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The world of business is changing at the speed of the light. What is new today might be an obsolete piece of work tomorrow. This change can be tackled only when the right person steers the right business model. The topic of entrepreneurship has caught the attention from board rooms to universities all around the world. They are trying to answer whether an entrepreneur is born or made.
This assignment is focused on identifying who is an entrepreneur, what is a business model, the types of business models and the pre requisites for small business start ups. In order to effectively answer these questions a real world success story of an entrepreneur and his business model has been analyzed here. For the purpose of this assignment the founder of Dell Computer Corporation was selected. Throughout this assignment the effort has been focused on tracking the key success factors of Michael Dell and his venerable business model.
Entrepreneur & Entrepreneurship
Michael Dell - The path of success
Today dell Computer Corporation is one of the premier PC brands both in and outside United States. Dell started his business in a time where IBM was dominating the market in a big way. He who assembled PCs in his university dormitory within 20 years surpassed almost all the key players in the business. Here is a brief account of Michael Dell, the man behind the billion dollar PC manufacturing company.
Michael Dell was born in 165 in Houston in Texas. Although he did not show interest in school, he showed entrepreneur skills from his childhood.
Dell at 12 - started his first business venture by creating a stamp auction. He advertised 'dell's stamps' in Linns stamp journal and earns $2000 from it. This is the first time where he learnt the importance of eliminating the middlemen.
Dell at 16 - he was selling newspaper subscriptions for Houston Post. This is where he learnt about the power of segmentation. At the end of the year Dell had earned $ 18,000.
Dell at 18 - Enters the Texas University and sells upgraded high performance PCs there. He registers the company as 'PC limited'. Michael started Dell Computer Corporation with an initial investment of $1,000. He drops out from the university to fully devote to the company. His grandparents having faith on his idea lend him $300,000 for the business in order to expand the company.
Dell at 26 - Becomes the youngest CEO of a company that was ever to earn the fortune 500 title.
One of the key success factors of Michael Dell is his passion for computers. At the age of 15 he broke down his apple 2 computer and rebuilt it. By the time goes on he realized that then market leader IBM was not making PCs by IBM parts. They were stock parts from different vendors. This finding led him to assemble PCs which were superior to IBM machines.
Michael also advertised his custom made computers in famous computer magazines. While his prices were less than retailers the machines were directly shipped to customers.
Personnel computer industry - An overview
By 1950s mainframe computers were the size of an entire room. Possessing a computer was beyond reality for many until 1970s. The first such a consumer computer was built by a company called MITS. In 1977 apple launched apple 2 which was believe to be the first true personnel computer. By today the PC has come a long way from its origins to become one of the must have consumer electronics for the modern day man.
Michael dell became a success by addressing the main issues PC manufacturers faced in late 70s and 80s.
Followings are some of the key feature in the PC industry.
Average product life cycle of personnel computers has been declined from 22 months in 1988 to 6 months in 1997.
Price as well as performance doubled in 18 months making excess inventory depreciate quickly. Also customers are ready to pay a premium on technically superior products.
From early days performance of hardware was matched by growing complexity of software. This provides two implications.
Excess inventory depreciate in value 10% per month.
Technologically sophisticated machines have a higher demand and gives a premium price.
Therefore minimum inventory cost as well as bringing new technologies quickly assures higher profits for their organizations.
Most PC manufacturers use the indirect distribution channels as shown in figure 1. This is contrary to dell's direct distribution channel.
FIG - 1 Indirect distribution channel of the PC industry.
Analysis of Dell's business model
As discussed previously dell became successful by addressing the common deadlocks faced by other manufacturers in the industry. Since Dell started manufacturing its own PCs in 1985 it started a 24/7 hotline for complaints and assured shipment of replacement parts within 24 to 48 hours. In 1990 Dell started selling through retailers such as CompUSA, prie club and circuit city.
Despite rapidly growing revenues dell experienced its first loss in 1993. As a result it decided to pull out from the retail channels and went in to its roots of direct selling. The move put the company back on track by generating profits soon.
