Dell Ecommerce Case

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CENTER FOR RESEARCH ON INFORMATION TECHNOLOGY AND ORGANIZATIONS University of California, Irvine 3200 Berkeley Place Irvine, CA, 92697-4650

Dell Computer: Using E-commerce To Support the Virtual Company Authors: Kenneth Kraemer and Jason Dedrick Center for Research on Information Technology and Organizations University of California, Irvine Irvine, CA 92697-4650, USA

June 2001

Contact Authors: Jason Dedrick: / Kenneth Kraemer:

Dell e-commerce case 6-13-01.doc


DELL COMPUTER: USING E-COMMERCE TO SUPPORT THE VIRTUAL COMPANY Kenneth L. Kraemer and Jason Dedrick University of California, Irvine INTRODUCTION Dell Computer has been touted by itself and others as a quintessential Internet company. The Internet has given Dell a means for extending the reach and scope of its direct sales business model at a relatively low marginal cost. It has done so in part by automating functions such as product configuration, order entry, and technical support, enabling the company to grow revenues without a corresponding increase in customer service costs. Also, it has used the Internet to coordinate a network of suppliers and business partners who carry out many of the processes involved in building, distributing and supporting personal computers. Dell refers to this network of partners as a “virtual company” linked electronically by the Internet. Another name for this type of industrial organization is the value web (Kraemer and Dedrick, 2000). In early 2000, Dell began to redefine itself as the company that “knows how E works.” Capitalizing on its reputation as an e-commerce pioneer, Dell has offered to share that expertise with its customers as they develop their own e-commerce capabilities. Dell is using the virtual company approach to expand the scope of its business without a commensurate expansion of its own work force and without making a major acquisition. It is doing so by developing a network of software and services companies that offer technologies and skills that Dell lacks in its existing value web. However, Dell remains focused on the fact that it is still a hardware company. Its e-commerce efforts are aimed at improving its own efficiency, enhancing customer satisfaction, and reaching new product markets, rather than transforming itself into a services provider as its competitors such as IBM, Compaq, and Hewlett-Packard are becoming. A close analysis of Dell’s use of the Internet and electronic commerce illustrates the strategic and organizational challenges that face any company that is serious about embracing the Internet and trying to tap its potential. It also offers insights into a new form of business organization that may become more prevalent in the networked economy. Company Background Dell Computer was founded by Michael Dell in 1984, while he was a student at the University of Texas, Austin. Dell began by selling upgrades of IBM-compatible PCs and in 1985 began to sell its own brand of PCs. From the beginning, Dell operated on the direct sales model, taking orders over the phone and building PCs to the customers specifications. Dell entered the retail PC channel for several years in the early 1990s, but a downturn in business in 1993 led it to return to its roots as a direct vendor (although the company does work with resellers in some markets). Dell grew rapidly and in the mid-1990s, its sales reached an inflection point, soaring from $3.5 billion in 1994 to $25 billion in 1999. By 1999, Dell had become the number one PC seller in

Dell e-commerce case 6-13-01.doc


the United States, and was number two worldwide. More importantly, profits were soaring, thanks to the cost structure of the direct, build-to-order model. By turning its inventory over 60 times a year, Dell minimized the rapid depreciation costs that mark the PC industry, and by receiving payment from its customers before it paid its suppliers for components, Dell operated on a negative cash...
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