DELL COMPUTER CORPORATION:
THE SUPERIORITY OF ITS BUSINESS MODEL
by
Casey Gough
A SENIOR THESIS
m
GENERAL STUDIES
Submitted to the General Studies Council
in the college of Arts and Sciences
at Texas Tech University in
Partial Fulfillment of
the Requirement for
the Degree of
BACHELOR OF GENERAL STUDIES
Approved
DR. DENNIS B. ARNETT
Department of Marketing
Co-chair of Thesis Committee
'DR. LINDA M. NICHOLS
Department of Accounting
Co-chair of Thesis Committee
Accepted
DR. DALE DAVIS
Director of General Studies
DECEMBER 1998
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ACKNOWLEDGEMENTS
As the members of my thesis committee, Dr. Dennis Arnett and Dr. Linda Nichols,
thank you very much for your guidance and encouragement throughout the writing of this
thesis. I am sincerely grateful for your input and for showing me what it takes to make a
paper work.
I would also like to thank Dr. Dale Davis for his assistance during this thesis final
reVlslon.
I would also like to thank Coby Jones for his invaluable assistance in helping me
edit this paper.
TABLE OF CONTENTS
CHAPTER
I.
II.
INTRODUCTION
1
BASIC BUSINESS PRACTICES
8
Dell Computer Corporation
III.
IV.
V.
8
Compaq Computer Corporation
10
Hewlett-Packard
13
Packard Bell
15
~ENTORYPLANNING
17
Dell Computer Corporation
17
Compaq Computer Corporation
18
Hewlett-Packard
19
Packard Bell
20
22
PROMOTION
Dell Computer Corporation
22
Compaq Computer Corporation
25
Hewlett-Packard
26
Packard Bell
28
CHANNELS OF DISTRIBUTION
30
Dell Computer Corporation
30
Compaq Computer Corporation
32
Hewlett-Packard
32
11
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Packard Bell
VI.
33
DISCUSSION AND CONCLUSION
SELECTED BIBLIOGRAPHY
35
39
III
CHAPTER I
INTRODUCTION
The computer industry is constantly evolving due to the rapid changes in
technology and customer needs. Technology innovations are creating fast-paced changes
in hardware systems (Magid, 1998). These innovations are creating a high-speed
evolution for today's computers. Moore's Law states that technology doubles every
eighteen months, leading to ever-faster microprocessors (Magid, 1998). Technology
changes are directly related to consumer needs.
As computer systems change, the service that consumers need in order to stay
satisfied with component choice, price, and satisfaction continues to evolve. With so many
choices in today's computer world, customer service has become an important aspect of
procurement. Whether it is for business or pleasure, it is imperative for computer
consumers to have the ability to personalize their options. Price directly relates to
customization because different customers have different needs. A system richly
configured for a business will be more than the recreational or first-time buyer needs or
wants to pay for. Conversely, a business will be wasting money on less expensive
inadequate hardware. Thus total customization is beneficial to meeting customer needs
and price ranges.
Buyers are also in need of constant contact with the manufacturing progress and
service representatives to answer any questions or help with any problems. By providing
readily available service, any buyer (especially first timers) can feel at ease with products.
The next logical step in servicing customers is the delivery of customized products in an
efficient manner.
Distribution ofa customer's order must be done in an efficient and user-friendly
manner. Distribution gets the end-product to the customer. Efficient ways of distribution
get a product straight to the buyer at a low cost. Distribution channels must be
recognizable to a customer. User-friendly channels are those that a consumer can
understand and trust.
Companies must find efficient, innovative, and effective business methods in order
to stay ahead of the technology curve, maintain customer needs, and produce efficient
means of distribution (Makridakis, 1990). There are two distribution approaches being
utilized in the computer market today: the direct business model (hereafter direct model)
and the distributive business model (hereafter distributive model). The direct model is one
that involves the manufacturer of a product selling directly to its end buyer. (Friedman,
1994) The distributive model is an indirect channel that starts at the manufacturer which
sends its finished products to partners such as distributors, retail stores, and resellers who
all share profits involved with sales (Friedman, 1994).
The first model discussed will be the direct model in the areas of channel length and its
effects on inventory, promotions, and distribution. Direct systems best utilize channel
length for the purpose of efficiently planning inventory, creating innovative marketing
promotions, and streamlining distribution channels (Dobler & Burt, 1996). Reduction of
channel partners means that direct companies eliminate all partners between the
manufacturer and the end consumer (Rea & Ketzner, 1998). The elimination of partners
2
reduced channel noise (Dobler & Burt, 1996). Through personalized customer contact,
information, attitudes, problems, and image can be addressed in the manner intended by
the manufacturer.
The absence of channel partners simplifies the distribution processes. Orders are
taken by the manufacturer and are sent to the customer (Dobler & Burt, 1996). The
manufacturer decides the methods by which the products are ordered. The most popular
methods are by phone, catalogue, Internet, and sometimes fax. Getting an order to a
customer is also a matter of selection. Mail is the most common way to deliver the
finished products (Karp, 1998). The product is sent to the buyers selected location. The
customer has the option of receiving the product overnight or in a matter of days.
Distribution methods are streamlined in the direct model. By maintaining channel
efficiency, direct model companies compete through controlling inventory, utilizing direct
feedback, and simplified distribution methods.
The second model discussed is the distributive model in the areas of channel length
and its effects on inventory planing, marketing strategies, and channels of distribution.
Distributive models utilize channel partners in order push its products through retail
channels (Dobler & Burt, 1996). Relationships with retailers, resellers, and distributors
are essential in the sales and promoting of products. Distributive marketers rely on third
party vendors for forecasting of demand in inventory planning, promotions, distribution
(Dobler & Burt, 1996).
The presence of channel partners in inventory planning creates inventory planning
based on speculation. The distributive model relies on demand forecasts to control
4
inventory (Dobler & Burt, 1996). The demand is calculated based on speculation. Third
party vendors request products for delivery and then sell the products through retail stores
(Dobler & Burt, 1996). Third party vendors rely on the finished goods that have been
pre-manufactured and configured. Inventory consists of components as well as finished
products at manufacturing as well as vendor warehouses (Dobler & Burt, 1996). A
surplus must be maintained to accommodate any sudden increases that might occur in
sales (Dobler & Burt, 1996). This is to prevent the occurrence of out-of-stock
merchandise that leads to customer dissatisfaction reflected on the retailer and the
manufacturer. The relationships between the channel members are the cornerstone of
effective inventory management. Forecasts of demand, number of orders placed by third
parties, and surplus inventories make up the inventory planning of distributive models.
