Dell Computer The Past, Present, and Future

When Michael Dell founded Dell Computer in 1984 the companys mission was to be the most successful computer company in the world (Diversity Facts, 2011). To achieve his goal of becoming the dominant supplier of affordable consumer grade PCs, Dell Computer adopted a Direct Selling business model, building each PC only after a customer places an order. Revolutionary at the time, this system allowed Dell to reduce inventory to Just in Time levels. The efficiencies gained through reduction of inventory necessary to operate had enabled Dell to sell computers for significantly less than the competition with a smaller margin. Dells focus was to acquire as many new customers as possible, which in turn allowed them to negotiate even lower prices from their component suppliers, and through economies of scale, reduce costs even further. This strategy was extremely successful, shown in Figure 1 Dell sales numbers and income rapidly increased through most of the 1990s. Figure 1

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At its peak Dell achieved daily sales in access of $57 million, with over 16 million customer interactions per week (Navigating the Company Timeline, 2011). Their customer acquisition strategy and direct sales model was a stellar achievement in the business world.

Putting the Customer First But as the computer age marched on, so did decreases in the cost of PC ownership. The Personal Computer became a commodity and new competition entered the market. While the market changed, Dells strategy did not. Remaining focused on beating the competitions price, Dell became their own worst enemy and the Dell brand was soon associated with low cost, low performing consumer PCs with poor customer service. Sales of Dell PCs plummeted and with little diversification in their product portfolio, the company had nothing to fall back on when consumers defected to the competition. Drastic losses in Dells customer base and revenues are shown in Figure 2. Most notable is the change in revenues of $58 Million Dollars on March 13, 2000 to $18 Million Dollars on December 19 that same year. Figure 2

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Dell was hemorrhaging customers and knew something needed to be done to change consumer perception and increase sales back to former levels. As part of the process to rehabilitate the Dell brand image, the company began the Customer Experience Initiative (Dell Computer Corporation, 1999). Through this initiative, Michael Dell wanted to provide the best possible customer experience across all

points of contact (Dell Computer Corporation, 1999). A major part of achieving Mr. Dells goal was the shift in how his company would measure the quality of their products. Traditionally the computer industrys measurement of quality had been based on product failure rates, Dells new measurement of quality would now include quantifiable metrics for the sales process and the quality of customer service. Managers now had to meet service goals and accomplish several objectives: 1) 2) 3) 4) Increase brand loyalty Increased repeat business Add value to the Dell buying experience Leverage customer information to expand product offerings

To facilitate managers in meeting the objectives, Dell started working with several relationship marketing providers in order to leverage the vast amounts of customer information they collect through their direct sales model. As we learned in our reading, there is reliable prediction model for customer value based around length of tenure in a contract/noncontract environment, which Ive laid out in Figure 3. Figure 3

Segment 2 Profits increase over time, but only

Proposition 4 Research suggests contract customers pay higher However, informal study's with mgrs. reveal they come more cost conscious and expect lower prices on single items due to the total spend for goods purchased. Other anecdotal evidence suggest that long term buyers become more educated on lower cost items that offer the same benefits as the higher cost competition and switch their buying habits

L i f e t i m e D u r a t i o n Short

with contract a customer. Consumers may have a long dormancy rate, purchasing only promotional items/loss leaders. This this causes acquisition costs that are in excess of the profit margins made on these customers due to the costs associated with on going long term marketing to this segment. However if the customer is billed for services not used its a gain

Proposition 1 Revenue of a one time purchase by a consumer is likely less then the cost of acquisition . Fickle buyers can lead to service costs greater then the revenues they generate. However, poor service will also cause high defection rates A manager should calculate the NPV of the expected ECM, and terminate business with unprofitable customer who have an NPV>ECM

Proposition 3 Positive probability for a profitable lifetime relationship. However, much money is spent on long term communications with longtime buyers. IT is assumed these buyers also develop brand loyalty causing the promotional mix to be more more effect with in this segment, as In theory cost of targeted promotions should be favorable However, no empirical evidence supports this

Lifetime Revenues Low High

This model reveals valuable consumer insight which Dell seems to have been aware of when developing what is now their current business strategy. It shows that segments 1 & 3 are very attractive when calculating promotional costs over a small period of time. Additionally, customers who fit into Proposition 3, the short life high value segment, typically pay the most per item but when measured

over a lifetime, the most profitable customers are those in Proposition 4, long term contract business buyers. Realizing more profit could be had with business buyers, Dell could no longer focus solely on the consumer market so with customer data analysis in hand, Dell defined several profitable business segments and began to include enterprise customers in their strategy by building the Premier Pages website for enterprise buyers. While the consumer space continued to be a battle field fought over narrow margins, Premier Pages allowed Dell to become a major supplier of IT consulting services for enterprise corporations, and enabled the integration of ERP systems (SAP and Baan) into their CRM existing CRM. (E-Marketing Strategy, 2011). An immediate success, sales through Premier Pages had increased Dells revenues by 50% from the previous year. (Dell Finds Success. Information Week Nov. 1999) Seeing business sales sky rocket while the consumer market became saturated, Dell realized what needed to be done, choosing to decrease the companys reliance on desktop systems. Dell forecast that by the end of 2000 production of consumer PCs would be cut by 50%. (Dell finds Success. Information Week Nov. 1999). The new business strategy as stated in their 10-K form is, in part to: Shift Portfolio to Higher-Margin and Recurring Revenue Offerings. We are focused on expanding our customer solutions business by delivering best-value solutions in the enterprise, including servers, storage, services and software. Our view is that a large majority of the data centers and the server and storage opportunities now and in the future will be based on best value, simplification, and more open data center solutions. These are the kind of solutions that we believe Dell is well positioned to provide. We believe that our installed customer base, access to customers of all sizes, and capabilities position us to achieve growth of our customer solutions business. We will focus our investments to grow our business organically as well as inorganically through alliances and strategic acquisitions. Our acquisition strategy targets businesses that we believe will expand our customer solutions business by delivering best-value solutions in the enterprise, including servers, storage, services and software.

