Polytechnic University of the Philippines – Sta. Mesa

Graduate School

Masters in Industrial Engineering

An Analysis: Case Study on Dell’s Direct-to-Consumer

Model: Revolutionizing Customization and Efficiency

in the PC Industry

Submitted by:

Yasuda, Michiko D.

Submitted to:

Dr. Md. Mohammad M. Habib

Professor

May 2024

INTRODUCTION

Dell Technologies, founded by Michael Dell in 1984, began as a humble startup with

a bold vision to revolutionize the personal computing industry. The company started in

Michael Dell’s dorm room at the University of Texas at Austin, where he began building and

selling customized personal computers directly to consumers. This direct-to-consumer model

was a groundbreaking approach at the time, eliminating the need for intermediaries and

allowing Dell to offer high-quality PCs at competitive prices.

From its inception, Dell embraced a customer-centric philosophy, focusing on

understanding and meeting the unique needs of each customer. This philosophy was reflected

in their innovative build-to-order model, which allowed customers to select and customize

components based on their specific requirements. This not only provided a tailored computing

experience but also reduced excess inventory and associated costs, setting Dell apart from its

competitors who relied on pre-assembled PCs. As Dell grew, so did its need for an efficient

and scalable supply chain. The company developed a sophisticated logistics network that

emphasized just-in-time manufacturing and close relationships with suppliers. By integrating

advanced technology and data analytics, Dell optimized its supply chain operations to ensure

rapid delivery times and minimal inventory holding costs. This efficient supply chain became

a key driver of Dell’s success, enabling the company to maintain flexibility, reduce waste, and

respond swiftly to market demands.

Today, Dell Technologies is a global leader in technology solutions, offering a wide

range of products and services that extend beyond personal computers to include servers,

storage devices, and IT services. Despite its expansion, Dell remains committed to its founding

principles of direct customer engagement and operational efficiency, continually evolving its

supply chain and logistics strategies to maintain its competitive edge in the ever-changing

technology landscape.

II.

CASE STUDY

Dell Background - The Personal Computer

In 1976, Stephen Wozniak and Steve Jobs sold their worldly possessions (a

programmable calculator and a Volkswagen) so they could start Apple Computer, a

manufacturer of Personal Computers (PCs). The Apple PC became popular with the invention

of VisiCalc, a spreadsheet program that made inroads in corporations. By 1980, IBM realized

that the PC business was rapidly developing, and decided that it must ship its own PC within

a year. To meet this challenge, IBM opted for an open architecture, using off-the-shell

components and software that were purchased from outside vendors like Intel (the 8088

microprocessor), Microsoft (the DOS operating system) and Tandon (the disk drive).

Moreover, IBM went beyond its own sales organization and used computer retailers like

Computerland and Sears Business Centers to sell the IBM PC. The result was that the IBM PC

met its one-year, August, 1981 deadline¾a first for IBM. By 1983, IBM commanded a 42%

share of the PC market, with Apple’s share being driven down to 20%. The PC fundamentally

changed the structure of the computer industry from a collection of vertically-integrated

corporations to a collection of horizontal “slices,” each focused on a distinct segment of the

industry’s value chain. Intel’s Chairman, Andrew Grove, who based his company’s strategy

on this transformation, described it as follows:

This horizontal structure enabled IBM-PC “clones” like Compaq, a host of start-ups an

established computer firms like Hewlett Packard to enter the market and manufacture their

own, IBM-compatible PCs. The cutthroat competition among PC makers shifted the bulk of

the profits to two highly-concentrated industry “slices”: the operating system, where Microsoft

had a virtual monopoly, and the microprocessor, which was dominated by Intel. One of the

manufacturers of IBM-PC “clones” was Dell.

The Dell Indirect Model

PC manufacturers were using indirect sales channels since the inception of the IBM PC

in 1981. The general approach to selling PC’s to corporations through indirect channels is

shown in Figure 1. Under this approach, a distributor/reseller such as MicroAge, Vanstar,

Dell

Computer Corp

Distributor

Component

Manufacturer

CompuCom or InaCom purchased PCs directly from the manufacturer and distributed them to

corporate customers. The reseller customized the PC to the customer’s requirements, installed

components or software as necessary and often provided additional service and support. There

were a few variations on this theme. For example, retail sales followed a similar supply chain

to that shown in Figure 1, except that the PCs were shipped from the manufacturer to the

retailer, who sold them to consumers (in most cases, these sales were not triggered by orders).

The retail channel was dominated by national chain stores like Circuit City and CompUSA.

