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DELL COMPUTER CORPORATION

Will Internet Channels Keep Growth Going?

History

In 1983, during his first year in college, Michael Dell tookhis interest in tinkering with computers to a rrew level.During his first semeste! as the now legendary storygoes, Dell began to purchase outmoded IBM pCs fromlocal retailers, upgrade them and resell them notjust toothgr students but to local law firms and small businesses.Dell's sales method was simple-door to door directsales, bypassing the dealers and retail outlets throughwhich virtually all computers were sold, The idea was so

successful, that during the summer after his first year ofcollege, Dell sold $180,000 worth of PCs in only his firstmonthl Shortly after his initial success, Dell modified hisbusiness. Instead of continuing to purchase older ma-chines and upgrade them, Dell recognized that he couldpurchase new computer components, assemble themhimself, and sell them directly to customers. This strategyenabled him to blpass the traditional channels of distri-bution adhered to by the established computer makers,and offer PCs to his customers at a 75 percent discount.Dell's direct contact with customers allowed him to buildproducts to order instead of maintaining an inventory.Dell's innovative concept of custom design and directsales took off right from the start and demand was over-whelming; so much so, that Michael Dell never returnedLu cullcge,

Dell continued to grow throughout the 1980s at anastounding rate, enabling Michael Dell to fund growthinternally. Dell's sales grew ro a level that enabled him tosecure bank financing using only his receivables as col-Iateral, avoiding the need for venture capital.

It was not until 1987 rhat Dell offered stock, and thecompany did not go public until 1988. Some $30 million

was raised in its initial public offering, netting MichaelDell $18 million.

By 1991, with Michael Dell just 23 years old, sales

reached $800 million and then more than doubled to $2billion in 1992. This high rate of growth, howeveq wastoo rapid for Dell to handle. Flaws in the design of Dell'snotebook computers began to emerge and managerswere too young and inexperienced to handle many ofthe new problems often associated with companies at-tempting the transition from entrepreneurial start-up tolarge public company. In 1992, despite its enormous salesincreases, Dell reported a $36 mitlion loss for the year.Many industry experts felt that Dell had made its run andcould not return to profitability.

Michael Dell was not listening to the skeptics and in-stead bulked up his management team by bringing in ex-perienced managers to add much-needed maturity andknowledge. Dell recruited Mort Topfer from Motorola tohandle the day-to-day operations. Topfer, an experiencedexecutive, understood the purchasing and manufactur-ing of high-tech componenti and helped Dell ser up a

manufacturing facility in Asia. In addition to Topfer, Dellalso recruited several key Apple Computer executiveswho wcle wolkirrg on the Apple PowelBook laptop com-puter to fix Dell's notebook comprrter problems. The re-sults were astonishing. Within 12 months, many of theproblems rvere lt'orked orrt nnd thc following ycar Dcll salv

its profits hit $149 million. Despite the turnaround, skep-tics abounded, consistently underestimating customer de-mand for direct sale computers. Many still had questionsas to whether the growth could continue at such an ex-ceedingly high rate and whether Michael DeIl had theskills to guide his company's growth in this highlycompetitive business.

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624 Case 22 Dell Computer Corporation

Dell's Attempt atTraditional Retailing

Not everything Michael Dell did rurned to gold. In factthere were some serious mistakes, such as an attempt in1993 to sell computers via traditional retail channels. Byselling computers via this channel, Dell faced new prot>lems that the company had never before encountered.The competitive advantage that Dell had gained by sell_ing computers direct to customers evaporated whenplaced in traditional retail distribution channels. Dellcould no longer adjust its supply to fit customers, spe_cialized demands, but instead had to create an inventoryfor resellers to stock. Further, since most of Dell's saleswere to businesses, its computers faced a brand recog_nition problem when placed in retail stores, and invari_ably fierce price competition became a factor for Dell.Since retailers were now selling the computers, Dellcould no longer avoid the increased costs associated withthis traditional channel structure. So the experiment atselling computers via retail channels was short_livedand unsuccessful. Dell discontinued this practice withinthe year and has since sold computers only via directchannels.

