Download Dell Hell Early Years Michael Dell founded his company while still a

Dell Hell
Early Years
Michael Dell founded his company while still a student at the University of
Texas in Austin. He decided not to follow the established practices in the industry
which were to manufacture products, find distributors and attempt to sell them in
the marketplace. Rapid innovations in PC components meant that unsold stock
contained out-of-date parts, meaning that such computers had to be heavily
discounted in order to sell them. Dell came up with the clever idea of making
computers to order. Customers selected from a list of options on hardware and
software, and telephoned their orders. An advantage of this approach was that Dell
was paid in advance, which by improving cash flow was an enormous benefit to a
young, growing company. Business and home buyers then received a machine that
was customized to their requirements and the make-to-order model allowed the use
of the very latest components, if desired. And so was born one of the most
revolutionary business models of the 20th century.
Dell also worked hard on streamlining manufacturing and co-ordinating the
supply chain. Whereas there were 130 ‘touches’ or interventions by staff on a
standard PC assembly line, Dell reduced this to just 60. He also introduced ‘just-intime’ delivery of components and finished products that resulted in major savings in
terms of inventory and storage costs.
The advent of the internet was a boost to the business in terms of both
demand and supply. The company’s extensive experience of computer direct
marketing meant that it became a ‘first mover in exploiting the internet as part of its
marketing strategy and it became the major sales channel for the company. Further,
the virtual integration of the supply chain reduced co-ordination and communication
costs, and decreased order processing time. When a customer placed an order with
Dell, it automatically went to Dell suppliers so that product components could
immediately be sent to a Dell assembly plant. Customers who visited the Dell
website were offered assistance in selecting the type of technology most suited to
their needs. Customers were then guided through the process of choosing the most
appropriate specification from a range of options. Once a decision was made, the
customer received an instant price quote and the date of delivery. Prices were low
based on Dell’s cost structure which was the lowest in the industry. Dell kept prices
low by eliminating distributors, doing very little R & D and keeping overheads lower
than 10 per cent of sales.
For large business customers the service was enhanced by offering Premier
Pages. The service was dedicated to a particular corporate customer and only
accessible by that customer. It could be used for two-way communication and holds
records of all previous interactions. It provided additional services including fast
response product support, order status, service information and details of special
offers available exclusively to them.
Dell’s main rivals were using a different strategy. Hewlett Packard and IBM
sold through computer stores and had invested in large sales forces to push stock
into their distribution channels. This meant higher costs and hence higher prices
than Dell.
The strategy was so successful that Dell’s early growth was phenomenal and
it became market leader in the PC market. Although thought of as a consumer brand,
Dell’s major successes were in the large business and educational market segments.
Its share price was the top performing big company stock of the 1990s rising by a
staggering 29,600 per cent between 1990 and 1998 (from 23 cents to $68). Michael
Dell became super rich.
The Changing Environment
By 2005 the marketing environment facing Dell and its rivals had changed.
PCs had become commodities and IBM had sold its PC division to Lenovo, a Chinese
company wishing to gain a global presence. Hewlett Packard had bought Compaq
computers several years earlier in an unsuccessful attempt to gain the scale which
they believed was necessary to compete with Dell.
Dell’s situation had also changed. Customers had started complaining about
the poor service they were receiving from Dell, which was of increasing importance
because some of its computers were failing. At one point, its computers suffered
from exploding batteries. The following comments posted on the internet reflected
some of Dell’s problems:
‘’ Dell computers are terrible. Aside from their cheap looking design, they are not
reliable machines. My friends owned them at law school, and this was enough for
me never to buy one. No one I new was satisfied, but since we were broke law
students, people had to get one. If you can afford a better computer, don’t go with
Dell’’
‘’ Their supply chain is horrible. It takes sometimes 2-3 months to get your laptop
and good luck trying to cancel and getting your money back. The customer service is
horrible and after three bad experiences, I’m scared to order anything from them
again.’’
Dell was regarded as making dull, cheap, entry-level computers. Further,
they lost their competitive edge by putting features into their products that that
customers did not value enough to pay for. Hewlett Packard, however, was
rejuvenated, launching new computers with innovative features and attractive
designs such as the first touchscreen all-in-one desktop aimed at families with
children. Also, their cost cutting programme meant they could charge prices that
were competitive against Dell. Buyers were regarding their PCs as extensions of
themselves, wanting to look ‘cool’ when seen using their laptop at universities, in
coffee shops, on trains etc.
Hewlett Packard also hit Dell’s corporate business, which at one point was 85
per cent of its total sales revenue. Large companies were increasingly buying
computers as part of a package which included IT consultancy services that added
value by offering solutions to particular business problems. Also as IT systems
became more complex, corporate customers were looking to their suppliers to
manage the systems for them. HP’s IT Solutions for Large Enterprises division placed
it in a better position than Dell to meet their needs. By late 2006, Dell had lost its
lead in the PC business to Hewlett Packard.
