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Strategic Management


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Title: Strategic Management

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Strategic Management
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Case 14
Case 14
Arthur A. Thompson, The University of
Alabama John E. Gamble,University of South Alabama
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In 1984, at the age of 21, Michael Dell founded
Dell Computer with a simple vision1 and business
concept2 that personal computers could be built
to order3 and sold directly to customers. Michael
Dell believed his approach4 to PC manufacturing
had two advantages5 (1).bypassing distributors6
and retail7 dealers8 eliminated the markups9 of
resellers, and (2) building to order greatly
reduced the costs and risks associated10 with
carrying large stocks11 of parts, components, and
finished goods12.
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While Dell Computer sometimes struggled12 during
its early years in trying to refine its strategy,
build an adequate14 infrastructure15, and
establish market credibility against better-known
rivals16, its build-to-order and sell-direct
approach proved appealing to growing numbers of
customers in the mid-1990s as global PC' sales
rose to record levels. And, just as important,
the strategy gave the company a substantial17
cost and profit-margin advantage over rivals that
manufactured PCs in volume and kept their
distributors and retailers stocked with ample18
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Going into 1998, Dell Computer had a 12 percent
share of the PC market in the United States,
trailing20 only Compaq Computer and IBM, which
held first and second place in the market,
respectively. Worldwide, Dell Computer had nearly
a 6 percent market share (see Exhibit I). And the
company was gaining21 market share quickly in all
of the world's markets. The company's fastest
growing market for the past several quarters was
Europe. Even though Asia's economic whoes in the
first quarter of 1998 resulted in a slight
decline22 in Asian sales of PC's, Dell's sales in
Asia rose23 35 percent.
  • ?? ?????? 1998 ???? Dell ?? ?? Compaq Computer ?
    IBM ?? ????? PC ?????? 12 ?? ???? ??????? ????
    ???? ?? ???? ?? ??? ???? ?? ???? ???? ?? 6
    ?????.( ???? ?? ???? 1)
  • ????? ??? ???? Dell ???? ?????? ?? ????? ??????
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    ??? ???? ?? ?????? ???? ??? ?? ????? ??? 1998
    ?????? ????? ???? ???? PC's ? ??? ????? ??
    ????35 ????? ????? ??.

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Dell's sales at its Internet Web site were
averaging 5 million a day and were expected to
reach 1.5 billion annually by year-end 1998.
Dell Computer had 1997 revenues24 of 12.3
billion, up from 3.4 billion in 1994a compound
average growth rate of 53 percent. Over the same
period, profits were up from 140 million to 944
million an 89 percent growth rate. Since 1990,
the company's stock price had exploded from a
split-adjusted price of 23 cents per share to 83
per share in May 1998a 36,000 percent increase.
Dell Computer was the top-performing big company
stock so far during the 1990s and seemed poised25
to become the stock of the decade.
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    ???? ???? ????? ???? ???.??????? ???? ?? 4/3
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    1990 ?? 83 ???? ?? 1998 ?????? ????.(36000 ???)
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Dell's principal products included desktop PCs,
notebook computers, workstations, and servers.
The company also marketed a number of products
made by other manufacturers, including CD-ROM
drives, modems, monitors, networking hardware,
memory cards, storage devices, speakers, and
  • ????? ??????? ???? Dell

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The company's products and services were sold in
more than 140 countries. Sales of desktop PCs
accounted for about 65 percent of Dell's total
revenues sales of notebook computers, servers,
and workstations accounted for about 33 percent
of revenue27. In early 1998, the company had
16,000 employees.
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COMPANY BACKGROUND At age 13, Michael Dell was
running a mail-order1 stamp-trading2 business,
complete with a national catalog, and grossing
2,000 per month. At 16, he was selling
subscriptions3 to the Houston Post, and at 17 he
bought his first BMW with money lie had earned.
He enrolled4 at the University of Texas in 1983
as a premed5 student (his parents wanted him to
become a doctor) but soon became immersed6 in
computers and started selling PC components out
of his college dormitory7 room.
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    ??????? ????? ?? ??? 1983 ????? ????? ??.??????
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He bought random-access memory (RAM) chips and
disk drives for IBM PCs at cost from IBM dealers,
who often had excess supplies on hand because
they were required to order large monthly quotas8
from IBM. Dell resold the components through
newspaper ads (and later through ads in national
computer magazines) at 10-15 percent below the
regular retail9 price.
  • ?? RAM ? Disk drive ???? ??????????? IBM

By April 1984 sales were running about 80,000
per month. Dell dropped out of college and formed
a company, PCs Ltd., to sell both PC components
and PCs under the brand name PCs Limited. He
obtained his PCs by buying retailers' surplus
stocks at cost, then powering them up with
graphics cards, hard disks, and memory before
reselling them. His strategy was to sell directly
to end users by eliminating the retail markup,
Dell's new company was able to sell IBM clones
(machines that copied the functioning of IBM PCs
using the same or similar components) at about 40
percent below the price of an IBM PC.
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    ???????? ??? ?????.

The price discounting strategy was successful,
attracting price-conscious buyers and producing
rapid growth. By 1985, the company was assembling
its own PC designs with a few people working on
six-foot tables. The company had 40 employees,
and Michael Dell worked 18-hour days, often
sleeping on a cot in his office. By the end of
fiscal 1986, sales had readied 33 million.
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During the next several years, however, PCs Ltd.
was hampered by a lack of money, people, and
resources. Michael Dell sought to refine the
company's business model, add needed production
capacity, and build a bigger, deeper management
staff and corporate infrastructure while at the
same time keeping costs low. The company was
renamed Dell Computer in 1987, and the first
international offices were opened that same year.
In 1987 Dell added a sales force to serve large
customers, began selling to government agencies,
and became a public companyraising 34.2 million
in its first offering of common stock. Sales to
large customers quickly became the dominant pan
of Dell's business. By 1990 Dell Computer had
sales of 388 million, a market share of 2-3
percent, and an RD staff of over 150 people.
