Dell Inc.

in 2009

Questions for discussion:

1. Explain Dell’s business model before 2006 and good practices.

2. Critically discuss if a good business model can be sustained

over time. Use the Dell case as an example to illustrate your
points.

Class Discussion

https://padletuq.padlet.org/hxu32/explain-dell-s-business-model-before-
2006-and-good-practices-sfnovyt3nm70af33

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 Dell Inc. in 2009

Case Study IBUS7316 – International Supply Chains

Agenda

▪ Company introduction
▪ Dell’s best practice
▪ The downturn
▪ Current situation
▪ Discussion & recommendations

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In 2009, Dell – known for its low-cost, direct model – is #2
PC vendor globally
Key facts Business model
▪ Founded by Michael S. Dell in 1983 ▪ Initially only direct-to-customer sales
▪ Originally focused on selling desktop Direct selling
▪ Later retail channels added
computers
▪ 1980-2000s: Dell grew to be world’s
leading supplier of computer systems ▪ Through cutting out retailers, able to offer
Low price
lower prices while still having good margin
▪ Widely-known for its low-cost, direct
model and innovative supply chain
Focus on ▪ Corporate market more profitable
▪ #2 PC manufacturer in the world (in corporate
2009) market ▪ Late mover in consumer market

Financials
80 Apple
$ 61 bn
60 Lenovo 6%
14% HP
12% 34%
40 CAGR
Acer
20 17%
$ 3 bn Dell
7% CAGR
0 29%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Revenues Net income Market share Q2/2008

For 20 years, Dell’s development was a pure success story

1984 1985 1987 1991-1995

1st customer PC with
Michael Dell founds First international
next-day, at-home First major setback
PC’s Limited subsidiary in UK
product assistance

1995 1998 2001-2002 Since 2006

Recovery boosted by Decline due to
First manufacturing
govs and large worldwide economic Dell underperforms
center in China
corporations weakness

#1 for PCs in US, #1

Internet impact on Expansion in other Retail strategy & new
Worldwide for large
revenues and costs products manufacturing model
businesses
1996 1999 2003 2007

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Agenda

▪ Company introduction
▪ Dell’s best practice
▪ The downturn
▪ Current situation
▪ Discussion & recommendations

Dell’s key success factors allowed the company to

outperform its competition
Key Success Factors Other Factors
Direct sales Market strategy
▪ Achieved through telephone, fax, internet and so forth ▪ Looking for the biggest “profit pools” and
▪ Creates direct relationship with its customers all over adjacent markets
the world ▪ “Customized assembly” of components
→ Valuable information about the customers’ wants & postponed until order placed
needs and reduced the bull-whip effect

Assemble-to-order supply chain Corporate culture

▪ Quality products manufactured based on ▪ Anti-hierarchical
requirements of an individual customer offered at a ▪ High emphasis on cost efficiency
competitive price and within short production time ▪ Hiring practices focusing on highly effective
▪ No excess inventory people capable of coping with a lot of
→ Customer receives exactly what he asked for pressure

Supplier integration
▪ Extended enterprise approach adopted through
▪ Training and supporting suppliers
▪ Close location to Dell’s plants and use of
Extranet
→ Inventory velocity achieved

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Cutting out retailers allowed Dell to save time and costs

Typical Supply Chain Dell‘s Supply Chain

Suppliers

Manufacturer

Final Customer

Source: Lau et al., 2003; Mark, 2009

Dell‘s lean fulfillment process creates a competitive

advantage

1 2 3 4
Software
Order Assembly of
Kitting Installation and
Placement Items
Testing

5 6 7
Final Test and
Boxing Delivery
Labelling

CordatusConsulting, 2012; Oscarmorant2011, 2011

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Dell is one of the best practice examples for Just-in-time and
mass customization

Concepts Dell’s best practice

Demand-pull Suppliers deliver components within 1 hour after

▪ Products are moved through SC only upon customer order comes in
customer order → “assemble-to-order” ▪ Supplier inventory hubs near assembly plants
→ No finished goods inventory ▪ Key components backed up at production line
▪ Supplier integration (information systems)
Just-In-Time (JIT)
▪ Pull concept based on delivering materials in No finished goods inventory (loaded straight onto
exact amounts and at exact time as needed delivery trucks)
→ Minimized inventory costs ▪ Cross-docking: warehouses for inventory
▪ JIT principles: coordination rather than storage
▪ zero inventories
▪ short, consistent, reliable lead times → Inventory turn of 15 times, compared to 4-7 for
▪ small, frequent replenishment quantities manufacturers selling through retailers
▪ high quality or zero defects → From order to delivery truck: just 36 hours

