1 Executive Summary

This case study reviews the history, growth and success of Dell Inc., the world’s 3rd largest PC

maker headquartered in Round Rock, Texas. Dell Inc., named after its founder, is built on its

strategy for providing low cost products to customers; superior customer service; and virtual

integration. These strengths have enhanced the company’s reputation beyond the PC industry as

a proactive and innovative company with a unique drive for success. Despite these successes,

Dell Inc. needs to maintain its market share within the PC industry while it maximizes

potentially areas of growth and opportunity within other viable industries.

In the first half of 2010, Dell earnings fell and its profit margin was less than estimated despite

its price cutting initiative. This was due to higher component costs and increased sales of less-

profitable PCs over the holidays. This review details key components of Dell Inc., i.e., its

background, products, market strategy, competitors, opportunities, etc. Our goal is to elaborate

on what makes Dell successful while we provide recommendations that we believe will ensure

continued success for the company in the 21st century.

2 Background

Dell Inc. designs, develops, manufactures, markets, sells, and supports PC systems to 3 major

business divisions worldwide: the relationship, small and medium business, and the consumer

business. It also provides IT related services to these customers organized primarily on a product

basis, separating queues for desktops, notebooks, servers and storage, among many other

products the company carries. The relationship business division currently accounts for about

60% of Dell’s revenue; the small and medium businesses account for roughly 30% of its revenue

while consumer business and other smaller investments account for the remaining 10% of its

revenue worldwide.

Further, the company provides financial services, including originating, collecting, and servicing

customer receivables related to the purchase of its products; and financing alternatives and asset

management services. It serves corporate businesses; government, education, and healthcare

organizations; law enforcement agencies; and small and medium-sized businesses, individual

customers, and retailers. The company sells its products and services through its sales

representatives, telephone-based sales, and online at dell.com, as well as through indirect sales

channels.

2.1 History

1984: Company was founded by Michael Dell, then a college dropout who tried to grow his

burgeoning business by upgrading IBM compatibles for local area businesses. Dell benefited

from the result of the PC’s open architecture. Company’s revenue had grown from nothing to

about $6 million.
1985: Dell shifted its focus to assembling its own brand of PCs – PC limited, on a build to order

basis. By EOY, sales had grown to about $70 million.

1990: Dell’s sales had grown to over $500 million while also building its reputation as a

national supplier of desktop and portable computers based on the most recent Intel processors.

This was accomplished due to Dell’s model of low cost and by providing customers with the

ability to customize their PC configuration to meet the unique needs of the users.

1993: Experienced continued success until it faced an operating loss for the first time despite a

40% increase in sales. This was mainly due to its entry into retail channels. Realizing that the

retail channel didn’t fit the Dell direct model, the founder exited the retail channel resolving to

re-enter only when the retail channel will aid Dell’s ability to continue to leverage one of its

major attributes: the ability to customer configure its products.

1999: Dell became the leading seller of PCs in the United States, surpassing early leaders like

IBM and Compaq. The founder also had coined the phrase ‘virtual integration’ to express his

company’s strategy of choosing the best in class providers for each component and leveraging

their scale investment in R & D.

2000s: Dell experienced growth in its revenue, although there was a decline after the Y2K burst.

Dell made some forays into the server and storage businesses. Company has experienced more

successes than failures but is constantly seeking the best way to seamlessly utilize its major

attribute to capture the small and medium businesses in the areas of server and storage

businesses.

2.2 Main competitors

Dell’s primary competitors in the PC industry are IBM, Apple, HP, Compaq, Toshiba, Sony,

Gateway. In the storage and server industries, Dell competes with companies such as Cisco,
Xerox, EMC, etc.

Despite such impressive list of competitors, it has been so far very hard for companies to respond

effectively to Dell success. This is primarily due to the fact that Dell established their business

with an innovative different value chain, and a very different basis for the competitors. With its

direct model, Dell focused on the end customer as opposed to the dealer. More importantly, Dell

actually focused on customers as opposed to products. It appears that this was the key ingredient

its competitors have been unable to replicate and execute properly. At some point, Gateway was

the closest successful imitation that threatened Dell. But that did not last very long either.
3 Issues

3.1 Penetration of consumer market through retail market

In an attempt to broaden its penetration in consumer market, Dell went into partnership with

retailers in 1992, but had to work back from those agreements, when it was faced with a 5% loss

in the consumer market, compared to the 5% increase achieved at the same time in the direct

channel. The loss was in part caused by the 15% margin required by the retailers.