The presence of channel partners in marketing creates a fellowship between the
companies involved. The relationship that distributive companies have with their retailers
dictates whether the channels of distribution are effective (Dobler & Burt, 1996).
Distributive models keep close ties with the vendors selling its products. The necessity for
close channel relationships rides on the concept that the retailer is not only selling a
product but selling the manufacturer name and reputation. The vendor selling the products
of the manufacturer shares the reputation of the product as well. Manufacturers leave the
majority of customer service responsibility in the hands of the vendors (Dobler & Burt,
1996). As a result, vendors have more direct contact with customers than the
manufacturer does. Customer feedback flows from the customer, to the vendor, then to
the manufacturer. (Dobler & Burt, 1996) All parties of this process must trust one
5
another to assure customer feedback is accurately delivered to the manufacturer. The
result of effective flow of information throughout the channel member results in quality
customer satisfaction and maintenance of quality products. The codependent relationship
that manufacturers have is based on the ability to serve customers and maintain a good
reputation for all parties involved.
The presence of channel partners in the distributive model elongates the gap
between manufacturers and end consumers. Manufacturers assemble goods
predetermined by the retail merchants. These goods should supply a product that best
suits the customers' needs at that point and time. The pre-determined order is filled, and
shipped in the quantity required by the retail merchant (Rea & Ketzner, 1997). The Preconfigured, mass quantity orders are then set out on display or stored in warehouses until
sold to the consumer (Rea & Ketzner, 1997). The distributive model lengthens the
channel by adding non-value-adding members to the distribution process. These nonvalue-adding processes can increase costs to the consumer and increase time to market. If
not properly handled, increased time to market could lead to an over stocked inventory.
The overstock is directly related to the quickly changing technology based field.
The direct and distributive models are represented by the companies to be
compared in this paper. The direct model is the model that Dell uses in order to establish
market dominance over today's computer corporations. Representing the distributive
model are Compaq Computer Corporation (hereafter Compaq), Hewlett-Packard, and
Packard Bell NEC, which are top contenders in the computer industry. Throughout their
success, these companies have utilized the distributive model.
6
This comparison brings up an important question about Dell, Compaq, HewlettPackard, and Packard Bell NEC. Is the Dell Computer Corporation's Direct Business
Model superior to its competitors that use the Distributive Business Model? This paper
will examine this question by comparing the operations of three different computer
companies with those of Dell. The three companies chosen for this analysis are Compaq,
Hewlett -Packard, and Packard Bell NEC. These companies have all been chosen because
they are all major competitors of Dell. This paper will conduct an in-depth analysis of
each company's inventory planning, promotion, and distribution processes.
7
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CHAPTER II
BASIC BUSINESS PRACTICES
Dell Computer Corporation
In order for Dell to distinguish itself from its competitors, it has mastered several
business processes. Dell's approach creates a direct link between the company, home-PC
users and large international corporations. Dell has bypassed the third-party retailers and
resellers in order to relinquish unnecessary time constraints and expenditures. The choices
by Dell were chosen so that it can help meet consumer needs. There are several reasons
why Dell's clients are accepting the direct model as a preferred means of purchase. Price
by performance, service and support, present technology, and superior shareholder value
all highlight the clients' concerns.
Dell has implemented "price by performance." It has taken out all the intermediate
steps between manufacturing and purchasing. These steps alleviate wasteful expenditures
for both Dell and its customers. Steps eliminated include the passing of finished products
from the manufacturer to retailers such as CompUSA, Best Buy, and Computer City and
finally to the home-PC user. Dell perceives these channel relationships as bottlenecks in
supply and customer service. The more control Dell obtains, the better price, service and
quality it can supply. Dell utilizes this added control to more effectively control inventory.
Dell uses a Just-in-Time (JIT) inventory management system. The JIT system reduces
8
inventory costs, thereby reducing cost to the consumer. Dell continues to keep costs low
through effective inventory acquirement and an efficient product assembly plant.
(Dell Online, 1998)
Dell provides customization to their clients. Dell takes specific orders from clients
and builds the computers to their specifications. It offers every customer the exact
components designated for a personalized computer. Dell offers all parties precisely what
they prefer.
Dell has implemented a superior service and support system. At the moment a
transaction takes place, Dell records the information of each contact. These contacts are
stored on a relational database for future support. Dell uses this information to customize
service and support for each individual. When a customer calls Dell, the customer service
representative will have the customer's information immediately available. This information
includes the name of the customer, the last contact date, the type of computer(s)
purchased and any past problems. With this information at hand, the representative is able
to impress the customer with specialized knowledge. Dell's customized service and
support has made it the object of critics' praise.
(Dell Online, 1998)
Dell uses the latest technology to construct computers. It has an extremely
proficient system of manufacturing products. Dell capitalizes by utilizing only the newest
technology pertinent to today's computer systems. The technology is introduced to
customers directly from the manufacturer at earlier intervals than possible through other
manufacturers. Dell accomplishes this task via an efficient production process, JIT
9
inventory system and the delivery of the latest technology in ten days or less. This quick
turnaround time is possible because ofthe lack of channel relationships.
(Dell Online, 1998)
Dell enjoys superior shareholder value. Dell stock has grown to be twice as
valuable as it was a year ago. It was gauged by Nasdaq and Standard & Poor as a
topnotch stock in the area of achievement in the years of 1996 and 1997. Dell stock is
merited as a loftier performer than most others on the Dow Jones World Stock Index.
(Dell Online, 1998)
Dell continues using consumer relations, record growth, and superior economic
ability to uphold rising product demand in order to maintain competitive market
advantages and, ensure direct distribution.
Compaq Computer Corporation
Compaq continues to be one of the top international PC corporations. Compaq is
aggressively pursuing customers. The computer market is ever changing with the needs of
consumers and technology. Compaq intends to change tactics to meet the needs of
customers through service and support as well as more effective distribution channels.
Compaq believes that it can achieve the objective of retaining a top three spot by the end
of the decade. These tasks will all be accomplished while attempting to preserve the same
quality image.