Michael Dell's vision was for Dell Computer to
become one of the top three PC companies.
Thinking its direct sales business would not grow
fast enough, in 199093 the company began
distributing its computer products through Soft
Warehouse Superstores (now CompUSA). Staples (a
leading office-products chain). Wal-Mart, Sam's
Club, and Price Club (now Price/Costco). Dell
also sold PCs through Best Buy stores in 16
states and through Xerox in 19 Latin American
But when the company learned how thin its margins
were in selling through such distribution
channels, it realized it had made a mistake and
withdrew from selling to retailers and. other
intermediaries in 1994 to refocus on direct
sales. At the time, sales through retailers
accounted for only about 2 percent of Dell's
Further problems emerged in 1993. Dell reportedly
had 38 million in second-quarter losses that
year from engaging in a risky foreign-currency
hedging strategy. Also, quality difficulties
appeared in certain PC lines made by the
company's contract manufacturers, profit margins
declined, and buyers were turned off by the
company's laptop PC models.
To get laptop sales back on track, the company
took a charge of 40 million to write off its
laptop line and suspended sales of laptops until
it could get redesigned models into the
marketplace. The problems resulted in losses of
36 million for the company's fiscal year ending
January 30. 1994.
Because of higher costs and unacceptably low
profit margins in selling to individuals and
households. Dell did not pursue the consumer
market aggressively until sales on the company's
Internet site took off in 1996 and 1997.
Management noticed that while the industry's
average selling price to individuals was going
down. Dell's was going uppeople who were buying
their second and third computers, who wanted
powerful computers with multiple features, and
who did not need much technical support were
choosing Dell.
It became clear that PC-savvy individuals liked
the convenience of buying direct from Dell,
ordering exactly what they wanted, and having it
delivered to their door within a matter of days.
In early 1997, Dell created an internal sales and
marketing group dedicated to serving the
individual consumer segment and introduced a
product line designed especially for individual
By late 1997, Dell had become the industry leader
in keeping costs down and wringing efficiency out
of its direct sales and build-to-order business
model. Industry observers saw Dell as being in
strong position to capitalize on several forces
shaping the PC industrysharp declines in
component prices, rapid improvements in PC
technology and growing customer interest in
having PCs equipped with the power, components.
and software they wanted.
Exhibit 2 through Exhibit 5 contain a five-year
review of Dell Computer's financial performance
and selected financial statements contained in
the company's 1998 annual report.
MICHAEL DELL Michael Dell was widely considered
one of the mythic heroes within the PC industry
and was labeled "the quintessential American
entrepreneur" and "the most innovative guy for
marketing computers in this decade." He was the
youngest CEO ever to guide a company to a Fortune
500 ranking. His prowess was based more on an
astute combination of technical knowledge and
marketing know-how than on being a techno-wizard.
In 1998 Michael Dell owned about 16 percent of
Dell Computers common stock, worth about 10
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Once pudgy and bespectacled, Michael Dell wore
expensive suits and contact lenses, ate only
health foods, attended executive seminars at
Stanford, and was a frequent speaker at industry
conferences. He lived in a three-story
33.000-square-foot home on a 60-acre estate. The
company's glass-and-steel headquarters building
in Round Rock, Texas (an Austin suburb), had
unassuming, utilitarian furniture, abstract art,
framed accolades to Michael Dell, laudatory
magazine covers, industry awards plaques, bronze
copies of the company's 11 patents, and a history
wall that contained the hand-soldered guts of the
company's first personal computer.
In the company's early days Michael Dell hung
around mostly with the company's engineers. He
was so shy that some employees thought he was
stuck up because he never talked to them. But
people who worked with him closely described him
as a likable young man who was slow to warm up
to strangers.2 He was a terrible public speaker
and wasn't good at running meetings. A Business
Week reporter labeled him Walker's tutelage.
Michael Dell became intimately familiar with all
pans of the business. overcame his shyness,
learned to control his ego, and fumed into a
charismatic leader with an instinct for
motivating people and winning their loyalty and
respect. When Walker had to leave the company in
1990 because of health reasons. Dell turned to
Morton Meyerson. former CEO and president of
Electronic Data Systems, for advice on how to
transform Dell Computer from a fast-growing
medium-sized company into a billion-dollar
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Though sometimes given to displays of impatience
and a strong temper. Michael Dell usually spoke
in a quiet, reflective manner and came across as
a person with maturity and seasoned judgment far
beyond his age. He became an accomplished public
speaker. He delegated authority to subordinates,
believing that the best results came from
"turning loose talented people who can be
relied upon to do what they're supposed to do."
Business associates viewed Michael Dell as an
aggressive personality, an extremely competitive
risk-taker who had always played close to the
edge. Moreover. the people he hired were
aggressive and competitive, traits that
translated into an aggressive, competitive,
intense corporate culture with a strong sense of
mission and dedication.
Developments in Early 1998 Dell's sales were up
strongly in the first quarter of 1998, even in
product areas where the company had previously
lagged, pushing its global market share to 7.9
percent and its U.S. share to 11.8 percent. Unit
shipments were 1.6 million units, compared to
978.000 in the first quarter of 1997. In laptop
PCs. Dell moved into third place in U.S. sales
and fifth place worldwide. And it climbed into
second place in higher-margin products like
servers and Windows NT-based workstations. Dell
announced the formation of an alliance with Data
General Corporation to enter the market for data
storage equipment.
In the first quarter of 1998. about half of the
industry7 s PC sales consisted of computers
selling for less than S 1.300. Dell's average
selling price was S2.500 per unit, down 9 percent
from the prior quarter. The company was planning
to broaden its product line to include
lower-priced PCs equipped with Intel's low-end
Celeron chip Dell's new budget models were
priced in the S 1,200 range.
