move into this emerging
market, we will see component manufacturers offering more robust product lines and the
erosion of current industry leaders’ market share.
Further, because today’s US market for PC hardware is considerably larger than
elsewhere in the world, it is not uncommon for international competition to enter this
domestic market. Large name companies such as Toshiba and Sony have been offering
competitive alternatives, in terms of innovation and quality, to domestic company
offerings. As the U.S. market continues to grow, and competitors find new ways to cut
production costs, new international competition will likely enter the US market.
Threat of Substitute Products
Through the proliferation of computer technology during the Information Age, the
threat of substitute products seems fairly minimal in urban areas. However, regional
population density may place varying importance on PC system ownership. Cities with a
higher population have a much greater demand for public computing terminals like
Internet Café’s. Although these café’s must purchase PC systems for business, the end
result for PC manufacturers is fewer sales.
Low-cost computer clones may also become common, as vendors from
developing countries grow and decide to enter the U.S. market where they can undercut
current cost models. Computer buyers often see price as the bottom-line decision factor
for purchasing a PC. Therefore, whichever vendor can offer cheaper hardware on a
consistent basis is likely to see market share growth.
Finally, the miniaturization of technology makes PCs grasp on the consumer
market tenuous at best. New technologies, such as the personal device assistant (PDA’s),
are arriving every quarter at a smaller size. These products provide at least some of the
functionality of a personal computer, and that functionality is continually growing. While
some vendors are now entering these markets to maintain market presence, the future
may see small hand-held devices replacing the personal computer altogether.
Conclusions Based on the Porter Analysis
Important conclusions based on the results of a Porter Analysis. The major
competitive threat to any vendor in this industry is the degree of price competition within
the industry. This price competition is a result of a continual drop in revenue-per-unit
shipped. This average revenue drop has forced market vendors to aim for market share
dominance, in an effort to increase their clout in negotiations with component vendors.
The threat of new entrants by global companies, that can undercut the cost
structure of current market, is also an important issue. From a domestic point of view, the
emergence of niche competitors has also caused companies in this industry to take note,
as public demand for increasingly customized computers increases. Further, the steep
discounts that corporate and governmental customers demand can cost PC vendors in
their profitability. The pressure to offer the most cost effective product in these volume
orders places serious pressure on company profitability. Finally, vendor reliance on
component suppliers can put an unbalanced level of power in the suppliers’ favor. All of
these factors must be adequately managed by every vendor in the PC industry, in order to
maintain long-term company survival.
e. Globalization of the Industry
Major market players of the PC Hardware industry have already moved to
position themselves into emerging global markets. IBM, H-P and Dell are already deeply
rooted with customers in Europe, Japan, and Indo-China. As these vendors see market
saturation occur in the US, with annual PC sales beginning to level out, they have been
quick to think globally in an effort to maintain company growth.
Moreover, as developing countries take aim at narrowing the gap between
themselves and their developed counterparts, their desire to integrate information systems
for efficiency and communication gains becomes evident. Today, major gains in the
governmental sector of many developing nations are reaping the increased savings and
efficiency by using information systems for communication and collaboration by its
governmental employees. Also, in Chile, Brazil, Peru, and India innovative uses of
networked information technology bring the promise of a better future for their people.
As China recently surpassed Japan as the second largest PC market in the world,
American PC vendors were hard at work making a name for themselves in this potential
goldmine. The pull of emerging markets on the global PC industry is such that vendors
are in a race to develop a presence in these markets before domestic vendors corner them.
Yet as is being reported on a quarterly basis, the major international PC vendors have
some catching up to do in the world’s fastest growing computer market. In 2000, the
strong performance of domestic personal computer sellers sent a message to international
competitors. China's top PC vendor Legend captured 9 percent of the market, as it saw its
market share grow by over 100 percent since the year before. Legend made 4.34 million
PCs between April and June, 20 per cent higher than the previous quarter. All in all,
because the Chinese market was growing by almost 40% on a quarterly basis in 2000,
international market players see a strong motivation for continued attempts at penetrating
this market.
Today, almost every international PC vendor has a base of operations in China.
For example, Dell has a factory in Xiamen. In the most recent fiscal second quarter, Dell
said China unit volume grew 35 percent compared with only 10 percent growth in Japan.
And China now accounts for 45 percent of all of Dell's sales in the Asia-Pacific region.
Overall, Asia Pacific (including Japan) is 9 percent of total $8.5 billion in sales.5
Although Dell and other PC manufacturers have a very strong global brand, these major
U.S. companies are still being completely outsold by local vendors in developing
countries like China. In these countries, where the most common payment system is
personal check, companies using the direct sales model will have initial growing pains
while building a customer base.
f. Importance of Information Technology to the Industry
The importance of information technology to the PC Hardware industry cannot be
overstated. While marketing technology tools to consumers all over the world, this
industry has made good use of its own product line in order to gain efficiency and
increase productivity. The role of IT throughout the industry is critical to supporting all
core processes, from procurement to distribution and support. The Porter Value chain is a
powerful tool that allows analysis of the entire production processes within an industry.
With this tool, an understanding of the role of IT as a process supporter can be gained.
PC Industry Value Chain
Product and Service Flow


5
Inventory Management: IT plays an important role in supporting the inventory
processes within the PC industry by enabling vendors to track inventory levels,
automatically reorder inventory at specified intervals or triggered events. (Such as
low component levels).
Manufacturing: By electronically sending orders directly to the factory floor,
vendors are able to increase efficiency and effectiveness. IT enables detailed
electronic orders, enabling floor workers know exactly what the specifications of
each machine to produce.
“US PC maker Dell unfazed by growth of Asian vendors”. Leo Magno. ©2003 www.inq7.net



Product Delivery: Automatic customer notification of product shipment, and the
ability to track a shipment throughout the entire production process, is an ITenabled capability that increases the customer’s perceived value in the order.
Marketing and Advertising: As the web and other electronic mediums permeate
the public, opportunities for electronic marketing and web-advertisement arise.
Technical support: The efficiency of handling support requests by customers is
greatly increased as employees are able to look up specifications for a customer’s
order. This instant information awareness allows support technicians to narrow
the cause of erratic PC behavior.

