What is the story?
Dell started fast and strong. The original company was founded in 1984 when the founder was only a 19-year-old student at the University of Texas. Four years after the inception of the company, Michael Dell was selected Entrepreneur of the Year. Eight years after he started the company from the comfort of his dorm room, Dell was chosen as the Man of the Year by PC Magazine. Nine years after he established Dell Computer Corporation, he was chosen CEO of the Year by Financial World. A year before the award was given, his company was included in the enviable list called Fortune 500. A decade after the founding of the company, Dell’s business empire was already raking in $3.5 billion in sales. The company was acknowledged as the world’s leading direct marketer of personal computers. At the same time, Dell was known as one of the top five PC vendors on the planet (Hunger 9).
In 2005 the company was considered one of the most admired companies in the world. More than two decades after its inception, Dell raked in $55.8 billion in net revenue, and the investors pocketed at least $3 billion in net profit. However, the company’s journey encountered a major hurdle down the road. Even after recovering from an economic recession in 2010, the company continued to experience declining sales.
Dell experienced major setbacks because of the following factors:
- Dell’s success drove down the cost of producing computers.
- The PC market matured, therefore, manufacturers focused on producing servers and mobile devices.
- Direct-marketing was not applicable outside North America.
- Apple Computers became a game-changer and significantly altered the way people perceive personal computers.
Dell became the victim of its success when it succeeded in driving down supplier costs. There is a saying that when the water rises, all boats in the area also rises. The same principle can be applied to low-cost computer components.
When PC sales slowed down, Dell struggled to sell desktop PCs. At the same time, its competitors found a way to eat into the market share of Dell. When Apple Computers entered the fray, Steve Jobs’ company changed the rules of the game. Thus, Dell’s old strategy to wait out until new technology became stable and standardized backfired on the company. In other words, consumers are no longer buying laptops, desktops, and mobile devices based on the product’s computing power.
At the height of its success, Dell was known as the world’s leading direct marketer of PCs. At the same time, it was also acknowledged as one of the top five vendors of personal computers. However, these statements painted an incomplete picture. Most of the sales came via direct orders from North American households and North American companies. It was a different story when it comes to the rest of the world. For instance, emerging economies did not do well with the direct-marketing method employed by Dell. It can be argued that the people living in these regions did not have sophisticated knowledge of computer systems. Thus, they required the assistance of salespeople to help them decide which laptop or desktop model to acquire. Dell had to find answers to these problems to stay relevant.
In the fast-changing computer industry, innovation and creativity are essential key success factors. Please discuss Michael Dell’s entrepreneurial character
Dell’s entrepreneurial character was a perfect match for the needs of the fledgling computer industry. He was chosen as Entrepreneur of the Year a few years after founding his computer company, and that was a well-earned distinction. He deserved the recognition of the leaders in the computer industry because Dell behaved like a seasoned businessman. When he examined the computer industry in 1984 he saw what the consumers needed. He also saw the problems that computer manufacturers had to deal with. These problematic factors explained the high cost of acquiring personal computers.
Dell knew that the conventional supply chain management that governed the distribution of personal computers was the main factor that drove up the prices, making it unfordable for students and small companies to acquire computers. He also realized that the technology surrounding desktop computers was relatively new. Thus, there were only a few manufacturers and only a few suppliers that we’re able to produce the needed components to build computer products.
Dell saw a way to solve the problem by eliminating the conventional way of distributing desktop PCs. When he eliminated the need for traditional marketing schemes and directly sold the computers to his clients, Dell was able to drastically reduce the prices of the computers. At the same time, Dell realized that there was a way to acquire surplus computer components from suppliers in North America.
The decision to create a business model based on direct-marketing was a brilliant move for the young entrepreneur. The American public found it convenient to simply order computers through the help of Dell’s catalogs and the efficient marketing arm of his company. Dell perfected the delivery system, and the efficiency earned him praise from his customers.
The direct-marketing scheme solved Dell’s cash flow problems. He did not have to endure the common cash flow problems plagued by new entrepreneurs. Due to the system that was in place, the customers had to pay the company first before they can expect to receive the product they ordered. As a result, Dell had access to the funds that he needed to purchase computer components and build the desktops that were ordered. This was an innovative solution and it was very different from the old model. In the past, computer manufacturers had to borrow money from banks to build the product. After building the product they spend more money to deliver the products to computer stores all over America. After all these efforts there was no assurance that people will come and buy the said product. In the case of Dell, the product was paid in full.