Mass customization ▪ Suppliers deliver ready-made components

▪ No full customization, but ready components ▪ “Customized assembly” of components
→ “assemble-to-order”, not “build-to-order” postponed until order placed
▪ Enabled through postponement → “Assemble-to-order”

Dell’s innovative supply chain is key to its competitive

strengths

Supply Chain Supply Chain

Competitive Strategy
Means Strategy

JIT & Pull Offer customized products

Responsiveness
Reasonable prices (through
mass custom. & direct sales)
MassJIT & Pull
customization
Quick response to
market/technology changes
Low finished goods
inventory
No cost & risk of finished
Supplier integration
goods inventory

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Agenda

▪ Company introduction
▪ Dell’s best practice
▪ The downturn
▪ Current situation
▪ Discussion & recommendations

Despite its best practice, Dell‘s share price drops

$ 42.38

$ 7.99

Dell share price development in USD

Drastic decline from over $40 in 2005 to under $10 per share in 2009

Sources: (Yahoo! Inc., 2012 a), (Yahoo! Inc., 2012 b)

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The reason: Dell went from market leader to market
follower

The Dell mantra: Today’s technology is tomorrow’s commodity

A worldwide success
… followed by a sudden downfall…
Dell is market leader on strong shipments - Changes in PC industry leave Dell behind
WSJ 2004 - - WSJ 2006 -

Dell Still Losing Market Share to Hewlett

… that could have been predicted and Others, Data Shows
- NYT 2007 -
It can pay to be a copycat (on HP)
- FT 2005 –

Competitors started catching up…

Key success Supply and Distribution

Market segment
factors manufacturing channels

▪ 3 brand offerings to ▪ Big variety of ▪ Manufacturing ▪ Mainly through

compete in low- & products operations spun off retail channels
high-end segments ▪ Cost reduction to another
company
▪ Premium and ▪ Design & ▪ Production ▪ Own retail stores,
educated marketing of whole subcontracted to direct & online
consumers product Taiwanese sales
▪ Emotional appeal manufacturers ▪ 3rd-party resellers
▪ Different product ▪ Cost reduction ▪ Contract ▪ Mainly third-party
lines to target through flexible manufacturers resellers
different segments sourcing strategy ▪ Multiple suppliers
for components
▪ Fast growing Asia ▪ High quality and ▪ In house ▪ Online sales
Pacific market good look manufacturing ▪ Retail channels
▪ Business and ▪ Advertising in India;
consumers R&D in Japan

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… while Dell relied on its low-cost, direct model

Dell relies on… Competitors catch up…

1 Low-cost, direct model 1 Low-cost, pre-configured PCs

2 Supply chain strengths 2 Replication of Dell‘s SC

3 The Dell mantra 3 Innovative products

4 Focus on corporate clients 4 Mass consumer market

Missed the mass consumer New retail strategy:

market opportunity ▪ Move into consumer market
▪ Direct model worked fine (but: late-mover)
with focus on corporate ▪ Tried retail strategy before in
market 1994

Agenda

▪ Company introduction
▪ Dell’s best practice
▪ The downturn
▪ Current situation
▪ Discussion & recommendations

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SWOT: Past strengths turned into weaknesses in the new
market setting

Strengths Weaknesses
▪ Customization ▪ Share & awareness in customer markets
▪ Low inventory costs ▪ No retailers

S W
▪ Service ▪ Relying on “commodity technology”, no innovations
▪ Low prices
▪ Higher margins
▪ Direct contact to customers

Opportunities Threats
▪ Outsourcing to low-cost countries ▪ Competition
▪ Growing demand for PCs in developing countries ▪ Fast-developing technologies

O T
▪ Technology development ▪ New devices replacing PCs/laptops
▪ Online shopping becoming more important
▪ Emphasis on service

Current positioning: Dell’s main competitors are HP and

Acer

Price range USD

Apple
$ 999- $ 2199
CS 84
Hp
$ 369- $ 1849
CS 74
Acer
$ 349- $ 1299
CS 74
Dell
$ 399- $ 1299
CS 75
IBM-Lenovo
$ 499- $ 2019
CS 71* (2001)

Customer Satisfaction - ACSI

Prices are today’s prices while CS data is from 2009
Source: ACSI 2009 – Personal Cumputer Industry; www..apple.com; www.lenovo.com; us.acer.com; www.hp.com; www.dell.com.