IT Importance: IBM’s CRM Rollout
One very impressive example of IT exploitation in this industry is IBM’s CRM
system. In 2001 IBM Global Services launched a hosting service for customer
relationship management, with an offering intended to help companies get a CRM
application up and running faster than an in-house deployment. IBM itself already
utilized this product package in its own service and support systems, routing customer
queries and tracking responses on a global basis. This huge deployment allowed IBM to
maintain a constant understanding of what questions were being asked by what customers
and for what reason. This management package, called CRM Management Services,
allows IBM to have a much tighter relationship with customers, including the ability for
its own call centers to follow up on so called “closed” or completed customer inquiries.
This ability lets IBM gain an understanding of how the customer felt their inquiry was
handled by the company, and recommend any steps to increase efficiency or assistance to
customers in the future. The CRM services were deployed on IBM UNIX servers at
various data centers. IBM also worked with providers to provide call center functions as
part of the offering. This technology was so successful that IBM teamed up with Avaya
to offer CRM services to other customers under its Global Services packages6.
This CRM Management System represents a huge conglomeration of Information
Technology for the purpose of increasing speed and cutting costs for IBM in the future.
Further, it helps IBM form better relationships with its customers, whether corporate or
consumer.

Self-Supporting Customers
Another aspect of the PC industry’s customer relationship represents an important
trend amongst almost all PC vendors: to offer free online support to customers. In fact,
online support has become so successful that thousands of companies, tech-related or not,
have an online support area. A quick trip to any of the major PC vendor websites will
result in finding gigabytes of free online documentation, driver upgrade, or customer
bulletin boards. These online support centers allow users to help themselves and each
other, in numerous ways:
 The ability to search for results to common problems, bugs, or issues with their
PC or peripheral component. This is usually done with a vast online database that
holds hundreds of common support questions and answers. The ability to search
for one’s question online saves the vendor from having to handle the inquiry over
“IBM unveils CRM initiative”. © 2004 ComputerWeekly.com Ltd.
http://www.computerweekly.com/Article108742.htm
6
the telephone. Users are also able to electronically submit support requests to the
vendor, if they don’t see their answer listed.
 In some cases, if a user fills in a product’s serial and model number, along with
purchase date, the customer can automatically request an authorization number
for the purpose of returning the product as defective. This RMA number is sent to
the customer via email and starts a “ticket” or product issue reference. This
reference will be updated when the product is received by the manufacture. Upon
receipt, the vendor can repair, replace, or contact the customer directly regarding
future action. Much of this interaction is done with little or no human
involvement, which saves these industry players time and money in support costs.
In many cases, it is cheaper for the vendor to simply replace the product than
repair it.
 Online end-user support communities, where users ask and answer each other’s
common questions on electronic bulletin boards. These communities allow users
to post questions and answers to each other’s inquiries. This saves time and
money for the PC manufacturer – their only cost is in hosting the electronic
community.
PC vendors have saved millions of dollars and thousands of hours of support-time in
allowing customers to support themselves. Further, when a vendor has such a quality online system, users have a more positive experience with the company. Knowing that there
are volumes of information on-line dedicated to enabling users to answer their own
questions makes customers feel well-taken care of.
Section II: Company Perspective: An Analysis of Dell, Inc.
Company Profile
Dell is a perfect example of how harnessing the power of the Internet can lead to
total market dominance. Through the company’s direct model, Dell has managed to grow
from a $6 million to a $23 billion dollar company in 15 years. This is largely due to their
extension of the direct model with information technology and the World Wide Web. The
company had its beginnings when its founder, Michael Dell, began selling computer
upgrades out of his dorm room in Houston. His personal success as a salesman led Dell to
subscribe to the theory that selling direct to your customer was more profitable and
efficient than selling through middle-men. When the Mosaic web browser was developed
in 1994, Dell began to realize what this could mean for his company. He realized that the
Web gave his company the ability to directly do business with partners and customers all
over the world, at no additional overhead. An order from Japan took the same amount of
time to receive and process as did one from across the street. The seeds of selling direct
were laid, and the company has had enormous success with this philosophy. Today the
company is headquartered in Round Rock, Texas, and is currently rated has having the
largest annual percentage of market share in the PC industry. The IT-enabled direct
business model has created strong partner relationships, and stronger sales. Combined
with heavy advertising, competitive discounts, and a diversified product line, Dell’s core
business now performs $39.7 billion in annual sales.
Recent strategies by the company have included moving into PC-related product
markets, such as printers, digital cameras, laptops, PDA’s and most recently LCD TV’s.
With this expanded product offering, Dell hopes to maintain the growth that the
company, and PC industry as a whole, enjoyed during the 1990’s. Of important note is
that Dell physically manufactures none of its products – it is completely removed from
the fabrication process. Although the company does build its own computers (including
build-to-suit computer systems), it purchases all of its products’ components directly
from manufacturers. The company is able to leverage its muscle by buying components
in large quantities, while commanding steep discounts. After combining and re-branding
components into new products, Dell markets them to end-users and corporate clients.
Further, through its strong relationships with component and device manufacturers, Dell
is able to reach exclusive agreements with peripheral manufacturers that allow Dell to
market select products to customers. Such a relationship is productive for both Dell and
peripheral manufacturers because of Dell’s strong brand recognition, which the company
fostered through heavy TV and media marketing investment. Below is a brief overview
of just a few deals currently offered by Dell, because of the company’s numerous
corporate relationships:7

The company now offers deals with Netflix – an online movie-rental venue,
where customers can rent free DVD’s with the purchase of a Dell system with
a DVD player
 6 Months of AOL Membership Included with purchase of a Dell PC.
 Over a dozen KODAK products are available directly for purchase from
DELL
 The company offers various models of both Canon and Lexmark printers
 An agreement with McAfee, a PC security software vendor, enables Dell to
offer Antivirus tools at 35% off retail price. Further, Dell is allowed to
partially re-brand McAfee’s software under the Dell company name.
Dell has also extended its service and support contracts in order to capture revenue from
the services industry. The company allows customers to extend warrantee periods directly
with the company, on virtually any product Dell offers. While these products help
customers gain support, Dell’s financing options increase the affordability of every
product they offer. Indeed, under each product description is the product’s monthly
financing cost, informing potential customers how much they can expect to spend for
each product.

