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  1. DELL Direct Hadjar Homaie December the 2nd, 2003IT Management Course LectureDr Taghi Yareh Tehran University, ECE Department

  2. This Lecture Changes that Dell’s business model made in Personal Computer Industry What is Dell Direct Model and Why it is successful Dell Premier Pages functionality and how they create value for dell and its customers

  3. Dell Computer Corporation Founded by 19-year-old Michael Dell in a dorm room, grew by more than 50% a year over 1995-1998 Dell produces custom build PCs in a matter of hours and producing no PC component it could sustain a large portion of PC market comparing to IBM, HP, Compaq, Hitachi, Sony, Fujistu, …

  4. Personal Computer 1976, Stephen Wozniak and Steve jobs, Apple Computer, Apple PC 1980, IBM, open architecture, using off-the-shelf components MS Dos from Microsoft Intel 8088 microprocessor Tandon disk drive Computerland and Sears Business as Retailers In 1981 IBM commanded 42% of PC market share while Apple’s share was driven down to 20%

  5. Personal Computer Structure of the computer industry Vertically-integrated corporations -> Horizontal “slices” Silicon platform | Computer platform | System software | Packaged application This structure enabled IBM-PC “clones” like Compaq, Hewlett Packard One of them was DELL Computer Corp.

  6. Dell Background Dell: Birth and Childhood (1983 – 1990) Michael Dell University of Texas at Austin Upgraded IBM-compatible PCs in his spare time in dorm room. Then he assembled entire PC with 15% discount to established brands On May 3, 1984 Dell Computer Corp was officially established.

  7. Dell Background Dell: Birth and Childhood (1983 – 1990) Efficient and Low Cost operations Support services such as 24-hour hotline and guaranteed shipment of replacement part Attractive to technology literate customers who looked for quality at a reasonable price

  8. Dell Background Dell: Birth and Childhood (1983 – 1990) Dell grew from nothing to $5 million at 1985

  9. Dell Background Dell: Birth and Childhood (1983 – 1990) International Expansion 1987: UK 1990: Limerick, Ireland to serve the European, middle eastern and African markets

  10. Dell Background Dell: Birth and Childhood (1983 – 1990) Sales In 1990: $500 million Michael Dell became the richest person in Texas Emphasizing Simplicity, efficiency, agility

  11. Dell Background Dell: Profitless Growth (1990 – 1994) Dell’s Model being imitated by other vendors like Gateway 2000undercut Dell’s prices by 15% - 30%

  12. Dell Background Dell: Profitless Growth (1990 – 1994) In 1991 Dell entered Retail channel For customers who prefer face-to-face physical-access sales process Through agreement with CompUSA, Staples, BestBuy, Sam’s Club, Price Club/Costco, Business Depot and PC World. Two new brands to serve this segment

  13. Dell Background Dell: Profitless Growth (1990 – 1994) Sales grew from $890 million in 1991 to $2 billion in 1992

  14. Dell Background Dell: Profitless Growth (1990 – 1994) Four new product lines in 1993 Sales grew by 40% Dell joined top-five PC makers Worldwide

  15. Dell Background Dell: Profitless Growth (1990 – 1994) First Operating Loss at the end of 1993 Loss of $35.8 million Stock dropped $7 a share to $25 The Weakness was Lack of Senior Management Michael Dell hired Mort Topfer of Motorola

  16. Dell Background Dell: Profitless Growth (1990 – 1994) Major Problem: use of Indirect Channels Dell’s operating model didn’t mesh well with retail channel Selling through the retail channel it did not take advantage of its customization capabilities

  17. Dell Background Dell: Profitless Growth (1990 – 1994) Dell pulled out of retail channel in mid-1994 “the benefit of exiting retail was not just the change in our financial condition, the real value was that forced all of our people to focus 100% on the direct model, the single-mindedness was a powerful unifying force”, Michael Dell, Direct from Dell

