DELL Direct

Hadjar Homaie
December the 2nd, 2003
IT Management Course Lecture
Dr Taghi Yareh
Tehran University, ECE Department
http://www.xeegeex.net/geexLab/ITM/dell

This Lecture
Changes that Dells business model made in
Personal Computer Industry
What is Dell Direct Model and Why it is
successful
Dell Premier Pages functionality and how they
create value for dell and its customers

Dell Computer Corporation

Founded by 19-year-old Michael Dell in a dorm
room, grew by more than 50% a year over
1995-1998
Dell produces custom build PCs in a matter of
hours and producing no PC component it could
sustain a large portion of PC market comparing
to IBM, HP, Compaq, Hitachi, Sony, Fujistu,

Personal Computer
1976, Stephen Wozniak and Steve jobs, Apple
Computer, Apple PC
1980, IBM, open architecture, using off-the-shelf
components
MS Dos from Microsoft
Intel 8088 microprocessor
Tandon disk drive
Computerland and Sears Business as Retailers

In 1981 IBM commanded 42% of PC market share

while Apples share was driven down to 20%

Personal Computer
Structure of the computer industry

Vertically-integrated corporations -> Horizontal slices

Silicon platform | Computer platform | System software | Packaged application

This structure enabled IBM-PC clones like

Compaq, Hewlett Packard
One of them was DELL Computer Corp.

Dell Background
Dell: Birth and Childhood (1983 1990)
Michael Dell
University of Texas at Austin
Upgraded IBM-compatible PCs in his
spare time in dorm room. Then he
assembled entire PC with 15% discount
to established brands

On May 3, 1984 Dell Computer Corp was

officially established.

Dell Background
Dell: Birth and Childhood (1983 1990)
Efficient and Low Cost operations
Support services such as 24-hour hotline and
guaranteed shipment of replacement part

Attractive to technology literate customers

who looked for quality at a reasonable
price

Dell Background
Dell: Birth and Childhood (1983 1990)
Dell grew from nothing to

$5 million
at 1985

Dell Background
Dell: Birth and Childhood (1983 1990)
International Expansion
1987: UK
1990: Limerick, Ireland
to serve the European, middle
eastern and African markets

Dell Background
Dell: Birth and Childhood (1983 1990)
Sales In 1990: $500 million
Michael Dell became the richest person in
Texas
Emphasizing Simplicity, efficiency, agility

Dell Background
Dell: Profitless Growth (1990 1994)
Dells Model being imitated by other
vendors like Gateway 2000
undercut Dells prices by 15% - 30%

Dell Background
Dell: Profitless Growth (1990 1994)
In 1991 Dell entered Retail channel
For customers who prefer face-to-face physical-access sales process

Through agreement with CompUSA, Staples,

BestBuy, Sams Club, Price Club/Costco,
Business Depot and PC World.
Two new brands to serve this segment

Dell Background
Dell: Profitless Growth (1990 1994)
Sales grew from
$890 million in 1991
to
$2 billion in 1992

Dell Background
Dell: Profitless Growth (1990 1994)
Four new product lines in 1993
Sales grew by 40%
Dell joined top-five PC makers Worldwide

Dell Background
Dell: Profitless Growth (1990 1994)
First Operating Loss at the end of 1993
Loss of $35.8 million
Stock dropped $7 a share to $25

The Weakness was Lack of Senior Management

Michael Dell hired Mort Topfer of Motorola

Dell Background
Dell: Profitless Growth (1990 1994)
Major Problem: use of Indirect Channels
Dells operating model didnt mesh well with retail channel

Selling through the retail channel it did not

take advantage of its customization
capabilities

Dell Background
Dell: Profitless Growth (1990 1994)
Dell pulled out of retail channel in
mid-1994
the benefit of exiting retail was not just the change in our financial
condition, the real value was that forced all of our people to focus
100% on the direct model, the single-mindedness was a powerful
unifying force, Michael Dell, Direct from Dell

Dell Background
Dell: Explosive Growth (1994 1999)
Sales Grew 49% a year
From $3.5 billion in 1994
to
over $25 billion in 1999
($1.7 billion income in 1999)
Profits raised 62% annually

Dell Background
Dell: Explosive Growth (1994 1999)
US PC Market share
3% in 1994
to
16% in 1999
Became number one in US