COMPUTER INDUSTRY When the personal computer
industry first began to take shape in the early
1980s, the founding companies manufactured many
of the components themselvesdisk drives, memory
chips, graphics chips, microprocessors,
motherboards, and software. Believing that they
had to develop key components in-house. companies
built expertise in a variety of PC-related
technologies and created organizational units to
produce components as well as to handle final
assembly. While certain "non-critical" items were
typically outsourced. if a computer maker was not
at least partially vertically integrated and an
assembler of some components, then it was not
taken seriously as a manufacturer.
But as the industry grew. technology advanced
quickly in so many directions on so many parts
and components that the early personal computer
manufacturers could not keep pace as experts on
all fronts. There were too many technological
innovations in components to pursue and too many
manufacturing intricacies to master for a
vertically integrated manufacturer to keep its
products on the cutting edge. As a consequence,
companies emerged that specialized in making
particular components. Specialists could marshal
enough RD capability and resources to either
lead the technological developments in their
area of specialization or else quickly match the
advances made by their competitors. Moreover,
specialist firms could mass-produce a component
and supply it to several computer manufacturers
far cheaper than any one manufacturer could fund
the needed component RD and then make only
whatever smaller volume of components it needed
for assembling its own brand of PCs.
Thus, in recent years, computer makers had begun
to outsource most all components from
specialists and to concentrate on efficient
assembly and marketing of their brand of
computers. Exhibit 6 shows the value chain model
that such manufacturers as Compaq. IBM,
Hewlett-Packard, and Packard-Bell used in the
1990s. It featured arm's-length transactions
between specialist suppliers, manufacturer/assembl
ers, distributors and retailers, and end-users.
However, Dell, Gateway, and Micron Electronics
employed a shorter value chain model, selling
direct to customers and eliminating the rime and
costs associated with distributing through
independent resellers.
Building to order avoided (a) having to keep many
differently-equipped models on retailers shelves
to fill buyer requests for one or another
configuration of options and components and (b)
having to clear out slow-selling models at a
discount before introducing new generations of
PCs. Selling direct eliminated retailer costs and
markups (retail dealer margins were typically in
the 4 to 10 percent range). Dell Computer was far
and away the world's largest direct seller to
large companies and government institutions.
while Gateway was the largest direct seller to
individuals and small businesses. Micron
Electronics was the only other PC maker that
relied on the direct sales and build-to-order
approach for the big majority of its sales.
strategy was built around a number of core
elements build-to-order manufacturing, mass
customization, partnerships with suppliers,
just-in-time components inventories, direct
sales, market segmentation, customer service, and
extensive data and information sharing with both
supply partners and customers. Through this
strategy, the company hoped to achieve what
Michael Dell called "virtual integration"a
stitching together of Dell's business with its
supply partners and customers in real time such
that all three appeared to be part of the same
organizational team.5
Build-to-Order Manufacturing and Mass
Customization Dell built its computers,
workstations, and servers to order none were
produced for inventory. Dell customers could
order custom-built servers and workstations based
on the needs of their applications. Desktop and
laptop customers ordered whatever configuration
of microprocessor speed, random access memory
(RAM), hard-disk capacity. CD-ROM drive,
fax/modem, monitor size. speakers, and other
accessories they preferred. The orders were
directed to the nearest factory. Until recently
Dell had operated its assembly lines in
traditional fashion, with workers each performing
a single operation. An order form accompanied
each metal chassis across the production floor
drives, chips, and ancillary items were installed
to match customer specifications. As a partly
assembled PC arrived at a new workstation, the
operator, standing beside a tall steel rack with
drawers full of components, was instructed what
to do by little red and green lights flashing
beside the drawers. When the operator was
finished, the components where automatically
replenished from the other side of the drawers
and the PC chassis glided down the line to the
next workstation. However, Dell reorganized its
plants in 1997, shifting to "cell manufacturing"
techniques whereby a team of workers operating at
a group workstation (or cell) assembled an entire
PC according to customer specifications. The
result had been to reduce assembly times by 75
percent and to double productivity per square
foot of assembly space. Assembled computers were
tested, then loaded with the desired software,
shipped, and typically delivered within five to
six business days of the initial order.
EXHIBIT 6 Comparative Value Chains of PC
ManufacturersTraditional PC Industry Value Chain
(utilized by Compaq Computer,IBM,Hewlet-Packard,mo
st others)
Manufacture of PC Components by suppliers
Service and support activities provided to PC
users by resellers (or some PC makers IBM to PC
Purchases by PC users
Sales and marketing activities of resellers to
sell inventories of PCs on hand
Assembly of PCs by PC makers (to fill orders
from suppliers and keep distribution channels
Build-to-Order/Direct Sales Value Chain (employed
by Dell Computer,Gateway, and Micron Electronics)
Manufacture of PC Components by suppliers
Service and support activities provided to PC
users either by PC maker (via telephone,fax,or
e-mail) or by independent service providers
Purchases by PC users
Customized assembly of PCs by PC makers as
orders from PC buyers come in
This sell-direct strategy meant, of course, that
Dell had no in-house stock of finished goods
inventories and that, unlike competitors using
the traditional value chain model (Exhibit 6), it
did not have to wait for resellers to clear out
their own inventories before it could push new
models into the marketplace. (Resellers typically
operated with 60-70 days' inventory.) Equally
important was the fact that customers who bought
from Dell got the satisfaction of having their
computers customized to their particular liking
and pocketbook.
Dell had three PC assembly plantsin Austin.
Texas Limerick. Ireland and Penang. Malaysia.
The company was constructing another plant in
Ireland to serve the European market as well as a
new plant in China (the company expected the
market for PCs in China to soon be huge). Both of
the new plants were expected to come into use at
the end of 1998.
Partnerships with Suppliers Michael Dell
believed it made much better sense for Dell
Computer to partner with reputable suppliers of
PC parts and components rather than to integrate
backward and get into pans and components
manufacturing on its own. He explained why If
you've got a race with 20 players all vying to
make the fastest graphics chip in the world, do
you want to be the 21si horse, or do you want to
evaluate the field of 20 and pick the best one?