  18. Dell Background Dell: Explosive Growth (1994 – 1999) Sales Grew 49% a year From $3.5 billion in 1994toover $25 billion in 1999($1.7 billion income in 1999) Profits raised 62% annually

  19. Dell Background Dell: Explosive Growth (1994 – 1999) US PC Market share3% in 1994 to16% in 1999 Became number one in US

  20. Dell Background Dell: Explosive Growth (1994 – 1999) International PC Market shareAsian market: Penang, Malaysia in 1996Another plant in Limerick site 2nd largest PC manufacturer Worldwidewith 9.6% share in 1999 After Compaq with 13.7% share

  21. Dell Background Dell: Explosive Growth (1994 – 1999) Dell line of computers Dimension and OptiPlex Desktop computers Latitude and Inspiron Notebook computers PowerEdge network servers Precision Workstations PowerValut Storage devices Value added services Dell Plus and DellWare Leasing Option

  22. Dell Background Dell: Explosive Growth (1994 – 1999) Sales office in 33 countries Selling products to 170 countries

  23. Dell Background Dell: Now (1999 - 2003) Revenue for fiscal years:

  24. Dell Background Strong Growth in Servers, Storage Systems Introducingits own digital music players and LCDtelevision/computer monitors, and new versions of the company's Axim handheld computersand digital projectors Dell brings direct model to bear in network spacewith PowerConnect 3324, 3348 and 5512 switches Dell: Now (2003)

  25. Dell Background Dell: Now (2003)

  26. Dell Background Technology Business Research (TBR) for the first time ranked Dell No. 1 in U.K. France and Germany. In its most recent report on U.S. corporate buying behavior and customer satisfaction for desktop computers, TBR said Dell demonstrated strength in 10 of 13 categories and had no weaknesses. The next-best computer supplier showed strength in only two areas. Dell: Now (2003)

  27. Dell Direct Model Components Forecast Forecast Component Manufacturer PCManufacturer Distributor/Reseller Corporate Customer Indirect Channels Product Product Components Reseller Customized the PC to customer requirements, installed components and provided additional service and support

  28. Dell Direct Model The Direct Model Direct Sales From the PC manufacturer to the corporate customer or consumer “As a small startup Dell couldn’t afford to create every piece of value chain,… We concluded we’d be better off leveraging the investments other have made and focusing on delivering solutions and systems to the customers… if you’ve got a race with 20 players that are all vying to produce the fastest graphics chip in the world, do you want to be the twenty-first horse, or do you want to evaluate the field of twenty and pick the best one?!”, Michael Dell, Direct from Dell

  29. Dell Direct Model Components Order Component Manufacturer Dell Computer Corp. Final Customer The Direct Model Product Distributor Components Bypassing the dealer channel, selling directly to consumerFocus on Speed of Execution and Minimum Inventory

  30. Dell Direct Model The Direct Model Characteristics Eliminate costs and risks of carrying large finished good inventories High velocity Low-cost distribution Direct customer relationship Build-to-order Just-in-time manufacturing Products and Services aimed at specific market segments

  31. Dell Direct Model The Direct Model Characteristics Reduced channel costs: from 13.5%-15.5% to 2% of product revenue Latest Technology was introduced faster than indirect channels Dell can use IT to directly control its value chain, set quality measures and monitor in real time how material is flowing throughout the chain

  32. Dell Direct Model The Direct Model Characteristics Managing Information to Increase Velocity, Track data on margins, selling price,… Utilize info. to get the suppliers in sync with the high-velocity model

  33. Dell Direct Model The Direct Model Characteristics “We put it on the shelf and off the shelf!” Most of Dell’s suppliers keep components warehoused less than 20 minutes away from Dell’s factories Dell has small number of suppliers Even it reduced their number from 204 in 1992 to 47 in 1997

  34. Dell Direct Model Manufacturing Process No warehouse Space, No inventory other than work in process Manufacturing is synchronized to avoid storing parts or finished systems This needs close relationship with suppliers Trust Manufactures like Sony, Logistics like UPS No test time

