Institute of Rural Management Anand (IRMA)

Strategic Management
PGDM (RM) – 44

Term-IV

Submitted To: Prof. Manzoor Ul Akram

“Matching Dell ”

Submitted by :

Section: A
Group No. : 4

Sr. No. Student Name Roll Number

1 Jeeva C. P44023
2 Suraj Karode P44055
3 Dipjyoti Deka P44073
4 Sakshi Tewari P44106
5 Vedant Phadol P44118
6 Ruchita Ghinaiya P44218
Introduction
In the mid-to-late 1990s, Dell Inc. emerged as one of the most successful PC manufacturers
in the world, known for its unique direct-to-consumer sales model. Founded by Michael Dell
in 1984, the company quickly grew from a small start-up into a global powerhouse by
eschewing traditional retail channels and instead selling custom-built PCs directly to
customers. This approach allowed Dell to reduce costs, eliminate the middleman, and offer
customers more personalized products at competitive prices. The PC industry during this
period was characterized by intense competition, rapid technological change, and razor-thin
margins. Major players included industry giants such as IBM, Hewlett-Packard (HP),
Compaq, and Gateway, all of which followed more traditional business models relying on
third-party distributors and retailers. The industry was also marked by significant price wars,
product commoditization, and evolving customer preferences, with an increasing emphasis on
lower prices and faster product delivery.

Case in brief
Dell’s Business Model:

Dell's strategy centered around its direct-to-customer sales model, which eliminated
intermediaries such as distributors and retailers. This direct model allowed Dell to interact
closely with customers, understand their needs, and offer customized products. This approach
reduced costs associated with inventory and distribution, allowing Dell to price its products
competitively while maintaining healthy margins. The direct model also enabled Dell to
adopt a build-to-order production system. Customers would order PCs with specific
configurations, and Dell would assemble them upon receiving the order. This system
minimized inventory costs and reduced the risk of obsolescence, as Dell did not hold large
stocks of pre-manufactured computers.

Dell’s Supply Chain Management:

Dell adopted a just-in-time (JIT) manufacturing system, which allowed the company to
reduce its inventory levels significantly. This approach minimized the costs associated with
holding large amounts of stock and reduced the risk of inventory obsolescence, especially in
an industry where technology evolves rapidly. JIT manufacturing also allowed Dell to
quickly respond to changes in consumer demand without the need for large-scale production
shifts.

Dell developed close, strategic relationships with its suppliers, ensuring a steady and reliable
flow of components. By sharing real-time sales data and forecasts with its suppliers, Dell
could synchronize its production with the supply chain, ensuring that components arrive
exactly when needed. This collaboration not only enhanced efficiency but also allowed Dell
to negotiate favorable terms and prices, contributing to its competitive pricing strategy.
Dell's supply chain was closely integrated with its build-to-order system, where each PC was
assembled only after an order was placed. This customization was possible because of the
supply chain's flexibility and efficiency. The ability to offer custom-built PCs without
incurring high costs or delays was a significant competitive advantage, as it allowed Dell to
cater to diverse customer needs while maintaining low operational costs.

Unlike its competitors, who often maintained large inventories of pre-assembled PCs, Dell
kept its inventory levels low by relying on the efficiency of its supply chain. This approach
reduced warehousing costs and the risk of unsold stock. Additionally, low inventory levels
meant that Dell could quickly adapt to the latest technological advancements, ensuring that its
products remained up-to-date with the newest components.

The flexibility of Dell’s supply chain allowed the company to scale production up or down
rapidly in response to market demand. This was particularly important in the fast-changing
PC industry, where demand could fluctuate significantly based on factors such as new
product launches, technological advancements, or economic conditions. Dell’s ability to
quickly adjust its production levels without incurring excessive costs was a major competitive
advantage.

Competitive Landscape:

Dell’s efficient supply chain enabled it to lead aggressive price wars, undercutting
competitors who were burdened by higher fixed costs. Competitors struggled to match Dell’s
low prices without hurting their margins, leading to industry consolidation, such as the HP-
Compaq merger.