Management believed long-term partnerships with
reputable suppliers yielded several advantages.
First, using name-brand processors, disk drives,
modems, speakers, and multimedia components
enhanced the quality and performance of Dell's
PCs. Because of the varying performance of
different brands of components, the brand of the
components was as important or more important to
some buyers than the brand of the overall
system. Dell's strategy was to partner with as
few outside vendors as possible and to stay with
those vendors as long as they maintained their
leadership in technology, performance, and
Second, because Dell committed to purchase a
specified percentage of its requirements from
each of its long-term suppliers. Dell was assured
of getting the volume of components it needed on
a timely basis even when overall market demand
for a particular component temporarily exceeded
the overall market supply. Third, Dell's formal
partnerships with key suppliers made it feasible
to have some of their engineers assigned to
Dell's product design teams and for them to be
treated as pan of Dell. When new products were
launched, suppliers' engineers were stationed in
Dell's plant.
If early buyers called with a problem related to
design, further assembly and shipments were
halted while the supplier's engineers and Dell
personnel corrected the flaw on the spot.7
Fourth, Dell's long-run commitment to its
suppliers laid the basis for just-in-time
delivery of suppliers' products to Dell's
assembly plants in Texas, Ireland, and Malaysia.
Some of Dell's vendors had plants or distribution
centers within a few miles of Dell's Texas
assembly plant and could deliver daily or even
hourly if needed. To help suppliers meet its
just-in-time delivery expectations. Dell openly
shared its daily production schedules, sales
forecasts, and new-model introduction plans with
Michael Dell explained one aspect of the
information-sharing relationship with suppliers
as follows We tell our supplier? exactly what
our daily production requirements are. So it's
not. "Well, every two weeks deliver 5.000 to this
warehouse, and we'll put them on the shelf, and
then we'll take them off the shelf." It's.
"Tomorrow morning we need 8.562. and deliver them
to door number seven by 7 am.
Dell also did a three-year plan with each of its
key suppliers and worked with suppliers to
minimize the number of different stock-keeping
units of pans and components in designing its
Why Dell Was Committed to Just-in-Time Inventory
Practices Dell's just-in-time inventory emphasis
yielded major cost advantages and shortened the
time it took for Dell to get new generations of
its computer models into the marketplace. New
advances were coming so fast in certain computer
pans and components (particularly
microprocessors, disk drives, and modems) that
any given item in inventory was obsolete in a
matter of months, sometimes quicker. Having a
couple of months of component inventories meant
getting caught in the transition from one
generation of components to the next.
Moreover, there were rapid-fire reductions in the
prices of componentsmost recently, component
prices had been falling as much as 50 percent
annually (an average of 1 percent a w'-eek).
Intel, for example, regularly cut the prices on
its older chips when it introduced newer chips,
and it introduced new chip generations about
every three months. And the prices of hard-disk
drives with greater and greater memory capacity
had dropped sharply as disk drive makers
incorporated new technology that allowed them to
add more gigabytes of hard-disk memory very
The economics of minimal component inventories
were dramatic. Michael Dell explained If I've
got 11 days of inventory and my competitor has 80
and Intel comes out with a new 450-megahenz chip.
that means I'm going lo get to market 69 days
sooner. In the computer industry, inventory can
be a pretty massive risk because if the cost of
materials is going down 50 percent a year and you
have two or three months of inventory versus
eleven days. you've got a big cost disadvantage-
And you're vulnerable to product transitions,
when you can get stuck with obsolete inventory.
Collaboration with suppliers was close enough
to allow Dell to operate with only a few days of
inventory for some components and a few hours of
inventory for others.
Dell supplied data on inventories and
replenishment needs to its suppliers at least
once a dayhourly in the case of components being
delivered several times daily from nearby
sources. In a couple of instances. Dell's close
partnership with vendors allowed it to operate
with no inventories. Dell's supplier of monitors
was Sony. Because the monitors Sony supplied with
the Dell name already imprinted were of
dependably high quality (a defect rate of fewer
than 1,000 per million). Dell didn't even open up
the monitor boxes to test them.
10 Nor did it bother to have them shipped to
Dell's assembly plants to be warehoused for
shipment to customers. Instead, utilizing
sophisticated data exchange systems. Dell
arranged for its shippers (Airborne Express and
UPS) to pick up computers at its Austin plant,
then pick up the accompanying monitors at the
Sony plant in Mexico, match the customer's
computer order with the customer's monitor order,
and deliver both to the customer simultaneously.
The savings in time. energy, and cost were
The company had. over the years, refined and
improved its inventory-tracking capabilities and
its procedures for operating with small
inventories. In 1993. Dell had 2.6 billion in
sales and 342 million in inventory. In fiscal
year 1998. it had 12.3 billion in sales and
S233 million in inventoryan inventory turn
ratio of seven days. By comparison, Gateway,
which also pursued a build-to-order strategy, had
1997 sales of 6.3 billion and inventories of
249 millionan inventory turn ratio of 14 days.
Compaq had inventories of l.57 billion at
year-end 1997. and 1997 sales of 24.6 billion
(thus turning its inventories about every 23
days). Dell's goal was to get its inventory turn
down to three days before the year 2000.
Direct Sale?
Selling direct to customers gave Dell firsthand
intelligence about customer preferences and
needs, as well as immediate feedback on design
problems and quality glitches. With thousands of
phone and fax orders daily. 5 million in daily
Internet sales, and daily contacts between the
field sales force and customers of all types, the
company kept its finger on the market pulse,
quickly detecting shifts in sales trends and
getting prompt feedback on any problems with its
products. If the company got more than a few
similar complaints, the information was relayed
immediately to design engineers.