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 Dell‘s solution: A new strategy to go global – Supply chain
segmentation (I/II)

• Supply chains can be segmented by factors such as

product, market, distribution channels, customers
→ Goal: Achieve profitable relationships with all customer segments

Transformation of Dell‘s supply chain

• From customisation and high responsiveness direct-only model to an efficient (low-
cost) end-to-end supply chain
• Segmentation of Supply Chain according to customer needs: B2B and B2C
• Channels:

Online Sales Agents Retailers Distributors or Value

Added Re-seller

Sources: (Business Wire, 2009), (Davis, 2010), (O'Marah, 2010), (Electronics Business Journal, 2012)

Dell‘s solution: A new strategy to go global – Supply chain

segmentation (II/II)

Differences in the four Supply Chains:

• location of the push-pull horizon
• lead time from customer order to delivery
• amount of product choices

Main Outcomes:
• Product complexity reduced
• Forecast accuracy improved

Sources: (Business Wire, 2009), (Davis, 2010), (O'Marah, 2010), (Electronics Business Journal, 2012)

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Agenda

▪ Company introduction
▪ Dell’s best practice
▪ The downturn
▪ Current situation
▪ Discussion & recommendations

Discussion and recommendations

What are your recommendations for Dell?

Consumer market Corporate market Both

▪ The new retail strategy is ▪ Expand offerings, e.g.: ▪ Invest in brand awareness to
overdue for consumer market ▪ Software, e.g. ERP systems differentiate from HP and
▪ More emphasis on design ▪ Data storage Acer
▪ Maintenance ▪ Continuous improvement of
▪ Target SMEs providing a lean SC management
wider range of services

Which other industries/companies could

Dell’s best practice be applied to?

▪ Automotive industry
▪ Fashion industry (fast fashion)
▪ Health care (especially hospitals)

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Questions?

Appendix (I/II)

▪ CordatusConsulting (2012), “DELL Lean supply Chain.flv”, Video, http://www.youtube.com/watch?v=LkL17lqMq90.

▪ Lau et al. (2003) “Virtual agent modeling of an agile supply chain infrastructure”, Management Decision, Vol. 41 No. 7, pp. 625 – 634
▪ Manataki, A. (2007)
▪ Mark, K. (2009), “DELL INC. IN 2009 - A Knowledge-Based Analysis and Modelling of Dell’s Supply Chain Strategies”, Master Thesis,
University of Edinburgh
▪ Coyle et al. (2009), “Supply Chain Management – A Logistics Perspective”, 8th edition, Thomson Learning, London
▪ Thomhill, S. and Mark, K. (2009), “DELL INC. IN 2009”, Case, Ivey Publishing, London (ON, Canada)
▪ Dell Inc., Financial Reportings, http://content.dell.com/us/en/corp/investor-financial-reporting.aspx
▪ Oscarmorant (2011), “Dell case and SCM”, Website, http://oscarmorant2011.wordpress.com/2011/05/24/dell-case-and-scm/.
▪ Yahoo! Inc., 2012 a. DELL Basic Chart - Dell Inc. Stock - Yahoo! Finance. [Online]
Available at: http://finance.yahoo.com/q/bc?s=DELL+Basic+Chart&t=my
[Accessed 19 August 2012].
▪ Yahoo! Inc., 2012 b. DELL Historical Prices - Dell Inc. Stock - Yahoo! Finance. [Online]
Available at: http://finance.yahoo.com/q/hp?s=DELL&a=00&b=1&c=2004&d=07&e=19&f=2012&g=d
[Accessed 19 August 2012].
▪ Business Wire , 2009. Dell Announces Anticipated Q4 Expense Toward $3 Billion in Cost Reductions by End of Fiscal 2011. Business Wire
[New York], 28 January.
▪ Davis, M., 2010. Case Study for Supply Chain Leaders: Dell's Transformative Journey Through Supply Chain Segmentation, November 12:
Gartner Inc. .
▪ Electronics Business Journal, 2012. Business Software and Service Companies; JDA Outlines Strategies for Achieving Maximum
Customer and Enterprise Value Through Supply Chain Segmentation. Electronics Business Journal, 4 January, Volume Jan 4, p. 438.
▪ O'Marah, K., 2010. WINNING TACTICS: Lessons from the Supply Chain Top 25. Supply Chain Management Review, 14(5), pp. 14-16, 18-
21.

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