Dell's Strategic use of Information Systems
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The purpose of this report was to examine an organisation that has different types of electronic commerce interfaces. We chose DELL Inc Which was founded by Michael Dell in 1984.
In the beginning it was based on direct sales approach, and then it became quickly one of the leading companies in PCs markets. It is one of world's most admired business. It has 3 categories of customers Large, Public Sectors and Home and small sized businesses. Dell uses its website www.dell.com as one of the main channels to sell products directly to customers and provide products based on customer's customized orders. Dell's organizational structure is divided into four main regions (Americas, Europe, Asia and Japan), each of which includes their own functional departments. Dell utilises the Internet and other advanced technology in all aspects of its relations with customers, from ordering, sales, delivering and services to customers' research and forecast
Dell's information system also allows customers to use their ERP procurement application to order products Dell provides customers with personal support sites where information about the products and their history conditions are kept and processed. Dell works with various suppliers for components and softwares. The effective use of information systems to collaborate with suppliers gives Dell several important advantages. Dell's phenomenal success has been largely due to its strategic use of IS to complement its unique business and organizational strategies.
Dell was founded by Michael Dell in 1984 and started as a small computer selling company. Right at the beginning, its business based on a direct sales approach. Dell quickly grew into one of the leading companies in PCs market and one of the most admired businesses all over the world. Its significant success has been mainly due to its distinctive strategic model in general and its information systems strategy in particular. Two core elements of its business strategy include its direct sales and build-to-order approach (Manataki, 2007).
Dell uses online sales and services as their main way of doing business. However, other methods like ordering and technical services through phone and recently, its introduction of retail stores also contribute to its business process.
This paper will limit the analysis of Dell's strategic use of IS in response to two main competitive forces: the bargaining power of buyers and the bargaining power of suppliers.
We will use Michael Porter's competitive forces model and other studies to analyse the strategic use of information systems in the case of Dell Inc. This report will use Michael Porter's model to analyse how Dell Inc has used information systems (IS) strategically and accordingly with its business and organizational strategies to gain competitive advantages. In doing so, a brief literature review is necessary
Michael Porter's five competitive forces model
The rapidly development of information technology in general and the internet in particular has largely changed business process. However, the effectiveness of IT application for the success of a business depends largely on its capacity of systems planning. This process is very important but also very difficult and thus, good frameworks or planning techniques are of great value. Michael Porter's five competitive forces model is one among widely used methodology for planning of strategic usage of IT. In this model, there are five important forces that companies have to deal with, including:
(1) Threat of new entrants as a result of emergence of new businesses like e-commerce;
(2) The bargaining power of buyers who demand for better prices and quality;
(3) The bargaining power of suppliers such as those who monopolise in an area, or can cause high switching cost when changing suppliers;
(4) Substitute products or services which are enabled by the introduction of the internet, for instance, travel online is a substitute for travel agents;
(5) The intensity of rivalry among competitors (Porter, 2009).
Information Systems (IS) Quality Triangle
IS Quality Triangle represents the interdependency and integration of three levels of strategies – business strategy, organizational strategy and IS strategy, of which IS strategy must complement the other two strategies (Porter, 2001). The aim of a business is to use IS strategically in accordance with business and organizational strategies rather than simply using IS (Pearlson & Saunders 2010, 46-69).
IS strategy aligned with business and organizational strategies, should be implemented strategically to alter company's competitive forces to achieve its business goals (Pearlson & Saunders 2010, pp46-69).
Reasons for choosing Dell as the case study
Dell is one of the biggest companies in the PCs industry. Its phenomenal success depends largely on its strategic choices, of which IS strategy is a significant factor. Dell is the leading company in effectively applying IT into its business. An in-depth analysis of how Dell has strategically used IS to achieve its business goals will offer practical and useful knowledge for other businesses in improving their usage of IS and for further research into organizations' IS.
The bargaining power of buyers
Identify Dell's buyers
Dell's customers consist of 3 major categories: (1) Large enterprise; (2) Public sector (state and local government, federal government and educational institutions); (3) Home and small business. Michael Dell stated that Dell core customers are large ones who do not need various services from resellers and are always able to pay their bills. “Dell does not have any customers that represents more than 1% to 2% its revenue, 90% of Dell sale go to institutions- business or government- and 70% to very large customers that buy at least $1 million in PCs per year” (Margetta, 1998).
The power of buyers is represented by its demand for lower prices, better quality and services, which lead to increase in cost and competition for companies (Porter, 2008). In the PCs industry, Dell's customers are powerful for several reasons:
Dell has to compete with several strong rival companies in terms of attracting customers, such as Compaq, IBM and Hewlett- Packard. Dell also has to compete with local sellers for market share, for example Sony and Toshiba in Japan, Samsung and Asus in Asia.
Another reason is that PC products in the market are in many cases, not very differentiated and thus, there is possibility of customers play one seller against others (Porter, 2008).
One more reason is that in a high fixed cost market, Dell's core customers are large-volume customers, who, according to Porter (2008), have power of demanding for discount from selling competitors. Dell's core customers – corporate buyers – are those who have good experience in terms of prices and technology, and thus, Dell has to find its own way to offer these important and demanding customers with better prices and quality while remaining profitable.
