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Strategy
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Dell management believed it had the industry’s most efficient business model. The company’s strategy was built around a number of core elements: build-to-order manufacturing, partnerships with suppliers, just-in-time components inventories, direct sales to customers, award-winning customer service and technical support, and pioneering use of the Internet and e-commerce technology. Management believed that a strong first-mover advantage accrued to the company from its lead over rivals in making e-commerce a centerpiece in its strategy.
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.
In 2000, Dell had PC assembly plants in Austin, Texas; Nashville/Lebanon, Tennessee;
Limerick, Ireland; Xiamen, China; Penang, Malaysia; and El Dorado do Sul, Brazil.
All six plants manufactured the company’s entire line of products.
Until 1997, Dell operated its assembly lines in traditional fashion, with each worker 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 containing the components the operator needed to install. When the operator was finished, the drawers containing the used components were automatically replenished from the other side, and the PC chassis glided down the line to the next workstation. However, Dell had 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 shift to cell manufacturing reduced Dell’s assembly times by 75 percent and doubled 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 order placement.
Dell’s build-to-order, 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 7), 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 to 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.
Quality Control Programs All assembly plants had the capability to run testing and quality control processes on components, parts, and subassemblies obtained from suppliers, as well as for the finished products Dell assembled. Suppliers were urged to participate in a quality certification program that committed them to achieving defined quality specifications. Quality control activities were undertaken at various stages in the assembly process. In addition, Dell’s quality control program included testing of completed units after assembly, ongoing production reliability audits, failure tracking for early identification of problems associated with new models shipped to customers, and information obtained from customers through its service and technical support programs. All of the company’s plants had been certified as meeting ISO 9002 quality standards.
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Michael Dell believed it made much better sense for Dell Computer to partner with reputable suppliers of PC parts and components rather than integrate backward and get into parts and components manufacturing on its own. He explained why:
A central element of Dell Computer’s strategy, therefore, was to evaluate the various makers of each component, pick the best one or two as suppliers, and partner with them for as long as they remained leaders in their specialty. 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 varying performance of different brands of components, the brand of the components was as important or more important to some end users than the brand of the overall system. Dell’s strategy was to partner with as few outside vendors as possible and to stay with them as long as they maintained their leadership in technology, performance, and quality. Second, because Dell’s partnership with a supplier was long term and because it committed to purchase a specified percentage of its requirements from that supplier, 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 part of Dell. When new products were launched, suppliers’ engineers were stationed in Dell’s plant, and 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.10 |
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. Many of Dell’s vendors had plants or distribution centers within a few miles of Dell assembly plants 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 vendors. Using online communications technology, Dell communicated inventory levels and replenishment needs to vendors on a daily or even hourly basis. Michael Dell explained what delivery capabilities the company expected of its suppliers:
We tell our suppliers 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."11
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 parts and components in designing its products. Current initiatives included using the Internet to further improve supply chain management and achieve still greater manufacturing and assembly efficiencies.
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 parts 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, it was not unusual for there to be rapid-fire reductions in the prices of components—in 1997 and early 1998, prices for some components fell as much as 50 percent (an average of 1 percent a week). 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. The prices of hard disk drives with greater and greater memory capacity had dropped sharply in recent years as disk drive makers incorporated new technology that allowed them to add more gigabytes of hard disk memory very inexpensively.
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-megahertz chip, that means I’m going to 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 11 days, you’ve got a big cost disadvantage. And you’re vulnerable to product transitions, when you can get stuck with obsolete inventory.12
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 day—hourly 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.13 Nor did it bother to have them shipped to Dell’s assembly plants to be warehoused for shipment to customers. Instead, using 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 up 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 significant.
The company had, over the years, refined and improved its inventory tracking capabilities, its working relationships with suppliers, and its procedures for operating with smaller inventories. In fiscal year 1995, Dell averaged an inventory turn ratio of 32 days. By the end of fiscal 1997 (January 1997), the average was down to 13 days. The following year, it was 7 days, which compared very favorably with Gateway’s 14-day average, Compaq’s 23-day average, and the estimated industrywide average of over 50 days. In fiscal year 1999, Dell operated with an average of 6 days’ supply in inventory. The company’s long-term goal was to get its inventories down to a 3-day average supply.