Company Leaders
 Michael Dell, Chairman and CEO: Michael Dell originally founded the company
with the theory that the direct model approach to sales would allow for fierce competition
with industry players already dominating the market. His presence has been integral for
Dell’s success. Dell has developed and integrated many of his theories on how to run a
business during his tenure at Dell:
o The Direct Model: This model is almost synonymous with the man himself.
Removing retailers and sales vendors from the value-chain equation enabled
Dell’s company to reap more financial rewards, have more control over their
7
Dell Home & Home Office Partners and Programs.
http://www1.us.dell.com/content/default.aspx?c=us&cs=19&l=en&s=dhs
relationships with customers, and more accurately assess the success of new
product offerings.
o Leadership on the Web: Dell’s most often-referenced innovation is using the
web to create a huge market presence. His insight into how the Internet could
be harnessed into creating a strong relationship with the company’s customers
has been the cornerstone of maintaining long-term customer business
contracts.
o Hire Ahead of the Curve: Dell started a policy that when the human
resources department considers employee applicants, that applicant’s future
role in the company should be considered, not simply what the company
needs personnel for today. Further, employees who are moving out of the
company should be prepared to consider and recommend a suitable qualified
replacement.
o Forming Alliances: Dell’s strategy for forming business relationships with
only a handful of valued component suppliers has enabled his company to
maintain high inventory velocity and turnover rates.

Jerry Gregoire, Chief Information Officer (1997 – 2000)
Although no longer with the company, Gregoire’s role in creating an IT system
that can support the company’s core processes, and scale as the company grows, was
pivotal. Gregoire was hand picked at a time when the IT department’s support system
was slow and difficult to use. Gregoire forced the department to switch from an SAP
system that was unable to handle the dramatic increase in support volume the company
was experiencing. During 1997 – 2000, Dell grew at its fastest rate, and it was up to
Gregoire to develop an IT department that could handle the loads of today and tomorrow.
Gregoire developed a proprietary, decentralized support system that allowed the
IT department to interface more flexibly with the rest of the company’s departments. The
system was dubbed Generation 2, or G-2. The G-2 system is able to handle the 60%
growth in volumes processed Further, G-2 is elegant. When new functionality or
departmental interfaces are being added, the current architecture stays on-line. The ability
for business processes to continue handling information is not lost during these upgrades.
Gregoire’s plan regarding the locality of IT required that any IT department have no more
than 100 employees. This keeps each individual IT department cell focused on supporting
the specific business process that the cell is designed to support.

Competitive Strategy Statement
Dell’s main strategy in a highly competitive environment is to be the low-cost
leader in PCs and peripherals. Through its direct model approach, the company is able to
reduce costs on product development and marketing. The company’s main long-term
strategy is market share growth, in order that it can increase its leverage with suppliers
and continue to demand deep discounts. This seems to be self-fulfilling: Dell passes these
discounts onto customers, thus increasing its user base, which increases the company’s
market share.. Further, through increased product differentiation Dell hopes to increase
sales and growth potential. The company is increasing the competitive advantage of the
direct model by applying the efficiencies of the Internet to its entire business, from sales
to support. Finally, the company employs standards-based technology in hardware and
software, in order to ensure product interoperability with existing technology.

