Dell's Direct Sales Model

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Case 11.1: The direct sales model or a ‘dual system’ model: Dell’s distribution strategy in China. 1. What are Dell’s FSAs? What are the macro-level requirements for the direct sales model to be successful? What are the major advantages of the direct model, compared with the tradi tional channel strategy in the computer business?

Dell’s main FSA is its well designed and integrated supply chain based on its direct sales model. Dell successfully controls its own distribution, bypassing conventional distribution channels and selling directly to consumers. By bypassing the retailers, Dell could sell PCs at lower prices, and because of its direct contact with it customers they are also able to better understand customers’ needs and forthcoming customize its products, creating big purchasing advantages compared to the traditional model.

Dell could benefit to large extent of its direct sales model, because of the availability of large macro-level opportunities beneficial for Dell. In the 1980s, corporate customers and individuals were becoming very sophisticated and experienced technology users. Because they knew exactly what they wanted, they did not necessarily need intense personal selling. They could buy directly from Dell and benefit from their low prices. This macro-level sociological trend was thus beneficial for Dell. The other macro level trend is a technological one because of the standardization of components in the computer industry. This made mass customization viable and because Dell used the built -by-order concept, they were better capable to meet the customization requirements of consumers compared to the traditional model with retailers with more standardized PCs in stock.

Compared to the traditional supply chain, the direct model had two major advantages . First, the closeness to end users helped Dell better understand users’ needs, forecast demand more accurately and build long -term relationships with end users. Second, the elimination of distributors helped Dell reduce not only its selling cost, but also its inventory through both accurate forecasting and integration with component suppliers.

2. How did Dell treat its distributors in China during its re -entry into China in 1995? Was there a vicious cycle of bounded reliability involved? Who should be blame d for Dell’s initial failure? When Dell re-entered China in 1995, they imported PC’s from other countries and then sold PCs through distributors. Dell used four first-tier distributors located in strategic geographical areas, second -tier resellers and third-tier resellers. Dell’s representative office in China formulated the sales plan, designed promotion strategies and coordinated the relationships among the distributors. Because of this, distributors had almost no influence in the strategy process.

There was a vicious cycle of bounded reliability, because Dell had no intention of creating a long -term relationship with their distributors. Dell was waiting for the right time to apply its direct sales model and therefore didn’t want to put much ef fort in building a relationship with their distributors. On the other hand these distributors didn’t want to invest much in this market either, knowing that Dell wanted to change its distribution channel.

Dell can be blamed for the initial failure, becaus e it lacked investing in its distributors. When you decide to invest in a distributor, you can build on a certain relationship with that distributor. Not investing in a partner means that you have no confidence in the way things are running at that moment, causing a downward vicious circle.

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Strategy & International Process
Assignment 4: Case 12.1 & 13.1 | 12 October 2012

3. With the changing market situation after 2004, what new location -bound FSAs should Dell develop to cater to retail buyers in China? Or, alternatively, what complementary capabilities should Dell expect from its distributors?

Dell needs to create an FSA that...
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