  35. Dell Direct Model Products For year 2002

  36. Dell Direct Model Customer Service In 1986, San Francisco, Dell determines the company’s future direction: “The first: to really grow our business, we would have to target large companies. The second: to land large companies we would have to offer the absolute best support in the industry. That was how we came up with the idea to provide the industry’s first on-site service for PC’s. if a customer called us with a problem, we’d say, “We’ll be out tomorrow to fix it”

  37. Dell Direct Model Customer Service 1,300 technical support personnel Accessible by phone 24 hours a day 90% of calls can be solved on the phone by standard troubleshooting procedures

  38. Dell Direct Model Customer Service Third-party maintenance providers like Unisys, Wang, Decision one consulting and Digital Equipment Tight coordination with supplier, vendors and maintenance providers feels like Just one large company The rule: as few partners as possible as long as they maintain their leadership in technology and quality

  39. Dell Direct Model Customer Service In Computerworld’s 1998 survey Dell ranked first in user satisfaction followed by Gateway According to Computerworld traditional vendors depends too heavily on resellers that prevents them from reacting quickly to customer needs, because resellers may place their own interests first

  40. Dell Direct Model Customers And Segmentation TransactionalIndividuals or businesses who make transaction-by-transaction buying decision - based on the Economics of the purchase Focus on performance, specification, featured, reviews, awards Relationship Based on “total cost of ownership” TCO and price is a secondary concern. Like business, government or education accounts in medium-to-large organizations.Focus on service, reliability, vendor reputation and standardization

  41. Dell Direct Model Customers And Segmentation - Cash flow Payment type Transactional: Credit card or charged full upon delivery Relationship: Purchase orders, Credit cards, lease agreements, Longer payment cycles Velocity of generating cash from orders Transactional: less than 24 hours compared to 2 weeks for Gateway Relationship: 40 days compared to 56 days for Dell’s payable outstanding

  42. Dell Direct Model Customers And Segmentation Dell’s customer segmentation was a direct of result of their business model Focus the efforts considering the profitability of the segment “About 15 percent of our total revenue is consumer business and the rest is B2B”, Kaufman “B2C keeps them in newspapers a lot, B2B keeps them in the black”, Aberdeen’s Allen

  43. Dell Direct Model Customers And Segmentation Segmentation Makes it easier to know the customer and identify unique opportunities Better attention and Focus Bring Dell closer to customer to understand their needs and operating environment

  44. Dell Direct Model Customers And Segmentation Large Corporate Accounts “Gold” $5-$10 millionLargest Account “Platinum” exceed of $10 million Forums for information exchange Periodic regional “Platinum Council” for discussion and interaction with Platinum accounts

  45. Dell Direct Model Customers And Segmentation Worldwide PC and servers sales First six months of 2003

  46. Dell Direct Model Customers And Segmentation - Demand Understanding the future needs of customers Telephone sales reps steer the customer toward available products, even sales rep can match the price of the lower-quality configuration to keep the parts moving based on gross margins provided and calculated by information systems.

  47. Dell Direct Model Customers And Segmentation - Sales Account Executivesselling products tailored to the needs of customers Telephone Sales Reps. Processing orders and handling sales calls Relationship accounts are assigned to both,Consumers rely on sales rep

  48. WWW.DELL.COM First interests in the early 1990’s “We think about internet as a logical extension of our direct model” Michael Dell, Direct from Dell Corporations and computer literate customers

  49. WWW.DELL.COM Developing Designing Started in 1995 Emphasize on early internet leadershipIt’s better to be in front with an imperfect internet implementation than to be late with the “perfect” Website Site Launched in July 1996 Sales on the Web By December 1996 : $1 Million a day By May 2000: $40 million daily {50% of total sales} In 2003: $16 billion

  50. WWW.DELL.COM Developing mirrored Dell’s segmentation strategy Autonomy to deliver the contents for it’s segment Dozens of regional Dell Websites Offers customers “choice and control” Resistance among Dell employees that feared that moving to the internet would automate away their jobs ended in focusing on higher value activities