Dell made more money than his competitors because he also saved money by eliminating the need to maintain a certain level of inventory. Dell’s computers were made to order, therefore, there was no need for warehouses or complicated distribution channels.
At the height of his success, Dell’s entrepreneurial savvy was made more evident when he decided not to compete in terms of research and development. Dell’s strategy was to wait until a new technology became standard. In other words, he was willing to wait until a particular technology became a commodity.
Is Dell “doing the Right Thing” by continuously changing its business model?
Dell is compelled to make continuous changes to its business model. The business model that made the company a household name was no longer relevant and effective in terms of enhancing its revenue stream. In the first place, the direct-marketing model is no longer a reliable means of increasing the profitability of the company. Consumers located outside North America rely on the advice of sales staff when they purchase computer products. As early as 2007 Dell decided to sell its computers through the help of retailers. Also, the company can no longer deny the impact of declining sales. It is practical to seek out new markets. As a result, the company shipped Dell computers to at least 56,000 outlets worldwide.
Dell also had to contend with the realization that sales growth was no longer in the corporate market, the area that the company dominated for two decades. The money was in emerging countries and the consumer market. Thus, the company had to rethink its reliance on desktop PCs as its flagship product.
Corporate executives at Dell realized the impact of mobile devices on their business model. This new development was brought about by the availability of Apple’s iPad’s and the subsequent emergence of reliable tablet computers. Dell was forced to create a product that will rival the iPad. The company released a tablet computer in 2010, however, the product failed to elicit excitement from the consumers.
Dell was hounded by Apple’s phenomenal success. The old strategy to weather out the impact of new technology was no longer working for Dell. The company had to invest in Research and Development to develop cutting edge technology that will in turn attract new customers. However, Dell must expect an uphill climb when it decides to funnel more money into the Research and Development arm of the company. It is important to point out that Steve Jobs’ Apple changed the criteria for selecting personal computers and mobile devices. In the past, the main goal of the consumer was to purchase the computer that is the most efficient but priced lower than the others. In a nutshell, this was the business model employed by Dell. However, 21st consumers are aware that computer technology had reached a plateau when it comes to computing power and practical functionality. In other words, it easy to purchase a reliable computer with decent computing power at a relatively cheap price. Thus, competitors like Apple decided to market their products not solely on the computer’s technological refinements but also on user experience. The sleek design of Apple’s iPads created a new way of appreciating mobile devices. Dell had to change along these lines.
Dell was also compelled to rethink the company’s business model when its main rivals were acquiring companies that focus on servers, software, and consulting. Dell executives are well aware of the fact that the company can experience a higher return on investment compared to the sales of personal computers. IBM sold its laptop business to focus solely on the services business department of the company.
Without a doubt, Dell has to evolve into a computer company that can compete in the global market and can solve the problem of declining sales in the PC market. The company must overhaul its business model. However, it is extremely difficult to decide which part to cut-off and what type of strategy to add to the current mix of strategies that influenced the manufacture and distribution of personal computers.
What would be the most dangerous thing for Dell to extrapolate into the future?
Dell risks financial ruin if it extrapolates on the data regarding IBM and HP’s success in the business services sector. After Dell fails to create a rival product for Apple’s iPad, it has become clear to the company’s corporate executives that they do not stand a chance in the event of a head-to-head comparison with Apple product. Dell’s business model makes it impossible for the company to create something as ground-breaking as an iPad. The success of the company was always rooted in the need to produce the most powerful personal computer in the most cost-efficient manner. The products that the company made were produced based on pragmatic ideals. There was never a time when Dell excelled in the creation of products that appealed to the artistic side of the consumers. The company never sold any product by focusing on changing the lifestyle of the consumers. The failure to develop an exciting product line for mobile devices may have forced Dell into a corner. Thus, corporate executives may have a compelling reason to gravitate towards the business services sector of the computer industry.
