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The computer hardware industry is a mature and highly competitive one, filled with many players, big and small. Dell is the largest manufacturer, representing 18 percent of the market share. With $55.9 billion in revenues in fiscal year 2006 (U.S. Securities and Exchange Commission 2006,Form 10-k), Dell was the first major company to move to e-commerce in 1996. With the prices and service it provided, Dell quickly captured its customer's hearts. The company's online business quickly rose from $1 million a week to $1 million a day during the first several years. During the past decade, Dell has experienced fast growth. It is currently 2nd in the Global PC market, ranked only behind Hewlett Packard (iSuppli Market research). However, when it comes to low-cost computer hardware available to purchase on line, Dell is number 1.
To Dell, the whole business is structured based on a simple concept: "By selling computer systems directly to customers, it could best understand customer needs and efficiently provide the most effective computing solutions to meet those needs" (U.S. Securities and Exchange Commission 2004). Because cheaper prices and competition are shrinking the PC industry's profit margin, most manufacturers are trying to diversify into more profitable products. This also extends their business life cycle and gradually shifts their focus from lower-profit PC products to more profitable products like servers, networks, and peripheral services. The goal is to provide a form of "one-step" shopping that offers consolidated resources consulting and management.
Direct-to-customer online selling has been Dell's hallmark since the start of the business and has helped make it the low-cost leader. This direct sales model, along with the company's supply chain management strategy of shortening the cycle between the components, the manufacture and the end customer has resulted in saving time and money.
Dell takes advantage of its "just in time" inventory system. This system allows the company to reduce the costs involved in warehousing and hiring staff, which in return will reduce the total
cost to customers. It also saves money that can be used in adding value activities to its
The company uses the Internet not only to make the customer ordering process easier, but also to
build a strong relationship with its suppliers. Dell believes that the suppliers have to be very
involved in the ordering process from the start to make sure that the final product is delivered to
the customer within the deadline. Also the company benefits from its up to date technology and
IT systems by allowing them to exchange information and interact quickly with both suppliers
With time, combining its direct customer model with efficient manufacturing, supply chain management, and standards-based technologies enhanced its cost leadership position. Owing to its successful strategies, Dell is the world's number one online supplier of personal computer systems, servers, notebook computers, and desktop shipments in the U.S. According to Dell's claims, the direct-to-customer model focuses on "a balance of three priorities: liquidity, profitability, and growth". This model provides the company with advantages in all environments and across all product segments and regions. This should give Dell the opportunity for continued profitable growth.
Dell deals directly with its customers through sales representatives, telephone representatives, and online at www.dell.com. Within each of Dell's geographic regions, resources are divided among these various customer groups. Dell's broad base of customers, ranging from small businesses and individuals to large corporate entities, allows for evenly distributed sources of revenue. In fact, no single customer accounted for more than 10 percent of Dell's consolidated net revenue during the last couple of years (U.S. Securities and Exchange Commission ).
For its large business and institutional customers, Dell maintains a field sales force throughout the world. Dell also maintains programs targeted at federal, state, and local governmental agencies, as well as specific healthcare and educational markets. Dell markets its products and services to small-to-medium businesses and consumers through television, the Internet, in a variety of print media, and by mailing a broad range of direct marketing publications, such as promotional pieces, catalogues, and customer newsletters. The majority of the sales to small-to-medium businesses and consumers occur online through www.dell.com.
Dell is able to distinguish itself from its competitors with its customised on-demand manufacturing. The customers can design their own customised computer and Dell will build it in three days and have it delivered to its customers within a week. Dell manufactures most of the products it sells and has six factories worldwide to serve its global customer base. Dell believes that "its manufacturing processes and supply-chain management techniques provide it with distinct competitive advantages" (U.S. Securities and Exchange Commission 2004). Its build-to-order manufacturing process is designed to allow Dell to significantly reduce costs while providing customers with the ability to customise their purchases. By managing its supply chain (i.e., keeping informed of inventory levels and shipping status as changes occur), Dell decreases its exposure to the risk of declining inventory values. This allows Dell quickly incorporate new technologies or components into its product offering as well as to rapidly pass on the component cost savings directly to customers.