Dell pulled out from the consumer market in 1993, considering that its model was inadequately

prepared to reach the consumers through the retail market.

3.2 Growth in PC market as an extension to the laptop market

The laptop market seems as a natural extension of the desktop market. But in 1992 the quality

and robustness of laptops was not comparable to that of the desktops.

Dell resolved to exit the Laptop market in 1993, until the industry reached acceptable

standardization and robustness of its components.

4 Current Strategy: The Dell Direct Model

The Dell Direct Model is the engine to Dell’s success. This model incorporates three strategies:

low cost, direct customer relationships and virtual integration. It is a high velocity, efficient

distribution system characterized by build-to-order manufacturing, and products and services

targeted at specific market segments.

Low cost is the most important piece of the Direct Model strategy as it enabled Dell foray into

new PC and IT markets, and helped the company identify the next high-margin technology

product that it could create while maximizing economies of scale. Dell was gradually able to cut

into other markets by aggressively cutting cost and selling products at values sometimes 30 –

40% below the next competitor. Coupled with this is the fact that Dell provided its customers

with an ability to customize their products based on the unique needs of the users.

Despite all its successes due to the low cost approach, Dell’s focus on direct customer

relationship cannot be overemphasized. Dell excelled in customer service due to its quick

turnaround time to fix issues with PCs and servers. Typically after the shipment of a product, a

customer could either go online to www.dell.com or call for assistance over the telephone. The

phone service model was a major innovation in the PC industry which allowed Dell to handle

75% of service related calls either online or over the phone; over twice the amount of services

resolved by its closest competitor via the phone. Dell also created the Premier Access program to

address the needs of its most independent customers as well as those who had a close partnership

with a regional service provider.

Further, Dell was able to virtually integrate with its customers by leveraging the power of the

Internet. After creating a pilot team of nine people to begin delivering online technical support
and order status information, Dell was able to translate this initiative on a large scale by the

provision of ‘Premier pages’ to transactional customers. Individual employees of corporate

customers could access the premier pages and gain access to solutions for basic service issues.

Corporate MIS managers responsible for customer support went online via their premier pages to

access information regarding higher order service questions. This online model strengthened

Dell’s efficiency on both the transactional and relationship sides of its core business.
5 Analysis

4.1 Strengths of the Dell Model

 Elimination of Intermediaries led to Cost Reduction

The key to Dell’s success to date was its innovative direct business model, which focused

on selling Dell products directly to customers rather than through intermediaries. Dell

believed that the so called “middlemen” added little to no value to the end product and

that their associated fees were essentially unnecessary mark-ups for customers. By

completely cutting out these intermediaries, Dell not only reduced its customers’ costs,

but created more opportunity for itself to customize computers meeting customers’ needs

while providing superior customer service. Doing so ultimately helped Dell establish

itself as one of the most customer-centric information technology companies in operation.

 Strategic Vision

With regards to product R & D, Dell did not aspire to be the industry pioneer. Instead,

Dell created alliances with industry leading technological companies. Its aim was to

utilize its unique marketing distribution formula to generate sales of the products

manufactured by its allies. Michael Dell’s intuition about the future of the IT market

largely contributed to the success of the company. As noted in the case, Dell had the

“uncanny ability to reach out into the market and identify the next high-margin
 technology product that could be driven to scale with lower priced products driven by its

direct model.” This foresight basically eliminated Dell’s need for its own R&D efforts

and allowed Dell to pass the corresponding cost savings onto its customers.

 Show of Good Judgment

Dell’s management also exercised good judgment with respect to the launch of new

products: if new products were unpopular, Dell immediately purged them from its

offerings while it utilized its metrics to determine what products consumers tend to favor.

By monitoring changing industry/market trends, Dell was able to horizontally integrate

its business from personal computers into the server and storage markets.

 Efficient Supply Chain Management

To build an effective business process which utilizes SCM, Dell shared vital information

among all its business partners. Information sharing through the Internet reduced the gap

for business-to-business (B2B) commerce by enabling seamless integration with

enterprise processes among partner corporations. Dell developed its internal business

process by creating production cells that start assembly at the point of order. It also

established an internal information system to make the details of the products under

production electronically available to all parties within the chain.