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, $35 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 of the same complaints, the information was relayed immediately to design engineers, who checked out the problem. 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 PC makers in Asia, that operated on the basis of large production runs of standardized products and sold them through retail channels. Dell saw its direct-sales approach as a totally customer-driven system, with the flexibility to change quickly to new generations of components and PC models.
Despite Dell’s emphasis on direct sales, industry analysts noted that the company sold perhaps 10 percent of its PCs through a small, select group of resellers.14 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 time, 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 50 to 60 dealers.
Dell’s Use of Market Segmentation To make sure that each type of computer user was well served, Dell 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 took off in 1995–97, these segments were subdivided into finer, more homogeneous categories (see Exhibit 8).
In 1999, 65 percent of Dell’s sales were to large corporations, government agencies, and educational institutions. Many of these large customers typically ordered thousands of units at a time and bought at least $1 million in PCs annually. Dell had hundreds of sales representatives calling on large corporate and institutional accounts. Its customer list included Shell Oil, Sony, Exxon-Mobil, MCI, Ford Motor, Toyota, Eastman Chemical, Boeing, Goldman Sachs, Oracle, Microsoft, Woolwich (a British bank with $64 billion in assets), Michelin, Unilever, Deutsche Bank, 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.
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 phone 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 toll-free call centers in Europe and Asia.15 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 rep. Dell began Internet sales at its Web site (www.dell.com) in 1995, almost overnight achieving sales of $1 million per day. In 1997 sales reached an average of $3 million daily, hitting $6 million on some days during the Christmas shopping period. Dell’s Internet sales averaged nearly $4 million daily in the first quarter of 1997, reached $14 million daily by year-end 1998, and climbed sharply to $35 million daily at the close of 1999. In early 2000, visits to Dell’s Web site for information and order placement were approaching 2.5 million weekly, about 20 times more that the number of phone calls to sales representatives. In early 2000, about 43 percent of Dell’s sales were Web-enabled and the percentage was increasing.
Dell in Europe In fiscal year 1999, $6.6 billion of Dell’s $18.2 billion in 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, accounting for sales of $4.7 billion, up from $3.0 billion the prior year. Dell’s European revenues were growing over 50 percent annually, and unit volume was increasing at nearly a 35 percent annual rate. Sales of PCs in Europe were 19.7 million units in 1997, 25.4 million units in 1998, and 29.9 million units in 1999. Expectations were for continued growth of 18 to 22 percent for the next several years. Europe’s population and economy were roughly the same as those of the United States, but computer usage was only half that of the United States in 1999. Germany led Europe in sales of PCs, with 6.6 million units in 1999 (up 21.6 percent over 1998); Great Britain was second, with unit sales of 5.5 million (up 25.2 percent over 1998); and France was third, with 1999 unit sales of 4.4 million (up 26.7 percent over 1998). According to Dataquest, the top five market leaders in PCs in Europe were as follows:
Fujitsu and Siemens had merged their PC operations in 1999 to move ahead of Dell in the ratings in Europe during 1999 (based on the combined market shares of the two brands); based on individual brand, however, Dell ranked second in Europe, ahead of both the Fujitsu brand and the Siemens brand.
Dell in China Dell Computer entered China in 1998 and by 2000 had achieved a market share close to 2 percent. China was the fifth largest market for PCs in the world, behind the United States, Japan, Germany, and Britain. But with unit volume expanding 30 percent annually and a population of 1.2 billion people, the Chinese market for PCs was expected to become the second largest in the world by 2005 (with annual sales of $25 billion) and to become the world’s largest PC market sometime thereafter. The market leader in China was Legend, a local company; other major local PC producers were Founder (ranked fourth) and Great Wall (ranked sixth). IBM, Hewlett-Packard, and Compaq were among the top five market share leaders in China—all three relied on resellers to handle sales and service. Other companies among the top 10 in market share in China included Toshiba, NEC Japan, and Acer (a Taiwan-based company). Dell, ranked eighth in market share in 1999, was the only market contender that employed a direct-sales business model. Dell’s sales in China in 1999 were up 87 percent over 1998 levels.