Competitive and operation strategies
Developing a competitive strategy requires an understanding of demand and how it is determined in an industry. According to Michael Porter (1985), "value can be explained by what buyers are willing to pay for certain products and superior value stems from offering lower prices than competitors for products of the same quality or providing benefits that more than offset a higher price." Porter also mentioned two basic types of competitive advantages: "Cost Leadership and Differentiation." These two are most commonly used to attain to relative competitive advantage. While Dell was building its competitive strategies and establishing a profitable and sustainable position, the direct-to-customer model remained its core strategy.
What Dell did was find a market segment to enter and used the Internet as an extension of its distribution channels. Through the Internet, various levels of service were created for high-end and low-end customers. Dell discovered that the mid-range customers were relatively knowledgeable and required a modest level of service, as compared to consumers at the bottom level of the pyramid. The direct-sale model became feasible because of an understanding of the demand concept, the company, and its competition. Operational excellence was achieved by offering reliable products and services that could be obtained easily and cost effectively. This represented a focus on outperforming others by delivering both lower prices and consistent quality, therefore achieving customer satisfaction.
Today Dell not only is a PC manufacturer, but also a designer, distributor, and service provider, giving the best example of how innovation and flexibility can work together in a computer hardware company. While 80 per cent of Dell's revenue still come from its PC segment, the enterprise system is gaining ground and the company is using its abundant resources to explore new fields (International Data Corporation 2004). Porter's Five Forces theory provide an adequate framework from which to examine a firm's current status in an industry, and promotes and understanding of the computer hardware industry and how different forces can impact a company.
Competitive strategy is the relative position a company takes in its industry. Positioning is the major determination of a firm's profitability, and even in an unfavorable or unprofitable industry, if a firm can position itself well, it can still earn a better than average return. Therefore, a sustainable competitive advantage can be built on two basic types of strategies: low cost and differentiation. Working within the scope of goals a firm intended to achieve, three generic strategies can be further extracted: cost leadership, differentiation, and focus (Porter 1985).
Since the computer hardware industry is mature and fragmented, a differentiation strategy is not applicable. Also, as the product life cycle is relatively brief while new products enter the market, pricing of previous models is forced downward to attract continued sales. Dell chose to be the low-cost provider at the outset and has maintained that position. This leadership position was established on its direct-to-customer model, preferred supply chain of all resources, and an economic of scale. This represents a cost leadership strategy.
To add value to its products, Dell also provides technical support, consulting and services to strengthen its low cost strategy as being more than just a computer hardware manufacturer. That is also how Dell built its image and earned customers trust, which further strengthened its power in the market.
Dell's strategies are enough to stop new entrants and cause others to rethink or abandon their strategies when they are facing this strong competitor. The cost leadership strategy particularly depends on pre-emption and Dell achieved it. The only exception would occur if a major technological change allows another firm to radically changes its cost position, but so far this has not been the case in the computer hardware industry. Because differentiation in the computer hardware industry is not obvious and Dell's market position is so strong, imitating its low cost strategy might be costly and the desired result would not be achieved. For example, if Dell and a new, less well-known computer maker have the same configurations and the same costs, Dell will have a higher chance of being chosen because of the first mover advantage and the reliable image Dell has established. Customer value is generated by quality products with lower prices and the assistance from Dell. No matter if the purpose is personal or business, the image that Dell creates is to make people's lives easier. This touches people's hearts and makes Dell feel like a friend who is assisting them instead of robbing money from their pockets. Reliable and friendly images are irreplaceable. Stealing market shares from Dell is difficult and costly. Under the current computer hardware industry environment, and Dell's recent year's performance, Dell should be able to continue maintaining its leadership position and grow consistently.