To manage the supply of computer parts, Dell maintained close relationships with its

suppliers and logistics providers. Suppliers focused on managing their inventory while
 Dell focused on product assembly. In addition, Dell used enterprise technology to make

their database and methodologies available to the suppliers to understand how Dell

works. On the consumer side, orders made through the phone or online through

www.dell.com produced a tracking code for determining the status of a customer order at

any time through the phone or on Dell's website.

 Efficiency in Product Delivery

Dell’s entire model was efficient enough to require no more than 36 hours from order to

shipping. In terms of quality of service, Dell has won numerous awards for highest

quality. Dell continually seeks ways to increase the efficiency of the products it delivers.

For instance, the CEO suggested that reducing the human interaction with hard drives

during assembly would decrease its failure rate. As a result, Dell automated the hard

drive assembly process thus minimizing the number of failures and return rates.

 Dynamic Approach aimed at growing Business

Michael Dell model is based on keeping no inventory. Focus was on segmenting

customers into scalable businesses that can be analyzed for their level of demand. Sales

executives at Dell used communication skills to elicit information from customers that

would further support the demand forecast initiatives at the company. Dell also sent

surveys to customers to further understand the satisfaction level with the services

provided by Dell so as to modify its product line and services accordingly.

 Michael Dell discussed how regional meetings in various countries invited potential

customers to further enrich the relationship and give room for comments and feedback

about Dell's services. Dell strived to provide information for its customers to help them

make proper choices for their IT requirements and gain privileged information about new

and upcoming technologies. Dell invested in developing a web portal in the form of

"Premier Pages" for high-end customers and another for small to medium businesses at

Dell Both sites aim at providing information to customers and establishing a single point

of access for customers' IT service requirements.

4.2. Weaknesses

 Dell’s biggest weakness may be its dependency on low cost as a major driver of its sales.

This aspect is primarily directed towards the customer group, not the large and small

business. This is because the consumer group typically purchases products based on costs

and with minimal understanding of what features are important on a fully functional

system. The problem with this is that customers could potentially purchase products that

are cheaper than other competitors but may not be able to perform as well. As a result, if

these customers have bad experiences during their PC utilization, Dell’s reputation may

take a hit.

 For home users, Dell’s direct method and customization approach could pose problems.
 For one, customers cannot go to local retailers to demo Dell products since the latter does

not typically utilize distribution channel. This weakness is not as prevalent as it was in

the past. Some Dell products can now be found in electronic stores (e.g. Best buy)

although not in the quantities that competing products may be found. Customers just

can’t buy Dell as simply as other brands because most of its products are customized and

cannot be obtained immediately.

4.3. Opportunities

Personal computers are becoming a necessity now more than ever. Customers are getting more

and more educated about computers. Second-time buyers would most likely avail of Dell’s

custom-built computers because as their knowledge grows, so do their need to experiment or use

some additional computer features. Demand for laptops is also growing. As a matter of fact,

demand for laptop has overtaken the demand for desktops. This is another opportunity for Dell to

grow in other segments.

The internet also provides Dell with greater opportunities since all customers now have to do is

to visit Dell’s website to place their order or to obtain more information on products that they

might be interested in. Since Dell does not have retail stores, the online stores would surely make

up for its absence. It is also more convenient for customers to shop online than to actually drive

and do purchases at a physical store.

4.4. Threats

In a volatile market such as personal computers, threats abound. Computers change in a constant

sometime daily basis. New software, new hardware and computer accessories are introduced at a

lightning speed. It is essential for Dell therefore to be always on the lookout for new things or

introduce new computer systems. The threat to become outmoded is a pulsating reality in a

computer business. Not only that, companies must produce products that are of high quality but

low in price. This is one challenge that Dell contends with.

One of the biggest external threats to Dell is that price difference among brands is getting

smaller. Dell’s Direct Model attracts customers because it saves cost. Since other companies are

able to offer computers at low costs, this could threaten Dell’s price-conscious growing customer

base. With almost identical prices, price difference is no longer an issue for a customer. They

might choose other brands instead of waiting for Dell’s customized computers. The growth rate

of the computer industry is also slowing down. Today, Dell has the biggest share of the market.

If the demand slows down, the competition will become stiffer in the process. Dell has to work

doubly hard to differentiate itself from its substitutes to be able to continue holding a significant

market share.