Dell Background
Dell: Explosive Growth (1994 1999)
International PC Market share
Asian market: Penang, Malaysia in 1996
Another plant in Limerick site
2nd largest PC manufacturer Worldwide
with 9.6% share in 1999
After Compaq with 13.7% share

Dell Background
Dell: Explosive Growth (1994 1999)
Dell line of computers
Dimension and OptiPlex Desktop computers
Latitude and Inspiron Notebook computers
PowerEdge network servers
Precision Workstations
PowerValut Storage devices

Value added services

Dell Plus and DellWare
Leasing Option

Dell Background
Dell: Explosive Growth (1994 1999)
Corporate Structure
Corporate Headquarter in Round
Rock, Texas (Americas)
Dell Europe, Middle East and Africa
in Bracknell, UK,
Dell Japan in Kawasaki, Japan
Dell Asia-Pacific in Hong Kong

Sales office in 33 countries

Selling products to 170 countries

4 manufacturing facilities
Round Rock for Americas
Limerick, Ireland for Europe, Middle
East and Africa
Penang, Malaysia for Asia-Pacific
and Japan
Xiamen, China for China

Dell Background
Dell: Now (1999 - 2003)
Revenue for fiscal years:

Dell Background
Dell: Now (2003)
Strong Growth in Servers, Storage Systems
Introducing its own digital music players and LCD television/
computer monitors, and new versions of the company's Axim
handheld computers and digital projectors
Dell brings direct model to bear in network spacewith PowerConnect
3324, 3348 and 5512 switches

Dell Background
Dell: Now (2003)

Dell Background
Dell: Now (2003)
Technology Business Research (TBR) for the first time ranked Dell No.
1 in U.K. France and Germany.
In its most recent report on U.S. corporate buying behavior and
customer satisfaction for desktop computers, TBR said Dell
demonstrated strength in 10 of 13 categories and had no
weaknesses. The next-best computer supplier showed strength in only
two areas.

Dell Direct Model

Indirect Channels
Components

Component
Manufacturer

Forecast

PC
Manufacturer

Forecast

Distributor/
Reseller
Product

Corporate
Customer
Product

Components

Reseller Customized the PC to customer requirements,

installed components and provided additional service and
support

Dell Direct Model

The Direct Model
Direct Sales From the PC manufacturer to the
corporate customer or consumer
As a small startup Dell couldnt afford to create every piece of value chain,
We concluded wed be better off leveraging the investments other have
made and focusing on delivering solutions and systems to the customers
if youve got a race with 20 players that are all vying to produce the fastest
graphics chip in the world, do you want to be the twenty-first horse, or do
you want to evaluate the field of twenty and pick the best one?!, Michael
Dell, Direct from Dell

Dell Direct Model

The Direct Model
Component
Manufacturer

Components

Dell
Computer Corp.

Order

Final
Customer

Product
Components

Distributor

Bypassing the dealer channel, selling directly to consumer

Focus on Speed of Execution and Minimum Inventory

Dell Direct Model

The Direct Model Characteristics
Eliminate costs and risks of carrying large finished good
inventories
High velocity
Low-cost distribution
Direct customer relationship
Build-to-order
Just-in-time manufacturing
Products and Services aimed at specific market
segments

Dell Direct Model

The Direct Model Characteristics
Reduced channel costs: from 13.5%-15.5% to 2% of
product revenue
Latest Technology was introduced faster than indirect
channels
Dell can use IT to directly control its value chain, set
quality measures and monitor in real time how material is
flowing throughout the chain

Dell Direct Model

The Direct Model Characteristics
Managing Information to
Increase Velocity,
Track data on margins, selling price,
Utilize info. to get the suppliers in sync with the
high-velocity model

Dell Direct Model

The Direct Model Characteristics
We put it on the shelf and off the shelf!
Most of Dells suppliers keep components warehoused
less than 20 minutes away from Dells factories
Dell has small number of suppliers
Even it reduced their number from 204 in 1992 to 47 in
1997

Dell Direct Model

Manufacturing Process
No warehouse Space,
No inventory other than work in process
Manufacturing is synchronized to avoid storing parts or
finished systems
This needs close relationship with suppliers
Trust Manufactures like Sony, Logistics like UPS
No test time

