What Explains the Success of Dell Before 2002?
Question 1: What explains the success of Dell before 2002?
Dell has attributed much of its success to its vaunted “Direct Model.” While competitors sold primarily through distributors, resellers, and retailers, Dell took orders directly from customers, built computers to customers’ specifications, and shipped the machines straight to customers. Direct model allows Dell to build strong relationships with customers, save cost in R&D, logistics, supply chain, and other expenditures. In any case, winning in business entails creating and capturing value better than competitors. Dell’s unique business model entails systems of activities designed to offer superior benefits, it also has the benefits of lowering cost. Thus, Dell has a differentiation with cost advantage strategy.
Dell has also enjoyed the boom of PC industry as the demand for personal computers has exponentially increased since its entry to PC market in 1996. Case Exhibit 1 and 2 showed that both U.S. and Worldwide PC market size has doubled from 1996 to 2002. Companies enjoyed high profits as PC prices were very high in late 1990s. Subsequently, PC performance improved steadily, and prices fell rapidly. Consequently, firms have negative compound annual growth rate (CAGR) from 2004-2008 as indicated in Exhibit 9, with only exception Apple.
Using Porter’s 5 forces to analyze the PC industry helps us determine the impact of competitive forces on PC industry firms’ profitability (Appendix 1). While barrier to entry was relatively high due to capital requirements and dominant incumbents, Dell entered the PC market in 1996, early enough to capture the values and create profits for a high-growing industry in the next 5-6 years. Dell was a pioneer in direct sale by taking orders from end-customers with a strong focus on very large customers called relationship buyers. These were large organizations that placed repeated orders for multiple PCs. Dell’s transaction buyers included small-to-media businesses and home computer users who could order a Dell computer online or by calling an inside sales representative. Dell’s online site allowed customers to customize their product and track an order’s progress. Dell has an early mover advantage in direct sale as both IBM and HP attempted to expand direct sale business but did not do well.
Analyzing Dell’s internal capabilities using the value chain framework helps understand the sources of firm’s costs and differentiation. Compared to competitors, Dell’s expenditures on R&D were low. With the Direct Model, Dell saved cost associated with retailing and reseller. Dell’s pricing had been competitive. Since computer performance has increased dramatically, even low-end PCs could performance nearly all of the functions most users required. Dell thus has the