Dell's Business model
The essence of dell's business model is selling directly to the customer and build to order production.
This approach has two elements. Direct customer relationship and targeting distinct customer segments. By adapting direct sales method it must either reach customers by its own sales force or via advertising and other marketing tools.
Direct customer relationship
The direct approach provides dell a 6% cost advantage over the indirect sellers. It also gives a greater insight in to its own customers while Dell's competitors have to rely on secondary marketing research to know their own customer base.
Through direct approach dell can identify customer trends. Therefore it can swiftly respond by bringing desired products to the market before its competitors.
The direct approach make it easy for customers to deal with Dell. For instance dell adapted Boeing's IT system thereby making it easy for Boeing to operate dell products. Dell uses EDI to process orders and for a federal government defense contractor like Boeing this makes life easy as it terminate the need to connect to the internet thereby securing secrecy.
However lack of extensive reach of channels is a drawback of direct approach. To solve this by segmenting its market by size dell has mainly focused on large clients. Who could reach directly by dells own sales force.
Customer segmentation for sales
Dell has 3 segments of customers as relationship, transaction and public international customers.
The relationship customers are fortune 1000 companies. These numbers about 50 organizations which include Toyota, Goldman sacks, Exxon, Microsoft, Boeing, Wal-mart, sears, Shell oil, Ford. These companies purchase at least $1 million annually and accounts for about 70% of Dell's sales. To gain and retain these customers Dell provides highly customized services.
These relationship customers are served by field based sales representatives in the customer's premises as well as an equal number of telephone service representatives. For instance Dell has stationed a staff of 30 people to take care of Boeings 140,000 computers at Boeing. This team in addition to managing the machines forecast future PC purchases for Boeing.
The second segment transaction customers account for 30% of sales are mainly small and medium enterprises. They are served by several thousand strong sales force that analyze prior purchase records and supports customers in choosing their purchases. The office and home customers account for 10% of the total sales.
The international market is catred by a combination of subsidiaries and distribution agreements. Since buying directly from the manufacturer is still a new concept in most countries a more flexible approach is used here. However Dell decided to enter the Chinese and Brazilian market with the direct approach with the confidence that these countries would support the method.
Built to order production
Dell's production system uses principles of just in time production that was first used by Japanese automaker Toyota, eliminating the need for excess inventory. The build to order goes a step further from lean production for the customized production. Since the approach requires specific parts for custom build machines the sales force and production department as well as its suppliers work hand to hand to satisfy the component requirement. The build to order is the most critical point in Dells business operations.
The build to order is carried out mainly through Dell's website. When the customers place an order through internet they are supported by configuration management software that enables the customer to select from a menu of software and hardware options. The menu assures only the compatible components are selected. After receiving the order online the configuration details are sent to the manufacturers where all the assembling and testing of machines are carried out.
Following is the illustration of how the built to order is carried out
Customer orders the machine through Dell website
Configuration details sent to manufacturing floor
The complete assembly is carried out
After hardware were installed all the software are installed
The complete system is boxed and shipped
An outside monitor supplier receives email to supply the monitor
Dells annual spending on research and development is estimated to be $ 250 million. the main objective is to developing cutting edge technologies and evaluating their ability to be adopted by the current systems.
Following are some improvements which were taken place in Dells R & D during past few years.
The entire system is barred by only five screws to reduce wastage.
Shorten cables to make assembling, replacement and repairing easy.
Use of fiber optics thereby reducing the software downloading time by 75%.
Declined number of machine retouches via product redesign.
Dell's use of information and technology
Refining the business model
One of the key success factors of dell computers is its extensive use of technology. Dell's performance metrics is a major breakthrough in its analytical abilities. It analyses production operations, inventory levels, cash collection, market share, probability as well as selling overhead per customer segment. Table 1 illustrates how dell takes advantage of IT to refine its business model.