Compaq considers service and support the feature that sets it apart from the
competition. Compaq places emphasis on customer relations as an integral component of
10
o
its corporate culture. Compaq has been able to solidify a reputation for service and
support through the implementation of CompaqCare. CompaqCare provides product
maintenance assistance program that operates 24-hours day and assists Compaq customers
for the life of the product. This program gives customers the opportunity to solve
technical difficulties from convenient locations such as the Internet, authorized dealers,
and trained technical support teams. Through these quality programs all desktop, portable
PCs, and servers are replaced or repaired by Compaq free of charge.
(Compaq Online, 1998)
Compaq is now investigating multiple distribution channels. While keeping the
same retailers and resellers, Compaq is exploring opportunities in multiple distribution
channels. Compaq is gearing distribution channels to best meet its customers' needs.
Compaq is attempting a type of direct model for small businesses in the U.S. named
DirectPlus. The strategy has been engineered to offer less expensive computers with more
popular software used in the environment of smaller businesses. Compaq hopes to
accomplish the DirectPlus approach by dealing with customers in a more personal manner.
A plan to utilize close contact channels in order to deal with small business customers is
called the Optimized Distribution Model (ODM). There are three types of systems
involved in the Optimized Distribution Model. The first to be implemented is the Built-ToOrder model (BTO). Midway through the summer of 1997, Compaq presented a dozen
new types of computers in the DeskPro series. This began Compaq's Built-To-Order
strategy. The BTO model is designed for the small business customer. These include
businesses with 20 to 200 employees. Compaq hopes to lower inventory levels,
11
predetermine delivery dates, and increase the number of computer configurations by
manufacturing products at the customer's request. Built-To-Order increases the chances
of consumers having a positive feeling about owning a Compaq product at a reduced
price. Compaq has experienced immediate results from additional orders being placed as a
result of the BTO program.
(Compaq Online, 1998)
Due to such a positive outcome of the Built-To-Order model, Compaq released
the Configure-To-Order program and the Channel Configuration Program in late 1997.
Configure-To-Order means that the customer orders personalized computers through a
retailer. The order is then sent to Compaq, where the computers are assembled. Then
finished computers are sent back to the retailer, where a customer can pick up the order.
The Channel Configuration Program relies on the retailer to assemble consumer orders.
Compaq supplies the partner with components that can be used to customize systems. A
consumer has the freedom to choose from certain hardware and software specifications to
build computers that suit his or her personal wants and needs. The components are
assembled at the retail store, and the customer picks up the finished products. Through
the CTO and CCP systems, Compaq wants to decrease inventory levels as well as make its
products less expensive for consumers.
(Compaq Online, 1998)
Compaq has the goal of acquiring customers with comprehensive customer service
policies and new programs implementing direct contact with small business customers in
order to obtain a more efficient system of distribution and inventory control. Compaq has
12
implemented the systems in order to give customers superior quality, increase distribution
rates, and reduce extra costs associated with an indirect model. Compaq hopes to
personalize relationships with consumers in order to grasp customer ideals.
Hewlett-Packard
In order to maximize the profits, Hewlett-Packard must consider the worth of
adequate relations with respect to customer service. These relations are conveyed through
obtaining exceptional merchandise quality and superior customer service at a low price. In
order to remain ambitious in the international market, Hewlett-Packard mandates that it
carry out research and development, manufacturing, customer support, and administrative
functions at the lowest feasible cost.
(Hewlett-Packard, Online 1998)
Hewlett-Packard equates contentment of consumers to the importance offavorable
quality management. The two concepts work in a cause-effect relationship. Therefore,
Hewlett-Packard strives to improve quality while balancing customer support. HewlettPackard stresses quality management in order to better serve its consumers.
The belief in designing consumer goods that perform at high levels for long periods
of time without fault is the basis ofthe quality management during hardware assembly.
Hewlett-Packard strives to maintain constant contact with companies from which it
purchases components. It monitors parts for quality and buys significant amounts to
assure lower prices. Hewlett-Packard requires that all of its suppliers maintain the same
level of quality assurance for which Hewlett-Packard is known. These types of quality
13
,, "
..--
...
demands reduce re-manufacturing and return expenditures, thereby lowering the cost of
the final product. After parts are obtained from suppliers, Hewlett-Packard builds the
products through its quality-controlled assembly line. Hewlett-Packard maintains low
production costs throughout the whole process while maintaining hardware integrity.
Hewlett-Packard is finicky about where the finished products are to be sold.
Companies are chosen on the grounds that they provide the same corporate ideals as
Hewlett-Packard. The ideals consist of selling top quality merchandise, offering a hazardfree environment, and practicing methods of conservation.
(Hewlett-Packard, Online 1998)
Customers have a broad spectrum of needs that must to be realized in order for
Hewlett-Packard to accommodate its customer base. Hewlett-Packard gives consumers a
multitude of hardware options to meet those expectations. It is important to HewlettPackard that all products sold will be able to ful:fill any future applications that clients
might later find useful. Hewlett-Packard maintains open relationships with its customers in
order to accomplish an awareness ofthe technological needs and wants. This is
accomplished through close channel relationships. The partners within the channel
interact with customers to decipher the features that the customer most desires. HewlettPackard uses the consumers' desires to achieve requirements that fit hardware
expectations.
Packard Bell
Packard Bell NEC invents, builds, and sells a wide variety of products. These
products include desktop and notebook computers, monitors and servers. Which are best
utilized for the home, business, education and government use. Packard Bell promotes
and sells computers and other lines internationally through Packard Bell, NEC, and Zenith
Data Systems.
Packard Bell's computer lines are promoted through its homebuyer subdivision
called Ready brands. Packard Bell promotes its domestic computers as the easiest to use.
Its computer systems provide the ability to handle multiple tasks that meet customer
expectations with ease. Packard Bell also stresses the importance that consumer
satisfaction has on overall ease of operation. The Ready brand NEC computer stands for
Packard Bell's high end product options. This domestic line of computers emphasizes
user-friendly, topnotch products for household use.
