The creation of the famous Dell computer company is one of the best success stories in the world of business. An interview with Michael Dell tells the story and shows the challenges they faced to get to where they are today.
Background (General Facts)
Dell is a computer corporation recognized for manufacturing computer systems through parts assemble. In 1983, Michael Dell saw an opportunity in using IBM compatible computers for a new assembly line that can be sold to local businesses. The idea as explained by Michael Dell, in an interview with Joan Magretta, is that in the early days of computers’ manufacturing, companies had to be able to produce every part of the system. As the industry matured, companies started to focus on single parts and to become specialized in creating items that can be assembled with other parts to prepare a computer. As a result, Dell understood that to have a competitive edge in the market, they needed to focus on activities that drive sales instead of putting capital in producing items that other manufactures are already creating.
In the 1990’s, the computer market revolved around desktops, notebooks, and network servers. Dell competed with high-end machines from IBM, HP, and Compaq with a product line that provided value-priced systems for consumers and highly reliable networked systems for business. In the late 90’s, around 40% of households owned a pc in the US. On the contrary, from the business side, around 80% of the companies still had old server and desktop machines. Management had to approve purchasing orders, which resulted in only 2.2% of servers’ sale in comparison to the total purchases for desktop PCs in 1996.
In order for Dell to achieve $7.8 billion from sales in the late 90’s, it had to skip over the traditional channels of using retail or value-added resellers (VARs) to sell directly to the consumers . The “direct-model “or as Michael Dell comments on how his new employees call it “The model” is not that all powerful system. It is simply a way for Dell to cut on the standard supply chain cycle and deliver goods directly from the manufacturer to the customer. They created partnerships with several suppliers such as Sony, Intel, and others to deliver goods effectively at the time of the order to Dell’s plant where the assembly took place. The delivery and shipment were outsourced through a dedicated service that also insured delivering the monitors directly from the supplier at the same time. Mr. Dell talks about how suppliers are benefiting from the fact that Dell buys more items from the suppliers keeping no inventory and only requesting faster delivery upon orders.
In 1996, Dell capitalized on the growing number of customers who are using the Internet and launched its online store at dell.com. The online venture then proved to be the most appropriate sales channel that matched the supply chain direct model implemented by Dell.
In its path to compete in the market, Dell had to provide additional services such as DellPlus that enabled Dell to install commercial software packages, DellWare which provided hardware and software from other vendors, and after sales and on-site support services. These actions, as described by Michael Dell, required establishing more partnerships, which Mr. Dell describes as a process of “trial and error”. The integration with partners was changing as the technology is evolving and many venders go volatile while others remain sold. Furthermore, looking for an IT company to build the online store brought in very few players, which made Dell accept the overhead of developing the portal in-house.