CASE NUMBER: EC-17 November 2000
In 1995, a manager from a leading Japanese computer company was recounting his company’s plans to conquer the US Personal Computer (PC) market: “We have a strong brand name in consumer electronics, and what’s most important, we build many of the components that are needed in the PC ourselves: monitors, audio equipment, CD-ROM, DRAM, and so on. This will give us a tremendous advantage over American competitors, who have to buy everything outside” . Several years later, it looks like the competitive weapon of this and other Japanese electronics giants had misfired. Hitachi, Sony and Fujitsu have spent vast resources trying to crack the US PC market, but had only captured a marginal share—and they had lost money doing it. At the same time, Texas-based Dell Computer Corporation, founded by 19-year-old Michael Dell in a university dormitory room, was growing rapidly, sustaining a much larger portion of the PC market than all Japanese vendors combined. And while the Japanese PC manufacturers were unable to earn any money in the US market, Dell, which produces no PC components, was highly profitable, grew by more than 50% each year over the 1995-1998 period, and saw its stock grow about 30,000% in a decade (see Exhibit 1 for Dell financial summary). Dell does not manufacture any components, but it can produce custom-built PCs in a matter of hours. How does Dell do it? Why did it succeed where the Japanese PC manufacturers floundered along with the rest of the PC industry? How does Dell use the Internet to achieve competitive advantage?
By Haim Mendelson, Graduate School of Business, Stanford University, Stanford, CA 94305, firstname.lastname@example.org. References (in numbered brackets) are listed at the end of the case.
I. Dell Background
The Personal Computer In 1976, Stephen Wozniak and Steve Jobs sold their worldly possessions (a programmable calculator and a Volkswagen) so they could start Apple Computer, a manufacturer of Personal Computers (PCs). The Apple PC became popular with the invention of VisiCalc, a spreadsheet program that made inroads in corporations. By 1980, IBM realized that the PC business was rapidly developing, and decided that it must ship its own PC within a year. To meet this challenge, IBM opted for an open architecture, using off-the-shelf components and software that were purchased from outside vendors like Intel (the 8088 microprocessor), Microsoft (the DOS operating system) and Tandon (the disk drive). Moreover, IBM went beyond its own sales organization and used computer retailers like Computerland and Sears Business Centers to sell the IBM PC. The result was that the IBM PC met its one-year, August, 1981 deadlinea first for IBM. By 1983, IBM commanded a 42% share of the PC market, with Apple’s share being driven down to 20%. The PC fundamentally changed the structure of the computer industry from a collection of vertically-integrated corporations to a collection of horizontal “slices,” each focused on a distinct segment of the industry’s value chain. Intel’s Chairman, Andrew Grove, who based his company’s strategy on this transformation, described it as follows: The model of what I call the Old Computer Industry as it used to exist before the personal computer consisted of corporations like IBM, DEC, NCR, NEC and Wang, who would compete in vertical blocks against each other. Each corporation would develop their own silicon components, build a computer platform around that silicon implementation, develop their own system software, and then either develop their applications running on their system software or have those applications developed by third parties. They would then have their own wing-tipped sales people sell those computers to corporate accounts. Each of these vertical blocks then competed against the other vertical blocks. This is how the computer industry and the business of...