(Packard Bell Online, 1998)
Packard Bell has recently implemented a more direct attempt at marketing its
products. This strategy is being implemented to combat the pressures that Dell has placed
on the rest of the market to compete in this direct market area. Clients have the choice of
either customizing hardware from a store or buying straight from Packard Bell NEC. This
can be done through the new Packard Bell NEC Computer Services Division. The
Consumer Services Division plans to team up with stores that are dedicated to the
representation of Packard Bell's developing technologies and customer service. Packard
15
Bell is offering incentives to retailers that support the Ready brand NEC computer lines.
Retailers receive the incentives by primarily selling its hardware. Incentives for Packard
Bell NEC supporters consist of monetary assistance and a wide array of cooperative
marketing techniques to increase sales and customer satisfaction.
(Packard Bell Online, 1998)
Packard Bell NEC plans on standing by the partners that endorse the product to
help in stimulating growth. Packard Bell wants to establish loyal partners in order to grow
as a corporation. With increased growth Packard Bell will double its sales force and
widen the scope of sales. By forming numerous alliances, Packard Bell hopes to reach
more customers and increase sales.
(Packard Bell Online, 1998)
Packard Bell NEC is determined to stimulate growth by establishing a more direct
means of sale. The goal is to raise customer satisfaction and build stronger alliances with
its distribution partners.
Comparing the business practices leads to the fact that Dell is more efficient than
Compaq, Hewlett-Packard and Packard Bell NEC. Dell has more efficient practices than
its competitors. Dell has no partnerships with retailers or vendors thus it is just Dell
computers and its customers. In order to further justifY Dell's superiority aspects of
processes will be discussed.
16
CHAPTER III
~ENTORYPL~G
Dell Computer Corporation
Inventory planning has been a very effective way for Dell Computer Corporation
to establish superiority over its competitors. Dell has currently improved on an inventory
stock averaging only seven days (Serwer, 1998). In business, inventory can depreciate by
1% each week (Serwer, 1998). In an industry where component costs drop more than
15% annually, this translates into a gross margin of 1.8% to 3.3% (Jacob, 1995). Dell
Computer Corporation is geared toward measuring inventory in hours (Serwer, 1998).
This time is important to consider. Every day that inventory remains unsold it depreciates.
In such a fast-moving market, it has become necessary for companies to maintain as little
inventory as possible. Inventory stock loses value and therefore increases the cost ofthe
:final product due to obsolete or out-dated technology.
Dell does not have to worry about losing money by cutting prices on obsolete
products, like the other corporations (Himmelsbach, 1997). Direct-marketer Dell builds
to order. Its inventory turns about 27 times a year, as opposed to four to seven turns for
manufacturers that sell through the distributive model (Himmelsbach, 1997). As
previously stated, Moore's law states how quickly products can become obsolete. Dell
Computer Corporation has no finished goods in its inventory. This serves to reduce costs
(Serwer, 1998).
17
----~
-
.-.--~~--~~~
Unlike competito~ Dell does not keep warebouses fuJI of parts (DeB 0nJime,.
1998). Dell frequently rereives parts just hours or even minutes before ~ a PC
to fill a customer order. This means that when component costs are fallin& DeB is buyiIIIg
new parts at the lowest price, and Dell can pass on the 10wer costs to cuswmecs DIDJre
quickly than its competitors. Dell customers thus get both the latest tedDJlogy aDd a low
price. (Dell Online, 1998)
Compaq Computer Corporabon
Compaq's inventory system is not as effedive as Dell Computer Cotporation. Its
original inventory strategy is common to all indirect systems. An imaJtories wae stomI
in warehouses and retail stores (Serwer~ 1998). Compaq ended up ",ith a huge smpJus of
inventory due to overestimation of demand (Senver~ 1998). Now Compaq .DlIlI5t get rid of
an inventory "hairbaIr (Serwer. 1998,p.I). 'I'lm bas fOICCd Compaq to take a loss 0Jll
computer sales (Sowyer. 1998). Compaq has suJIen=d fiom the compromising simabon of
large inventory (Sowyer. 1998).
In~1Y overhead is plaguing indirect PC pIaJas and
their channel partners. These large inventories relate to higber costs. and this spells trouble
for companies trying to compete with fust. Iow-cost direct sellers such as Dell ~
Corporation (Himmelsbac~ 1991).
"The changing business environment requires that indirect players re-ewIuate tbeiJr
traditional distnbution models and take steps to stay coqJditive- (Hiomdsbach"
1991~
p.I). Companies like Compaq have developed build-to-order programs. which it hopes
will reduce both financing costs and the need for price protection agreements.. as wdI as
18
Unlike competitors, Dell does not keep warehouses full of parts (Dell Online,
1998). Dell frequently receives parts just hours or even minutes before assembling a PC
to fill a customer order. This means that when component costs are falling, Dell is buying
new parts at the lowest price, and Dell can pass on the lower costs to customers more
quickly than its competitors. Dell customers thus get both the latest technology and a low
price. (Dell Online, 1998)
Compaq Computer Corporation
Compaq's inventory system is not as effective as Dell Computer Corporation. Its
original inventory strategy is common to all indirect systems. All inventories were stored
in warehouses and retail stores (Serwer, 1998). Compaq ended up with a huge surplus of
inventory due to overestimation of demand (Serwer, 1998). Now Compaq must get rid of
an inventory "hairball" (Serwer, 1998,p.l). This has forced Compaq to take a loss on
computer sales (Sowyer, 1998). Compaq has suffered from the compromising situation of
large inventory (Sowyer, 1998). Inventory overhead is plaguing indirect PC players and
their channel partners. These large inventories relate to higher costs, and this spells trouble
for companies trying to compete with fast, low-cost direct sellers such as Dell Computer
Corporation (Himmelsbach, 1997).
"The changing business environment requires that indirect players re-evaluate their
traditional distribution models and take steps to stay competitive" (Himmelsbach, 1997,
p.1). Companies like Compaq have developed build-to-order programs, which it hopes
will reduce both financing costs and the need for price protection agreements, as well as
18
allow channels to carry less inventory (Himmelsbach 1997). Vendors are trying to cut
down finished goods inventory to about half (Himmelsbach, 1997). About 18 months ago,
Compaq was turning inventory more than six times a year, Dell was getting 27 turns
(Himmelsbach, 1997). Currently Compaq has been trying to get inventory down to two
weeks. Their attempt has been unsuccessful to this point for the inventory has been lapsing
to as much as 12 weeks (Hulme & Harbert, 1998). For all these reasons, Compaq
Computer Corporation cannot compete with the same efficiency as Dell. Compaq has to
re-evaluate its inventory planning in order to make the adjustments necessary to compete
with Dell. Compaq does not enjoy the same inventory advantages as Dell.