Dell also uses technology heavily in managing relationships. Although customer service is outsourced at Dell it acts as a bridge between customers and third party maintainers or TPM. With its prior experience in hardware manufacturing Dell knows what kind of problems arise to customers and which parts gives more problems. With this experience it has incorporated frequently asked questions and solutions in to their web site.
Another advanced use of technology can be seen in Dell order Management System [DOMS] where all the customer orders are recorded. The following illustration explains how the DOMS works.
Extending the business model
Dells IT staff not only refines the business model but also involve in extending the business model. This means they strive to extend business with existing customers, reach new customers, cover new geographical areas and offer new products to these markets.
The extending of the business model can be widely observed via dell website. This enables the company to reach customers in distant areas where it does not have a reach through its sales force. The website also enables the customer to easily get in to telesales if they are willing to contact a tele sales representative via company website.
Another example of Dell's extension of business model is its customized web pages for the company's corporate clients. In its website dell has customized web pages for each of its key clients where employees of those companies can log in to these web pages and access information.
When it comes to a small business startup it involves many formalities and elements prior to step in to the arena. Here we propose a 10 step procedure that would ensure a smooth take off for a start up. It includes financing, conceptualizing the idea, marketing, research, suppliers, licensing etc.
Step 1 - find the right fit
A person who wish to start a business might be overwhelmed by tons of new ideas. But he should decide which business is right for him. A prior experience as well as a good background on a certain area has a higher probability to succeed. Also a keen interest on a certain area tend to give good results in the future. For instances dell's desire to move with hardware as well as Bill Gates' interest in programming drew them to the pinnacle.
Thus one needs to carry out a genuine self survey on his talents, skills as well as hobbies. The person should also focus on his personality factor. Whether the person is outgoing or prefer to keep to himself and even whether he likes to work 24/7 or enjoys the down town as much as the work time should be considered. Because every business has its own personality and it is very important that one's personality being complying with the business.
Step 2 - research the idea
Many people have wonderful ideas but their business fail in the market due to not having proper market audience for the product. The research on business idea should answer the following questions.
What solutions does the product offer?
Who are the potential buyers?
Why will they buy it?
Fro where will they buy it? [Online, super market etc]
What is the right price that assures a handsome profit and are the customers ready to pay that price?
Who will be the competitors?
When it comes to a small business it cannot cater to everybody. Thus defining the business as well as target market is critical. It is even applicable to a much larger organization. For instance Wal-Mart caters to bargain hunters while Tiffany's niche is upscale jewellery customers although both are in the business of retailing.
To check whether the business idea has a chance to be successful one needs to do more research and this time it should be more formal. A good idea is to meet t5he local small business development advisor or a marketing professor of a local college. In addition with the help of census bureau one can analyze trends, surveys, statistics, as well as other data to gain further insight in to the market.
Step 3- calculating the start up cost
It is crucial to decide the amount of cash needed for the start up. One need sufficient capital to cover all the expenses until the business reaches the breakeven point. Expert normally recommend a capital requirement that covers at least six months of expenses ahead for a start up.
Following is a check list of expenditure for a start up.
Equipment, supplies, furniture and people
Inventory, product development, licence fee, permits, working capital, legal or professional fee.
Monthly rent, taxes, utilities, shipping
It is wiser to refer to similar start ups in the industry for the purpose.
Step 4- writing the business plan
The documentation of a business idea has a higher significance. This significance is beyond the ability to secure a loan package. It's a document that shows business opportunities as well as difficulties ahead such as under-capitalization and lack of sufficient markets.
A typical business plan contains three parts.
1. The business concept - the product or service, the relevant industry, the structure of the business as well as the steps taken to make the business a success should be included.
2. The market place - analyzing the potential customers, their geographical locations, buying intentions. Also an analysis on potential competition as well as plans to tackle such competition should be included.
3. financial area - with the assistance of an accountant as well as a accounting software package one need to prepare cash flow statement, break even analysis as well as balance sheet and financial ratios.
Step 5 financing
After deciding the type of business one should decide the ways of financing the business.