The Market Continues to Evolve Today, Dell's consumer division accounts for approximately 20% of the companys total revenues. Dell Incorporated currently ranks 3rd among PC manufacturers (Dell Profits Triple, 2011). These numbers seem to be a drastic reduction from the figures published in the 1990s. However, in quarter 3 of 2011, Dell had earned record revenues when it achieved $15.4 Billion in sales over that 3 month period. Below is a breakdown of the contributed revenue by market segment.

Large Enterprise: $4.3 billion, a 27 percent increase from Q3 2010 Public (Government, Education, Medical) revenue was $4.4 billion, a 20 percent increase from Q3 2010 Small and Medium Business revenue was $3.7 billion, a 24 percent increase from Q3 2010

Consumer revenue was $3 billion, a 4 percent increase from Q3 2010 and improving to a break-even operating income for the quarter Footnote: The companys EqualLogic storage business grew 66 percent. http://content.dell.com/us/en/corp/d/secure/fy11_q3_earnings_release Clearly Dell made the right choice by moving away from the consumer market. Further proof that there is little money to be gained in this segment is depicted in the chart below which shows that none of the Top 3 PC manufacturers have made positive gains in the market. Figure 3

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To fend of decreasing consumer sales, Dell continues to strengthen its enterprise strategy, focusing on servers, data storage devices, and technology consulting services which have higher margins and are more profitable than the company's basic PC business. Expected revenue for all of 2011 is expected to grow by 5% to 9%, for a total of $67 billion. (Dell profits Triple, 2011). Dells revenue per

employee (RPE) figure of $598,000 is currently 3rd in the industry, 1st being Apple, and 2nd Super Micro Computer (Highest Revenue per Employee, 2011). Preparing for the Future As one of the computer industrys few stalwarts, Dell knows their current success does not guaranty success in the future. Technology is ever changing and data processing needs evolve. Today we are moving away from physical media. No longer needed are things such as floppy disks, CD-ROMs, or even Hard Drives. Files can now be stored remotely over high speed internet connections and accessed anywhere in the world via the cloud. I can see this impacting the computer industry in 3 ways: 1) The need for enterprise storage solutions will continue to soar as both business and consumers begin to store files off site to the cloud 2) Workstations and PCs become less complex as the cloud will house and process data, reducing the need for consumer level tech support, and increasing the need for corporate solutions and data center technicians. 3) The need for different cloud technologies to be interoperable will again increase demand for corporate solutions providers Dell seems to be anticipating these changes as well, having spent $2.7 billion so far this year on acquisitions of businesses that provide data security, data storage and network equipment and having increased their annual research and development budget to $1 billion. (Dell Needs a Broader Product and Service Offering, 2011). The tech world moves fast, and Dell needs to have solutions in place for the cloud computing future by 2013 if they want to stay ahead of the industry.

REFERENCE LIST

Dell Needs a Broader Product and Service Offering, Retrieved December 8, 2011 from http://ycharts.com/analysis/story/dell_needs_a_broader_product_and_service_offering_but_spends_o n_stock_buybacks Highest Revenue per Employee, Retrieved December 4, 2011 from http://www.fnno.com/story/fast-lane/331-highest-revenue-employee-computer-hardware-industrydetected-apple-aapl-smci-dell-fast-lane-0) Dell Profits Triple as Computer Maker Sees Cuts, Retrieved Oct 14, 2011 from http://www.usatoday.com/money/companies/earnings/2011-05-18-dell_n.htm Dell Finds Success. Information Week. Nov 1999. Retrieved on November 1, 2011 from http://www.informationweek.com/761/infdell.htm Diversity Facts: Dell.com. Retrieved on December 2, 2011 from http://www.dell.com/content/topics/global.aspx/about_dell/investors/main/en/faqs?c=us&l=en#faq8 Dell Computer Corporation: A Zero-Time Organization. Retrieved on December 1, 2011 from http://cyberlibris.typepad.com/news/files/dell_case_study.pdf E-marketing Strategy. Retrieved on December 3, 2011 from http://www.marketing-insights.co.uk/wnim0502.htm Navigating the Company Timeline. Retrieved on November 27, 2011 from http://content.dell.com/us/en/corp/our-story-company-timeline.aspx Dell: Develop Existing Customers. Retrieved on November 27, 2011 from http://www.solutionset.com/clients/casestudies/dell Dell Profits Triples as Computer Maker Cuts Costs, USA Today. March 18, 2011 from http://www.usatoday.com/money/companies/earnings/2011-05-18-dell_n.htm