When design flaws or components defects were
found, the factory was notified and the problem
corrected within a matter of days. Management
believed Dell's ability to respond quickly gave
it a significant advantage over rivals,
particularly over PC makers in Asia. That made
large production runs and sold standardized
products through retail channels. Dell saw its
direct sales approach as a totally
customer-driven system that allowed quick
transitions to new generations of components and
PC models.
Despite Dell's emphasis on direct sales, industry
analysts noted that the company sold 10-15
percent of its PCs through a small, select group
of resellers.11 Most of these resellers were
systems integrators. It was standard for Dell not
to allow returns on orders from resellers or to
provide price protection in the event of
subsequent declines in market prices. From time
to lime. Dell offered its resellers incentive
promotions at up to a 20 percent discount from
its advertised prices on end-of-life models. Dell
was said to have no plans to expand its reseller
network, which consisted of about 50-60 dealers.
(No Transcript)
Market Segmentation To make sure that each type
of customer was well served. Del had made a
special effort to segment the buyers of its
computers into relevant groups and to place
managers in charge of developing sales and
service programs appropriate to the needs and
expectations of each market segment. Until the
early 1990s, Dell had operated with sales and
service programs aimed at just two market
segments(1) corporate and governmental buyers
who purchased in large volumes and (2) small
buyers (individuals and small businesses). But as
sales look off in 1995-97. these segments were
subdivided into finer, more homogeneous
categories (see Exhibit 7).
In 1998. 90 percent of Dell's sales were to
business or government institutions and of those
70 percent were to large corporate customers who
bought at least l million in PCs annually. Many
of these large customers typically ordered
thousands of units at a time. Dell had hundreds
of sales representatives calling on large
corporate and institutional accounts. Its
customer list included Shell Oil. Exxon. MCI.
Ford Motor, Toyota. Eastman Chemical, Boeing.
Goldman Sachs. Oracle. Microsoft. Woolwich (a
British bank with S64 billion in assets).
Michelin. Unilever, Deutsche Bank. Sony,
Wal-Mart, and First Union (one of the 10 largest
U.S. banks).
However, no one customer represented more than 2
percent of total sales. Because corporate
customers tended to buy the most expensive
computers. Dell commanded the highest average
selling prices in the industryover S1.600 versus
an industry average under SL400.
Dell's sales to individuals and small businesses
were made by telephone, fax, and the Internet. It
had a call center in the United States with
toll-free lines customers could talk with a
sales representative about specific models, get
information faxed or mailed to them. place an
order, and pay by credit card. Internationally.
Dell had set up six call centers in Europe and
Asia that customers could dial toll free.12 The
call centers were equipped with technology that
routed calls from a particular country to a
particular call center.
Thus, for example, a customer calling from
Lisbon. Portugal, was automatically directed to
the call center in Montpelier. France, and
connected to a Portuguese-speaking sales
representative. Dell began Internet sales at its
Web site ( in 1995. almost overnight
achieving sales of l million per day. In 1997
Internet sales reached an average of S3 million
daily, hitting S6 million some days during the
Christmas shopping period. In the first quarter
of 1997.
Dell's Internet sales averaged nearly 4 million
daily and the company expected that 1998 sales
at its Web site would reach S1.5 billion. The
fastest growing segment of Dell's international
segment was on the Internet in Europe, where
sales were running at a weekly volume ofS5
million in early 1998. Internet sales were
ramping up rapidly from Asian buyers. In early
1998. Dell's Internet sales were about equally
divided between sales to individuals and sales
to business customers. Nearly 1.5 million people
visited Dell's Web site weekly to view
information and place orders, about 20 times more
than called to talk with sales representatives
over the telephone.
In 1997, 31 percent, or S3.8 billion, of Dell's
sales came from foreign customers. Europe, where
resellers were strongly entrenched and Dell's
direct sales approach was novel, was Dell's
biggest foreign market. Dell's European sales
were growing at 50 percent annually. The market
leader in Europe was Compaq, with a 14.8 percent
market share, follow/ed by IBM with 8.3 percent.
Dell with 7.8 percent. Hewlett-Packard with 7.6
percent, and Siemens Nixdorf (Germany gt with 5.6
percent. In Britain, which Dell had entered in
the laic 1980s. Dell had a 12 percent share,
trailing only Compaq. Sales of PCs in Europe were
expected to reach 22-24 million in 1998 and 28.5
million in 1999. Total European sales in 1997
were 39.7 million units.
Customer Service Service became a feature of
Dell's strategy in 1986 when the company began
providing a guarantee of free on-site service
for a year with most of its PCs after users
complained about having to ship their PCs back
to Austin for repairs. Dell contracted with local
service providers to handle customer requests for
repairs on-site service was provided on a
next-day basis. Dell also provided its customers
with technical support via a toll-free number,
fax. and e-mail.
Customer Service Dell received close to 40.000
e-mail messages monthly requesting service and
support and had 25 technicians to process the
requests. Bundled service policies were a major
selling point for winning corporate accounts. If
a customer preferred to work with his or her own
service provider. Dell gave that provider the
training and spare pans needed to service the
customer's equipment.
Selling direct allowed Dell to keep close track
of the purchases of its large global customers,
country by country and department by
departmentinformation that customers found
valuable. Maintaining its close customer
relationships allowed Dell to become quite
knowledgeable about its customers' needs and how
their PC network functioned. Aside from using
this information to help customers plan their PC
needs and configure their PC networks.
Dell used its knowledge to add to the value it
delivered to its customers. For example. Dell
recognized that when it delivered a new PC to a
corporate customer, the customer's PC personnel
had to place asset tags on it and then load the
software from an assortment of CD-ROMs and
diskettesa process that could take several hours
and cost 200-300.
Dell's solution was to load the customer's
software onto one of its own very large Dell
servers at the factory and. when a particular
version of a customer's PC came off the assembly
line. to use its high-speed server network to
load that customer's software onto the PC's hard
disk in a few seconds. If the customer so
desired. Dell would place asset tags on the PC at
the factory. Since Dell charged customers only an
extra 15 or 20 for the software-loading and
asset-tagging services, the savings to customers
were considerable.
