According to Michael Cannon, Dell's President of Global Operations, the key differentiators that have made Dell so effective for nearly two decades are its made to order direct sales model and its innovative supply chain (SCN, 2008).
Historically, personal computer companies produced most of the components for a computer which they assembled into their final products and distributed to resellers. The manufacturing of these components was vertically integrated into the organisation. Dell, as a small start-up, could not build this infrastructure. Instead, they developed a model where they developed relationships with organisations that could provide these components, allowing Dell to focus on selling and delivering computers. By selling directly to customers, initially through mail orders and later by using the internet, Dell avoided reseller mark-up. Dell also enabled customers to order customised computers, which Dell then assembled after receiving the order (Magretta, 1998, p.73-74). “Customers got exactly the computer they wanted and Dell saved money making the computers only when they were ordered” (Hill & Seggewiss, 2008).
Dell also focused on developing an efficient and innovative supply chain, providing customers with their products within 2-3 days after ordering (Bozarth & Handfield, 2008, p.26). Dell have also focused on building strong partnerships with their suppliers, and sharing information with them to help them provide better service to Dell. The direct model allowed Dell to gain access to valuable purchasing information that could also be passed down the supply chain to suppliers (Magretta, 1998, p.73-74). Dell were also able to reduce inventory turnover to 3-4 days compared to its competitors 30-45 days, providing a slight first mover strategic advantage (Kumar & Craig, 2007, p.201).
Up until quite recently, this model had served Dell extremely well, helping them to become the largest supplier of personal computers in the world, until 2007 when HP took their place (Shah, 2007). Since then, Dell's profits have gone down, along with their share price. Furthermore, Dell's major competitors have improved their position in the personal computer market. Hill & Seggewiss (2008) believe that while HP has made improvements to its customer service and prices, Dell has had problems with its customer service and product quality, resulting in Dell replacing its senior management and cutting jobs.
In response, Dell have announced a radical change to their business strategy, effectively planning to move away from their trademark made to order direct sales model and reduce the complexity of their supply chain. Dell will adopt a more traditional approach of selling computers with fixed configurations via resellers (SCN, 2008).
Kumar & Craig (2007, p.211) present a SWOT analysis for Dell, which is very useful in identifying the environmental changes that have led to Dell reversing its made to order strategy. The following threats were identified.
Customisation from other companies (i.e. HP, Sony, Lenovo, Apple); Foreign manufacturing;
Commoditisation of computers;
Price competition intensifying;
Supply chain improvements from other companies;
Increasing shipping costs;
Potential for backlash from suppliers due to power imbalances. (Kumar & Craig, 2007, p.211)
In responding to threats...