Hewlett Packard
Hewlett-Packard has not been as effective as Dell in inventory planning.
Contrasting the two companies is the easiest way to convey the inventory differences.
Dell reported its quarterly results the day before Hewlett-Packard. Hewlett-Packard had
81 days of inventory, but Dell had only eight (Fitch, 1998). Hewlett-Packard's number
does not include the inventory in its distribution channel. This number remained around 40
days' worth. Hewlett-Packard has 121 days of inventory. This is 113 days more than Dell.
The price of that material falls 1% every week and 113 days is about 16 weeks. The result
is that Dell has a 16 percent margin advantage over Hewlett-Packards inventory carrying
costs. In addition, the merchant who sells the Hewlett-Packard computer to the customer
charges a 6% to 7% markUp. This translates to a 22- to 23-point advantage over HewlettPackard. (Fitch, 1998)
19
Hewlett-Packard has the same inventory "hairball" that the other indirect
companies possess (Serwer, 1998). In order to remedy the situation, Hewlett-Packard is
using the overstock to enter the sub- $1000 market ofPCs which is centered on the
liquidation of surplus inventory. Hewlett-Packard must release the inventory now and
take the same loss that all sub- $1000 makers have been forced to accept. (McGraw,
1998) Hewlett-Packard has no plans to abandon it's retail channels to run a completely
direct inventory model. Hewlett-Packard has 80% of its business that still prefers to buy
their products from vendors who use local merchants (Hayes, 1998). Hewlett-Packard
has slimmed down its inventory. However, it is locked into holding more inventories than
its competitors. (Hayes, 1998) Hewlett-Packard is obligated to stay in the indirect market
by alliances, sales, and client base. Hewlett-Packard cannot achieve the inventory
planning efficiency that Dell Computer Corporation has.
Packard Bell
Packard Bell has had a tough time keeping inventory levels down. It has entered
the inventory liquidation process just as Compaq and Hewlett-Packard. (McGraw, 1998)
Packard Bell has been forced to slash prices lower than the other competitors (Ricadala &
Harrington, 1998). Inventory planning has led Packard Bell to over-extend itself on
unsold finished goods (Serwer, 1998). The company has overstocked warehouses that
contain mostly obsolete hardware. This hardware will eventually be written off the books
as a loss to the company (McGraw, 1998).
20
The company must stop or at least alleviate overhead costs just as the other
competing companies. The abundance of overhead has damaged Packard Bell's ability to
increase profits (McGraw, 1998). Packard Bell has been trying to improve the inventory
levels in order to maintain a more efficient system (Serwer, 1998). The lowest levels that
Packard Bell achieved are around three weeks; however, it has continually relapse to the
twelve-week level (Hulme & Harbert, 1998). Packard Bell is suffering the same fate of
most technology manufacturers. Dell has the most efficient inventory planing system
(Hayes, 1998).
Packard Bell's carrying costs have become such a problem that it has begun to
hinder the growth of the company. A number of studies have indicated that the annual cost
of carrying a production inventory averaged approximately 25% of the value of inventory
(Dobler & Burt, 1996). For example, if Packard Bell purchases $50,000 worth of
production material and keeps it in inventory, it has this much less cash to spend on other
purposes (Dobler & Burt, 1996). Packard Bell has huge costs associated with long-term
inventory holdings.
These costs need to be brought under control if Packard Bell is to compete with
the other industry leaders Dell has continuously led the industry in inventory controls. As
has been mentioned previously, Dell keeps significantly less inventory than its competitors.
This has remained at seven days or less. Small amounts of inventory and no finished
goods in stock give Dell minimal carrying costs.
21
CHAPTER IV
PROMOTION
Dell Computer Corporation
Dell promotes itself with an average PC price between $2,400 and $2,600
(Spooner, 1998). Dell puts only the latest and best parts in its systems like Pentium II
processors (Dell, 1998). Most Dell customers are opting for Pentium II processors
because they realize it represents leading-edge technology that protects against early
obsolescence. Newer components will help the consumers' PCs meet their future
computing needs (Dell, 1998). Dell has already completed the campaign to make the
transition of its desktop PCs to exclusively Pentium II processors (Dell, 1998). In the past
years Dell has tailored its promotions to capturing the smaller PC market. The recently
introduced Dimension line is designed for small business and home users. This line has led
the industry in awards received from the leading technology publications (Dell, 1998).
PC magazine awarded Dell top honors for customer service and reliability
(Reader's, 1998). Computer Shopper awarded Dell its top honors for on-time reliable
delivery, out-of-box quality, technical-support response, overall hardware reliability, and
volume discounts ("Dell Is," 1998). Dell Computer Corporation touts itselfas the
company that will provide superior equipment and award-winning customer service. Dell
is a very customer friendly corporation. The idea of superior customer service has been
22
on the minds of the Dell CEO's since the company was conceived. Dell has effectively
positioned itself as a customer service leader through its promotions and actions within the
industry. (Jacob, 1995)
Dell allows the buyer to maintain close ties with their order. This is accomplished
by allowing customers to get product information, track shipments or receive technical
support for 6,500 hardware and software products (Maglitta, 1997). The custom Web
pages are the latest evolution in Dell's promotional strategy. "Dividing the customer base
into logical segments such as enterprise, large, medium, small, education, etc., then giving
discrete business units autonomy to make sure that each type of customer gets what it
wants' (Maglitta, 1997, p.43). This segmentation has driven Dell to the most recognized
direct marketer of business and personal PC's.
Another recently implemented addition to Dell's Web page promotion allows
consumers the ability to track their individual purchases in all areas of the production and
the delivery process. Dell has built links that let customers track shipments online after
products are shipped via Airborne Express, Federal Express, or United Parcel Service as
well as any preferred shipper (Maglitta, 1997). Each order is tagged with an ID that can be
used to pull up any systems parameters that have been sold, so that customer service
representatives have a layout of the system (Maglitta, 1997,p.43). Dell Computer's senior
online manager said, '"the service further strengthens the customer's sense of confidence
and control." (Maglitta, 1997,43) These promotions are giving Dell the ability to
overcome its competitors in the local retail market. Dell has become a master of
promoting itself through user-friendly, hands-on service.