Dell management believed that in China, as in other countries around the world, the company could be very price-competitive by cutting out middlemen and selling direct via the Internet, telephone, and a sales force that called on large customers. Dell’s primary market target in China was large corporate accounts. Management believed that many Chinese companies would find the savings from direct sales appealing, that they would like the idea of having Dell build PCs to their requirements and specifications, and that—once they became Dell customers—they would like the convenience of Internet purchases and telephone orders. Dell recognized that its direct-sales approach would temporarily put it at a disadvantage in appealing to small-business customers and individual consumers. According to an executive from rival Legend, "It takes two years of a person’s savings to buy a PC in China. And when two years of savings is at stake, the whole family wants to come out to a store to touch and try the machine."16 But Dell believed that over time, as Chinese consumers became more familiar with PCs and more comfortable with making online purchases, it would be able to attract growing numbers of small-business customers and consumers through Internet and telephone sales.
IBM was the market leader in 1999 in the entire Asia-Pacific region, with an estimated 8.4 percent share, up from 8.1 percent in 1998.17 Compaq had a second-place 7.3 percent share but was the market leader in a number of individual countries within the region. China-based Legend had a 7.1 percent share, most all of which came from sales in China. Samsung had the fourth largest market share, followed by Hewlett-Packard.
Dell in Latin America In 2000, PC sales in Latin America were approaching 5 million units annually. Latin America had a population of 450 million people. Dell management believed that in the next few years use of PCs in Latin America would reach 1 for every 30 people (one-tenth the penetration in the United States), pushing annual sales up to 15 million units. The company’s new plant in Brazil, the largest market in Latin America, was opened to produce, sell, and provide service and technical support for customers in Brazil, Argentina, Chile, Uruguay, and Paraguay.
Service became a feature of Dell’s strategy in 1986 when the company began providing a year’s free on-site service 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 phone number, fax, or e-mail. 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 its own service provider, Dell supplied that provider with the training and spare parts needed to service the customer’s equipment.
Value-Added Services Selling direct allowed Dell to keep close track of the purchases of its large global customers, country by country and department by department—information that customers found valuable. And its close customer relationships resulted in Dell being quite knowledgeable about what each customer needed and how its PC network functioned. Aside from using this information to help customers plan their PC needs and configure their PC networks, Dell used it to add to the value it delivered to its customers. For example, Dell could load a customer’s software at the factory, thereby eliminating the need for the customer’s PC personnel to unpack the PC, deliver it to an employee’s desk, hook it up, place asset tags on the PC, then load the needed software from an assortment of CD-ROMs and diskettes—a process that could take several hours and cost $200 to $300.18 Dell’s solution was to load the customer’s software onto 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 whatever software the customer had specified onto the PC’s hard disk in a few seconds. If the customer so desired, Dell would place the customer’s asset tags on the PC at the factory. Dell charged customers only $15 or $20 for the software-loading and asset-tagging services—the savings to customers were thus considerable. One large customer reported savings of $500,000 annually from having Dell load its software and place asset tags on its PCs at the factory.19 In 1997, about 2 million of the 7 million PCs Dell sold were shipped with customer-specific software already loaded on the PCs.
In late 1997, in another effort to add value for its customers, Dell, following Compaq’s lead, created a financial services group to assist customers with financing their PC networks.