Rapid innovation in the industry, especially the shift towards mobile computing, forced all
players to adapt quickly. Dell’s build-to-order system provided it with flexibility, allowing
the company to incorporate the latest technologies faster than its rivals, who often had excess
inventory of outdated products.

As Dell’s success became apparent, competitors attempted to mimic its direct sales model but
faced challenges integrating it with their existing operations. Despite these efforts, Dell
maintained its competitive edge through superior operational efficiency and strong customer
relationships.

The pressure from intense competition led to mergers and acquisitions, further consolidating
the industry. Dell’s innovative business model and strategic focus on efficiency and customer
satisfaction positioned it as a leader in a rapidly evolving market. However, Dell also faced
challenges, including market saturation and the rise of new devices, which required constant
adaptation to maintain its competitive advantage.
Dell’s Financial Performance:

Profitability:

Higher Margins: Dell consistently enjoyed higher profit margins than its competitors,
primarily due to its direct-to-consumer sales model and efficient supply chain management.
By eliminating the middleman and reducing inventory costs, Dell was able to maintain lower
operating expenses and offer competitive prices while still achieving healthy margins.

Cost Efficiency: Dell’s build-to-order approach allowed it to minimize waste and optimize
production, leading to cost savings that directly impacted the bottom line. This operational
efficiency translated into superior profitability compared to rivals who had higher costs
associated with traditional manufacturing and distribution methods.

Revenue Growth:

Increasing Market Share: Dell’s financial success was also reflected in its ability to rapidly
increase its market share during the late 1990s and early 2000s. By focusing on customer
satisfaction, customization, and competitive pricing, Dell attracted a growing number of
consumers and businesses, leading to significant revenue growth.

Diversification: Dell’s expansion into new markets, including international territories and the
business-to-business (B2B) segment, further boosted its revenue streams. The company’s
ability to adapt its model to different markets helped it sustain growth even as the overall PC
market matured.

Return on Investment (ROI):

High ROI: Dell’s business model required relatively low capital investment compared to
competitors who maintained large inventories and extensive retail operations. This low
capital intensity, combined with high profitability, resulted in a high return on investment for
Dell. Investors viewed Dell as a highly efficient and profitable company, which was reflected
in its strong stock performance.

Cash Flow:

Strong Cash Flow: Dell’s efficient operations and low inventory levels contributed to strong
cash flow generation. The company’s ability to convert sales into cash quickly provided it
with the financial flexibility to reinvest in the business, pursue growth opportunities, and
return value to shareholders through stock buybacks and dividends.

Comparison with Competitors:

Struggling Rivals: While Dell thrived, many of its competitors struggled with declining
profitability, squeezed margins, and slower revenue growth. Companies like Compaq and
Gateway, which were burdened by high operating costs and less flexible business models,
found it difficult to compete with Dell’s financial performance. This financial pressure
eventually led to industry consolidation, as seen in the HP-Compaq merger.
Challenges and Sustainability:

As the PC market matured, growth opportunities slowed down, leading to increased

competition for market share. This saturation made it more difficult for Dell to sustain its
rapid growth and maintain high-profit margins.

The rise of mobile computing and alternative devices like tablets and smartphones posed a
significant threat to Dell’s core business. Adapting to these shifts required significant
investment in research and development, as well as changes in the product mix.

Dell’s success attracted imitation from competitors who attempted to replicate its direct sales
model. Although many struggled with execution, this increased competition put pressure on
Dell to continuously innovate and refine its model to stay ahead.

To sustain its competitive advantage, Dell needed to focus on continuous innovation, both in
its product offerings and in its operational processes. This included exploring new markets,
diversifying its product range, and enhancing its supply chain efficiency.

Maintaining a strong focus on customer needs and preferences was crucial for Dell’s
sustainability. By continuing to offer customized solutions and superior customer service,
Dell could build loyalty and differentiate itself from competitors.

Dell’s ability to quickly adapt to changes in technology and consumer preferences was vital
for its long-term sustainability. This required agility in its supply chain, investments in new
technologies, and a willingness to pivot as market dynamics evolved.