Direct Model

Dell’s direct model, based on direct sales from the PC manufacturer to the corporate

customer or to consumers, is shown in Figure 2. The model was driven by the “slicing” of the

computer industry that took place in the mid-eighties. Dell pioneered a new business model

that focused on speed of execution and minimum inventory. To this end, the company

bypassed the dealer channel, selling products directly to customers over the phone. This

eliminated the reseller’s markup and the costs and risks of carrying large finished goods

inventories. The Dell direct model was characterized by high-velocity, low-cost distribution,

direct customer relationships, build-to-order, Just-In- Time manufacturing, and products and

services aimed at specific market segments.

Components

Order

Product

Components

Forecast

Distributor/

Order

Product

Components

Component

Manufacturer

Corporate

Customer

Final

Customer

The direct model had several key advantages. By eliminating the intermediaries,

Dell could dramatically reduce its channel costs: Exhibit 3 shows that channel costs

amount to 2% of product revenue under the direct model compared to 13.5%-15.5% for

indirect sales. Since every Dell system was built to order, customers got exactly what they

asked for. Dell used the knowledge it gleaned from this direct contact to tailor its service

and support as well as future offerings. Since materials flowed faster in Dell factories,

latest technology was introduced faster than through the slow-moving indirect channels.

As Dell remarks, “If I’ve got 11 days of inventory and my competitor has 80, and Intel

comes out with a new 450-megahertz chip, that means I’m going to get to market 69 days

sooner” [3]. Figure 3 shows how many days of supply Dell had in inventory over 1994-

99.

Dell relies on information Technology (IT) to tightly control its value chain and

achieve a high degree of coordination. Dell strives to accelerate every facet of its business

by managing information to increase velocity. Using the weekly updates of inventory

level for each product component, Dell works with both customers and suppliers to

determine the right levels of component inventory. Data on margins, average selling price

and overhead are tracked closely by customer segment, by product and by geography. In

this way, the company is instantly aware of problems with the mix of products being sold

in a particular country or segment, for example.

Dell utilizes information to get its suppliers in sync with its high-velocity model.

This is achieved either directly, by improving the logistics, or indirectly, by enhancing

quality. For example, when a defective part is identified, Dell lets the supplier know what

was wrong with the part, so it can quickly redesign the part and the poor quality problem

is fixed immediately. A key feature that makes this model work is the relatively small

number of suppliers that Dell chooses to partner with. To be able to sustain tight links

with its suppliers, Dell reduced their number from 204 in 1992 to 47 in 1997.

Customers and Segmentation

Figure 4 shows Dell’s customer segments. They can be classified as

“transactional” or “relationship.” Forty percent of customers, mainly large corporate

accounts, are classified as relationship, 30%



consisting mainly of consumer and small

businesses



as transactional, and the remaining 30% as a mix of the two. This customer

segmentation drives the organizational structure of the company.

Transactional customers

are individuals or businesses who make transaction-by-

transaction buying decisions. These customers focus on the economics of the purchase,

looking at factors such as performance, specifications, features, reviews and awards. On

the lookout for the best PC for a particular application, they shop from a variety of

vendors and use an array of information sources, including reviews, editorials, advertising,

and word of mouth in making their purchasing decision. Dell does best with more

experienced computer buyers; first-time buyers tend to be in the market for low-priced

PCs, have more intensive service needs, and feel more comfortable with a salesperson.

Consequently, Dell focuses on computer-literate customers.

Large Customers

Small Customers

(Business/Consumer)

Relationship customers

, in contrast, treat computer purchases in the context of the

system’s “Total Cost of Ownership” over the life cycle of its use, where price is only a

secondary concern.

Most of these are business, government or education accounts in

medium-to-large scale organizations. These customers focus on attributes such as service,

reliability, vendor reputation and product standardization. Dell’s main competitors for this

customer type are Compaq, IBM, HP, and national resellers. The indirect channel offers

a wide range of hardware from PCs to peripherals, with a large selection of services and

packaged or customized software, placing Dell at some disadvantage. However, Dell

alleviates these problems by first focusing on the economics of the overall account. Dell

uses the cost advantage gained by its direct model to win new accounts and expand sales

in existing accounts. Further, Dell has become more than just a hardware vendor and

developed value-added services such as DellPlus, that installed items from network cards

to customers’ proprietary, in-house software applications right on the manufacturing line,

as well as leasing options and asset recovery services, including Dell Financial Services,

all of which are designed to drive down the customer’s total cost of ownership and make

Dell the single source for customers’ computing needs.

Dell’s ability to nurture its relationship customer base was a key reason for its

success. Historically, large customers did not sign exclusive purchase agreements with a

single vendor. However Dell managed to capture 25% of Fortune 500 companies as

exclusive accounts. Dell has been increasing its penetration into the medium-to-small

business segments as well.

