To: Michael Dell
Due to competitors including IBM, Compaq, and HP attempting to mimic the business model of selling directly to end users, Dell must exploit its core competencies to maintain its leadership position in the direct sales channel. In order to understand why cultivation of core competencies is crucial to the future success of Dell in this period of increasing competition, we will examine which competencies have led Dell to be successful in the past, what the competitive advantage derived from these competencies is, and what Dell must do to maintain its leadership position despite the entry of competitors into the direct sales channel.
Core competencies provide access to a wide variety of markets, make a significant contribution to customer benefits of the end product, and are difficult for a competitor to imitate. Dell has developed two strong core competencies that have allowed it to pursue a cost leadership strategy successfully in our view: * Supply chain excellence
* Direct sales excellence
Supply chain excellence has allowed Dell to run a lean, customized, and high quality manufacturing operation. Just-in-time manufacturing (low inventory), minimization of working capital in the production process, and the ability to work with suppliers have led to cost leadership in the PC market and given Dell a strong competitive advantage. Direct sales excellence has allowed Dell to cut out resellers and other intermediaries from the sales process and distribute high quality products to consumers at competitive prices.
In 1998, the year that competitors (other than Gateway) began to introduce a direct sales channel, Dell had a significant competitive advantage in the PC market. The first part of this advantage was manifested in much lower costs than competitors (details in table 1 and 2): | Dell| Compaq/Reseller team|
Inventory (% of total assets)| 5.5%| 8.7%|
SG&A costs (% of revenue)| 9.8%| 16.0%|...