Dell's Order processing System

While retaining the direct-selling concept that MichaelDell utilized from the start, today's Dell computer hascome a long way in the level of sophistication ir uses tomeet its customers' needs, Dell now sells about 4 millionpersonal computgrs, notebook computers, servers, andworkstations per year and generates a sales volume of$12.3 billion annually. Approximately gb percent ofDell's sales are to businesses and b percent to consumers.Orders can be placed by customers via an g00 number,dedicated internal company sales rep, or through Dell'sWebsite. Each PC is still made to order, eliminating in_ventory buildup and excessive lag times. The wholeprocess from initial order to loading for delivery takesonly 36 hours. Large customers of Dell can even get theircomputers shipped via Dell's quick-ship program within12 hours after manufacture.

Customer or.der.s alc irnmediately relayed to one ofDell's three plants in Austin, Texas; penang, Malaysia; orLimerick, Ireland. Next, suppliers are notified. Dell'sAustin plant manager says that all the srrppliers know thatcomponents must be delivered to the planr within anhuur of a request, Unce the components arrive, they aretaken fi-onr the lrucks and placed on t]re assembly lines

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so there is no component inventory or finished goodsinventory in Dell's system.

Virtual Integratisp-The Next Step

The direct sales model that Dell continues to use pro-vides other benefits besides customization. As founderMichael Dell stated in a recent interview the direct salesmodel allows Dell to build relationships with its cus-tomers. The relationship generates valuable information,which in turn allows Dell to leverage its relationships withboth suppliers and cusromers. When you add the ad-vancements in data sharing, just-in-time manufacturing,and the Internet to the mix, the traditional functionsof each member of the supply chain become blurred,thus creating 'Virtual Integration," Operating under thismodel, Dell could maintain a tightly coordinated supplychain, yet still concentrate on customization and special-ization found in virtual corporations.

Technology is the key to Michael Dell's vision for vir-tual integration, enabling real-time data exchange totrack everything from product orders to service calls,The consistent real-time exchange of information en-ables suppliers, component manufacturers, customers,and others to become an integral part of Dell,s business,almost as if they worked inside the company. AJthoughvirtual integration exists in theory, it remains to be seenwhether Dell can implement it successfully. And, if itdoes implement virtual integration, whether it wiil fuelfurther growth and profitabiliry,

The Internet

Dell has been using the Internet as one of its channelsfor direct selling computers. However, unlike other chan-nels, the Internet provides an instantaneous global salesnetwork. Michael Dell refers to it as the "ultimate direcrmodel." Through its Website, customers may place or-ders for Dell products, ask questions via E-mail, and evenobtain customized computer systems and technical solu-tions, Instead of calling the company on the phone, cus.tomers may now simply log onto the Website. As a result,Dell has had to hire fewer employees to take orclers andprovide technical support, saving the company money.The sales numbers for Dell's Website arc staggering.

^lLrof March 1997, Dell was selling $1 milliou per day via theWebsite, and as of March 1998, this number has doubledto $i2 million in sales per day. With much of the Internet

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Dell's corporate strategy is geared to increasing theuse of the company's Website, If fact, Dell envisions vir-tually all of its customers conducting virtually all of theirbusiness through the company Website. Currently Dell,sIarge corporate customers, which account for 3b percentof the company's revenues, and its Asian and Europeancustomers do not use the Internet for their transactions.

Dell is not alone, however, in its use of the Internet.Several other companies are using the Internet success-fully as extensions of their channels. Companies usingthe Internet successfully include networking giant CiscoSystems, and computer manufacturers Micron Technol-ogy, and Gateway 2000. Both Micron and Gateway oper-ate under business models similar to Dell's by taking or-ders from customers before building the machines. IBMhas also implemented a build-to-order manufacturingsystem of its own, which is also available via the Inrernet.Given these other competitors, Dell faces new challengesthat it has not encountered before. Indeed, for muchof the 15 years of Dell's existence, it was the only com-puter manufacturer that could produce built-to-order

DiscussionQuestions 625

computers at competitive prices. With increasing compe-tition, falling component prices, and shrinking marginsin build-to-order computers, Dell faces new challenges.The Internet is the means by which other competitorscould potentially chip away at Dell's dominance by at-tracting large customers as well as the Asian and Euro-pean customers whom Dell has not yet integrated into itsInternet services. By using the Internet, other computermanufacturers also avoid the increased costs associatedwith traditional channels of distribution, allowing themto lower prices, thereby eliminating Dell's price advan-tage. How Dell will adapt to these developments remainsto be seen.

Discussion Questions

1. Is the Internet channel the ideal means forsustaining Dell's strategy of made-to-ordercomputers and direct sales to customers?

2. Will the availability of the Internet as a marketingchannel for competitors quickly erode Dell'scompetitive advantage?