One large customer reported savings of 500.000
annual! from having Dell load its software and
place asset tags on its PCs at the factory.14 In
1997. about 2 million of the 7 million PCs Dell
sold w/ere shipped with customer-specific
software already loaded on the PCs.
Corporate customers paid Dell fees to provide
support and service. Dell then contracted w4th
third-party providers to make the necessary
service calls. When a customer with PC problems
called Dell. the call triggered two electronic
dispatchesone to ship the needed pans from
Dell's factory to the customer sites and one to
notify the contract service providers to prepare
to make the needed repairs as soon as the parts
arrived.15 The service providers sent the bad
parts back to Dell.
Dell then endeavored to diagnose what went wrong
and what could be done to see that the problem
wouldn't happen again. Problems relating to
faulty components or flawed components design
were promptly passed along to the relevant
supplier, who was expected to improve quality
control procedures or redesign the component.
Dell's strategy was to manage the flow of
information gleaned from customer service
activities both to improve product quality and
speed execution.
Dell had plans in place to build Application
Solutions Centers in both Europe and North
America to assist its customers and independent
software providers in migrating their systems and
applications to Intel's new next-generation.
64-bit computing technology. Dell was partnering
with Intel. Microsoft, Computer Associates, and
other prominent PC technology providers to help
customers make more effective use of the Internet
and the latest computing technologies.
Dell. which used Intel microprocessors
exclusively in its computers, had been a
consistent proponent of standardized Intel-based
platforms because the company believed those
platforms provided customers with the best total
value and performance. Dell management considered
both Intel and Microsoft as long-term strategic
partners in mapping out its future.
In recent months Dell. following Compaq's lead.
had created a capital services group to assist
customers with financing their PC networks.
Virtual Integration and Information-Sharing But
what was unique about Dell's latest incarnation
of its strategy was how the company was using
technology and information-sharing with both
supply partners and customers to blur the
traditional arm's-length boundaries in the
supplier-manufacturer-customer value chain that
characterized Dell's earlier business model and
other direct-sell competitors. Michael Dell
referred to this feature of Dell's strategy as
''virtual integration."16 On-line communications
technology made it easy for Dell to communicate
inventory levels and replenishment needs to
vendors daily or even hourly.
Boeing offers an example of how the lines were
becoming blurred between Dell and its customers.
Boeing. which had 100.000 Dell PCs. was served by
a staff of 30 Dell employees who resided on-site
at Boeing facilities and were intimately involved
in planning Booing's PC needs and the
configuration of Boeing's network. While Boeing
had its own people working on what the company's
best answers for using PCs were. Dell and Boeing
personnel worked closely together to understand
Boeing's needs in depth and to figure out the
best ways to meet those needs.
A number of Dell's corporate accounts were large
enough to justify dedicated on-site teams of Dell
employees. Customers usually welcomed such teams,
preferring to focus their time and energy on the
core business rather than being distracted by PC
purchasing and servicing issues.
In addition to using its sales and support
mechanisms to stay close to customers, Dell had
set up a number of regional forums to stimulate
the flow of information back and forth with
customers. The company formed Platinum Councils
composed of its largest customers in the United
States, Europe. Japan, and the Asia-Pacific
region regional meetings were held every six to
nine months.17 In the larger regions, there were
two meetingsone for chief information officers
and one for technical personnel.
As many as 100 customers and 100 Dell executives
and representatives. including Michael Dell
himself, attended the three-day meetings, at
which Dell's senior technologists shared their
views on the direction of the latest
technological developments, what the flow of
technology really meant for customers. and
Dell's plans for introducing new and upgraded
products over the next two years.
There were also breakout sessions on such topics
as managing the transition to Windows NT.
managing the use of notebooks by people out in
the field, and determining whether leasing was
better than buying. Customers were provided
opportunities to share information and learn from
one another (many had similar problems) as well
as exchange ideas with Dell personnel. Dell found
that the information gleaned from customers at
these meetings assisted in forecasting demand for
the company's products.
Dell had developed customized internet sites
(called Premier Pages) for its 3.000 largest
global customers These sites gave customer
personnel immediate on-line access to purchasing
and technical information about the specific
configurations of products that their company had
purchased from Dell or that were currently
authorized for purchase.18 The Premier Pages
contained all of the elements of Dell's
relationship with the customerwho the Dell sales
and support contacts were in even country where
the customer had operations, detailed product
descriptions, what software Dell loaded on each
of the various types of PCs the customer
purchased, service and warranty records,
pricing, and the available technical support.
Dell was readying Premier Page software
improvements for introduction in the second half
of 1998 with even greater functionality. One new
feature made it easy for a customer to specify
what types of machines and options their
personnel should be authorized to purchase. Other
features included allowing customer personnel to
access detailed information about Dell products
on-line, view all the different machines and
options the customer had authorized for its
personnel, obtain the price of the particular PC
they wanted, place an order, and have the order
automatically routed to higher-level managers for
These features eliminated paper invoices, cut
ordering time, and reduced the internal labor
needed to staff corporate purchasing functions.
Dell was said to have the most comprehensive
Web-based PC commerce capability of any PC
vendor. The company's goal was to generate 50
percent of its sales on the Internet within the
next two or three years by setting up Premier
Pages for virtually all of its large customers
and adding more features to further improve
functionality. So far, customer use of Premier
Pages had boosted the productivity of salespeople
assigned to these accounts by 50 percent.
The company also gave its large customers access
to Dell's own on-line internal technical support
tools, allowing them to go to enter
some information about their system, and gain
immediate access to the same database and
problem-solving information that Dell's support
personnel used to assist call-in customers.20
This tool was particularly useful to the internal
help-desk groups at large companies.