Dell Direct Model

Products

For year 2002

Dell Direct Model

Customer Service
In 1986, San Francisco, Dell determines the
companys future direction:
The first: to really grow our business, we would have to target large
companies. The second: to land large companies we would have to
offer the absolute best support in the industry. That was how we
came up with the idea to provide the industrys first on-site service
for PCs. if a customer called us with a problem, wed say, Well be
out tomorrow to fix it

Dell Direct Model

Customer Service
1,300 technical support personnel
Accessible by phone 24 hours a day
90% of calls can be solved on the phone by standard
troubleshooting procedures

Dell Direct Model

Customer Service
Third-party maintenance providers like Unisys, Wang,
Decision one consulting and Digital Equipment
Tight coordination with supplier, vendors and
maintenance providers feels like Just one large

company
The rule: as few partners as possible as long as they maintain their
leadership in technology and quality

Dell Direct Model

Customer Service
In Computerworlds 1998 survey Dell ranked first in user
satisfaction followed by Gateway
According to Computerworld traditional vendors depends
too heavily on resellers that prevents them from reacting
quickly to customer needs, because resellers may place
their own interests first

Dell Direct Model

Customers And Segmentation
Transactional
Individuals or businesses who make transaction-by-transaction
buying decision - based on the Economics of the purchase
Focus on performance, specification, featured, reviews, awards

Relationship
Based on total cost of ownership TCO and price is a secondary
concern. Like business, government or education accounts in
medium-to-large organizations.
Focus on service, reliability, vendor reputation and
standardization

Dell Direct Model

Customers And Segmentation - Cash flow
Payment type
Transactional: Credit card or charged full upon delivery
Relationship: Purchase orders, Credit cards, lease agreements, Longer
payment cycles

Velocity of generating cash from orders

Transactional: less than 24 hours compared to 2 weeks for Gateway
Relationship: 40 days compared to 56 days for Dells payable
outstanding

Dell Direct Model

Customers And Segmentation
Dells customer segmentation was a direct of result
of their business model
Focus the efforts considering the profitability of the segment
About 15 percent of our total revenue is consumer
business and the rest is B2B, Kaufman
B2C keeps them in newspapers a lot, B2B keeps them in
the black, Aberdeens Allen

Dell Direct Model

Customers And Segmentation
Segmentation
Makes it easier to know the customer and identify
unique opportunities
Better attention and Focus
Bring Dell closer to customer to understand their
needs and operating environment

Dell Direct Model

Customers And Segmentation
Large Corporate Accounts Gold $5-$10 million
Largest Account Platinum exceed of $10 million
Forums for information exchange
Periodic regional Platinum Council for
discussion and interaction with Platinum accounts

Dell Direct Model

Customers And Segmentation

Worldwide PC and servers sales

First six months of 2003

Dell Direct Model

Customers And Segmentation - Demand
Understanding the future needs of customers
Telephone sales reps steer the customer toward
available products, even sales rep can match the
price of the lower-quality configuration to keep the
parts moving based on gross margins provided
and calculated by information systems.

Dell Direct Model

Customers And Segmentation - Sales
Account Executives
selling products tailored to the needs of customers

Telephone Sales Reps.

Processing orders and handling sales calls

Relationship accounts are assigned to both,

Consumers rely on sales rep

WWW.DELL.COM
First interests in the early 1990s
We

think about internet as a logical extension

of our direct model Michael Dell, Direct from Dell

Corporations and computer literate customers

WWW.DELL.COM
Developing www.dell.com
Designing Started in 1995
Emphasize on early internet leadership
Its better to be in front with an imperfect internet
implementation than to be late with the perfect Website

Site Launched in July 1996

Sales on the Web
By December 1996 : $1 Million a day
By May 2000: $40 million daily {50% of total sales}
In 2003: $16 billion

WWW.DELL.COM
Developing www.dell.com
Dell.com mirrored Dells segmentation strategy
Autonomy to deliver the contents for its segment
Dozens of regional Dell Websites
Offers customers choice and control
Resistance among Dell employees that feared that moving
to the internet would automate away their jobs ended in
focusing on higher value activities

WWW.DELL.COM
Storefront
Initially it was geared to Transactional Customers
Manual order processor
Order tracking system
Technical support manuals, FAQs, troubleshooting info.
Configuration diagrams, software upgrades, device drivers

