Matching DELL History: IBM Market Leader in Mainframe –market share 61%, starts PC business in ’81, in 2 yrs market share is 42% IBM Strategy : • Purchase PC components as against manufacturing inhouse (Main frame) • Open Architecture : OS – Microsoft, Microprocessor – Intel , reason, to encourage application developers and enhance Peripheral market • Sales : Largely corporate clients – thought its huge sales force o Retail clients through value added resellers – handled, installations, configured SW,customer networks and service part of responsibility • Competition : Apple with propriety architecture had 20% market share, Compac enters in ’82, Dell in ’84, • Competitors strategy :: use resellers for large corporate accounts, due to lack of sales force • 1986- IBM moves to propriety architecture with PS/2 line and rejects 386 chip • 1980-90 – PC performace improved and chip price declined, o New technology advancement of 386DX and Pentium II processors were significant o Windows 3.
0 launched in 1990, commonly called Wintel architecture o PC Sales declined in 1990 due to US recession • Post 1990 Demand picks up due to economic growth, and technology like computer Networking, email and WWW.
o PC prices decline to less than 499USD, 45. 5% of US household owsn PC in 1998 ? Modular architecture prevalent for HW and SW, PC differed depending on configuration ? Most HW components sourced my numerous companies and highly competitive, however the Microprocessor was controlled by INTEL with 90% share, similarly for OS , Microsoft owned the market and even 80% of the productivity SW, like word processor, ? HW and SW started selling as integrated bundle ? PC customers were of 4 types Individuals (33% of Market)- buying depended on evaluations provided by consumer Reports • Educational institutes (5% of Market) • Small business and offices (22-23%of Market) – No MIS team, but had extensive experience, • Large/Midsize business and govt (37-38% of Market). – Had MIS team, spending 8-12K USD per annum to support each PC, multiple brands of PC led to maintenance and support problem – accounted for • 2 groups of buyers, one buying Apple others WINTEL, apple more successful in Individuals and educational institute ? Channels : in 1998 and portion of sales Retailers : 22%(US)17%(EMEA)26% (APAC) • Distr/Reseller 41%(US)63%(EMEA)49%(APAC) • Direct29%(US)18%(EMEA)23% (APAC) • Others7%2%1% • Retailers such as ComUSA took direct delivery from manufacturers, spent on retail display in stores and on sales people, constrained with space and thin margins • Large distributers :supplied computers to 100,000 resellers, who were responsible for configure, install service , support, their recommendations mattered for purchase. • Manufacturer provided buy back for channel inventory and price protection, costing them 2. 5 cent of Revenue, and another 2. 5 cent for Advertisements. • PC’s tool 4-5 weeks from Manufacturers to consumers ? Manufacturing : Basic assembly line to assemble 250,000 PC per year can be set up for USD 1 million, contract manufacturers in Asia were also available. • Average manufacturing cost USD 800-900, which would sell for USD 1000 • However component prices declines 25-30% per year ? Marketing and Sales • Apple, HP, IBM spent 2-3 % of sales in advertising, • Sales force : IBM-25,000 workforce, DELL Dell branded PC’s started in 1985, dealing directly with end customers, and served primarily corporate customers, offering high performance PC’s at Low price. PC’s customized to buyer spec, assembly commenced only after receiving order. • Business and govt – 77% of sales • Home and small offices – 18% • Educational institutes – 5% Sales and Marketing Very large customers accounted for 70% of business and no single customer accounted for more than 2 % Dell grouped there customers into two types • Relationship buyers – large companies with potential of repeat business, had a team of outside and inside sales rep to manage the relationship, having access to online info, about the customers entire purchase history. • Transactional buyers – SMB and Personal,user call centers, and AD’s by DELL to reach out to them • DELL experimented with retail channel in 1990, resulting in brisk sales, but lower margins, resulting in retail losses, in 1993, DELL withdrew in 1994. DELL sub divided its customer base into multiple categories, to identify unique opportunities and economies. • 1996-Dell website-as a medium for transaction buyers. • Premium pages were developed for Relationship buyers, with approved computer configurations for each customer • 1998 – resulted in USD 10 million sales per day thru the website. • Production and logistic o No finished good inventory, assembly on actual orders from 4 manufacturing plants, US, Ireland, Malasyia and China, o Daily meeting to match production schedule, order sent electronically to appropriate manufacturing site for assembly o Maintained shipping contracts with 3rd party shippers for delivery. Total production process took 1. 