Demand Forecasting Management believed that
accurate sales forecasts were key to keeping
costs down and minimizing inventories, given the
complexity and diversity of the company's product
line. Because Dell worked diligently to maintain
a close relationship with its large corporate and
institutional customers, and because it sold
direct to small customers via telephone and the
Internet, it was possible for the company to keep
a finger on the pulse of demandwhat was selling
and what was not. Moreover, the company's market
segmentation strategy paved the way for in-depth
understanding of its customers' evolving
requirements and expectations.
Having credible real-time information about what
customers were actually buying and having first
hand knowledge of large customers' buying
intentions gave Dell strong capability to
forecast demand. Furthermore, Dell passed that
knowledge on to suppliers so they could plan
their production accordingly. The company worked
hard at managing the flow of information it got
from the marketplace and seeing that it got to
both internal groups and vendors in timely
Forecasting was viewed as a critical sales skill.
Sales-account managers were coached on how to
lead large customers through a discussion of
their future needs for PCs, workstations,
servers, and peripheral equipment. Distinctions
were made between purchases that were virtually
certain and those that were contingent on some
event. Salespeople made note of the contingent
events so they could follow up at the
appropriate time. With smaller customers, there
was real-time information about sales, and direct
telephone sales personnel often were able to
steer customers toward configurations that were
immediately available to help fine-tune the
balance between demand and supply.
Research and Development Company management
believed that it was Dell's job to sort out all
the new technology coming into the marketplace
and help steer customers to options and solutions
most relevant to their needs. The company talked
to its customers frequently about "relevant
technology," listening carefully to customers"
needs and problems and endeavoring to identify
the most cost-effective solutions. Dell had about
1,600 engineers working on product development
and spent about S250 million annually to improve
users experience with its productsincluding
incorporating the latest and best technologies,
making its products easy to use and devising ways
to keep costs down.
The company's RD unit also studied and
implemented ways to control quality and to
streamline the assembly process. Much time went
into tracking all the new developments in
components and software to ascertain how they
would prove useful to computer users. For
instance, it was critical to track vendor
progress in making longer-lasting batteries
because battery life was important to the buyers
of portable computers. Dell was the first company
to put lithium ion batteries with a life of 5.5
to 6 hours in all of its laptop models.
Advertising Michael Dell was a strong believer in
the power of advertising and frequently espoused
its importance in the company's strategy. Thus.
Dell was the first computer company to use
comparative ads. throwing barbs at Compaq's
higher prices. Although Compaq won a lawsuit
against Dell for making false comparisons.
Michael Dell was unapologetic. arguing that "the
ads were very effective. We were able to
increase customer awareness about value."21 Dell
insisted that the company's ads be communicative
and forceful, not soft and fuzzy.
The company regularly had prominent ads in such
leading computer publications as PC Magazine and
PC World, as well as in USA Today, The Wall
Street Journal, and other business publications.
In the spring of 1998. the company debuted a
multi-year worldwide TV campaign to strengthen
its brand image.
Entry info Server? Dell entered the market for
low-end PC servers (those priced under 25.000)
in the second half of 1996. The company had
opened a 23.000-square-foot plant dedicated to
server production, trained 1.300 telemarketers to
sell servers, assigned 160 sales reps with
systems know-how to big customer accounts, and
recruited a staff of systems experts to help the
sales reps.
It had contracted with companies such as
Electronic Data Systems, which had in-depth
systems and networking expertise, to help provide
service to large customers with extensive server
networks. Dell's server plant used "cell"
manufacturing instead of an assembly line to
permit faster product updates and keep costs low
there were 30 cells at the plant, each with a
self-contained work team that performed the
entire assembly process from a kit of components
and a customized motherboard.
1 ????? 2 ????????? 3 ????? ?????? ???? 4
????? (???) 5 ????? ???? ??? 6 ???? ??? 7 ????
?????? 8 ??? ????? ???? 9 ??????? 10 ????
???? 11 ???? ??????? ???????? ??? 12 ??????
Dell's entry into servers had several1 purposes2.
The use of servers by corporate3 customers was
growing rapidly. The margins4 on servers were
large. Moreover, purchase price was not as
significant5 a factor in selecting which brand6
of server to buy because servers required far
more in the way of service, support, and
software. Several of Dell's rivals, most notably7
Compaq, were using their big margins on server
sales to subsidize8 price cuts on desktops and
notebooks in an attempt to win corporate PC
accounts9 away from Dell. According to Michael
Dell. "To neutralize10 that Dell needs to be in
the server market." The company expected11 that
sales of servers would grow to about 50 percent
of corporate revenues12 by 2001.
  • ???? ???? ?? ?? ????? ?????? ????? ??? ?? ??
    ????. ??????? ?? ?????? ?? ??????? ? ????????? ??
    ??? ????? ? ??? ???. ????? ??? ??? ?????? ????
    ???. ?????? ????? ???? ????? ???? ??????????????
    ???? ?????? ?? ????. ????? ???? ???? ?? ??????
    ????? ????? ?????? ???? ???? ?????? ???????? ?
    ????????? ???? ???.???? ?? ????? ???? ??? ?? ????
    ???? ?????? ????? ??? ????? ?? ??? ??????? ???
    ?????? ????? ?? ??????? ?? ??? ???? ??????????
    ???? ? ???? ??? ?????? ??? ?? ??????? ?? ???? ??
    ????? ?????? ? ??????? ?? ?? ?? ?? ??? ??? ???
    ??????. ??? ?? ??? ???? ?? ???? ???? ???? ?? ??
    ??? ???? ???? ????? ???? ?????. ???????? ?? ??
    ???? ?????? ?? ??? 2001 ?? ???? 50 ?? ????? ????

1 ???? ?????? 2 ???? ??????
Dell's build-to-order and sell-direct strategies
gave it a significant pricing advantage over
rivals. Servers from such competitors as Compaq.
IBM. and Hewlett-Packard, all of which relied1 on
networks of resellers, were estimated to cost 15
to 20 percent more than Dell servers. However,
analysts were skeptical2 about whether Dell could
provide the same quality of service and support
to server customers that resellers could.