When they crunch the numbers and look into the possible profit margins in this type of business, then, they will extrapolate this data into the future. Dell has little to fear when it comes to servers, software, storage systems, printers, and consulting services. The products and services created through this type of business model are very different from the failed experiment with the PC tablet when Dell attempted to counter Apple’s iPad. With regards to this type of products and services, Dell does not have to struggle with the overwhelming feeling of trying to tackle something that is beyond the capability of the company. It must be pointed out that Dell steadily expanded its product line over many years. Therefore, Dell’s executives, middle-managers, and staff are well-experienced when it comes to the aforementioned line of products and services. Therefore, the danger is not on the technical side but overconfidence. In the course of extrapolating data into the future, Dell can be persuaded to focus all its resources on manufacturing servers and offering consulting services to its clients.
If Dell decides to focus on servers, the inevitable outcome is to feel the desperate need to acquire companies that manufacture servers, as well as companies that specialize in taking care of clients’ needs with regards to the use of the said servers. Thus, it is highly probable that Dell will have to engage IBM, HP, and other rivals in a costly bidding war to acquire new companies. It must be pointed out that if Dell saw the value of investing in servers, IBM and HP reached the same conclusion a long time ago. Thus, in the bidding war that will ensue, Dell will be forced to buy an overpriced company. It will take Dell a long time to realize a profit from newly acquired companies. Moreover, the failure to turn out a profit is not a far-fetched reality. When that happens, then, there is a greater risk for Dell to experience negative growth for the first time in the company’s history.
Aside from the danger of engaging in a costly bidding war with its competitors, Dell’s decision to focus on servers and consulting services can backfire. Dell’s experience in dealing with servers pales in comparison compared to the experience of IBM and HP. Dell is in a precarious position because the company does not believe in investing a huge chunk of its profits in Research and Development. Servers are more difficult to sell than personal computers. However, they may not fully understand its ramifications, because they are experts in personal computers and not on servers.
Should Dell continue with its current strategy of following the consumer market down in price and adjusting its costs accordingly or, like IBM, should it change its focus to more profitable business services, or, like HP, should it do both?
Dell is in a rock and a hard place because computer experts can practically see the writing on the wall. Dell will never be able to re-experience the glory days when the company earned more than 3 billion dollars on the strength of selling personal computers alone. The sales of desktop PCs are on a steep decline because the computer industry had already matured. Thus, the market for desktop PCs in North America reached the saturating point. When IBM decided to sell its laptop business to another company, it signaled the serious decline of another important product for Dell.
Something has to change for Dell, however, it cannot afford to abandon its desktop and laptop business. Once Dell sells its computer business and focuses only on the manufacture and distribution of servers, then, the company eliminates its safety net.
Without a doubt Dell can no longer rake in the same type of profit it enjoyed during the glory years of the company. Nevertheless, the same infrastructure is still a place that enables the company to produce high-quality and yet affordable personal computers. In other words, corporate leaders have access to a significant amount of resources for them to turn things around.
Dell cannot afford to simply focus on the acquisition of companies to bolster its capability in the server business. Dell must be wary of the capability of both HP and IBM. Dell’s main rivals have two aces up their sleeves. First of all, the wealth of experience they had after immersing their respective companies in the server business is something that Dell may not be able to duplicate. Dell’s corporate leaders fully understand the type of service required for companies that acquire servers for their computing needs. Thus, these businesses are handling critical operations. Financial institutions and government agencies that require extraordinary computing power will never entrust their critical operations to the hands of a newcomer. It is human nature to trust the services of the company that has been in the said business since the 1980s. In this regard, Dell will have a tough time beating IBM.
It is not just the ability to attract new customers and increase its market share when it comes to the creation of top of the line servers. The most vulnerable area of Dell’s server manufacturing business is the reluctance of the company to invest in Research and Development. Companies are always on the lookout for servers that can offer decent computing power but are more cost-efficient. They are also on the lookout for servers that are more agile or servers that are more user friendly. It is highly unlikely that Dell will be on the bleeding edge when it comes to the innovative design of the next-generation servers. Thus, the company will always lag behind IBM and HP.
Based on the current situation, Dell is inevitably heading for more losses. It is not impractical to offer a third option. Dell may not have to worry about reducing the cost of operations or expanding the product line. One of the possible solutions is to break up the company and sell it piece by piece. It is not a popular option, however, cheaper products from China and India may force Dell’s CEO to consider the unthinkable.
Hunger, David. Strategic Management and Business Policy. New Jersey: Prentice Hall, 2010. Print.