Segmentation

Dell’s customer segmentation was a direct result of its business model. Dell

targeted customer segments where it could grow its revenues faster than its expenses.

This was a lesson the firm learned the hard way with its entry into the retail market in the

early nineties without really understanding the profitability of the segment. After that

experience, realizing that it couldn’t reach its profit objectives in the consumer segment,

Dell let its competitors introduce low-margin PCs for first-time users. Over time, Dell cut

its market into finer and finer segments (see Figure 4). Segmentation makes it easier to

know the customer and identify unique opportunities. Finer segments are also more

manageable and give the company better attention and focus.

Demand Management

Dell’s close relationship with its customers improves its demand forecasts. Dell

tries to understand the future computing needs of large accounts by discussing their

company’s needs and jointly planning the company’s infrastructure. With transaction

accounts, the telephone sales reps try to steer the customer toward product configurations

that are readily available. For example, if a customer requests a certain configuration on

the phone, the sales rep may suggest that for a small incremental payment, the customer

will get a component with significantly higher quality



and faster, because the component

is already in stock. In some cases, the sales rep will even match the price of the lower-

quality configuration to keep the parts moving. Sales reps’ commissions are based on

gross margins. Dell designed its information systems so the gross margin is calculated

for each system and displayed on the sales rep’s screen.

Sales Organization

Dell’s sales organization consists of teams of field Account Executives and

telephone sales reps. Account Executives are responsible for selling products and services

tailored to the needs of customers in their geographical area. The telephone sales reps are

responsible for processing orders and handling sales calls. Relationship accounts are

assigned to both Account Executives and telephone sales reps. Transactional customers

are handled solely by telephone sales representatives. The role of the sales rep varies with

the customer segment served. For example, customers in the consumer segment rely on

the sales rep for technical advice, so they can impact the purchase decision. On the other

hand, when dealing with large firms, whose purchasing departments predetermine system

configurations, the sales rep’s role is reduced to order-entry. Dell had a number of natural

advantages for selling on the Internet. Corporations and computer-literate customers that

were willing to buy over the phone were among the first to be ready to make purchases

on the Internet. Further, unlike rivals Compaq, HP and IBM, Dell did not have an existing

indirect channel that would feel threatened by direct Internet sales, and the discipline

imposed by tracking campaigns and direct telephone sales was applicable to Internet sales

as well.

Conclusion

With the success of Dell’s direct model and its Internet application, many other PC

firms were moving towards a build-to-order model. In July 1997, Compaq announced a

new build-to-order manufacturing process. It formed direct sales teams and call centers,

and later started shipping direct to customers through the Web. In addition, Compaq

acquired Tandem computer in 1997 and Digital Equipment in 1998, adding new product

lines and trying to become an enterprise computing superpower. Compaq ended up being

overpowered by the resulting complexity, coupled with conflicts between its traditional

indirect sales channels and its attempt to increase direct sales. Compaq’s board forced its

CEO to resign, and its past CIO turned COO, Michael Capellas, became the new CEO in

July 1999.

IBM and HP transferred part of their PC assembly to distributors and resellers,

hoping to reduce inventories. For example, IBM’s Authorized Assembly Program allowed

certified distributors and resellers to assemble IBM PC’s following IBM’s assembly and

testing procedures. NEC took more drastic steps, changing its distribution model from

indirect to direct, but it was unsuccessful. An NEC spokesperson said: “The ‘be like Dell’

model is not working for us. It did not do as well as we expected.”

Commentators argued that just imitating Dell at its own game was not enough: For

Dell, the Web was a natural extension of an existing business model, whereas its

competitors had to put together an entirely new delivery system. Furthermore, unlike its

competitors, Dell did not have to worry about channel conflicts.

III.

ANALYSIS

Dell’s direct-to-consumer model fundamentally transformed the personal computer

(PC) industry by bypassing traditional sales channels and selling directly to customers.

This innovative approach allowed Dell to leverage several key advantages, such as

reduced channel costs, increased customization, and faster introduction of new

technology.



Elimination of Intermediaries

: By selling directly to customers, Dell

eliminated the reseller’s markup and the costs and risks associated with carrying

large inventories of finished goods. This not only reduced overall channel costs

but also allowed Dell to offer competitive pricing to its customers.



Build-to-Order Model

: Dell’s build-to-order strategy enabled the company to

manufacture PCs based on individual customer specifications. This minimized

the need for maintaining large inventories of pre-assembled products, thereby

reducing inventory holding costs and the risk of obsolescence. Customers

benefited from receiving products tailored to their exact needs, enhancing

overall satisfaction.



