Matching Dell Case Solution

1. How attractive is the personal computer industry as an arena in which to do business in the late 1990's?

The pattern of high growth continued from mid 90s to late 90s as computer sales kept on increasing. As a result, all the companies were able to continue to make strides towards profitability. Similarly, the computer industry witnessed considerable consolidation, which led to the emergence of few key players such as Intel in the market. Nevertheless, the level of competition varied from one segment of the industry to another. This can be attributed to number of factors such as level of technology and cost of production. For instance, in the peripheral segment of the computer industry, the competition was very high as items such as keyboards, mouse, etc. could be purchased from a number of different suppliers. On the other hand, in microprocessor segment, Intel was successful in establishing its dominant status. Resultantly, Intel became the chief supplier of microprocessor for major companies. The operating system segment was competed by Apple and Window. The overall computer market was competed by the likes of Dell, Compaq and IBM, which involved in both price and non-price competition in order to increase their respective market share. However, due to decreasing processing cost, the competition in the computer industry increased as the line between PCs and other electronic and portable devices blurred. Similarly, with the increase in the power and specificity of PCs, the need of workstations started to diminish, which led to their substitution by powerful PCs. This further fuelled the market for PCs, which directly benefited the incumbent firms.

2. What strategy and which tactics did Dell employ to make the industry more attractive for itself?

Dell employed a completely different business model, which differentiated it from the rest of the competition. Dell used direct model to sell PCs to the customers. This model allowed the company to come directly in contact with the end customers unlike its competitors, which sold their computers through retailers. This allowed Dell to provide computers to corporate customers. The computer provided to these customers were not only high performance PCs but also very cheap in relation to the competition. This allowed Dell to build a loyal and sustainable customer base. In addition to this, Dell also distinguished itself from the rest of the market by providing customized PCs to the customers. Dell was the only company, which provided PCs tailored exactly to the requirements of the customers. This business model allowed Dell to target profitable segment of wholesale buyers such as businesses and government institutions. These customers also accounted for the major chunk of organization’s revenue. Additionally, Dell also employed tactic of dividing the customers based on the types of purchase. The two categories of customers, which are relationship and transaction customers, were dealt with completely different set of strategy. The relationship customers were approached through sales reps, which were responsible for managing the relationship of specific customers. On the other hand, transaction customers were approached through advertisement and trade journals. This enabled the company to achieve cost-effectiveness in relation to the customer type. Furthermore, this also allowed the company to increase its ROI (Return on Investment). However, in late 1990s Dell also entered into retail sector in order to increase its market penetration and subsequently profitability.

3. What are the key assumptions underlying Dell’s business model?

There were a number of key assumptions underlying Dell’s business model. The first key assumption is related to the profitability of approaching the customers directly in place of any intermediary. In other words, Dell believed that using direct model of sales will allow them to capture market share, which was not possible through retail distribution. As a result, Dell employed this model as their primary strategy. This assumption was validated with the performance of the company as Dell was not only able to create differentiation in the minds of the customer but was able to translate this differentiation with sales. The second key assumption is related to the quantity of the transaction. Dell assumed that as the most direct customers will be businesses or government institutions, the purchase will be done on a wholesale basis. This will allow the company to sell bulk of their products in one-go. This assumption was also warranted as most of Dell’s customer bought the PCs in large quantities. On the customer’s part, wholesale buying allowed them to achieve lower per unit cost, which increased the cost-effectiveness of their transaction. Last of all, Dell also assumed that the major attraction for the customers will be the customization services provided by Dell, which was unmatched by the rest of the market. Time proved that Dell was also correct in this assumption as customer approached Dell to develop customized PCs, which were according to the requirements of their processes and operations.

4. Why have Dell’s competitors not imitated Dell and removed its advantage?

Dell’s competitors did not imitate Dell’s business model as they felt that it would erode their brand images in the market. Instead, each of Dell’s competitors came up with the different strategy, which was aimed at removing Dell’s advantage but without compromising the brand image of the company. For instance, IBM took a number of steps in order to improve the coordination between distributors and resellers. Similarly, IBM launched ‘Joint Manufacturing Authorization Program’, which aimed at providing highly configured PCs to the retailers, which in turn can customize the products according to the requirements of the customers. Likewise, IBM also came up with Model 0, which was capable to be designed according to the requirements of the customers. Like IBM and Dell, Compaq also came up with new business model known as ODM. The purpose of ODM was to provide customized PCs to customers through distributors and retailers. Compaq also started DirectPlus Program to sell customized PCs to the SMEs. Following the footsteps of Dell, HP also introduced ESPP to target large corporate customer by building tailor-made PCs. Despite targeting the customers directly, HP still kept the importance of resellers at the center of its strategy. These initiatives clearly underline the success of Dell’s direct model of business. These episodes only show that the competitors tried to copy Dell’s model indirectly in order to replicate its success in the market. Furthermore, these programs allowed the respective companies to challenge Dell in the market of customized PCs.

5. How did the PC industry come to have the level of attractiveness it had in the late 1990’s? To whom would you assign responsibility for the state of the industry?

There are a number of factors, which contributed to the creation of attractive computer industry in the late 1990s. First of all, the popularity of internet and World Wide Web fuelled the demand of personal computers. Similarly, strong economic growth also increased the purchasing power of the customers, which, subsequently, enabled the customer to afford new PCs. On the other hand, different manufacturers were able to bring the price of PCs to a level, where it can be targeted to the mass market unlike in the past. The reduction in the price can be attributed to new cheaper technology and economies of scale achieved by the manufacturers. In this regard, Dell played an instrumental role using its direct model. This model allowed the company to cut the cost of intermediary and directly target the customers. The reduction in the cost was passed down to customers through decreased prices. Dell was so successful in the market that it forced the rest of the market to take notice and adopt a similar strategy. As a result, IBM, Compaq and HP also came up with its initiative of directly targeting the customers. Such initiatives further reduced the price of PCs in the market, which further increased the demand on the customer end. Moreover, this new wave competition manifested in both price and non-price competition. Overall, this competition played the part in improving the attraction of the overall computer industry.

6. How would you go about calculating Dell’s advantage over Compaq in serving a corporate customer in 1996? What do you need to know?

There are a number of indicators through which Dell’s advantage over Compaq can be determined. First of all, it can be clearly seen that Dell enjoys clear advantage over Compaq as far as corporate customers are concerned. This can be substantiated from the ratings of PC vendors by corporate managers. According to this rating, Dell enjoyed preferential advantage over Compaq in raw technology, pricing, support and customer relationship.