Company Financials
Despite an industry-wide economic downturn, Dell has managed to continue solid
growth through the PC industry’s worst years in recent memory. This is largely due to the
relatively low overhead associated with the direct-model approach the company takes
with marketing its products. During 2003 Dell recorded record unit sales. While severe
competition in the industry forced revenue-per-unit to drop from 2002, the company’s
focus on cost improvements resulted in improved gross and operating margins compared
to the fiscal year before
Fiscal Year Ended
31-Jan-03
2-Feb-02
2-Feb-01
2-Feb-00
2-Feb-99
2-Feb-98
35,404
2,122
16.30%
31,168
1,246
15.60%
31,888
2,177
13.30%
25,265
1,666
10.80%
18,243
1,460
9.70%
12,327
944
7.80%
(Dollars in Millions)
Net Revenue
Net Income
Market Share
Dell has seen considerable growth over the last five years, as its market share in the PC
industry has more than doubled. While net income has grown far less quickly, the
company has shown that its business model can scale. Net revenues have more than
doubled over this time period, yet the increased costs in achieving this type of growth
have not kept the company from increasing net income on an annual basis. This is a feat
in itself, and demonstrates the cost-competitiveness of the direct model.
Net unit shipments grew 21% for fiscal 2003 compared to an industry decline of
1% (excluding Dell) in calendar year 2002, and grew 15% in fiscal 2002 compared to an
industry decline of 7% (excluding Dell) in calendar year 2001. Dell’s market share gain
of 2.3 points worldwide in fiscal 2003 was one of the best in Dell’s history.8
Of importance is that Average Revenue Per-Unit sold (ARPU) in fiscal 2003
decreased 7% compared to fiscal 2002, which was primarily due to component cost
declines and Dell’s aggressive product pricing to gain market share. It is expected that
ARPU will continue to decline as technology spending remains soft, and component cost
declines continue. However, ARPU’s are not expected to decline as strongly as in past
years, as in 2002 when the company saw an ARPU decrease 15% compared to fiscal
2001.
8
2003: Dell Fiscal 2003 Year in Review. ©2004 Dell, Inc.
http://www.dell.com/downloads/global/corporate/annual/2003_dell_annual.pdf
Fiscal Year Ended
31-Jan-03
2-Feb-02
2-Feb-01
2-Feb-00
2-Feb-99
2-Feb-98
506
5,989
10,597
520
5,075
8,841
509
4,286
8,048
508
3,538
6,163
512
2,397
4,556
17
1,643
2,975
(Dollars in Millions)
Long Term Debt
Accounts Payable
Total Liabilities
As evidenced by the table above, Dell has $506 million in long-term debt, mostly in the
form of Senior Notes due April 15, 2008.9 Accounts payable has remained low for a
company that doubled in sales over the last five years. This speaks to Dell’s strong
financial planning. The company’s total long-term contractual cash obligations amount to
1.2 billion dollars, yet with 9.9 billion in cash on hand, and a positive growth outlook, the
company is in a strong financial position.
Significance of Information Systems
There is nothing insignificant regarding the role of information systems in Dell’s
business model. As a direct vendor, most of the company’s sales are done over the web,
especially with end-users.
 The orders that customers place are authorized via an online credit verification
system. The order is then sent to the nearest geographical warehouse for handling.
An automatic verification is sent to the customer via e-mail that the order has
been received and is being processed. As the status of the order changes from one
phase of the shipping process to the next, updates are sent to the customer to keep
them updated with up to the minute information. As the order is handled,
packaged, and shipped by the warehouse, a tracking number and estimated time of
arrival is sent to the customer. Customers can then track their shipment via FedEx
or UPS.
 Any inventory restock requirements can be automatically handled by Dell’s
inventory management system. This ensures that the company never runs out of
PC components or peripherals when orders come in. The system also allows
inventory control managers to analyze the past inventory requirements individual
warehouses to plan for future needs. This helps the company budget more
efficiently and plot growth. Further, such a system allows Dell to see where all of
its orders are coming from, and plan future warehouse locations based on the most
cost-efficient geographical locations.
 Dell has a full suite of customer self-support services, such as the scale mentioned
in Industry section of this paper. The role of information systems in this service is
absolutely critical, due to the information-based nature of the company’s business.
Dell’s on-line support system allows the company to customize its internet based
product information and product guides by country, language or product region.
Information systems are so effective in this respect that the company can
automatically email a user when there is an upgrade to a driver or software suite.
9
Dell, Inc 10K Results of Operations.
http://www.hoovers.com/free/co/secdoc.xhtml?ipage=2122481&doc=1&num=8
Strengths of Dell, Inc.
The strengths of Dell’s business model have been touted numerous times over the
last 6 years. Their direct business model has been emulated on various levels by
competitors like HP and Gateway. The company’s pioneering spirit and determined
mentality, embodied by founder Michael Dell, inspire its employees to perform.
 Brand Name Recognition
The company has built one of the strongest brand names in the PC industry. Through
heavy advertising towards a young audience, younger consumers have associated the
name Dell with a high-performance product line.
 Supplier Relationships
Dell also has some of the strongest business relationships in the industry, allowing it
to offer PC peripheral manufacturers’ products under the Dell flag. With little debt, 9
billion in cash and an efficient business that consistently executes its vision, the outlook
looks strong for the company.
 Enterprise Customers
An important final strength at Dell is that 85% of new business comes from corporate
customers, not end users.10 This has financial ramifications as this type of clientele
usually has much higher data processing requirements than the average end-user, and
therefore is a much more lucrative industry.
Weaknesses of Dell, Inc.
 Global Market Penetration
Despite any company’s continued financial success in a highly competitive
environment, there are always issues to consider. In this respect, Dell is no different. The
direct business model, relative to the PC industry, was not used widely before Dell
attempted to do so. While the company has experienced growth and success in the U.S.
market, effectively penetrating globally under this model may be a far riskier proposition.
HP already has a much firmer grasp on the European market, while IBM has more
customers in Asia and Japan. As the U.S. market becomes more saturated with PC
owners over the next 10 years, Dell will be forced to make serious inroads against
International and regional PC competitors in other countries.
 Weaknesses of the Direct Model
There are some disadvantages to the direct model that should be noted. Dell has
historically sold fewer units during the holiday season than its main competitor, HP.11
This is due to the fact that holiday shoppers often prefer to get a hands-on experience
with expensive electronics purchases. While this is not as much a factor with Dell’s
corporate clients, it is a trend that the company is likely to come across as it continues its
efforts in becoming a large player in international markets.
 Advertising Requirements
“CEO Visions: Dell Takes a Broad View” © 2004 InformationWeek.com
http://www.informationweek.com/story/showArticle.jhtml?articleID=17501935
10
“HP Leads Dell in 4th Quarter PC Sales” ©2003 NewsFactor Network
(http://www.newsfactor.com/perl/story/23006.html)
11
A final consideration on the direct model is that Dell is required to manufacture and
promote its own brand recognition. While other companies can put their products on store
shelves, Dell must advertise heavily for a new customer base. The cost of advertising is
certainly not trivial, and depends heavily on the marketing tactics used in TV, radio, and
other media commercials and advertisements. Therefore Dell requires an effective
advertising vehicle with which to market its products. Having an ineffective commercial
series in a foreign country could seriously jeopardize the company’s adoption in that
region.
Conclusions
In section I of this paper we offered an overview of the industry and a look at
some common tactics, strategies, and threats to its major players. The historical
performance of the industry was considered in order to motivate the current market
environment. Finally, we used the Porter model to analyze the industry’s competitive
forces, in order to get a cohesive understanding of the industry’s makeup.
Section II offered an analysis of Dell, Inc. and discussed the company’s direct
model in reaching and forming a customer base. After examining the company’s recent
financial history, we discussed the significant role that information systems played in the
company’s success. After concluding with a perspective on Dell’s strengths and
weaknesses, the third and final section will now offer an in-depth look at the details
regarding the use of Information Systems at Dell, Inc.
Section III: Information Systems at Dell, Inc.
Information Technology, and the Internet as a business-driver, forced Dell to
completely refocus its direct-business model. Section III of this paper will analyze the
strategies that Dell employs through the usage of information technology. The focus will
examine which strategies allowed the company to compete efficiently on a global basis:
 A strategic option generator will be examined to introduce the key strategies
utilized by Dell.
 An understanding will be gained of the role of information systems, and the
relationships between senior and middle management.
 The most important point in the success of Dell is how information systems
forced the company to redefine how it implemented the direct model. A section
analyzing Dell’s usage of the internet to form stronger relationships with
customers and suppliers will be included here.
 The role of telecommunications, as a support tool for Dell’s present day version
of its direct model strategy, will be explored to develop an understanding for the
great importance of telecommunications in making a direct internet model
successful.
 Finally, a success factor profile will be used to explain the major strengths of Dell
from the success factor profile.
a. Strategic Option Generator
The strategic option generator is a conceptual model used to identify strategic
opportunities involving the use of information systems. In this section we will evaluate
how Dell successfully used IS to gain a competitive advantage over the competition.
Strategic Option Generator For Dell, Inc.
Target:
For Dell, the target has always been the customer. By providing a web
presence that supported their direct model, the company increased the
intimacy of its relationship with the customer. Michael Dell himself said
“To win as a customer-focused company, you need to use the information
you gain to forge a seamless, strategic partnership.” IS allowed Dell to
establish virtual integration, which is the concept of bringing the customer
into your enterprise and treating them like a partner.
Thrust:
Dell’s primary tactic mirrors that of every major player in the PC industry:
to be the low-cost leader. The long-term goal for Dell is market share
leadership, and to this end they focus on total unit volume sold. This
results in aggressive price wars with other vendors in the industry, at the
expense of potential profits.
Dell also has been shooting for the goal of sustained hypergrowth. For
fifteen years the company has been growing at twice the industry rate, and
Michael Dell is out to prove this is sustainable by quick adaptation to new
trends.
Alliances are a second supporting process to increase the primary goal of
price-leadership. Dell takes great pride in its handful of chosen worldclass component suppliers. The relationship with these partners is so close
and critical to Dell, that Michael Dell himself describes them as a true
alliance.12
Mode:
From day one Dell has focused on thinking offensively. Dell has always
opted to be a trend setter - whether in competing with a direct model,
moving to capture new trends, or investing heavily into advertisement.
Direction:
Both customers and employees require the IS architecture that supports
Dell’s business model. Customers require the web site to order products
and receive support, while employees utilize the internal networks to
communicate, handle inventory, and share information with supplierpartners.
b. Roles, Roles and Relationships
The use of information systems at Dell supports the company’s core philosophy
on building relationships with the customer. The IT group’s current mission is to devote
75% of their IT team to research and development by 2005. This means the company
must have an extremely stable and scalable IS foundation for the core company processes
to continue with only 25% of the IT department “keeping the lights on”. Randy Mott,
Dell’s current senior VP and CIO at Dell, admits this can be painful as most development
teams have a tendency to want to do patchwork on older IT systems instead of focusing
on solutions that make those old systems obsolete.
Previous to Mott, the CIO at Dell was Jerry Gregoire. Michael Dell himself
convinced Gregoire to leave Pepsi in order to help manage the huge IT organization.
More specifically, Michael wanted Gregoire to change the IT department’s view of its
role in the company. In early 1993, Dell was facing deteriorating profit margins while
inventory and accounts receivable were piling up. In the company as a whole, each
segment, from accounts receivable to information systems, saw itself as an island within
the company. In essence, Dell as an enterprise was being run as a number of small
segments that occasionally interacted. The IS group, for example, would say “We’re the
IS group and our job is to create information systems,” rather than, “we’re the IS group
and our job is to facilitate the flow of information to our employees, customers and
shareholders”.
Gregoire’s first act in refocusing the IS department was to wean the company
from a floundering SAP implementation. It took his leadership to finally put an end to a
system that was too large and non-intuitive for employees to use. Gregoire’s reasoning
was that such large implementations weren’t flexible enough, and that departments that
used them would be completely dependant on the system’s vendor for any innovations
that improved the SAP.
As he took on the role of the CIO position, Gregoire stressed the importance of
system flexibility. At an IT industry presentation, Jerry stated what he believed the
critical concepts that a CIO should consider: "First, the architecture strategy must be open
and flexible", he stated, "and the applications should bring empowerment instead of
12
Direct From Dell: Strategies that Revolutionized an Industry. 1999. Michael Dell
presenting obstacles to the business managers"13. He also stressed some key
characteristics in this philosophy:
 Common systems should possess a global look and feel.
 Applications should require no training, and they should be intuitive to the end
user.
 Systems should be able to be individually tailored to suit the end user's unique
requirements.
When Gregoire formally proposed his strategy for the IS department to the CEO, he
named it G2. The strategy’s focus is preventing "the layering of problems around a
broken core". By designing custom technologies tailored to increase competitive
advantage, utilizing “best of breed” applications, and instituting company-wide common
interfaces for a low learning curve, Gregoire believed the IS department would add
significant value to the core processes at Dell. Gregoire was able to garner Michael Dell’s
full support in this IS division revamp by presenting the following key principals of the
G2 strategy:
 Nothing should be limited by size - everything should be scalable through the
addition of servers.
 The principle future application interface should be a web browser.
 Key programming should be done using languages like Java or Active X.
 Message broker technology should be used for application communication
and interfacing.
 Technology selection decisions should be made on an application by
application basis - never accept less than optimal solutions.
 Databases should be interchangeable.
 Where it makes business sense, extend the life of legacy systems by wrapping
them in a new interface.
 Utilize "off the shelf systems" where appropriate.
 In house development should rely on object based technology - new
applications should be made up of proven object puzzle pieces.
Today’s result of the G2 strategy is an “invisible” IS system that supports the end user,
whether employee or customer. Through this strategy Gregoire has driven the IT
department to deliver systems which fulfill "Customer Experience" goals and visions.
Essentially, these goals entail implementing core functionality into the customer
experience while making customer interaction as easy and enjoyable as possible. The
relationship Gregoire and Dell have is pivotal to the effectiveness of Gregoire’s G2 plan.
Having the CEO give his full support on redeveloping the role of the IS department in the
company was absolutely critical for the success of the G2 strategy, and the success of
Dell as a whole.
13
“Dell Business Strategy Secrets” 1999. www.itmweb.com
c. Redefine/Define
At a meeting in 1994, Michael Dell spoke with the CIO at 3M. The first thing the
CIO told Dell was, “I really like your website.” This blew Dell away. Up until that point,
the Dell Computer website was mostly just an informational site, being a resource for
information on what PC configurations were available, technical support information, and
an FTP link for product documentation. If a CIO could find value in that, imagine what a
true on-line presence could do. After this meeting, Dell developed a basic thesis:
“The Internet will fundamentally change the way that companies do business
through its ability to enable people to conduct low-cost, one-to-one customer
interactions with rich content.”14
An important preliminary assessment when analyzing just how IT can specifically
redefine the Dell business model is to examine what value-add processes the company
currently partakes in. To compare this with what the customer actually purchases is to
have a complete idea regarding which company processes should be most focused on in
the redesign process. The following model illustrates this assessment:
Value to Customer Analysis: Dell, Inc.
Dell was convinced the internet and information systems could make a significant
difference in redesigning their core processes, because the Internet offered a logical
extension of the company’s direct model. Michael consigned Scott Eckert, one of his
executive assistants, to assist him in developing ways IS could be used to redefine the
direct business model. Eckert and Dell finally concluded there were two major ways in
which IS could extend the enterprise:
 Make it easier for customers to do business with Dell, while enhancing
and strengthening customer relationships with Dell.
14
Direct From Dell: Strategies that Revolutionized an Industry. 1999. Michael Dell