23
Dell reaches customers through the mediums of promotion that provide coverage
to the largest segment of its target audience. Dell promotes itself in nationally circulated
catalogues, magazines, and television commercials. It has launched a massive campaign to
increase customer awareness of its offering of quality products and unparalleled customer
service. Dell no longer depends on word-of-mouth promotion.
Catalogues are sent in two-week intervals to target consumers. Dell's catalogue
includes the latest of its hardware packages as well as customization options. The latest
hardware includes desktop PCs, laptops, servers and peripherals. The catalog advertises
the Dell Web site as well as the 24 hour 1-800 number for ordering products.
Magazines provide a customer with visual product representation, written
information, and ordering information. Visual representation of Dell products consists of
a series of photographs. The photographs show many of Dell's PC's, laptop's, and servers.
The photograph is accompanied by literature describing product attributes and
applications. Ordering information accompanies the product literature. Dell supplies its
24 hour 1-800 number and Web site for ordering products. Magazine promotion visually
represents, informs and supplies information to prospective customers.
Television is the newest means of promotion for Dell. It has launched a global
campaign in order to generate product awareness. Commercials show customers needs
being met through customization. Dell has commercials for its PC, laptop, and server
lines. Each commercial covers a different line of Dell computer systems. The commercial
gives prospective customers Dell's 24 hour 1-800 number as well as the Web site for
product ordering.
24
With the new campaigns that Dell has produced, the company is attempting to
disarm the powerful name brands such as Hewlett-Packard. These brand names have long
controlled the retail market, where these large purchases are generally made. Dell would
like to dispel consumer attitudes that retail merchants are the only trusted agents for such
a large purchase. These types of advertisements are focused toward the first-time
consumer, who requires more education in the technology arena.
Compaq Computer Corporation
Compaq offers its line of computers to the business and consumer sectors. The
price range of Compaq computers varies from high-end $2,250 to low-end $1,000 (Jacob,
1995). Compaq has been forced into the lower factions of the PC market, resulting from
inventory surplus (Serwer, 1998). Compaq Computers are entering a new area of home
computers by promoting the sub- $1,000 and the cheaper $2,250 PC market.
Compaq has an established a reputation, which it uses to increase sales (Makridakis,
1990). Compaq promotes itselfby stressing quality and reliability. (Compaq Online, 1998)
Compaq stresses its commitment to provide the products of highest quality Setting the
industry standard for quality is Compaq's dedication. Compaq performs extensive audits
performed on finished goods on an ongoing basis. (Compaq Online, 1998)
This is good, but Compaq does not stress the customer's involvement in the same
fashion as Dell. Ifa customer is having problems, Compaq is unable to tell the buyer's
computer from 10,000 others. To clarifY, Dell has an ID tag on every part of every
25
computer, so that when a customer calls with problems, Dell can pull up those
specifications ofthe system. Dell also ID's every component in the system, so that it can
literally pull up relevant information on every piece contained within the product's shell.
Compaq does not offer this luxury to its customers. The systems are based on
predetermined configurations. This means a longer repair time as well as less efficiency in
fixing broken computers.
Compaq is moving to address the evolving challenges oftoday's commercial and
consumer customers while maintaining the quality it has established (Compaq Online,
1998). Compaq's goal is to remain in the top three by the year 2000. Compaq considers
itself uniquely qualified to playa strong role in technology solutions, from the Internet to
the distributed enterprise, from corporate IT users and small business to consumers.
(Compaq Online, 1998) Compaq has positioned its name and reputation upon strong
technology innovations in order to build clientele.
Compaq is not a person-to-person, direct contact business. Compaq is very
impersonal. It does not invite customers into the program like Dell. That is why Dell has
defeated Compaq in all major areas of business. Computer Shopper rated Compaq with
"lower scores across the board" when compared to Dell ("Dell Is," 1998). This survey
was conducted on out-of-box quality, technical-support response, overall hardware
reliability, and volume discounts.
Hewlett-Packard
Hewlett-Packard heightens its standing through the personal relationship it builds
26
with its customers. These relations are "shaped by two basic beliefs" (Hewlett Online,
1998,p.2). First, Hewlett-Packard believes that the company exists to satisfy real
customers' needs (Hewlett Online, 1998). Second, it believes that the needs can be met
through active participation and dedication of the whole company (Hewlett Online, 1998).
Hewlett-Packard feels that it must listen attentively to customers in order to understand
and respond to their needs and to anticipate future needs. This could be achieved by
Hewlett-Packard's plan of dedication to satisfying needs and to listening. Hewlett-Packard
has attempted to promote itself as a customer-oriented corporation through television and
print advertisements. However, this does not seem very feasible for a company that does
not have intimate customer contact. Hewlett-Packard is an indirect distributor, which
means that the dedication is bound to the distributors, resellers and retailers. This means
that the end buyer gets the least amount of customer service.
The next fundamental goal is to build positive long-term relationships (Hewlett
Online, 1998). Hewlett-Packard wants to characterize its relationships with mutual
respect for customers. Hewlett-Packard desires to create a reputation of courtesy and
integrity, by a helpful and effective response to customer needs and concerns (Hewlett
Online, 1998). However, in practice, the strong relationship is exclusive to those few
companies that place large orders. Dell Computer on the other hand, deals with all
customers on a person-to- person basis. Hewlett-Packard cannot achieve this due to an
indirect system and its dedication to the closeness ofthe channel members. HewlettPackard lacks the dependable bond that Dell has maintained with its customers. HewlettPackard relies too heavily merely on its name to promote its products (Makridakis, 1990).
27
Packard Bell
Packard Bell focuses on PCs that are at the low-end of the pricing strategies. The
high-end Packard Bell system runs $1,800 down to low-end systems that are $699.
Packard Bell hopes to use these prices to regain momentum in sales (Larson, 1998).
Packard Bell is attempting for instance, to capture the student market. Packard Bell has
spent $11.2 million on advertising this past year. Advertising is important, due to the fact
that Packard Bell is using cheaper Cyrix chips in its computers. Packard Bell is thus trying
to get back the ground that it lost, for Packard Bell lost a big piece of the low-end market
after Dell forced Compaq into the market. (Larson, 1998) Packard Bell is hoping that
buyers will be swayed by price.