Strategic Implications:

Dell's direct-to-consumer sales model set a new standard in the PC industry, pushing
competitors to rethink their own strategies. Companies that failed to adapt, such as Compaq
and Gateway, struggled to compete effectively. Dell's focus on just-in-time manufacturing
and a build-to-order approach highlighted the importance of operational efficiency. This
strategy reduced costs, minimized inventory risks, and allowed Dell to respond quickly to
market changes. Dell's success increased the competitive pressure on other players, leading to
industry consolidation (e.g., HP’s acquisition of Compaq) as companies sought to achieve
economies of scale to compete with Dell's low-cost structure. The case also underscores the
need for continuous innovation and adaptability. Dell's ability to maintain its competitive
advantage was closely tied to its responsiveness to technological advancements and shifts in
consumer preferences.
Question 1) How and why did the personal computer industry come to have such low
average profitability?

The factors responsible for this are,

Intense Competition:

The PC industry was marked by intense competition among numerous manufacturers.

Companies like Dell, Compaq, HP, IBM, and Gateway were all vying for market share. This
competition drove prices down, as each company sought to undercut the others to attract
customers. As a result, profit margins were squeezed across the industry.

Commoditization of PCs:

Over time, PCs became commoditized, meaning that the products offered by different
manufacturers became increasingly similar in terms of features and capabilities. This
commoditization led to price-based competition, where consumers chose products primarily
based on cost rather than brand loyalty or product differentiation. The lack of significant
product differentiation further eroded profit margins.

High Fixed Costs and Inventory Risks:

Traditional PC manufacturers, unlike Dell, operated with high fixed costs due to large-scale
manufacturing and extensive inventories. These companies produced PCs in bulk and relied
on third-party retailers to sell them. The risk of excess inventory and the need to discount
outdated models contributed to lower profitability.

Rapid Technological Changes:

The PC industry was characterized by rapid technological advancements, with frequent

updates to processors, memory, and other components. Manufacturers faced pressure to
constantly innovate and update their products, leading to shorter product life cycles and
higher R&D costs. This continuous need for innovation further squeezed profit margins.

Evolving Consumer Preferences:

As consumer preferences shifted towards mobile devices like laptops, tablets, and
smartphones, the demand for traditional desktop PCs declined. This shift led to overcapacity
in the market and increased competition in the shrinking desktop segment, further driving
down prices and profitability.

Supply Chain Challenges:

The traditional supply chain model, which involved multiple intermediaries (manufacturers,
wholesalers, retailers), added layers of cost. This contrasted with Dell’s direct sales model,
which was more efficient and allowed for better cost control. However, competitors who
stuck to the traditional model struggled with higher costs, contributing to lower industry-wide
profitability.
Question 2) Why has Dell been so successful despite the low average profitability in the
PC industry?

The key factors responsible for this are,

Direct-to-Customer Model: Dell's direct sales model allowed it to bypass traditional retail
channels. This not only reduced distribution costs but also enabled Dell to have direct
interactions with customers, which improved customer satisfaction and provided valuable
feedback for product improvements.

Build-to-Order and Just-in-Time Inventory: Dell's build-to-order approach meant that it

only manufactured PCs based on actual customer orders. This minimized excess inventory
and reduced storage costs, leading to more efficient use of resources. The just-in-time
inventory system further reduced costs by limiting the need for large inventory holdings.

Operational Efficiency: Dell's operational model was designed to maximize efficiency. By

closely aligning its supply chain, production, and distribution processes, Dell was able to
maintain low costs and pass these savings on to customers. This efficiency gave Dell a
competitive edge in pricing.

Customization and Customer Focus: Dell's ability to offer customized PCs to meet
individual customer needs added value beyond what many competitors offered. This focus on
customization and customer service helped Dell stand out in a crowded market and attract a
loyal customer base.

Cost Management: Dell maintained strict control over its costs through its operational
model. By streamlining its processes and focusing on cost efficiency, Dell was able to
achieve higher margins compared to many competitors who struggled with lower profitability
due to higher costs.

Strong Supplier Relationships: Dell built strong relationships with its suppliers, which
helped in managing the supply chain effectively and ensuring timely delivery of components.
This contributed to Dell's ability to maintain low inventory levels and reduce costs.
Question 3) Prior to the recent efforts by competitors to match Dell (1997-1998), how
big was Dell’s competitive advantage? Specifically, calculate Dell’s advantage over the
team of Compaq and a reseller in serving a corporate customer.