Transform the supply chain in order to strengthen supplier relationships
and drastically improve costs.
The following sections will analyze how the company implemented these extensions to
the direct model.

Making it Easier to do Business with Dell
The Internet made Dell’s direct model a worldwide tool for reaching its customer
base. Customers can access dell.com anytime, anywhere. Using the Internet also allowed
the company to add value to a customer’s experience at Dell. Along with ordering
products online, customers can:
 Check the status of orders as they moved down the manufacturing line
 Pre-configure PCs and customize the product
 Ask questions directly to dell representatives about products
 Have access to all of the same information that Dell’s own technical
support teams did.
The company found users responded positively to having a web-enabled mechanism for
purchasing and interacting with the company. Yet this was only the beginning. Dell later
created an interface for premiere customers, or big business customers with large volume
orders. This site enabled the employees of large enterprises to interact directly with Dell
through a number of mechanisms.
Each premiere account offers access to secure, customer-specific information
about Dell’s products and services. Because large enterprise purchase in bigger volumes,
their orders include discounts. With the premiere pages, these customers can configure,
price and buy systems at the previously agreed-upon price.
Dell also extended the inventory tracking functions for premiere customers to
query order tracking by detailed account purchasing reports by group, geographic
location, product, average unit price, and total dollar value. This allows premiere
customers to better manage their assets. In the support area, Dell extended its customer
support interface to allow customers to access contact information for dell account,
service, and support team members. This allows premiere customers to know what their
support contract covers, how long it is in duration, and who is the representative that
handle’s that specific customer’s issues.
Dell has also enabled its customers to access Dell’s data warehouse. Customers
can interface with the data warehouse to write custom queries beyond the reports Dell
offers by default. For example, if a company wants to know the number of PC’s they
purchased for its European operations, an employee can type in the parameters to search,
and get the results immediately.

Supply Chain Transformation
The use of Electronic Data Interchange (EDI) allowed Dell to redefine the
relationships it has with its suppliers, and dramatically increase the velocity of inventory
(VOI) inside the company. VOI is described as the speed at which inventory moves into
the company and out to the customer, and through increasing the company’s VOI, Dell
has redesigned the company’s supply chain structure to cut costs and increase efficiency.
Dell restructured its value chain by using EDI to create a direct link with its suppliers,
communicating with them up-to-the-minute inventory status and requirements throughout
Dell’s global operation.
The use of EDI allowed Dell to create vendor-managed inventories, or VMI’s,
that increased communication regarding Dell’s inventory needs and each supplier’s
order-fulfillment capabilities. Essentially, Dell was able to reach an agreement with
suppliers so that each supplier owns what they ship to Dell’s warehouses until the point
that Dell needs the parts for sale. Using the http://valuechain.dell.com supplier portal,
Dell can provide updated demand forecasts to suppliers 3 times per day. Today about
95% of suppliers use this site. This capability helped Dell forge closer ties with its
suppliers, and brings the suppliers into the company as a partner. Indeed, because of the
value chain portal, Dell routinely takes part in collaborative planning, forecasting, and
inventory replenishment meetings with its supplier partners. This new capability for
communication has allowed Dell’s suppliers to more intuitively understand Dell’s price,
time, and component requirements.
The value chain capabilities of Dell’s website allow suppliers to understand the
company’s inventory situation in real-time:
 Demand forecasting allows suppliers to know what Dell’s inventory needs
now.
 The use of dynamic pricing and merchandising allow suppliers to change their
offers for inventory components, receive the best margins, and keep the
supply chain stable.
 Suppliers can look up component and part quality standards that they must
meet in order to do business with Dell.
 On-line component tracking lets suppliers spend less administrative overhead
finding and tracking parts.
The integration of VMI’s in the Dell-supplier relationship has drastically cut the
amount of unsold inventory in Dell’s supply channel. As of 2001, Dell was turning over
their entire inventory 62 times per year15.Dell no longer buys what it believes it might
need in the future; it buys what it needs today. This redefinition of the Dell supply chain
has given the company enormous cost advantages that it then passes onto its customers.
d. Significance of Telecommunications
The importance of having a dependable global communications network to
support a company like Dell is not difficult to imagine. For a company that so deeply
integrates itself with customers and suppliers through various types of networks, the role
of telecommunications as a business enabler is obvious.
From an internal enterprise view, Dell is a company on a global scale. Operating
in 34 countries in three world regions, Dell must maintain a constant line of
communication for its employees to operate cohesively. The main network hubs of the
Dell enterprise occur at the following regional headquarters:
- Round Rock, Texas (the corporate headquarters)
- Bracknel, UK (for Europe)
“Logistics at Dell Computers”. 2001.
http://logistics.about.com/library/bllogisticsatdellcomputerschat2.htm
15
- Hong Kong, China (for Asia-Pacific)
- Kawasaki, Japan (for Japan)
Further, each manufacturing plan maintains a link with its regional headquarters. These
plants are located in Ireland, Malaysia, China, Tennessee, and Brazil.
Below is a diagram that depicts the important role telecommunications play as a
supporter to Dell’s relationships with suppliers, customers, and support processes.
The Role of Telecommunications in Supporting
Information Flows at Dell
OEMs and Component Suppliers: These rely on communications to interface
with Dell’s VMI system and check quotes on prices, component quality standards, and
inventory requirements by Dell.
Logistics: UPS and FedEx use telecommunications to interact with Dell’s
shipping and manufacturing plants in order to receive orders, quantities, and shipping
methods.
System Integrators: Interact with Dell and Dell customers in a support role to
aid in the deployment of Dell products throughout corporate enterprises.
Repair and support: Those support requirements that Dell out-sources receive
telephone customer support requests forwarded directly from Dell’s 800 number.
Regional and local repair companies automatically receive Dell customer repair orders,
complete with the customer name, address and product malfunction description. These
requests are either sent via email or faxed directly to the repair vendor.
Third Party HW and SW suppliers: These suppliers communicate directly with
Dell regarding adding support for Dell systems on various operating systems and/or
platforms. Communication with these suppliers is also a requirement for distributing
software or hardware upgrades that customers require to stay secure.
e. Success Factor Profile
This success evaluation is based on Dell’s implementation of a direct business
model that uses the Internet and EDI to lower costs and improve relationships with his
business partners. In creating a direct relationship with its customers, Dell revolutionized
the way the internet was used for E-commerce. Their ability to increase inventory
velocity and cut warehousing costs has dramatically reduced the company’s cost-ofoperations overhead.
Given the criteria for evaluating Dell, it is concluded that the following factors
were the major reasons for Dell’s continued success in the global PC market:

Business Vision
When the senior management at Dell embarked upon competing with a business
model of being direct, many analysts told them it was sure to fail. “People want to see
PC’s before they purchase them”, was an often-heard judgment. However, as early
Internet adopters were usually tech-savvy professionals, the demand for online computer
system configuration was high. Dell and his associates were able to see this fact and
capitalize upon it.
When the company decided to revamp their supply chain to further exploit the
advantages of EDI, and by extension a vendor-managed inventory system, large suppliers
were confused by the idea and slow to accept the new basis for vendor relationships. It
took the coaxing of upper management, and sometimes the replacement of suppliers in
order to create a system where 95% of Dell’s daily inventory is handled through the
direct supply chain interface.
As recently as this year, analysts were commenting that people wouldn’t want to
purchase printers direct from a vendor. Yet as of February 3rd, 2004, Dell has already sold
a million printers.16 As Michael himself put it “Let’s flip the question around, what
haven’t we been able to sell direct?” The business vision at Dell has a powerful grip on
the long term trends of the PC industry. Through rigorous analysis of the purchasing
habits of their customers, and understanding what customers demand in a relationship
with a vendor, Dell has formulated a plan to keep the company growing strongly. The
CEO himself claims Dell, Inc will have $60 billion in revenue by 2006.17 This dedication
to a strong business vision is what will maintain the long-term viability to the company as
a whole.

Culture
Dell contributes the majority of its success to the people that work there. Senior
management has worked endlessly to “engender a sense of personal investment in all
employees.”18 This boils down to three major culture tenets: responsibility,
accountability, and shared success.
o Create a Company of Owners
Senior management fosters a feeling of mutual responsibility amongst employees
by creating a company of owners. This means that every person in the company, at every
level, thinks and acts like an owner. That is, every employee strives to create the best
possible customer experience, and enhance the shareholder value. Management uses
incentives like profit pools to make success an immediate and personal value to
employees.
“Michael Dell: Where do we go from here?” http://www.pcmag.com/article2/0,4149,1501767,00.asp
“Dell wants $60B In Revenue”
http://www.informationweek.com/story/showArticle.jhtml?articleID=17300122
18
Direct From Dell: Strategies that Revolutionized an Industry, 1999. Michael Dell.
16
17
o Learn Voraciously
Learning is another important cultural value at Dell. Employees are encouraged to
approach their jobs from the standpoint of asking important questions: “What would
make my job easier, more efficient, successful or meaningful?” Management spends a
considerable amount of time listening to what their employees answer. At meetings, there
are periods where the floor is open, and anyone can ask questions to further their
understanding of why the company is taking a given route, or why isn’t it doing
something else. This encouragement of understanding by the leaders of the company
allows every employee to understand their role, and focus on their part in making the
company a more effective entity.
o Encourage Smart Experimentation
Finally, product groups, along with research and development teams are
encouraged to experiment with new types of innovation. Instead of telling employees,
“Feel free to innovate, just don’t screw up!” managers create a safe atmosphere for
failure, because important lessons have often been learned at Dell because of past
failures. The company culture at Dell is not focused on what succeeded in the past,
because of the dynamic nature of the market. Every day the enterprise is headed in
uncharted territory, and therefore must reinvent its processes to maintain competitiveness.
Therefore the company embraces its employees’ innovate experimentation by making
decisions. There are times when managers don’t have the luxury of waiting for all of the
data to be analyzed. Decisions are made based on the best available information. Indeed,
because there is a guaranteed element of risk in every new proposition, managers and
employees are encouraged to experiment – but experiment wisely.

IS Integral to the Business
Although conceptually the direct model is simple to understand, it requires a huge
support from an underlying information system to ensure consistent linkage between
Dell, its suppliers, and its customers. Information systems make all company processes
possible, from internal employee communication to order handling and warehouse
inventory management.
Because all information sent inside and outside the company can be measured and
recorded, Dell is able to analyze important metrics in measuring the success of the overall
business process19:
o Production operations
o Inventory management and turnover
o Management of Capital and cash flow
o Average product selling price
o Breakdowns on selling overhead
These production metrics have allowed Dell to remain extremely informed about how all
business processes are performing on a day to day basis.
Information Technology also allows Dell to monitor how it is performing in its
relationships with its customers. When a customer contacts a call center for a replacement
part, a Dell representative troubleshoots the PC issue. Upon conclusion on what the
malfunction is, the call center representative can electronically trigger a message that
begins the process of a replacement part being sent to the customer. Again, due to the
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“Refining and Extending the Business Model with IT: Dell Computer Corp.”
electronic nature of this process, Dell can analyze which parts are being replaced the
most often and by what types of customers. This can lead to important business decisions.
If a specific brand of component has a failure rate that is beyond the acceptable range for
management, company leaders can communicate these concerns with component
manufactures, and evaluate possible alternatives. IT support is pivotal throughout this
process; the thousands of recorded events throughout the enterprise can be quickly
analyzed to determine the real impact of any changes in the supply line.
At the end of the value chain, IT has also played a monumental role in increasing
the speed and efficiency of the order handling and shipment process. As online orders are
received by customers, they are passed through various stages of the Dell On-Line
Ordering System (DOMS). The first step in this virtually-automated system is to the
finance department, where the customer’s payment method and shipping address is
verified. If the order passes this stage, it is routed to the engineering department, where
each customized order is analyzed for feasibility. If the engineering department checks
off on the order, its next stop is the warehouse, or plant floor. A printed version of the
order is received by floor workers, complete with hardware and software specifications.
Each custom order is built, and an initial software image is loaded onto the system’s hard
disk. Corporate customers have the option of Dell loading proprietary software or
hardware into the machine, complete with custom start-up screens and company logos.
When the fabrication stage of this process is complete, the order is updated via barcode
scanning, enabling customers to track their order status. Each order is tested rigorously
for defects, and shipped to the customer. The nearly-automated nature of the order
procurement, verification, validation, and fabrication processes allows for a very fast
turnover rate from order reception, to order shipment.