Packard Bell has lost a lot of business due to extremely poor company products
(Hulme, 1998). "Resellers say that poor quality is the reason that Packard Bell NEC has
fallen from their favor" (Hulme, 1998,p.2). In this year's annual report card from
V ARBusiness, Packard Bell ranked last in every notebook subcategory and failed to rise
above fourth in any criterion (Hulme, 1998). Packard Bell is also racing to fix
"floundering relations" with its retail channel (Hulme, 1998). Packard Bell has a lot of
interior problems trying to promote itself out of a marketing chasm. Compared to Dell,
Packard Bell is overall the most inferior in market promotions and brand positioning.
Packard Bell has had big trouble with customer service and support lines. Year
after year, Packard Bell raises its investments in customer service and support, but every
28
year the company continues to be slammed for terrible performance in end-user surveys.
("Support," 1998) PC Magazine rated Packard Bell last in reader's ratings while Dell
finished at the top. Packard Bell has chosen to market to the first time-buyer. Companies
like Dell attract a more sophisticated customer that is more familiar with the product and
not as likely to have a problem. ("Support," 1998)
Dell is a superior promoter through price, customer service, and the media. Sales
for Dell have been at record highs; higher than those of Compaq, Hewlett-Packard and
Packard Bell. Dell's promotion is a direct result of sales providing sufficient evidence that
it promotion tactics are superior.
29
B
CHAPTER V
CHANNELS OF DISTRIBUTION
Dell Computer Corporation
Dell utilizes a direct marketing channel. This translates into a zero-level
distribution channel. However, Dell uses many form of media translation to receive the
orders for its products. For the purposes of viewing Dell's modes of distribution, the
customer will be portrayed as a retailer. This could be viewed as an upstream view of the
channels of distribution. This will be for the purpose of providing a transparent viewing of
Dell's perceived distribution channels.
Dell Computer Corporation receives orders directly from the phone, fax, and
Internet. These orders are responsible for 1998 fiscal revenues of$12.3 billion (Karp,
1998). Using the phone, a customer can call Dell and deal with a personal customer sales
representative (Maglitta, 1997). The sales representative takes the order to the customer's
exact specifications. The method of payment is by credit card so that Dell has the money
before the motherboard meets the chassis (Serwer, 1998). A customer's order is then
assembled with the latest high-margin components (Serwer, 1998). The order is sent as
soon as the product has been assembled. This often occurs the same day that the order is
received (Maglitta, 1997). All orders go directly to the customer within five days or less.
Dell's up-and-coming distribution channel is its Internet site. The company sells $6
million worth of computers per day online (McGraw, 1998). Michael Dell wants 50% of
sales to come from the Internet by the year 2001 (McGraw, 1998). Dell has gone
30
international with the Internet distribution channel (Maglitta, 1998). About 40 countries
in Europe and Asia have their own online stores. The Internet site offers interactive ways
to order a computer. Users log on to Dell through a password-protected site. Customers
then either configure a desired system or pick a pre-configured system. Buyers get a full
receipt immediately bye-mail. A detailed manufacturing update follows in 48 hours. The
order is sent to Dell's financial services for a credit check. After the check is done and
cleared, the order is sent to manufacturing. (Maglitta, 1998) Dell workers piece together
each individual order throughout the entire assembly process. After the computer is
assembled, Dell employees mail it directly to the customer.
Internet benefits are huge for the company and customer. Orders from the Web
have reduced phone calls to Dell sales stall from 41,000 to 25,000 weekly (Maglitta,
1998). This has enabled a 50% increase in sales productivity, because it frees up
representatives for other areas. The order itself is extremely fast and efficient. They
generally only takes six seconds to pass on. (Maglitta, 1998)
Dell uses a direct marketing strategy to distribute its products. Again, this
translates to a zero-level distribution channel. This is the point where Dell obtains its
sustainable competitive advantage. Dell's rival companies are unable to compete with the
inventory management and price based on this competitive advantage. The other
competitors have tried; but so far they have been unable to achieve a level of success
acquired through Dell's direct marketing strategies. It appears that Dell's choice to enter
the computer manufacturing industry as a direct marketer has proven to be its greatest
asset.
31
Compaq Computer Corporation
Compaq's distribution channel is not as efficient as Dell's. Compaq has the burden
of a middleman in its distribution channel. The computer vendors and retailers serve as
the middle link in the channel relationship. As noted in Chapter III, the company
developed a new refined distribution strategy, the Optimized Distribution Model. The first
strategy is Built-To-Order or BTO. BTO strategy builds products on the receipt of the
actual order (Compaq, 1998). These orders are sent in by channel partners to be filled by
Compaq (Compaq, 1998). Compaq still has to include the retailers in the channel of
distribution. The profits associated with the transaction are shared with the channel
members. The Configure-To-Order and Channel Configuration Program both configure
systems to customers' specifications (Compaq, 1998). These orders are then fulfilled
through the channel partner. Compaq provides configurable hardware to a limited number
of channel partners for the use of building products to customer specifications (Compaq,
1998). The indirect business model still has to share profits with the middleman. Compaq
has to rely on the vendors as a main channel of distribution. Direct vendors enjoy a
100%-profit model advantage (Hayes, 1998) Compaq cannot share this advantage due to
its indirect manner of business.
Hewlett-Packard
Hewlett-Packard stays with its use of vendors and retailers just like Compaq.
Hewlett-Packard has a majority of its PC business invested in the indirect business model
32
(Hulme & Harbert, 1998). Hewlett-Packard has emulated the superior Dell system, but
cannot eliminate the middleman from the system. A strong bond between the company
and the channels is important to Hewlett-Packard (Hewlett, 1998). The company wants to
stay in the channels that bring in the most revenue. Unfortunately, this forces HewlettPackard to share profits with the retailers and vendors (Hulme & Harbert, 1998). Retail
stores are Hewlett-Packard's biggest channel of distribution since it sells over 40% ofPCs
through the retail channel (Hayes, 1998). Hewlett-Packard and the retail stores continue
to share profits.