Premier Pages Dell had developed customized, password-protected Web sites (called Premier Pages) for 40,000 corporate, governmental, and institutional customers worldwide. Premier Page sites gave customer personnel online access to information about all Dell products and configurations the company had purchased or that were currently authorized for purchase. Employees of Dell’s large customers could use Premier Pages to (1) obtain customer-specific pricing for whatever machines and options they wanted to consider, (2) place an order online that would be electronically routed to higher-level managers for approval and then on to Dell for assembly and delivery, and (3) seek advanced help desk support. Customers could also search and sort all invoices and obtain purchase histories. These features eliminated paper invoices, cut ordering time, and reduced the internal labor customers needed to staff corporate purchasing and accounting functions. A customer’s Premier Pages also contained all of the elements of its relationship with Dell, including who the Dell sales and support contacts were in every country where the customer had operations, what software Dell loaded on each of the various types of PCs the customer purchased, and service and warranty records for each machine. So far, customer use of Premier Pages had boosted the productivity of Dell salespeople assigned to these accounts by 50 percent. Dell was providing Premier Page service to thousands of additional customers annually and adding more features to further improve functionality.
www.dell.com At the company’s Web site, which underwent a global redesign in late 1999 and had 50 country-specific sites in local languages and currencies, prospective buyers could review Dell’s entire product line in detail, configure and price customized PCs, place orders, and track those orders from manufacturing through shipping. The closing rate on sales coming through www.dell.com were 20 percent higher than sales inquiries received via telephone or fax. The company was adding Web-based customer service and support tools to make a customer’s online experience pleasant and satisfying. Already the company had implemented a series of online technical support tools:
• Support.Dell.com —This Web-based feature allowed customers to create a customized support home page; review technical specifications for Dell systems; obtain information and answers from an extensive database collected by Dell technicians, service providers, and customers; click on online links to Dell’s primary suppliers; and take three online courses on PC usage at no charge. The site enabled customers to select how they received online help, based on their comfort and experience with PC technology. The information available at this part of Dell’s Web site was particularly helpful to the internal help-desk groups at large companies. In late 1999, customer visits to support.Dell.com were running at a rate of 19 million per year.
• E-Support —Dell had developed advanced technology called "E-Support—Direct from Dell" that helped Dell systems detect, diagnose, and resolve most of their own problems without the need for users to interact with Dell’s support personnel. The goal of Dell’s E-Support technology was to create computing environments where a PC would be able to maintain itself, thus moving support from a reactive process to a preventive one. Michael Dell saw E-Support as "the beginning of what we call self-healing systems that we think will be the future of online support."20 Dell expected that by the end of 2000 more than 50 percent of the customers needing technical help would use E-Support—Direct from Dell. Management believed the service would shorten the time it took to fix glitches and problems, reduce the need for service calls, cut customer downtimes, and lower Dell’s tech-support costs.
• Dell Talk —An online discussion group with 100,000 registered users, Dell Talk brought users and information technology (IT) professionals together to discuss common IT problems and issues.
• Ask Dudley —The Ask Dudley tool gave customers instant answers to technical service and support questions. Customers typed in the question in their native language and clicked on "ask."
In February 2000, 40 to 45 percent of Dell’s technical support activities were being conducted via the Internet. Dell was aggressively pursuing initiatives to enhance its online technical support tools. Its top priority was the development of tools (as described in the above list) that could tap into a user’s computer, make a diagnosis, and if the problem was software related, perform an online fix. Dell expected that such tools would not only make it easier and quicker for customers to resolve technical problems but would also help it reduce the costs of technical support calls (currently running at 8 million calls a year). The company estimated that its online technical support tools had resulted in 25 percent fewer support calls from users, generating savings of between $5 and $10 per call.
Management believed that the enhancements it was making to www.dell.com made it easier and faster for customers to do business with Dell by shrinking transaction and order fulfillment times, increasing accuracy, and providing more personalized content. According to management, a positive Web site experience was a bigger driver of "e-loyalty" than traditional attributes like price and product selection.
On-Site Service Corporate customers paid Dell fees to provide support and on-site service. Dell generally contracted with third-party providers to make the necessary on-site service calls. Customers notified Dell when they had PC problems; such notices triggered two electronic dispatches—one to ship replacement parts from Dell’s factory to the customer sites and one to notify the contract service provider to prepare to make the needed repairs as soon as the parts arrived.21 Bad parts were returned to Dell for diagnosis of what went wrong and what could be done to see that the problems 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 to improve product quality and reliability.