Technological advancement is a double-edge sword. It is an opportunity but at the same time a

threat. Low-cost leadership strategy is no longer an issue to computer companies therefore it is

important for computer companies to stand out from the rest. Technology dictates that the most

up-to-date and fastest products are always the most popular. Dell has to always keep up with

technological advancements to be able to compete.

Also, as customers utilize the internet more and more, the competitors are being obliged to stop
using the traditional distribution channels and focus on selling products online. This can be an

important issue of concern for Dell. Once key competitors like HP and IBM will play the same e-

game, Dell’s e-business operational advantages will be reduced drastically or worse, disappear.

Those who differentiate themselves will be the only ones who survive the intense competition.
6 Recommendations

We believe that making a decision is not the issue but rather proposing measures that Dell should

take to continue to remain a force to be reckoned with within the PC/IT industry. As a result, we

will provide the following recommendations:

 Sustained Growth

To maintain and sustain its overall growth, we recommend a significant improvement in growth

in the U.S. and at least 50% increase in market share from international operations will be ideal.

Even in 2001, Dell’s growth was 26%, the lowest since 1996. Therefore, a 25% growth in the

U.S. is an achievable goal. From 1998 to 2000, Western Europe market grew by 26%, 88% in

Asia/Pacific, 78% in Japan, 52% in Latin America and 39% in the rest of the world. So an

expected 50% growth in the international market is attainable. The key is for Dell to be able to

generate substantial growth from non-U.S. Markets. Dell should expand high-end servers and

external storage market by leveraging its cost advantages, high velocity and good executions of it

unique “build-to-order” model. In addition, Dell should aggressively expand in international

markets, focusing on area of high revenue potential such as Germany, China, Brazil and Africa.

Dell could also expand into companion devices for home computers, because the role of the

computer is changing in the home. It's expanding for a broader usage in various areas. As homes

become digital, with digital music, digital pictures, digital video, digital televisions, customers

interests and needs grow in this areas, as well as the line of consumer electronics products

interacting with computers. Customers want these products to work together much more

effectively than they have in the past. That provides not only an opportunity for computer to play
a central role, in the digital home, but also for Dell to sell all the devices needed with computers.

This is actually more expanding the role of the computer, than going in consumer electronics

Business. The consumer market represents a modest percentage of Dell revenues, and it is

growing very fast, but most of Dell’s markets should continue to be businesses, institutions,

governments and larger entities. There are vast opportunities for Dell PC companion products, as

the digital home becomes a standard.

 Partnership with related companies

To get its market share in high-end servers and external storage segments of the PC/IT industry,

Dell can partner with renowned technological companies with strengths in areas where Dell is

weak. Dell already had strong partnership collaboration in PC and workstations with Microsoft

and Intel. The challenge would be to leverage this model and expand these alliances to high-end

servers and external storage where common interests exist.

 Improve Research & Development efforts

We recommend increasing the budget for R&D to go over 1.5%. The market segment is small

and mid-size companies. EMC’s products are expensive. Dell can target this market by offering

much affordable storage solutions. Low costs and prices aggressively are Dell’s strengths. On the

other hand, the potential growth in the storage market fuelled by a sharp increase in production

and consumption of data in the digital age can bring additional profit margins to Dell.

 Develop strategies for External Markets

To expand in the international markets, excellent human resources are vital. Dell did not fare as

well in foreign countries as it did in the U.S because the management teams in these countries
were not competent in those markets. This was most likely due to cultural and language barriers.

Dell should launch a program to recruit more competent managers who are natives in foreign

countries and know their markets very well. These managers should be trained in the U.S to learn

Dell’s culture, values, and management skills, and then relocated back to their homelands to take

management positions. In addition, aggressive marketing in these markets is important, not

limited to hiring more sales people, more advertising, more promotion and more distributors.
7 CONCLUSION
In its early years, Dell made a key strategic decision of going after large business customers.

That was an important decision that broadened the brand and the appeal of the company to a

much larger context and set the stage for Dell to expand into adjacent markets like servers and

storage and services.

Dell must continue to pay particular attention to the ever changing customers’ needs, wants and

demand. The company is obliged to be very vigilant and remain in a permanent state of

adaptation to meet up with the desires of its customers.

It should take advantage of its strengths, develop and put into full use the identified opportunities

while paying close attention to its weaknesses and engage in mitigating identified threats. Also,

Dell should constantly watch over identified threats that may impede the company’s growth.

Despite all odds Dell still holds today a significant portion of the market share in the industry.