Dell was founded by Michael Dell in 1984, while schooling at the University of Texas in Austin. Direct sales model was first adopted: Computers were first sold over the phone and they were built according to the customer specifications (Kraemer K. L, 2000). From a student’s personal company selling no more than 100 computers in its first years of existence, it became a big company of more than 35.000 employees and over 25.000 million dollars sales in 2000 (Koehn, 2001), competing “giants” such as IBM and HP. In 2010, Dell ranks fifth in the computer industry (World's Most Admired Companies, 2010).
According to Michael Porter, any business that wants to succeed must develop strategies to confront the five competitive forces that shape the structure of competition in its industry. These five competitive forces includes rivalry of competitors within the industry, Threat of new entrants, threat of substitutes, bargaining power of customers and bargaining power of suppliers (O’Brien, 2009). The main challenges that Dell faces are namely (1) rivalry of competitors and (2) the threats of substitutes. Dell’s major competitors within US include Compaq, IBM and Hewlett-Packard. Globally, it faces tough competitions from NEC, Fujitsu and Toshiba. Next, Dell also faces the threat of substitute due to configuration being made easily available to the next vendor (Kraemer, 2001).
Overcoming the threats using SCM
Michael Dell’s strategic choices and his effective way of realizing them have played a significant role in Dell’s success story. The key element of his successful business model of the company is its supply chain management (SCM). The core elements of Dell’s business model are its direct sales model, usually referred as “direct model”, and the build-to-order strategy.
To overcome the threat of competitors and threat of substitutes, Dell uses SCM to aid in gaining competitive advantage. It adopts a cost leadership strategy through direct sales model whereby Dell is able to sell PCs directly to customers through its website, Dell.com.
Indirect Distribution Channel of the PC Industry
Dell’s Direct Distribution Channel
Figure 1: Distribution channel of Dell vs. a traditional company
By eliminating the intermediary steps and creating a direct relationship with its customers, Dell is able to substantially reduce the cost of business processes and lower the cost of customers and suppliers.
In addition, Dell also uses the differentiation strategy to cope with the rivalry of competitors. Unlike its competitors, Dell’s built to order model allows customization based on specification of each client’s needs. As Michael Dell has stated, this direct relationship “creates valuable information” about the customer, thus Dell knows who the end users are, what they have bought from Dell and what their preferences are, a fact that allows Dell to offer add-on products and services, and stay, in general, closer to the customer (Kraemer, 2001). As Lawton et al (Lawton, 2001) suggest, this “provides Dell with a wealth of marketing and product development information”. By having such close relationship with its client, Dell is better able to understand what client’s concerns are and thus emerge as a market leader.
Dell has limited fears on the threat of substitutes. Since it adopts a Just-In-Time (JIT) manufacturing process, Dell has no need to stock up inventories hence even if technology becomes obsolete, Dell would not be severely disadvantaged as compared to her competitors. To overcome the threat of substitutes, Dell is constantly into research and development so as to develop better and faster technologies which would outpace its competitors.
Apart from this, Dell also adopts innovation strategy by entering new markets and, thus expands its product portfolio: servers, workstations, printers and PDAs, as well as flat-screen TVs and digital cameras (Rivkin, 2004).