On-Site Dell Support 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. For example, 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 Boeing’s PC needs and configuring Boeing’s network. While Boeing had its own people working on what the company’s best answers for using PCs were, there was close collaboration between Dell and Boeing personnel to understand Boeing’s needs in depth and to figure out the best solutions.
Migration to New Technology Dell had opened facilities in both Europe and North America to assist its customers and independent software providers in migrating their systems and applications to Windows 2000, Intel’s new 64-bit Itanium computer chip technology, and other next-generation computing and Internet technologies. 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 it 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.
Customer Forums In addition to using its sales and support mechanisms to stay close to customers, Dell held 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 area; regional meetings were held every six to nine months.22 In the larger regions, there were two meetings—one for chief information officers and one for technical personnel. As many as 100 customers and 100 Dell executives and representatives, including Michael Dell, attended the three-day meetings. At the meetings, 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 how to manage the transition to Windows NT, how to manage the use of notebooks by people out in the field, and 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.
Michael Dell believed that the Internet had revolutionary business potential, and he was instrumental in making Dell Computer a pioneering first-mover in using the Internet and e-commerce technologies. In a 1999 speech to 1,200 Dell customers, he said:
The world will be changed forever by the Internet . . . The Internet will be your business. If your business isn’t enabled by providing customers and suppliers with more information, you’re probably already in trouble. The Internet provides a dramatic reduction in the cost of transactions and the cost of interaction among people and businesses, and it creates dramatic new opportunities and destroys old competitive advantages. The Internet is like a weapon sitting on a table ready to be picked up by either you or your competitors.23
Michael Dell believed that for a company to harness the power of the Internet and succeed in revolutionizing the way business was done, it had to observe three rules:
1. Give customers a better experience online than they could get offline.
2. Execute efficiently.
3. Recognize that compressing time and distance in business relationships with suppliers and customers to enhance the velocity of business transactions is the ultimate source of competitive advantage. (Dell was convinced that transacting business with suppliers and customers in real time drove big improvements in business efficiency—requiring fewer people, less inventory, and fewer physical assets and speeding new products to market.)
Dell Computer was rapidly gaining valuable experience and know-how in applying these rules to its business. For example, the company had created valuechain.dell.com, which provided suppliers with secure personalized access to Dell’s operations through a single portal. This tool facilitated real-time collaboration on the quality of the items being supplied, helped assure continuity of supply and minimal components inventories, and made it possible for engineers at Dell and its suppliers to jointly develop online designs of next-generation components and products. Dell had also created an online "scorecard" for suppliers showing their performance against the quality standards that had been agreed on and how well they were doing against other suppliers in the same class. Both tools helped the company achieve its strategic objectives of product quality and reliability, rapid inventory turnover, and low costs.
Dell was using the Internet to improve its execution efficiency in several ways. By greatly improving the company’s capability to provide order status information quickly and conveniently over the Internet, the company had been able to eliminate tens of thousands of order status inquiries coming in by phone. Order status inquiries handled by phone typically cost the company between $3 and $10; however, the cost could be considerably more if a customer had 100 orders and the status of each one had to checked. Close to 80 percent of Dell’s order status inquiries in 2000 were being handled via the Internet at a cost close to zero, saving Dell an estimated $21 million annually and freeing personnel to do higher-value-added activities.
Although Dell was doing a very good job in solving 80 percent of customer issues over the phone (compared to an industry average of 27 percent) and saving money by not having to dispatch an on-site service provider, the company was working to greatly improve its online diagnostic technical support tools—Support.Dell.com, Dell Talk, and Ask Dudley. Management believed that Web-enabled technical support would make it easier and quicker for users to get the technical support they needed, as well as reduce the costs of handling the current total of 8 million technical support calls a year.
