Research Paper (undergraduate), 2006
13 Pages, Grade: 1.0
1 Michael Dell
2 Dell’s Strategy
3 SWOT Analysis
5 Competitive Strategy
6 Financial Performance
7 Chances and Prospects for Continued Growth in Revenues and Earnings
Michael Dell founded Dell Computer in 1984. At the time he was only 19 years old, and in his first year of studies at the University of Texas in Austin. Michael Dell had a simple but powerful vision: that personal computers could be built to order and sold directly to customers. This followed from his belief that the PC, made up of little more than software from Microsoft and chips from Intel, was rapidly becoming a commodity product. Dell's new approach to the PC business had two advantages: (1) bypassing distributors and retail dealers reduced marketing and sales costs by eliminating the markups of resellers, and (2) building to order greatly reduced the costs and risks associated with carrying large volumes of both and finished goods. Michael Dell started his company with only US$ 1,000 of capital. DellComputer experienced its share of difficulties in the first few years, to the point where some family members and friends wondered whether it had been wise for Michael to drop out of university. Several times it had to refine its strategy even as it was implementing it. The company started off by using the direct sales model for upgraded versions of IBM-compatible PCs. However, within a year it was selling its own brands of PCs. Most of Dell's customers in the 1980s were hobbyists and experienced PC consumers.
Not surprisingly, Dell Computer was an early and enthusiastic convert to the Internet. It gained a first-mover advantage by setting up its first Web site in 1994, a year in which its total revenues were US$ 3.5 billion. By 1998, its Internet sales accounted for more than half of the firm's total revenues, which by then had surged to more than US$ 20 billion. At that point, Michael Dell had joined Bill Gates of Microsoft and Larry Ellison of Oracle among those who had become high-technology billionaires after dropping out of university. Michael Dell believes that his biggest challenge now is to have his company's direct business model as widely accepted outside the United States as it is across Dell's home market. He sees a need for aggressive marketing activities to develop customer trust and some modification of the basic model to account for institutional weaknesses and cultural differences in places like China and India.
Michael Dell does not seem to be particularly concerned about the efforts of competitors to duplicate his build-to-order business model: He is quoted as saying "The competition started copying us seven years ago. That's when we were a $1 billion business.
Now we're doing $35 billion a year. And they haven't made much progress to be honest with you. The learning curve for them is difficult. It's like going from baseball to soccer...We're more challenged by new technologies on the market, some new computing model, something we haven't anticipated."
Michael Dell is spending a lot of his time these days thinking about Asia. He recognizes that the large developing economies in Asia (such as China, India and Indonesia) offer the greatest IT market potential in the 21st century. Remarkably, Dell has acknowledged that he respects the Legend Group in China more than any other current or potential rival.
Michael Dell put conviction behind his vision, and led Dell Corporation for 22 years, the longest tenure in the computer industry, driving revenue growth from $6 million to $55 billion. He envisioned an opportunity in the Direct Model, an unprecedented idea in the PC industry, and finely orchestrated its execution superbly. Even before the Internet was hot, he could see how this perfectly fitted into the overall strategy, and capitalised it. Michael Dell, the one of the youngest CEO of a Fortune 500 company, has been honoured for his visionary leadership many times, and he has been invited to the US President's Council for Science & Technology.
Dell's strategy, the Direct Model, was based on a simple concept - that by selling computer systems directly to customers, Dell could understand their needs and efficiently provide the most effective solution. Eliminating the retailer helped save costs as well as eliminate pipeline inventories, making it possible to provide customers with richly configured systems with the latest technology. As products fell into the commodity phase of their lifecycle, Dell could still make a profit despite wafer thin margins. Dell's next strategy was to reach out into the market and identify the next high margin product that could be driven to scale with lower priced products, using its Direct Model. Whilst Dell's Direct Model is simple to understand in concept, it is difficult to achieve in practice. Dell realised it by synchronising global value chain activities through alignment of processes, technology and organisational elements.
Sales - Trained people took calls from customers to guide them in configuring the required system. Now, Dell automated this task by providing on-line configuration through Internet.
Production - Dell paid attention to the factory layout, and created production cells that were designed to handle custom configurations efficiently, and provided electronic bar-coding and other shopfloor systems that provided information and could track every stage of production.
Procurement - Dell turned to strategic sourcing, reducing the number of suppliers from 200 to 25, and got them to locate warehouses within 15 minutes distance from Dell factories to achieve JIT supplies.
Outbound Logistics - Shipping was contracted out to multiple forwarders globally, and Dell used their IT systems to track the consignments until these were delivered to the customers.
Service - Dell could resolve most of the complaints either through the service call centre or through the website, and fewer than 20% of calls required a technical support person to be despatched to the site. As Dell realised the competency gaps in creating their own service teams, they outsourced the on-site technical support to large professional services companies.
The Direct Model allowed Dell to sell richer configured systems and achieve a higher ARU (Average Revenue per Unit). Also Dell was continuosly able to reduce inventory levels and achieved 4 days of inventory in the entire system. The operating costs were about 10% for Dell compared to 20%-25% for competitors. The implication was that even when gross margins fell from 50% to 25% on PCs, Dell could still grow profitably. Dell's revenue growth from its inception to date, even in the worst years, is the ultimate indication of the success of their unprecedented strategy and relentless execution driven by strong discipline and leadership.
 Martinsons, Maris G.: Explaining Dell’s Success from a Strategic Management Perspective, 2005 Bellevue
 Atos Origin: The Strategy Trap, 2005 Paris
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