(a) Price of the machine: $2,313 (Average price for the year 1996)

Gross margin: 21.5% of revenue

Gross margin is the percentage of revenue that exceeds the cost of goods sold (COGS), so it
can be calculated as:

Gross Margin=Revenue−COGS

So, the Cost of Goods Sold (COGS) is approximately $1,815.71.

(b) Calculating the Cost Difference:

1. Determine the difference in inventory holding time:

o 65 days (Compaq) - 15 days (Dell) = 50 days

2. Calculate the total component cost decrease during this time:

o Weekly decrease: 0.6%

o Daily decrease: 0.6% / 7 days/week ≈ 0.0857%

o 50 days decrease: 50 days * 0.0857% ≈ 4.285%

3. Estimate the additional cost per benchmark PC:

o Benchmark PC cost is $1,815.71, the additional cost due to slower inventory

turnover would be:

Additional cost=4.284%×$1,815.71≈$77.80

Compaq incurs an additional cost of approximately $77.80 per benchmark PC due to the
longer inventory turnover period compared to Dell, given the 0.6% weekly decline in
component prices

(c) Percentage of revenue spent by Compaq on these activities: 2.5%

Dell’s revenue per benchmark PC: $2,313

Expenditure equivalent: Expenditure=2.5%×$2,313

Expenditure=2.5%×$2,313=$57.83
Dell eliminates expenditures equivalent to approximately $57.83 per benchmark PC by not
needing to fund the advertising, market development, and product return management
activities that Compaq undertakes.

(d) To calculate the additional costs incurred by Compaq and its reseller due to the channel's
markup, we need to consider the following:

1. Channel's markup: 5-7%

2. Dell’s revenue per benchmark PC: $2,313

Calculation:

Range of additional costs due to markup:

Lower bound (5% markup): Additional cost=5%×$2,313=$115.65

Upper bound (7% markup): Additional cost=0.07×$2,313=$161.91

The channel's markup results in additional costs of approximately $115.65 to $161.91 per
benchmark PC for the Compaq and reseller alternative compared to Dell.

Dell’s competitive advantage arises from lower costs due to faster inventory turnover,
savings on carrying costs and other expenditures, and the absence of channel markup.
Question 4) How effective have competitors been in responding to the challenge posed
by Dell’s advantage? How big is Dell’s remaining advantage?

Competitors' Response:

Adoption of Direct Models: Competitors such as HP and IBM began to adopt similar direct-
to-customer models, trying to replicate Dell’s success. They aimed to streamline their
operations and reduce costs to compete more effectively on price and service.

Improvements in Supply Chain and Operations: Many competitors enhanced their supply
chains and operational efficiencies. They invested in better inventory management systems
and improved their ability to deliver customized products, narrowing the operational gap
between them and Dell.

Service and Support: Competitors also focused on improving their service and support
offerings to differentiate themselves from Dell. They tried to offer superior customer service
and build stronger relationships with their customers.

Product Innovation: Some competitors shifted focus to product innovation, differentiating

themselves through new features, designs, or technology advancements rather than purely
competing on cost.

Partnerships and Alliances: Competitors formed strategic partnerships and alliances to

enhance their market reach and operational capabilities, which helped them challenge Dell’s
market position.

Dell’s Remaining Advantage:

Cost Efficiency: Dell’s build-to-order model and just-in-time inventory system allowed it to
maintain lower costs and higher margins compared to many competitors. This cost advantage
remained significant, especially in a price-sensitive market.

Customization and Speed: Dell’s ability to offer highly customized products with quick
turnaround times was a major competitive advantage. This direct model continued to provide
a strong differentiator in terms of customer satisfaction and responsiveness.

Operational Excellence: Dell’s operational efficiencies, including its supply chain

management and direct sales approach, continued to be superior compared to many
competitors who struggled to match its level of integration and efficiency.

Brand Loyalty and Market Position: Dell’s established brand and market position provided
it with a substantial advantage. Its reputation for reliability and value continued to attract
customers despite increasing competition.