In 1998 the company had used technology to tackle the challenge of reducing its infrastructure cost of handling messages from customers. Michael Dell explained:
The needs for our e-mail structure had grown beyond the support we had internally. We faced a very serious challenge. We were receiving 2.7 million messages per week within Dell’s system, 4.3 million per month over the Internet, and our user base was growing at the rate of 50 percent per year. To solve this, we consolidated 200 servers into about 25 PowerEdge servers running Microsoft Exchange. There was a 10 times reduction in the number of servers and the associated management costs. We migrated to Exchange and lowered our user cost by 29 percent.24
Other Elements of Dell’s Business Strategy
Other element of Dell’s strategy, in addition to those mentioned above, are discussed below.
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 at maintaining 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 to keep a finger on the pulse of demand—what was selling and what was not. Moreover, the company’s market segmentation strategy paved the way for in-depth understanding of customers’ current needs, evolving requirements, and expectations. Having credible real-time information about what customers were actually buying and having firsthand knowledge of large customers’ buying intentions gave Dell strong capability to forecast demand. Furthermore, Dell passed that information 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 quickly sending that information to both internal groups and vendors.
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 $250 million annually to improve users’ experience with its products—including incorporating the latest and best technologies, making its products easy to use, and devising ways to keep costs down. The company’s R&D 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 very important to the buyers of portable computers. Dell was the first company to put lithium ion batteries with a 5.5- to 6-hour life 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. His competitive zeal resulted in the company’s being the first 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" and that they allowed the company "to increase customer awareness about value."25 Dell insisted that the company’s ads be communicative and forceful, not soft and fuzzy.
The company regularly had prominent ads describing its products and prices in such leading computer publications as PC Magazine, 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 major multiyear worldwide TV campaign to strengthen its brand image—the theme for the campaign was "Be Direct." A number of the ads featured Michael Dell talking about the importance of direct customer relationships, the company’s attentive and responsive customer service, and the unique value created by the company’s direct-sales and build-to-order approaches. One of Dell’s tag lines was "Empower Your Business Through the Internet with Dell."
Dell’s Increased Emphasis on Servers and Storage Devices Dell entered the market for low-end PC servers (under $25,000) in the second half of 1996. Its entry strategy included adding 23,000 square feet of production capacity suitable for cell manufacturing techniques and self-contained work teams, training 1,300 telemarketers to sell servers, assigning 160 sales reps with systems know-how to big customer accounts, and recruiting a staff of systems experts to help the sales reps. It also 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.
There were several drivers behind Dell’s entry into servers. The use of servers by corporate customers was growing rapidly. The margins on servers were large. Moreover, purchase price was not as significant a factor in selecting which brand of server to buy because servers required far more in the way of service, support, and software. Several of Dell’s rivals, most notably Compaq Computer, were using their big margins on server sales to subsidize price cuts on desktops and notebooks in an attempt to win corporate PC accounts away from Dell. According to Michael Dell,
We had to meet the challenge of extending the Dell brand beyond our strong desktop and notebook franchises. The next logical step was servers. Entering the server business was not only a huge opportunity but clearly a competitive necessity. An explosion of networked and internetworked systems was occurring throughout corporations, which meant that our present customers—the techno-savvy, second- or third-time buyers who were our core market—would be looking to make big purchases.
At the same time, the emergence of industry standards for operating systems (Windows NT) and multiprocessor servers meant that Dell could develop its own server systems based on these standards and avoid massive investments in new proprietary technologies that would ultimately become very costly for our customers. It also meant that we did not have to acquire a competitor to enter the server business.
We could profit by offering lower prices through the direct model. We could, in effect, shatter the price premiums customers were paying for proprietary server technologies.
The alternative wasn’t pretty. Servers were a force literally big enough to change the operating environment. If we ignored them, the market would consolidate around the top three providers—Compaq, IBM, and HP. We would be seen as a bit player, and would lose our standing with technology providers. And our operating margins would start to thin.
Our large competitors also were using excessively high margins in servers to subsidize the less profitable parts of their business, like desktops and notebooks. If we didn’t move into servers, we would be greatly exposed to attack in the desktop and notebook market.