Competition also intensified by the emergence of Acer, a Taiwanese-based
multinational electronics manufacturer that moved faster than Dell and Hewlett
Packard to become the market leader in inexpensive portable computers known as
netbooks. Their strategy is to use its lowest cost position to become extremely
aggressive on price. Lenovo has also emerged as a serious competitor using the IBM
–designed ‘Think’ brand to target large companies, and its Lenovo 3000 brand to
target small and medium sized businesses. The consumer segment was targeted with
attractively designed innovative machines such as the IdeaPad U110, a laptop with a
bright red top and a 11-inch screen, and the Y710 which had a keyboard with special
controls for video games.
A market trend that Dell has been grappling with is the growing popularity of
tablet computers and smartphones that let people work and surf the web on the
move. For example, Apple’s hugely popular iPad and other tablets have had an
impact on laptop sales, hitting a major source of Dell’s revenues.
An even more important trend sweeping the industry is the growth of cloud
computing. This allows companies to store and analyse vast amounts of data in
massive warehouses of servers run by third parties. New entrants such as Amazon
and Rackspace Hosting try to persuade companies to rent storage capacity ‘in the
cloud’ rather than buying their own servers from the likes of Dell and HP.
Dell’s response
The company’s first response was to bring back Michael Dell, who had taken
over the role as chairman, as chief executive. He has implemented a number of new
initiatives:
(i)His view was that Dell should stop selling dull gray/black boxes but aim for
products that build ‘brand lust’, as he called it. In line with this strategy, Dell
launched a series of laptops that customers could customize by mixing from
an array of colours, patterns and textures for an extra £29. Customers could
also choose artistic designs from Nigerian painter Joseph Amedokopo, South
African graphic artist Siobhan Gunning, and Canadian designer Bruce Mau for
£69.
(ii)The company has also cut back on the production of ‘utilitarian’ computers
in favour of premium-priced computers such as the Adamo range of superthin notebooks to challenge Apple’s MacBook Air.
(iii)A series of computers has been designed for small businesses in fastgrowing emerging markets such as China and India, which are the source of
most PC growth. Mr Dell has spent a lot of time visiting emerging markets.
(iv) Dell has made massive investments in improving its service capability.
(v) Its distribution strategy has also changed. Alongside its direct
marketing operation, Dell has struck deals to sell its computers through large
retailers, including Wal-Mart, on a global scale with many of them in
emerging markets. In the UK Dell computers are sold through Dixons and
John Lewis.
(vi) It has moved to work with so-called re-sellers – outside companies that
design and install computer systems for small, medium and large businesses.
(vii) The purchase of several firms to strengthen its consultancy services to
large companies (e.g. Perot Systems).
(viii) Marketing communications has been overhauled. Dell has hired WPP, a
multinational marcomms agency, in a $4.5 billion deal to revitalize its image.
Dell has also set up a corporate blog and website called Ideastorm that lets
customers make suggestions on how Dell can improve its products and
service.
(ix) Cost cutting to the tune of $3 billion. As part of this exercise its plant at
Limerick, Ireland has closed with production moving to Poland.
(x) The launch of Dell’s Streak 7 tablet based on Google’s Android operating
system.
(xi) The acquisition of a number of Cloud-related businesses such as data
storage providers (e.g. EqualLogic).
(xii) A significant increase in research and development investment.
Questions
1. At the height of its success how was Dell positioned in the marketplace?
2. Using the 4-Cs framework, explain why Dell’s fortunes declined.
3. What are the significant changes to Dell’s positioning that have taken place since
Michael Dell’s return as chief executive. Why has Dell made these strategic moves
and what are the risks?
Based on: Fernandez, J. (2009) Dell’s Long Hard Road, Marketing Week, 22 January,
16-7; Allinson, K. (2008) Analysts Assess Dell’s New Strategic Thinking, 7 April, 26;
Anonymous (2009) Dell’s Adamo: Good Looks, Bad Timimg, Business Week, 11 May,
71; Jana, R. (2008) Taking The Dull Out of Dell, Business Week, 10 November, 52-3;
Fortt, J. (2007) Will The Holy Grail of Marketing Revive Dell, Fortune, 5 December 235; Anonymous (2008) Take Two, Economist, 3 May, 84; Allison, K. (2008) Dell’d Long
View Irks Investors, Financial Times 1 September, 20; Anonymous (2011) Rebooting
Their Systems, Economist, 12 March, 73-4; Pritchard, S. (2011) Dell? He’s Too Hungry
to Worry about Being Cool, Independent, 3 July, 90-1
This case was written by Professor David Jobber, School of Management, Bradford
University.