Linkage to Suppliers
Dell’s close relationship with component vendors is an important key in
considering the overall success of the company. From 1992 to 1997, Dell reduced its
number of suppliers from 200 to 50. Of the remaining suppliers, 15 of these provide 85%
of Dell’s materials. Through negotiating contracts that span over multiple years, the
company is able to streamline its merchandise contract activities. These remaining
suppliers are essentially interwoven with Dell’s daily business activities. Suppliers ensure
that 2 inventory-hours exist in each warehouse at all times. Further, the majority of
components must be in the warehouse ready to be used, in 15 minutes or less. This type
of business relationship is advantageous to both parties: Dell maintains a consistent flow
of quality inventory items, and component vendors receive order sizes for their products
that few PC vendors in the industry can match.
Section IV: A Final Analysis
The Success of Dell, Inc.
a. Success Factor Profile
The overall success of Dell’s usage of information systems is apparent when an
analysis of the company’s past and present performance is performed. The company has
been growing solidly since 1990. From 1992 to 1997, the company grew 30% per year.
Net Sales for Dell, Inc. 1990-2003
40,000
35,000
Net Sales (In Millions)
30,000
25,000
20,000
15,000
10,000
5,000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Over the last 13 years, Dell has grown from $389 million in net sales to $35 billon 20. Net
income rose from $149 million in 1990 to $2.12 billion in 2003. As the chart above
details, this growth has been almost uninterrupted. These figures be attributed to many
factors, yet the implementation of a clear vision by senior and middle management,
combined with an IT-supported direct business model, are obvious reasons.
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1Jump Company Research and Business Tool. World Market Watch, Inc. http://www.1jump.com
Net Income for Dell, Inc. 1990-2003
2500
Net Income (In Millions)
2000
1500
1000
500
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
0
-500
Year
An analysis of Dell’s income over the last 13 years yields similar conclusions. Growing
from $5 million in net income to $2.2 billion proves the successful vision of the direct
model. The only drop in net income is largely due to aggressive price wars by every
vendor in the industry, combined with an economic turndown. Large and small customers
continue to buy PC Hardware direct from a reputable vendor. An intense advertising
campaign has increased brand awareness. The top-rated support service by Dell and its
partners has given the company a positive view of the company.
As the link between an IT-enabled direct model and Dell’s company success has
been made, the major accomplishments by Dell can be summarized:

Customer Integration: Allowing customers of all types to customize the hardware
and software on PCs purchased at Dell added significant value to the purchasing
experience. Creating an interface for premiere customers to track purchases,
create reports based on purchase history, and access account support services
made Dell an attractive alternative for end users and corporations alike.

Vendor Reduction and Integration: Cutting the number of component vendors
allowed a much more streamlined process of contract negotiations between Dell
and its suppliers. Allowing suppliers to interact with Dell, check the going rate of
component bidding, and forecast Dell’s inventory needs made Dell’s relationship
with its suppliers far more interwoven.

Process Outsourcing: Dell wisely outsourced many of its non-critical processes to
outside vendors. It chose top-quality partners in service and support, allowing
customers to get door-to-door customer support or product replacement.

Increased Product Line: Expansion into PC-related product lines has allowed Dell
to move into many of the emerging niche markets. New products, including
PDA’s, digital audio players, and PC peripherals has allowed Dell to maintain
revenue growth, increase brand awareness, and further exploit the cost advantages
to selling products directly.

Process reengineering: Dell redesigned the PCs they made in order to increase the
effectiveness of their fabrication personnel. Ideas that made for shorter build time
include: redesigning the system so that only five different types of screw are used,
using shorter cable lengths for ease of assembly, using fiber optics for PC
software downloads, and reducing the number of PC touches by humans 50%.
To conclude, many of the actions taken by management in the name of building customer
and supplier relationships, and increasing production efficiencies, have yielded positive
results. These undertakings by senior management have enabled Dell to consistently
compete in one of the most competitive markets in the world.
b. Have the Above factors Properly Positioned Dell for the Future?
Analysts estimate that 300 million PC’s will be shipped, on an annual basis, by
2010 . While that number roughly doubles the total market for computers in the year
2003, the average revenue per unit will continue to fall. This fact, and a continuation of
aggressive price strategies by major worldwide PC vendors, leaves the future uncertain
for everyone in this market.
While Dell has taken great strides in positioning themselves to lead the PC
industry in inventory velocity, production efficiencies, and partner relationships, it can be
counted on that major competitors will take similar actions to even the playing field. Dell
has wisely moved into other PC-related product markets, in an effort to maintain revenue
growth and brand awareness. The ability for Dell to acknowledge and compete in
emerging niche PC component markets is absolutely critical to their ability to maintain
the type of performance the company has enjoyed over the last 13 years. However, any
missteps by moving into unprofitable market segments can seriously jeopardize the future
sustainability of the direct model.
In conclusion, Dell has enjoyed a tremendously positive trend in growth for the
least 10+ years. Today the company ranks as the #1 global vendor of PC systems. The
future is bright for Dell, so long as the company is able to focus on new profitable
markets that customers are willing to buy direct from a vendor.
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