Matching Dell

Summary

In a competitive PC industry with intense price pressures, shrinking margins, and high rate of technology obsolescence, Dell identified opportunity and optimized value throughout the value chain to maximize its cost competitiveness over its nearest rivals. Dell’s innovative marketing and distribution strategy, and its just-in-time production system enabled better consumer targeting and superior operational performance which resulted in reduced channel costs, lower inventory and an industry best in turnaround time. Together these factors contributed to Dell’s competitive advantage and, in the business PC segment, translated into a net profit of 24%, 14% higher than nearest rival, Compaq (Exhibit 1).

Dell’s Direct Model

Historically the PC manufacturer’s used distributors and dealers as value added resellers. Apart from selling PC’s to customers these resellers performed important roles as educators, installers and customer service representatives in what was still a nascent industry. Over time their influence waned as customers became more knowledgeable about their PC’s. By 1996, these distributors and dealers primarily acted as middlemen chipping away at already thin profit margins and marking up the prices of PC’s – often by 5-7%. Dell’s innovative marketing and distribution strategy - Dell’s Direct Model - eliminated these costs and allowed them to enter the market with a key competitive advanage – despite the fact that they did not challenge technical standards in the industry.

Direct interface to the customers allowed Dell to understand its customers better. Finer segmentation of its target market allowed Dell to identify unique opportunities for value creation and capture. Dell focused on “knowledgeable” consumers. Unlike the personal computing market which competed on price, business consumers valued reliability, performance and customer service. Over 70% of Dell’s revenues were from business PC sales (86% of which were sold direct),...