As mentioned above, the bargaining power of Dell's customers, especially its corporate ones is relatively high. Therefore, it is of Dell's core interest to build up a distinct business strategy that helps maintain its sustainability, customers' satisfaction and loyalty while alter the competitive force from its powerful customers.
In order to succeed in a competitive market, a company's business strategy must illustrate the company's values which differentiate with competitors' (Porter, 2001, pp63-78). In the PCs market, where a lot of giant corporations like IBM and Compaq coexist, Dell chose for itself a distinctive way to serve customers: business based on a direct sales and build-to-order model. Unlike other PC makers who include retailers, resellers and other bodies in their marketing and sales, Dell uses its website www.dell.com as one of the main channel to sell products directly to customers and provide products based on customer's customized orders.
Direct Sales Method:
Dell's direct sales system relies on two factors: direct relationships with buyers, and products and services aimed at distinct customer groups.
Indirect Distribution Channel of the PC Industry
Dell's direct distribution Channel
Fig: Distribution Channel of Dell VS a traditional company
This direct strategy helps strengthen customer relationship as it helps Dell to understand all processes of their business and their customers' activities and needs from order, purchase, delivering, maintenance to upgrade or replacement. This information is critical for Dell to offer add-on products and suitable services to satisfy its buyers (Manataki, 2007). Also, it helps Dell to forecast customers' future demand. According to Michael Dell, sufficient anticipation is essential for the company to keep its cost down and therefore, satisfy its price-knowledgeable and demanding customers (Margetta, 1998, pp73-84). In addition, this direct approach makes it easier and more convenient for customers to purchase from Dell.
Dell does not manufacture all components of its products but relies on its suppliers in terms of components, softwares and services. This business strategy offers important advantages such as (1) know what customers' needs and thus, satisfy their demands because customers have chances to choose what they want; (2) allow the effective use of lean manufacturing and just-in-time operations which leads to reduced inventory, lower cost (cost savings are extended to customers in the form of better prices and value), quick adaptation to technology and demand changes and fast arrival of new products.
Traditionally, Dell organized its business on a globally centralised and functional basis, with all functions like sales, manufacturing and service reporting directly to the head-quarter. Its organization was then changed to a decentralized basis in accordance with its business model. Dell's organizational structure is divided into four main regions (Americas, Europe, Asia and Japan), each of which includes their own functional departments. It is also further subdivided according to business markets (large business, government/international, small business).
Strategic use of IS enables Dell to sell its products online at the website www.dell.com . This sales channel helps reduce retailing and distributing related costs which then result in lower prices and higher quality for customers. This sales model is also suitable with its main targeted customers - large-volume buyers – who expect good price and quality, convenience, fast service and tailored ordering.
Dell customers are segmented into different groups (small and medium business, large enterprise and public sector – these segments are then subdivided) with different mix of products and services. The segmentation of customers is, according to Michael Dell, crucial for the company to have a deeper understanding of its customers and thus, better serve their needs and expectations (Margetta, 1998, pp73-84).
Online Ordering with ease:
Customers can log in to Dell website to order the product with their own customized configurations. This information will be processed by Dell's customer database system to identify necessary components and then automatically send to corresponding suppliers. Hence, Dell suppliers are always prepared to accept Dell's requirements and deliver components requests. For corporate customers, Dell also takes full advantages of internet to achieve a tight relationship with these buyers by the use of Premier Pages at http://Premier.dell.com. Dell has developed over 50,000 Premier Page accounts in 13 different languages for its corporate customers around the world by mid-2000. These Premier Pages are used for configuration, ordering and technical services, which are all tailored to the customer's needs.
ERP Procurement Application:
Dell's information system also allows customers to use their ERP procurement application to order products. Dell coordinates with more than 20 ERP suppliers to ensure that all electric data transactions from ERP systems are accepted by Dell (this model is called Server-to-Server communication).
In addition, to bring Dell and customers closer, local meetings with its large customers are held regularly (namely Platinum Councils) to discuss their experience, demands, concerns and expectations with Dell. Also, Dell puts much emphasis on promoting better understanding and relationships with its customers through the introduction of Dell Forums, Dell Customer Experience Initiative, or Dell's Direct2Dell blog (Pearlson & Yeh, 1999).
Service and technical support in a PC company requires high cost and a lot of employees. However, in a competitive market, where products are, in many cases, standardized or undifferentiated, service and support quality is fundamental for companies to make a difference. Customers' history and profile are of great importance for Dell to understand its customers' needs and to provide better and more effective service and support. Therefore, Dell provides customers with personal support sites where information about the products and their history conditions are kept and processed. This strategy is regarded by Dell as “virtual integration” of which both customers and technicians have access to the same information and tools.
Dell provides online support for its customers at www.support.dell.com. Dell support is customized to better serve different segments of customers (home users, small businesses and enterprise IT).
Customers are offered with various support tools in terms of the products, order, warranty, resolution assistant, file library (drivers, software and other updates), contact details (including online chatting with technicians) and customer forum to exchange information and express demands (Dell website, 2010).
