March 4, 2011
The most critical shifts in Dell’s contextual factors, including industry dynamics, trends, technology changes and shift of the competitive landscape are following: The industry has changed significantly over the last 20 years. The traditional business model in the PC industry was inside-out, supplying machines based on orders from distribution, resell and retail channels, thus following the indirect selling concept. Dell’s direct model was at this time a new, challenging concept, taking orders directly from the end-consumer, and thereby, eliminating the middleman, costs and time. This was the initial crucial shift away from the traditional schema, allowing Dell’s quick and tremendous growth. In 1993, however, Dell reached a point where it had grown too large, without making the necessary internal improvements to stay profitable. Therefore, by bringing in four new ‘seasoned’ managers to focus on specific aspects of the business, Michael Dell hoped that Dell could become a synchronized, efficient, and profitable business again. This was another critical shift for Dell, because the resulting improvements led to Dells competitor-killing concept of “virtual integration,” which goes a significant step further than traditional integration by connecting the right parts together in the business and thereby, enhancing its efficiency in management and operation processes. Additionally, the strong trends within PC customers towards customized devices increased Dell’s success even more, and contributed significantly to its ultimate triumph over IBM as the 2nd largest market shareholder globally. However, Dell’s “vaunted Direct Model” for distribution and the focus on innovative marketing led to further critical shifts, particularly within the competitive landscape around Dell. Giants, such as IBM, Compaq and HP challenged Dell’s standing through following actions: a) IBM: After steadily losing market shares, IBM – who in contrast to Dell, heavily relied on distributors, resellers and retailers (90% of sales in 90’s), attempted to challenge Dell with two distinct new product models. The first one was “Enhanced Integration” – the idea of heavily configured IBM PCs, then sent to authorized middlemen, who added specifications and eventually sold it to the consumer. The second attempt was the AAP, which sent ‘lightly configured’ PC’s to downstream partners. The goal was to enable IBM to deliver customized PCs rapidly without holding large amounts of inventory – just as Dell did. However, IBM’s hope was crushed fairly soon after severe struggles with quality issues and ‘tear down’ costs. Finally, IBM anticipated cracking the direct market by boosting direct sales of ThinkPad laptops with halting retail sales. This failing move by IBM was critical for Dell as it had shifted dynamics in favor for Dell, as it eliminated IBM (at this point of time, late 90s) as a potential threat. b) Compaq & HP: Before the merger of Compaq and HP, Compaq surpassed IBM in ’94 to become the world’s largest maker of PC’s. Its dominant focus was on indirect selling through distributors, resellers and retailers. Aligned with this traditional concept, Compaq’s production and operation process was ruled inside-out, developing production plans by forecasts of channel members. In terms of competitive dynamics, Dell was challenged by Compaq when Compaq started its approach to enter the direct sales market and ran into conflicts with its indirect selling partners. HP was more careful by announcing direct selling only through an online store. However, Dell’s key competitive advantage here was that Compaq’s production and inventory times were significantly higher / longer than Dell’s. In fact, no player in the PC industry appeared to be able to live up to Dell’s speedy processes. After suffering steady losses, Compaq agreed to the controversial merger with HP, which – after initial struggles,...
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