We had the opportunity to do with servers what we had originally done with desktops and then notebooks: rapidly build market share by offering higher performance at a lower price, simultaneously forcing our competitors to lower their server prices and collapse their margins to the point where they couldn’t afford to subsidize their other product lines. We couldn’t afford not to take such an opportunity.26
As Michael Dell predicted, Dell Computer’s build-to-order, sell-direct strategy gave it a significant cost and pricing advantage over rival sellers of servers. When Dell launched its new PowerEdge server line, the servers from such competitors as Compaq, IBM, and Hewlett-Packard, all of which relied on networks of resellers, were priced 15 to 20 percent higher than comparable Dell models. To communicate to Dell employees the importance of achieving success in the server market, the company sent out companywide "Message from Michael" e-mails, put up posters in high-traffic areas, and talked through the strategy at numerous brown-bag lunches and company get-togethers.27 It also staged an event called "The Great Dell Torch Event" for 7,000 employees in a downtown Austin auditorium, opened by Michael Dell running into the auditorium carrying an Olympic-sized torch. In meetings with customers Michael Dell and Dell salespeople told customers to ask their server vendors to meet Dell’s pricing so they could at least save money on server purchases if they did not opt to buy from Dell. In the first year that Dell competed in servers, rivals cut prices about 17 percent on their competing models.
Dell’s objective was to achieve a double-digit share of the server market by year-end 1998; it achieved that goal in the middle of 1997. By year-end 1997, Dell had gone from 10th to 4th in market share worldwide. By the fall of 1998, Dell had passed IBM and Hewlett-Packard in the U.S. market, moving into second place with a 19 percent share; and Dell was the only server provider growing substantially faster than the rest of the market. During the 1997–99 period, Dell expanded its lineup of server products to include more powerful models, added modular features, and boosted its service capabilities for servers. By 2000, the company had captured a sizable share of the market for low-end servers and was a significant competitive force in the server segment.
More recently, Dell had expanded its product line to include storage devices designed to handle a variety of customers’ needs for high-speed data storage and retrieval. Dell’s PowerVault line of storage products had data protection and recovery features that made it easy for customers to add and manage storage and simplify consolidation. Dell management saw storage devices as a growth opportunity because the computing systems of corporate and institutional customers were making increasing use of storage devices.
Dell’s Introduction of a WebPC In December 1999, Dell unveiled a new line of PCs stripped of fancy features and equipped for easy, quick Internet access by novices. The new line included three models, ranging in price from $999 to $2,349. Each came with a monitor, printer, technical support options, and one-year subscription to Dell’s Internet service, DellNet. Each of the new WebPCs could be plugged in and made Internet-ready in three steps. The main unit was 6 inches wide, 11 inches high, and 10 inches deep and weighed 10 pounds. Dell believed the new line would help broaden the market for its products and give it a growing presence in the consumer and small-business segments. According to Michael Dell, "If Dell executes in the consumer and small business market alone this could add an additional $10 billion in revenue over the next several years."28 Two competitors were planning to launch comparable products. Compaq Computer had announced it would begin selling an iPaq PC in early 2000 for $499 without a monitor. Advanced Micro Devices planned to introduce its EasyNow model in late December at prices of $500 to $1,000.
Dell’s Efforts to Promote Good Strategy Execution
Michael Dell was a strong believer that good planning and good strategy amounted to little without good strategy execution. To promote effective strategy execution, the company had adopted a number of policies and operating practices. The company stressed use of facts and data in daily decision making—"Facts are your friend" was a common phase at Dell and an integral part of the corporate culture. The company had developed detailed profit and loss statements for each part of the business, and managers were expected to make fact-based decisions according to their impact on the bottom line; those who resisted were forced out.