Internet sales are a part of Hewlett-Packard direct marketing efforts. However,
Hewlett-Packard does not allow for the customization ofthe product order via the
Internet (Hewlett, 1998). A customer can log on to the Web-site and order only preconfigured systems. The service also gives purchasers the ability to pick up their new
computer at the nearest authorized dealer. The absence oftme custom configuration
creates a degree of separation. In contrast, as previously stated, Dell provides custom
configured systems to everyone (Dell, 1998).
Packard Bell
Packard Bell made an attempt to sell computers direct but failed miserably. Sales
of home computers were slipping for Packard-Bell. The major concern for Packard-Bell
was the sale of computers online (Larson, 1998). Online sales of business computers were
a "nightmare" for the company. Business computers count for 25% of Packard Bell's
company sales. Packard Bell's market share, based on unit shipments, dropped down to
33
5.2 percent in 1997 from 6.1 % in 1996. The company fell down from third to fifth place.
Packard Bell has had to rethink distribution strategies and change back to the indirect
business model. The company had to re-establish ties with at least two major partners in
order to sell their products. (Larson, 1998)
Before Packard Bell switched to online sales, it sold computers to distributors that
it referred to as value-added resellers (Larson, 1998). The switch was an attempt to
emulate the online success of Dell. After Packard Bell dropped its main value-added
distributors and it did not sell as many computers as expected. Now Packard Bell realizes
that it needs retailers to sell the volume need to stay competitive. Packard Bell does not
have any technical advantages over Dell. Packard Bell does not carry the same name
recognition and reputation that Dell possesses. (Larson, 1998) Packard Bell tried to enter
a direct system and failed. In the process, Packard Bell alienated the main channel of
distribution, the resellers and vendors. Now that Packard Bell has been forced to switch
back to this system, it must repair the broken relationships.
Dell Computer Corporation proved to be superior in the channel due to quality and
reputation. The distribution channel has no channel partners thus producing superior
contact with customers. Dell has a reputation for being direct and will continue its
advantage over Compaq, Hewlett-Packard, and Packard Bell..
34
CHAPTER VI
DISCUSSION AND CONCLUSION
Is Dell Computer Corporation's Direct Business Model superior to its competitors
that use the Distributive Business Model?
Study on backgrounds show that Dell is a more efficient company. Dell has found
a way to keep surplus levels down through inventory planning. It has maneuvered itself
into a self-sufficient marketing system. Dell has also eliminated the conventional channels
of distribution for direct marketing techniques. Dell has also pioneered the Internet direct
sales. Dell has a well-planned direct model through which to sell its products.
Background analysis show that Compaq, Hewlett-Packard, and Packard Bell NEC have
much more complicated business models and theories. All three companies have inventory
problems and cannot streamline inventory surplus. All three companies market themselves
from a less personal standpoint. All three companies could not achieve the same direct
customer interaction and service that Dell has created in its distribution channels.
Compaq, Hewlett-Packard, and Packard Bell NEC have lengthy business models that do
not have the same room for efficiency as Dell. Simplicity is the key to Dell's superior
business model.
Studies ofthe Dell Direct Model lead to the conclusion that Dell is superior in the
area of inventory planning. It has no finished products sitting in inventory. Thus,
products do not depreciate in value. Dell does not overbuy computer components based
on speculated demand. Dell stocks less than ten days of parts in inventory; therefore, it
35
has the highest component turnover rate. As a result of high turnover, all Dell computer
systems are built with parts no older than 10 days. Another direct result of high turnover
is that components do not sit and depreciate in value. Dell does not lose money on parts
and thus can pass value on to its customers.
In comparison, Compaq, Hewlett-Packard and Packard Bell NEC have more
costly methods of inventory planning. Dell's competitors' inventory planning is based on
a speculation of future demand. Overstocking has become a problem. The competitors
have component inputs as well as finished products in inventory. In many cases, these
products become obsolete before transferred to the consumer. This results in the dumping
of goods. This means that Compaq, Hewlett-Packard and Packard Bell are forced to sell
inventory surplus at a loss. All three competitors will have to sell at least part of their
inventory at a loss.
Studies of the Dell Direct Model have led to the conclusion that Dell is superior in
its direct marketing capabilities. Dell has direct contact with every customer that
purchases its products. Direct contact helps Dell receive a continual flow of customer
feedback that is utilized in determining customers' future wants and needs. Customers are
the most reliable source ofthis type of information. As a result, Dell can pinpoint the
user's needs and establish the most user-friendly means of ordering products. Dell makes
the ordering experience favorable by giving customers what they want. Dell's
implementation of personalized customer service sells itself
Compaq, Hewlett-Packard and Packard Bell NEC do not have the personal
contact with every customer that a Direct Model accomplishes. Compaq, Hewlett-
36
Packard and Packard Bell NEC are faced with the problem of representation. All three
must trust retail stores to hire salespersons that are knowledgeable and trustworthy to
successfully represent their products. A computer literate sales representative at a retail
store is not a customer representative. The Distributive Model lacks an actual company
representative to assist the customer in the transaction. As a result, Compaq, HewlettPackard and Packard Bell must market other areas such as customer service, price,
reliability, and reputation, in all of which Dell has ranked with top honors.
Studies of the Dell Direct Model lead to the conclusion that Dell is superior in
channels of distribution. Dell has extremely efficient channels of distribution. The main
channels are the telephone, Internet and fax. Orders are taken through one of the three
channels to customer specifications. As soon as financial infonnation clears, teams of Dell
employees fill the order. The order is then sent out the same day it is completed.
Customers receive orders through the parcel service of their preference. Orders go
directly from the assembly line to the customer.
Compaq, Hewlett-Packard and Packard Bell NEC have tried closer relationships
with retailers than the customer. The three companies are obligated to retail channels.
Leaving out retailers would eliminate the majority of Compaq's, Hewlett-Packard's and
Packard Bell NEC's sales ofPCs. This problem creates a codependent relationship in
which either party involved cannot compromise. None of the three Dell competitors can
truly maintain direct channels of distribution.
Impressed by Dell's market dominance, Compaq, Hewlett-Packard and Packard
Bell NEC have also tried to emulate the Direct Model but have not been as successful as
37
--
Dell. Compaq, Hewlett-Packard and Packard Bell NEC cannot achieve Dell's efficiency
in inventory planning, marketing and channels of distribution. Dell continues to show that
it cannot be matched in the areas of its superior efficiency in inventory planning,
promotions, and channels of distribution.
38
...:..:::.:0:;:_
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