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Case Study Dell

Dell pioneered the direct sales model in the PC industry in the 1990s, which helped it gain market leadership. However, starting in the mid-2000s, Dell's sales began declining as competitors replicated its model. To arrest the falling sales, Dell decided in 2007 to sell through retail stores like Walmart in addition to its direct channel, aiming to boost visibility and sales. While some analysts welcomed the change, others felt it risked straying from Dell's original successful strategy.

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486 views

Case Study Dell

Dell pioneered the direct sales model in the PC industry in the 1990s, which helped it gain market leadership. However, starting in the mid-2000s, Dell's sales began declining as competitors replicated its model. To arrest the falling sales, Dell decided in 2007 to sell through retail stores like Walmart in addition to its direct channel, aiming to boost visibility and sales. While some analysts welcomed the change, others felt it risked straying from Dell's original successful strategy.

Uploaded by

Ash
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Case Study: Dell

Abstract:
US-based Information Technology company, Dell Inc. (Dell) has
been regarded as pioneers in direct marketing. The direct
marketing strategy helped the company gain the market
leadership position. Dell became successful due to its direct
selling model in the 1990s till the mid-2000s; it started facing
decreasing sales from then on, eventually losing its market
leadership to Hewlett Packard Company in 2006. In the mid2000s, some analysts criticized Dell for sticking to its directonly business model. According to them, the business model
that had made Dell so successful in the past was no longer as
effective and the company was losing its competitive edge.

In 2007, Dell announced its intention of moving beyond the


direct-only model that it had zealously followed until then.
Hence, it decided to shift its focus from direct marketing and
sell its personal computers through retailer stores such as
WalMart and Carrefour. This was a bid to increase the visibility
of its products and push up sales by selling through the retail
division. Analysts in general appreciated Dell's new channel
strategy as many of them had been saying for a long time that
such a change was necessary for the company. They felt that
Dell would benefit from its foray into retail as well as its new
channel initiative. On the other hand, some analysts felt that
Dell was taking a huge risk by straying from what had made it
so successful in the PC industry.

Issues:
Study the direct-only business model of Dell and discuss its
advantages and disadvantages.
Understand the reasons behind Dells decision to move
beyond their direct-only model.

Understand the issues and challenges faced by companies in


managing the supply chain and in launching new channel
strategies.
Introduction
In October 2011, IDC1 and Gartner Inc.2 reported that USbased information technology company, Dell Inc. (Dell), had
recorded a drop in market share to 12 percent for the third
quarter of 2011 compared to the 12.6 percent recorded in the
same quarter of 2010.3 According to Dell, the lackluster
performance was due to a decrease in demand from consumers
and the increasing sales of tablets and smart phones
manufactured by competitors such as the Hewlett-Packard (HP)
Company4 and Apple Computers Inc.5 (Apple). Industry
observers opined that the decrease in the sales of Dell's
products was contrary to Dell's position from the 1990s to 2003
when the company had stood as the largest producer of
Personal Computers (PCs) in the world.
Analysts had reported that Dell had earned more than its rivals
and was also the only company to consistently report positive
margins on PCs. According to Dell, much of its success was
attributable to its direct selling model. While a majority of PC
makers sold through resellers, retailers, and distributors, Dell
was in direct contact with its customers. It took orders from
them, built PCs according to their specifications, and directly
delivered their PCs to them. Some industry observers noted
that all its rivals had copied the direct selling model. However,
no other PC maker could equal Dell's performance through the
mid-2000s.
Though Dell became a market leader in the PC market due to
its direct selling model, it started facing decreasing sales from
the mid-2000s. Much of the decline was attributable to its
direct selling model, according to analysts. Some industry
observers felt that Dell's focus on only the direct selling model
had led to its fall and given an edge to its competitors who sold
through resellers and retailers. Some analysts attributed Dell's

decreasing performance due to the change in leadership at the


company (Michael Dell (Michael), founder and CEO of Dell, had
stepped down from the post of the CEO in July 2004). To arrest
the decline in its sales, Dell decided to sell its PCs through retail
stores such as Walmart Stores Inc.6 and Carrefour S A.7 In
addition to this, the company also started a formal channel
partner program for value added resellers8 (VARs)

This was a bid to increase the visibility of its products and


increase its sales by selling through the retail division. While
some analysts welcomed Dell's decision to move beyond its
direct selling model, others felt that the company was taking a
huge risk by straying from what had made it so successful in
the PC industry. They felt that Dell faced some significant
challenges, considering that it was undergoing change at the
fundamental level and that many VARs deeply distrusted the
company.
Though Dell's new channel strategy helped it increase its sales,
it continued to lose market share to HP. However, Dell remained
confident about its growth since the company recorded a 16
percent increase in revenues for the FY 2011. The company
reported revenues of US$ 61.5 billion for fiscal 2011 compared
to revenues of US$ 52.9 in fiscal 2010.

About Dell
In May 1984, Michael Dell (Michael), a student at the University
of Texas, Austin, incorporated PC Ltd. with an investment of less
than US$ 1000.10 The company focused on building IBM11
compatible computers from stock components and selling them
at low prices. The gross revenues of PC Ltd. amounted to US$ 6
million in the first year of its business.12 In 1985, the
company's gross revenues reached US$ 40 million.13 In 1987,
the company started its first international operations in the UK.
In 1988, the company's name was changed to Dell Computer
Corporation. The rapid increase in revenues at the company

prompted Michael to recruit professionals from several


domains. By 1990, the company had international operations in
12 countries. In 1992, Fortune14 listed Dell in its Fortune 500
list of largest companies in the world. In the early 1990s, Dell
ventured into the markets through other distribution channels,
like retail arrangements with leading retailers but did not find
any better distribution network than direct selling. Since its
profits were growing at a healthy rate, the company
concentrated only on the direct selling model. It found that to
be the biggest profit-making channel. By the end of 1995, Dell's
sales revenues had crossed the US$ 3.5 billion mark and by this
time, its customers had begun to place orders through mails,
toll-free calls, etc.

Dell's Direct Selling Model

Dell made its foray into the PC market during the 1990s. The
exclusivity of Dell's PCs was its direct selling model, which
revolutionized the global IT industry. Earlier, PC makers had
sold their PCs through middlemen like wholesalers and
retailers.
Hence, there was little possibility of customizing the PCs. But
the direct model provided by Dell offered customers
customized products along with appended products and
services such as PC replacement, maintenance, and technical
support.
The Competition

Though Dell enjoyed a market leadership position in the 1990s


through the mid-2000s due to its direct selling model, it soon
started facing problems when its competitors tried to replicate
the direct selling model. In the 1990s, IBM took some initiatives

to reproduce some aspects of direct distribution by coordinating


better with resellers and distributors.

Dell: Moving Beyond Direct Selling Model

Dell's innovative sales model had made it the favourite in the


industry and the company was also regarded as a high
technology initiator. However, with the decline in Dell's profits
and share prices in the mid-2000s, many industry observers
began questioning the efficacy of the direct model.

Looking Ahead

Analysts in general appreciated Dell's new channel strategy as


many of them had been saying for a long time that such a
change was necessary for the company. They felt that Dell
would benefit from its foray into retail as well as its new
channel initiative.

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