Because much of what had contributed to Dell’s success went against the grain of conventional wisdom, Dell Computer made a conscious effort to hire employees who had open, questioning minds and were always ready to learn and try something new.29 Job applicants were screened carefully; the company looked for people who not only were results-oriented, self-reliant, and intelligent but also expected change to be the norm and liked looking at things from a different angle and coming up with unprecedented, innovative solutions. People were hired not so much for their ability to come in and fill a job opening as for their capacity to grow and develop with the company over the long term. Once hired, Dell employees were encouraged to be innovative, to look for breakthrough ideas, to challenge the status quo, and to experiment with new or better ways of doing things. Self-criticism and acceptance of periodic "course corrections" were ingrained in the Dell culture; everyone could question how things were being done and offer suggestions for improvement. Michael Dell preached against complacency and satisfaction with the status quo:
We try to avoid being too proud of our accomplishments . . . If we start to think we’ve made it, we’re just setting ourselves up to be eclipsed by someone else . . . It’s easy to fall in love with how far you’ve come and how much you’ve done. It’s definitely harder to see the cracks in the structure you’ve built yourself, but that’s all the more reason to look hard and look often. Even if something seems to be working, it can always be improved.30
A substantial part of the work process at Dell was organized around teams. Teams were given objectives and were held accountable for their performance. For example, on the factory floor people worked in teams of two to receive, manufacture, and pack an order for delivery to a customer. Profit-sharing incentives encouraged members to be productive as a team. Hourly metrics for team performance were posted on monitors on the factory floor so that each team could see how it was doing relative to other teams and to performance targets. Ratings of individual performance were based on a 360-degree performance appraisal that involved input from everyone with whom an employee worked rather than just supervisors.
The vast majority of Dell’s employees were also stockholders as a result of the company’s employee stock purchase plans, stock option grants, and a 401(K) plan in which Dell matched employee contributions with stock rather than cash. The compensation and incentives of Dell employees were tied to the health of Dell’s business, measured chiefly by the company’s return on invested capital (ROIC) and growth rate. Tying compensation increases and incentive awards to ROIC began in 1995 with a companywide push to educate all employees to the benefits of boosting ROIC that included e-mail "Messages from Michael," articles in the company newsletter, posters, and talks by managers. The company explained how employees could contribute to a higher ROIC by helping reduce cycle times, eliminating scrap and waste, increasing inventory turns, forecasting accurately, boosting sales volumes, controlling operating expenses, collecting accounts receivable more efficiently, and doing things right the first time.31 Dell executives believed that focusing attention on ROIC mobilized employees around a single company goal. And they believed that treating employees as owners helped employees understand the drivers of the business, fostered a sense of pride, and got them much more involved in the process of questioning procedures, experimenting with new ideas, and learning better ways to do things.
To spur the process of looking for innovations and new opportunities, Dell management made a practice of setting stretch objectives. In 1997, the company set a target of selling 50 percent of its systems at www.dell.com within the next few years. At the time, Web site sales were averaging $1 million per day and annual revenues were $12 billion. The 50 percent target was not picked out of the air but was based on the company’s growth, the market potential of the company’s products, and the perceived potential of online sales.
Dell management spent a lot of time communicating to employees—explaining what was going on, what the company’s strategy was, where the company stood in the market, what its future plans were, and what the organization needed to do to achieve its objectives. Michael Dell conducted "town hall" meetings at various locations annually and spent a lot of time answering questions. Company successes were celebrated at get-togethers and via e-mail communications congratulating teams on big account wins or other special achievements. Best practices in one area were shared with other areas. Much communication took place in real time via extensive use of e-mail and the company intranet.
The company made a concerted effort to avoid hierarchical structure, believing that hierarchy stymied communication and resulted in slower response times. Michael Dell explained:
We’re allergic to hierarchy. Hierarchical structure to me fundamentally implies a loss of speed. It implies that there’s congestion in the flow of information. It implies the need for layers of approval and command and control, and signoffs here, there, and everywhere. That’s inconsistent with the speed with which we all need to make decisions, both as leaders and as a company, in this fast-paced marketplace . . . Time is everything—the sooner you deal with an issue, the sooner it’s resolved.32
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