When Michael Dell started Dell Computer in 1984, personal computers were sold only in retail stores. Manufacturers shipped to wholesalers, who shipped to retail stores, which sold to end users.
Companies maintained expensive inventories at each stage of this supply chain. Dell thought that he could eliminate the retail channel by selling computers directly to consumers: I was inspired by how I saw computers being sold. It seemed to me that it was very expensive and it was inefficient. A computer cost at the time about $3,000 but there were only about $600 worth of parts inside the computer. And so I figured, hey, what if you sold the computer for $800? You don't need to sell it for $3,000.
And so we changed the whole way computers were being sold by lowering the cost of distribution and sales and taking out this extra cost that was inefficient. Now, what I didn't know was that the Internet would come along and now people can go on the Internet and they can go to Dell.com and buy a computer and that makes it a lot easier. I'd say the most important thing we did was listen very carefully to our customers.
We asked, what do they want, what do they need and how can we meet their needs and provide something that's really valuable to them? Because if we could take care of our customers, they'll want to buy more products from us, and they have.5 Eliminating retail stores not only reduced costs, but it also brought Dell closer to the customer, enabling it to listen better than the competition. It also eliminated sales channel inventories, which allowed Dell to rapidly bring new computers with new technology to the customer.
This eliminates the need to recycle or sell off existing pipeline inventory whenever a new model is announced. Additionally, Dell focused on its suppliers and now has one of the most efficient supply chains in the industry. Dell pays close attention to its suppliers and shares information with them on product quality, inventory, and related subjects via its secure Web site. According to its Web site, the first two qualities Dell looks for in suppliers are (1) cost competitiveness and (2) an understanding of Dell's business. In addition to computer hardware, Dell provides a variety of services
. It provides basic technical support with every computer, and customers can upgrade this basic support by purchasing one of four higher levels of support. Additionally, Dell offers deployment services to organizations to configure and deploy Dell systems, both hardware and preinstalled software, into customers' user environments. Dell offers additional services to maintain and manage Dell systems once they have been deployed. Dell enjoyed unprecedented success until the recent economic downturn.
In May 2009, Dell reported that first-quarter earnings had fallen 63 percent compared to a year earlier, and sales had dropped 23 percent. This report was on top of the prior quarter in which earnings dropped 48 percent from the same quarter a year before. The problem is not only Dell's however.
Sales were down in 2009 for other hardware vendors as well. The economy is responsible for some of this decline, and some of it is also due to the fact that customers were waiting to buy PCs after Windows 7 came out in late 2010. However, another financial result had to have been troubling to Dell. In that year, Intel reported that sales were returning to "normal patterns," and Cisco (maker of routers and other communication devices) reported that sales seemed to have bottomed out. So, the components of PCs seem to be selling, but not PCs themselves.
What might this mean? In September 2009, Dell tipped its hand as to how it views the future. On September 21 of that year, it bought Perot Systems for $3.9 billion. Perot was a provider of information systems services to health care and government customers. Clearly, Dell plans some change in its corporate strategy.
Questions
1. Explain how selling direct has given Dell a competitive advantage.
2. What information systems does Dell need to have to sell directly to the consumer?
3. Besides selling direct, what other programs has Dell created that give it a competitive advantage?
4. Consider Dell's recent financial troubles.
a. What are the implications of the company's tactics when revenue falls 63 percent but sales fall only 23 percent?
b. Intel sells CPUs and memory, and its sales have stabilized. Dell and HP make computers, and their sales continue to decline. Assume the sales of other PC manufacturers are similar to those for Dell and HP. What do you conclude?
c. Summarize what you believe the Perot purchase means about Dell's future direction. Is this a smart move for Dell? Why or why not?