  • ???????? ????? ?? ????? ????? ? ???? ?????? ????
    ???? ???????? ?? ???? ?? ???? ????? ???. ?????
    ??? ????? ?? ??????? ?????? ????? ??????
    ??.??.??? ????? ?????? ?? ???? ?????? ?? ????
    ???? ?????? ?????? ????? ????? 15 ?? 20 ????
    ????? ?? ??????? ???? ?? ?????. ?? ?? ???
    ??????????? ???? ????????? ?? ???? ?? ??????
    ????? ???? ?????? ?? ??????? ??????? ?????????? ?
    ??????? ???.

1 ?? ????? 2 ?????? ????? 3 ????? ??? 4 ??????
5 ?? ???? ????? 6 ?????? 7 ?????? 8 ?????
????9 ????? ??? 10 ?????? ??? 11 ??????????
??????? 12 ?????? ???? ????
To counter1 that perception2, Dell had bolstered3
its field sales and support staff to 600
employees4 and created an in-house5 consulting6
group to assist7 customers. For customers that
required extensive8 system support and
integration9, Dell partnered10 with systems
experts11 that were not resellers12, such as
Electronic Data Systems and Arthur Andersen.
  • ?? ????? ??? ?????? ???? ?? ????? ???? ?????? ?
    ????? ??? ?? ?? 600 ??? ????? ??? ? ???? ??????
    ?? ???? ???? ????? ?? ??? ??????? ????? ????.
    ???? ???????? ?? ???? ?? ???? ? ???????? ?????
    ????? ??????? ???? ?? ?? ??????? ????? ?? ???????
    ?????? ??????? ????? ???? ???????? ???????
    ?????????? ? ???? ?????? ?????? ????.

1 ????? ????? (???????) 2 ?????? 3 ????? 4
???? 5 ?????? ????? 6 ?????? ????? 7 ?????
???? ? ????
an estimated 250 million PCs in use in 1997 and
sales of PCs were approaching1 100 million
annually2 (see Exhibit 8). Michael Dell believed
there would be 1.4 billion PCs in use within 10
years. Going into 1998, household3 penetration4
of PCs was estimated to be 45 percent. There were
over 5 million new PC-owning households in 1997.
Many lured5 by the introduction of reasonably6
equipped6 sub- 1.000 PCs. The three most
influential7 factors in home ownership of PCs
were education, income, and the presence of
children in the household. Household penetration
was expected to exceed 50 percent by the year
  • ?????????? ???? ?? ???? ??????
  • ?????? ??? ?? ?? ??? 1997 ? 250 ?????? ??????
    ????? ??????? ???? ??? ? ???? ????????? ?? ????
    100 ?????? ??? ?? ??? ????????? (????? ????? 8).
    ???? ?? ????? ??? ?? ?? ?? ??? ????? ?? 1.4
    ??????? ?????? ??????? ????? ??. ??? ?? ??? 1998
    ??????????????? ???? ?? ???? ?????????? ????? ??
    45 ???? ???? ?? 5 ?????? ??? ?? ????? ???? ?????
    1997 ????? ???. ?? ???? ???? ???? ?????? ?? ???
    1000 ????? ????? ????? ???? ???? ???? ???? ?????
    ???????. ?????? ????? ? ???? ????? ?? ???????? ??
    ???? ??? ?? ???? ?????????? ????? ???. ??????
    ????? ?? ?? ??? 2000 ???? ?????????? ???? ??
    ????? ?? ??? 50 ???? ??? ????? ????.

1 ???? ? ???? 2 ????? ????? ?????
A number of factors were affecting the
competitive structure of the world market for PCs
in 1998 declining1 component prices, the
troubled economies of several Asian countries,
potential showdowns2 in the industry growth rate,
the attempts of Dell's rivals to shift to
build-to-order manufacturing, continuing advances
in PC technology, and the moves of several PC
makers to expand into marketing more than just
PCs to their customers.
  • ?????? ?? ????? ????? ?? ?? ??? 1998 ?? ?????
    ?????? ??? ????? ????? ??? ?? ???? ???? ?????
    ??????? ? ????? ??????? ???? ?? ??????? ???????
    ???? ???? ???????? ?? ??? ???? ? ???? ????? ????
    ?? ???? ???? ?? ????? ?????? ????? ????????? ??
    ????? ?????? ? ???? ???? ?? ???????????? ??????
    ???? ???? ????? ?? ????? ???? ???? ?????? ??

1 ??????? 2 ?????? ? ???? 3 ????? ???? ? ??????
???? ? ??? ??? ??? ????
Declining Component Price? Sharp drops in the
prices of a number of PC components (chiefly1,
disk drives, memory chips, and microprocessors)
starting in late 1997 had allowed PC makers to
dramatically2 lower PC pricessales of PCs priced
under 1.500 were booming3 by early 1998. Compaq,
IBM, Hewlett-Packard, and several other PC makers
had begun marketing sub- 1,000 PCs in 1997. In
December 1997, the average purchase price of a
desktop computer fell below 1,300 for the first
time. It was estimated that about half of all PC
sales in 1998 were of computers carrying price
tags under 1.500.
  • ???? ???? ??????
  • ???? ???? ???? ???? ?? ????? ?????? (???????
    ???? ??????? ???????? ? ??????????) ?? ?? ???
    1997 ???? ??? ??? ?? ???????? ?????? ????? ??? ??
    ????? ????? ???? ?????????? ??? ?? ?? ?????? 1500
    ???? ?? ?? ??? 1998 ??????? ????? ??? ??? ???
    ????? ???? ????. ????? ? ??.??.?? ? ????? ????? ?
    ???? ???????????? ???? ?????? ???? ?? ????
    ??????????? ?? ???? ???? ?? 1000 ???? ?? ??? 1997
    ??????. ?? ?????? 1997 ???? ????? ??? ?
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