Unlike individual customers, large customers including big corporate or public sector buyers often have their own Management Information System (MIS) departments, help desks and IT technicians to support users. Dell provides these relationship customers with the Dell Premier Support. As these MIS bodies and help desks have to deal with multiple systems and various networking problems, they are offered with not only all online support tools similar with those for home users and small businesses, but they are also provided with customized applications suitable for their multiple systems and platforms (Kraemer & Dedrick, 2001).
Dell's IS also enables Michael Dell's vision to become not only a seller but also a partner, an IT department for its corporate customers (Magretta, 1998, pp.73-84) and as a result, deliver better service, strengthen its tight relationships with customers, which in turn make customers more depend on Dell and find it difficult and money consuming to switch to other vendors.
In addition to online service, Dell also encourages its customers to choose other venues for supports that are most suitable and comfortable for them such as phone service or various service centres.
Bargaining power of suppliers:
Dell works with various suppliers for components and software such as hard drivers from Quantum, Seagate and Maxtor; microprocessors from Intel and AMD; software from Microsoft; monitor from Acer, Samsung, Philips or DRAM from Samsung and Toshiba. Dell also has service suppliers such as Banc Tec for home users and small businesses and IBM, Unisys and Wang for corporate customers (Kraemer & Dedrick 2001).
The power of Dell's suppliers represents in several aspects:
First, Dell faces the power of some suppliers' monopoly such as Microsoft in area of software and operating systems (Porter, 2008).
Another thing is that, as a company who does not directly produce all components, it has to rely on its suppliers that, according to Porter (2008) could lead to the inducement of these suppliers into the market. For example, in early 1990s, Sony was only Dell's monitor supplier but Sony later entered the PCs market and grew as a big competitor.
Also, company will face switching cost if they change suppliers (Porter, 2008).
Information systems strategy:
Dell uses information systems strategically and accordingly with its business and organizational strategy to gain competitive advantages and achieve its business goals. Build-to-order approach requires tight cooperation with suppliers through adequately exchanging of data and trusting each other. The use of Internet and information technology is of great significance for this process.
When Dell receives an order, its data processing systems will identify specific components and automatically deliver the request to appropriate suppliers. This process is done by Supply Chain Management (SCM) system of Dell Enterprise Resource Planning (ERP) system, which is integrated with suppliers ERP through electronic data interchange (EDI). This system will collect orders every 20 seconds, analyse needed components, check inventory and then automatically set up components requirements to suppliers. Suppliers systems will update every 2 hours by directly connecting to ERP procurement application.
The most important tool which increases the speed and quality of information sharing with suppliers is Dell website www.valuechain.Dell.com. This website keeps Dell's suppliers updated about products' supply and demand, inventory data and component quality (Kapuscinski, Zhang, Carbonneau, Moore & Reeves, 2004).
The effective use of information systems to collaborate with suppliers gives Dell several important advantages:
Dell's information systems enable their strategy of exchanging inventory for information, which means Dell keeps information about customer orders and demands instead of storing inventory. Information about current trends, forecasted demands and news products initiatives shared with suppliers helps minimize inventory level and cost for both Dell and its suppliers. This consequently creates Dell's advantages over indirect competitors who depend on their resellers and therefore, lack of understanding about customers' purchasing trends and needs (Pearlson & Yeh, 1999).
Regarding components suppliers, Dell helps these partners in making decisions about inventory ordering by sharing its forecasted information through its extranet system monthly. These forecasts are the result from interdependent coordination of different functions: marketing department forecasts future demands; centre of competence checks for components' availability; commodity departments identify specific required parts to place orders to suppliers.
For service suppliers, Dell uses its extranet, EDI and other electronic communication to dispatch service technicians. The company aims at the integration of its own service and support, its service suppliers and its customers (Kraemer & Dedrick, 2001).
Dell's phenomenal success has been largely due to its strategic use of IS to complement its unique business and organizational strategies. However, it is now facing a lot of challenges from its competitors who are also very successful in applying IT such as HP, Acer and Apple. Dell's direct sales and build-to-order model is no longer Dell's uniqueness as the development of the internet enables other companies to adopt this successful model. Therefore, it is of Dell's core interest to find strategic initiatives in addition to its traditional strategies.
Dell has to continuously improve its information systems accordingly with its business strategy to maintain its traditional advantages, including close and beneficial relationships with its large customers; tight integration with suppliers; high reputation and position in PCs market (which help Dell be favoured by important suppliers like Microsoft or Intel).
In addition, the question for Dell is how to improve its strategic use of IS in accordance with its new multi-channel business model. The report's suggestion is that, Dell's IS has to focus more on collecting consumer data, analysing and understanding it to result in the last product that satisfy customers' needs in terms of price, quality, design and other figures. In addition, Dell could help its retailers build their websites where customers can tailor their ordering to offer customers with more shopping channels. Another thing is that, Dell should focus more on social media sites (for example Twitter and Facebook), which have increased influence on shaping customers' purchasing trends, to better understanding and attracting more customers.
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