WWW.DELL.COM
Storefront
Later, Internet Proved to be a natural, more
efficient, extension of Dells direct model
Enabled Dell to decrease the direct costs of configuration, ordering,
tracking and support for its transactional business by 15%
Efficiency of the sales process through catalogues and calls
Toll-free numbers on website would lead to sale 50% more
Less phone calls in tracking system about (two-third)

WWW.DELL.COM
premier.dell.com
Problem: Convincing large corporate customers to buy
through Web
Dell studied how they evaluated and acquired systems
Dell designed Customized Websites called Dell Premier
Pages for platinum accounts, later for gold accounts.
In fall 1997 Premier sites designed in less than a day for every customer who
has an agreement with Dell.
They place the order, it gets routed up to whoever in their company needs to
approve it, then is sent directly to us, McNair

September 2000 -> more than 50,000 Premier sites

WWW.DELL.COM
valuechain.dell.com ( extranet )
Customized Supplier Web pages
Suppliers to share real-time information with Dell
on their Capacity, quality metrics, costs
Dell to share information on customer demand,
product quality and technical customer
requirements

WWW.DELL.COM
Additional Benefits
Move of Day-to-day operations to the internet
performance reports
new product information
Increase in speed of information flow
Made information transparent for the entire organization

WWW.DELL.COM
Additional Benefits
Tracking customer Response
Ability to measure customer response in a scientific way
Real-time experiments
Rich feedback loop

WWW.DELL.COM
Additional Benefits
Change in ownership of information
Within the company and in its relationship with customer and
supplier
Erasing the information boundaries that caused inefficiency, interorganizational
Bringing customers and suppliers literally inside the business, which is
the key to a virtually integrated organization, organization linked not
by physical assets, but by information

Kiosks
Last July Dell began to experiment with kiosks in
shopping malls. 57 kiosks in nine states
Kiosks are mini-stores, 10-12 feet wide, with basic
inventory and Dell salespeople. A brick-and-mortar
mini-store with an e-commerce option
Kiosks enable mall shoppers to go in and touch and feel some of our
product and then wither order right there or go back home and order,
Kauffman

Kiosks
Advantages
In comparison to Dell site, the department stores
foot traffic contains a higher percentage of women
and shoppers who are over 56
Thought! Dells core focus will remain its direct
e-commerce model.

Conclusion
In 1997 Compaq announced a new build-to-order
manufacturing process
Compaq acquired Tandem computer in 1997
Digital Equipment in 1998
New product lines
Ended up forcing its CEO to resign in 1999
Problem: Conflicts between its traditional indirect
sales channels and its attempt to increase direct
sales

Conclusion
IBM authorized assembly program for certified
distributors and resellers to assemble IBM PCs
NEC changed its distribution model from indirect to
direct but it was unsuccessful
Why it didnt work for them?!

Conclusion
For Dell, the web was a natural extension of an
existing business model
=> no channel conflicts could ever occur
Its competitors had to put together an entirely new
delivery system

Conclusion
Merrill Lynch, November 1998
Behind the simple proposition of direct selling is a complex
infrastructure that dell has developed over 15 years
Dells service advantage may be a greater differentiator than its
10-15% cost advantage, Dell has everything we want in a tech
company, especially Focus, Dell does nothing but PCs
Dell doesnt even need the best product or price anymore, because it is
starting to own the PC space in buyers mind

Resources
1.

2.
3.
4.
5.
6.

Haim Mendelson, Dell Direct Case Study, Center for Electronic

business and commerce, Business School, Stanford University,
EC-17: Version (A) 11/01/2000
James Maguire, Insights Trends: Case Study: Dell.com, Microsoft
Business Solutions, March 3, 2003
Michael S. Dell biography and Kevin B. Rollins Biography, Dell
Computer Corporation Website, 2003
Dell Fiscal 2003 in Review, Dell Computer Corporation Website,
2003
William J. Holstein, Exclusive Interview: Dell on Dell s Future , The
Chief Executive Group, L.P. Online Exclusive, November 2003,
William J. Holstein, Dell: One Company, Two CEOs, The Chief
Executive Group, L.P. November 2003, Vol. 193