The most common way is self financing. For entrepreneurs by ways of personnel savings, loans from family and friends as well as second mortgages. Crowd funding is another option of financing where networking with people online who are willing to invest small sums in start ups.
One might some tomes qualify for specialty loans. For instance organizations such as count me provides loans to women entrepreneurs from small sums up to $50,000. Some large banks offer special loan schemes for women, minority groups as well small businesses.
Angel funding as well as venture capitalists are two other sources of funding which are worthwhile considering. There are investors who are looking for great business ideas which can be turned in to gold mines. Such people can be located via online directories, industry associations, referrals via personnel contacts as well as trade group members. For instance sir Richard Branson's virgin group website has a special area where anyone with a great business idea can contact the company. There viable projects are qualified for financing from the virgin group.
Step 6 - naming the business
One of the most important decisions in a start up is naming the business. An effective name will lead to a strong brand identity in the market place. One can use the trade mark electronic search system, patent and trade mark office as well as Canadian and European trademarks prior to finding a name. Getting the help of a trademark attorney or a trademark firm would save money by avoiding future disputes over the company name.
Determine the legal structure of the business is also important. One should choose this from a range of types from sole proprietorship, partnership, corporation or a limited liability company as different business forms comes with different tax consequences.
Step 7 - developing the marketing plan
Without marketing the existence of the business is not known. A marketing plan includes strategies and tools that will be used to communicate to the target audience.
The marketing plan starts with describing the market, its segments, potential customers and competitors. Based on this the communication tools should be selected from a wide range of selection from TV, radio, print, billboards, social media, blogs, direct mail, web banners etc.
Then the customer service plan [CSP] should focus on developing relationships that are mutually beneficial for both the parties. As repeat customers are the life line of the organization the CSP must provide answers on total customer satisfaction. For this money back guarantees, handling customer complaints as well as buying incentives should be considered.
The inclusion of introductory price strategy, free consultation services, as well as teaming up with complementary businesses in to the marketing plan is recommended.
Step 8 - Building the support team
Even for a soloprenuer a support team is vital. A start up should focus on a mixture of mentors, professional peers, as well as financial advisors. This support team in the form of advisory board should be a pool of talents, skills, knowledge and also resources.
When it comes to hiring people for a start up interns, university undergraduates, or part timers would be suit well. If the business involves more part time workers considering independent contractors is also recommended.
Step 9 - Executing the marketing plan
The developed marketing plan at stage 7 should be implemented here.
Under this the website, marketing materials, business cards should be ready for distribution. Setting up auto responses for customer inquiries via e mail as well as through customer hot line is vital. Following is a list of actions in implementing the marketing plan
Mailing a press release to local media on the opening of the business
Going to the yellow pages
Co-op advertising with manufacturers
Creating coupon offers
Sending special offer post cards to potential buyers
Step 10 - licensing
When starting a business one should consider obtaining many licenses. These may include state, county or local licenses.
Following is a list of such license that vary from industry to industry and on the type of business.
Basic business operations license - this is the type of license that should be acquired from the administration of the city or county which the business operates.
Zoning and land use permits - This is for some home based businesses as well as manufacturing organizations.
Health department permits - this is for business involved in preparing food and beverages.
Sales tax licenses - in order to sell any product or service.
Fire department permits - for organizations that attract lot of customers such as night clubs and bars.
Special license issued by state - this is required if the business involves in selling followings.
Special license for professional outfits by the state - business involved in following occupations should get these permits.
Dell computers have come a long way since its origin from a university dormitory in mid 80s to become one of the largest PC manufacturers on the planet. While its competitors are struggling to tackle the time based competition the company has managed to thrive continuously. Dell's secret formula of success is simple in nature but is highly complicated in implementing it. Direct selling to the customer and build to customer order are the essence of Dell's venerable business model.
Dell's extensive use of IT is also a key factor in its success. The use of IT is visible in every occasion from procurement, logistics, production, service and support. The use of website for direct selling, DOMS system as well as performance matrix for analytical purposes has largely contributed to company's success.