5 days after order o Worked closely with suppliers, through electronic links on hourly basis to arrange JIT of parts/components, reducing days of inventory from 32 to 7 days. o Direct shipment of parts like Monitors were encouraged. Suppliers located warehouses close to the production facility. • Product and Services o Two lines of Desktop : reliable, stable Vs latest technology. o Two lines of notebooks in same line o Services – install off the shelf SW, or customer propriety SW, DELL Financial services offered leasing, technology planning and asset mgmt. o After sales support ? Online 50, 000 pages of documentation Tech support center manned 24X7 , this along with the diagnostic SW helped resolve 90% problem, ? Onsite visit was outrsourced to 3rd party, serviced in 24-48 hrs o Customer survery rates DELL no 1 for technology and 2 for other parameters like pricing service relation ship, o Dell also offered the prices as the second lowest to most of its competitors for most part of the years. • Infrastructure o Worked more like start up till 93, with few formal controls, post loss in 93 hired seasoned managers o Special attention to key performance metrics, overall metrics like return on invested capital o Helps in improvement of finances, ROC is 186% in ‘98
DELL’s competitors • IBM – o 1st to recognize the challenge – launched series of initiatives, Joint manufacturing authorization programs, Integration and Assembly program, enhanced integration and assembly program o ’95 – launched AAP, shipping lightly configured PC’s to resellers, known as Model 0s, partners completed the assembly, however components were shipped only from IBM, o In ’98 more than 50% of PC shipment to Microage, was thru model 0s, 25-33% were assembled by partners o Improved inventory, reduced teardown by resellers at the last moment, resulting in less defects, earlier dteardown defect was 2-2. 5%, now 0. % o IBM started own direct sales, Ambra in 92 for low end PC, in 98, launched website, offering Aptiva line of PC for consumers, the netfinity direct program was launched for enterprise purchases o With this the PC operations returned to profitability in 4th Q of 1998 • COMPAQ • Inorganic acquisitions led to growth, tandem computers in 97 and DEC in 98 o Sold 67% thru ditributors/resellers, 25% to retail and 4% direct o Product strategy – ? Consumers -Standard PC’s , built in own or Asain factories, with minimum configuration possible, sold through retail stores, launched tollfree number in 96, but not grt response from consumer as there was no price advantage o Production strategy ? Initially based on own forecast, changed to forecast by channel members, resulted in reduced inventory from 30-60 days ?
However total cycle was 65 days till it reached the end customer ? Launched Omtimized distribution model (ODM) in 97, buitd PC after order receipt, but would go though distributors and resellers ? Complicated M/C would be manufactured in 2 steps, strip down by Compac, and rest by channel parters, similar to Model 0s of IBM. ? Compac offered only 2 weeks of price protection in this scheme, resulting in total inventory time reducing to 40-45 days ? 98- launches DirectPlus Program – directed at small and midsize companies, product offered thru telephone and Net, resellers offered referral fee of 6-7%, intent was to reduce shipping to 5 days • HP Sold 75% thru distributor and resellers , 23% retail, 1% directly, o HP targeted all resellers who were unhappy with Compac’s Direct Plus program and and mobilized them for HP products o 98 – HP launches HP shopping village (web based) for new PC, against refurbished PC’s earlier, however corporated were directed to Resellers for the completion of the process • Gateway 2000 o 2nd largest direct marketer of PC, almost cloned DELL’s approach of direct selling, customized production, maintained , internal and external sales force like DELL, quick to implement new technology, o 58% sales to hoem and small office, 28% small and medium business and 13% educational and govt o The company advertised in family oriented magazine o Grew at the rate of 39%, o Tried inorganic growth by acquisition of Advanced Logic Research, in 1997, however not successful in serving the large clients By – Amit Jain & Raj Kamal SMP-06 – 2009-10 Indian Institute of Management Calcutta India
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