Dell Computers

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 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 conversion cycle. This minimized Dell s working capital requirements and allowed it to achieve high rates of return on its invested capital. The result was an exceptional run for Dell s stock, which outperformed even stalwarts such as Microsoft and Intel in the 1990s (Kraemer, et al., 2000). This success has taken place against the backdrop of falling PC prices, brutal competition, and enormous losses by other PC makers. Dell has not only survived, but thrived in this environment thanks to the fundamental advantages of the direct model, and to its continued efforts to improve its execution of that model. It also has taken advantage of its direct model to build strong, stable relationships with the large

corporations and other organizations who are its core customers. Unlike indirect vendors, Dell knows who its customers are and has a great deal of information that it uses to provide a high level of service and support, to target customers for retention and expanded sales, and to sell additional third party hardware and software. But even Dell has not been immune to the turmoil in the PC industry. While its most recent 26% growth rate continues to outpace the industry as a whole, it has not been able to match its earlier growth rates of 50% a year, and was hit hard by the slowdown in PC sales in late 2000.1 The result has been a sharp fall in Dell s stock price and a reminder that Dell is vulnerable to the brutal price competition and cyclical demand of the PC industry. Competition Dell face intense price and product feature competition from branded and generic competitors when selling our services. In addition to several large branded companies, there are other smaller branded and generic competitors. Historically, it competed primarily based on the customer value that a direct relationship can bring technology,

performance, customer service, quality, and reliability. Its general practice is to rapidly pass on cost declines to our customers to enhance customer value. As a result of the intensely competitive environment, it lost 1.9 points of share during calendar 2007. It lost share, both in the U.S. and internationally, as our growth did not meet overall personal computer systems growth. This was mainly due to intense competitive pressure in our U.S. Consumer business, particularly in lower priced desktops and notebooks, as well as a slight decline in our worldwide desktop shipments (compared to 5% worldwide industry growth in desktops). At the end of calendar 2007, it remained the number one supplier of personal computer systems in the U.S. and the number two supplier worldwide. It expect that the competitive pricing environment will continue to be challenging. However, it believe that the strength of its evolving business strategy

and indirect distribution channels, as well as its strong liquidity position, makes it well positioned to continue profitable growth over the long term in any business climate. For consumers, it recognize the increasing importance of product ID , which is the appearance, ease of use, and ability to interact with peripheral products like cameras and MP3 players, and they are focusing more resources to improve in this area.

Current Strategy High Quality, More Powerful, Faster, Customized and Cheaper . For every new product or service it introduces to the market, Dell consistently implements its startup mindset of build-to-order computers (referred to as the direct model approach) from the very beginning of the development and production process. Dell s business was unique in that it was able to consistently make significant profits in low margin product areas. Its direct model approach evolves for every new product and service achieving delivery of high quality PC s in a very cost efficient manner; one of continuous improvement. Dell is a continuous-growth model, constantly adapting, changing and finding ways to master its environment, as opposed to just responding to it. In addition, Dell has been able to take flexibility and speed, and build it into the company s DNA. Positioning- Michael Dell portrays his company as the good guy , the Robin Hood of the computer industry offering more for less. Their mantra is better, faster, cheaper using brand name components, build to order manufacturing, and customized customer service, which led to high quality and more powerful computing power. Dell had a reputation for effectively entering product markets where core proprietary elements had become standardized and undercutting existing players based on price. Dell s strategy was to choose the best in class providers (like Intel and Microsoft) for each

component and leveraging their scale investment in R&D. By 2001, Dell had become the US market leader in Wintel server sales. Target Market Dell s main focus is on large corporations with secondary efforts on

small and medium sized businesses. In addition, they also target the global consumer directly, but with minimal effort. Dell mainly focuses on the segments that are already knowledgeable about computers. Products - Dell currently has 6 main products: PC s, laptops, customer service, storage devices, workstations, and auxiliary services. Pricing - When Dell decides to enter a particular market, it consistently uses the Direct Model approach, pricing their product below that of their competitors. These low prices are the result of multi-level leveraging and from achieving economies of scale. Promotion - On-line model, direct mail order, catalogues, Premier Pages, special training and certifications, word-of-mouth, editorials, reviews, sales reps, and awards Place - Direct from Dell: On-line, telephone, mail-order. (Dell does not use any retailers or wholesalers to sell their products.) In conclusion, Dell s strategies do match the company s 4 P s, targeting, and positioning and can be summarized as a low-cost, fast and efficient business model, with superior customer value with virtual integration.