Just-In-Time Manufacturing

: Dell’s adoption of Just-In-Time (JIT)

manufacturing ensured that components were ordered and assembled only as

needed. This approach reduced lead times and allowed Dell to quickly adapt to

technological advancements. For example, Dell could introduce new

components, such as Intel’s latest microprocessors, into its products faster than

competitors who relied on slower-moving indirect channels.



Information Technology Integration

: Dell utilized information technology to

tightly control its value chain and achieve high levels of coordination with

suppliers. By maintaining real-time data on inventory levels, margins, and

customer preferences, Dell could optimize its production processes and respond

swiftly to market demands.



Customer Segmentation and Relationship Management

: Dell effectively

segmented its customer base into “transactional” and “relationship” segments,

tailoring its sales and support strategies accordingly. Transactional customers,

such as individual consumers and small businesses, valued performance and

price, while relationship customers, such as large corporations, prioritized total

cost of ownership and reliability. Dell’s ability to nurture and grow its

relationship customer base, including capturing exclusive contracts with

Fortune 500 companies, was a significant driver of its success.

FINDINGS

Cost Efficiency

: Dell’s direct model significantly lowered its operating

costs compared to traditional indirect sales channels. Channel costs under the direct

model amounted to only 2% of product revenue, versus 13.5%-15.5% for indirect

sales. This cost efficiency allowed Dell to offer competitive pricing while

maintaining healthy profit margins.

Customization and Customer Satisfaction

: The build-to-order approach

ensured that customers received precisely the products they desired, enhancing

satisfaction and loyalty. Dell’s direct contact with customers provided valuable

insights into their needs and preferences, allowing the company to continuously

improve its offerings and services.

Agility and Speed

: Dell’s low inventory levels and JIT manufacturing

enabled rapid incorporation of new technologies, giving it a competitive edge in the

fast-paced PC industry. Dell’s average inventory period was significantly lower

than that of its competitors, allowing it to introduce new products faster and more

efficiently.

Supplier Relationships

: By reducing its number of suppliers and fostering

close partnerships, Dell maintained tight control over quality and logistics. This

streamlined supply chain management contributed to the company’s high-velocity

operational model.

Market Segmentation

: Dell’s strategic segmentation of its customer base

allowed for targeted marketing and sales efforts. By focusing on profitable

segments and understanding the unique needs of different customer groups, Dell

could optimize its product mix and service offerings, driving growth and

profitability.

SUMMARY

Dell Technologies revolutionized the PC industry with its direct-to-consumer

business model, characterized by build-to-order manufacturing, Just-In-Time

inventory management, and direct sales. This approach resulted in significant cost

savings, enhanced customer satisfaction, and greater operational agility. Dell’s

effective use of information technology and strategic customer segmentation further

strengthened its market position. By eliminating intermediaries and maintaining close

relationships with both customers and suppliers, Dell created a highly efficient and

responsive supply chain. These innovations not only provided Dell with a competitive

advantage but also set a new standard for the industry, influencing other PC

manufacturers to adopt similar strategies.

IV.

CONCLUSION

In conclusion, Dell Technologies’ direct-to-consumer model has profoundly

reshaped the PC industry, setting a benchmark for efficiency, customization, and customer

satisfaction. By eliminating intermediaries and adopting a build-to-order strategy, Dell

significantly reduced channel costs and inventory holding expenses. The implementation

of Just-In-Time manufacturing enabled the company to swiftly integrate new technologies,

maintaining its competitive edge in a rapidly evolving market.

Dell’s strategic use of information technology has optimized its supply chain

operations, ensuring high levels of coordination with suppliers and real-time

responsiveness to customer demands. The segmentation of its customer base into

transactional and relationship categories allowed Dell to tailor its services and products,

further enhancing customer loyalty and driving profitability. The company’s ability to

maintain close partnerships with a reduced number of suppliers ensured quality and

streamlined logistics, contributing to its high-velocity operational model. Dell’s focus on

understanding and meeting the unique needs of different customer segments has been a

critical factor in its success, allowing for targeted marketing and sales strategies that drive

growth.

Overall, Dell’s innovative supply chain and logistics strategies have not only

provided the company with a significant competitive advantage but have also influenced

industry standards, prompting other PC manufacturers to adopt similar approaches. The

success of Dell’s model underscores the importance of agility, customer focus, and

efficient supply chain management in today’s competitive business environment.

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Dell’s direct model to success - dell’s business plan

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https://www.researchgate.net/figure/Dells-direct-selling-model_fig2_233994113

Strategy Study: How Dell’s strategy transformed it from a doomed player to leading the data

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information

. IMD Business School for Management and Leadership Courses.

https://www.imd.org/case-study/dell-s-direct-model-everything-to-do-with-information/

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