Matching Dell

Diana Castro

Business 109

4/14/2016

Case 2: Matching Dell

1. How and why did the personal computer industry come to have such low average profitability?

The personal computer manufacturers in the personal computer industry were all trying to copy each other. Dell, for a lot of is history, had been managed as a startup and when it started to grow it did not have the control systems to manage the growth which is why Dell had a net loss in 1993. The cash supply fell as low to $20 million in 1993. Because they noticed the growth of Dell, IBM, Compaq, HP, and Gateway took action. IBM created Model 0s which had little configuration and were then sent to a partner in the channel to make the rest of the configuration. IBM built the Model 0 PCs not based on the actual customer orders but on forecasted sales. This means that a times they created more Model 0 than necessary. Its PC division had lost $39 million before taxes in 1996 and more in 1997 and in 1998. Because of the ODM for Compaq, the total inventory in Compaq’s distribution and reseller channel declined to about 45-50 days. Compaq relied heavily on its PC server business. So when IBM cut prices heavily to servers, Compaq was affected. So in the first quarter of 1998 Compaq would break even instead of an expected profit that would exceed $500 million. HP did not do much of direct sales. It set up a website which customers could buy PCs from HP. However, business customers had to complete purchases with HP’s resellers. Business customers did not want to deal with resellers but with HP directly. Gateway 2000 relied heavily on home and small office users. Gateway in 1997 sales growth slowed to 25%. It attempted to clear excess inventory, acquisition expenses, and the abandoned effort to develop new customer information system helped to decline profits. It tried to get large business accounts but Gateway could not afford the expanded sales team so it resorted back to small businesses. Part of the reason the personal computer industry came to have such low average profitability was because most of the firms relied on resellers. They did not typically do direct sales, or if they did anything direct customers would purchase online but the customer still had to go through the reseller and not directly with the company. So the company had to pay the wholesalers and resellers. Also, most companies did not have an efficient way to deal with inventory. Some companies had excess inventory that lasted a while. So these companies had to pay for storage because of the excess inventory. Some systems were not as efficient as others. Some companies did not have the capacity to sell to certain customers. Thus, everything contributed to the low profitability of the personal computer industry.

1. Why has Dell been so successful despite the low average profitability in the PC industry?

Dell, from the start, dealt directly with customers. PCs were high performance PCs and had low prices. They only started to assemble computers when they received a customer order and they customized the PCs to customer specifications unlike IBM who made computers based on forecasted sales and not on actual orders. Their customers were more segmented. They split their customer groups into different categories and assigned sales reps to those large accounts such as large companies and institutions This way they could meet their specific needs. For those other customers, they used other means. They tried to do things at low costs. They were fast in assembling and shipping their computers. Dell worked very closely with their suppliers and arranged a just-in-time delivery of parts. This way it did not have to invest in a lot of storage costs because they ordered what they needed when they needed it. It was an efficient system and lowered inventory costs. In 1998 they managed to reduce its days of inventory down to 7. Other companies had higher days of inventory which sometimes resulted in excess inventory and higher costs. Since its suppliers worked so closely with Dell, the suppliers were encouraged to locate warehouses and production facilities nearby. This way Dell and suppliers could lower shipping costs between each other. Dell hired many experienced managers from many technology-related companies to monitor operations and manufacturing. The company monitored the days of inventory, receivables and payables, and many other aspects of the business. Other companies did not cut the costs very well. Dell had minimal contact with resellers while others did. Other companies had to pay the reseller because the resellers were more involved. Other companies would sometimes take longer to assemble the PC computers and would be standardized and then sent to the reseller to configure it and then to the customer. The computers would be more expensive than Dell. Gateway had lower PC prices than Dell but its main customers were home and small office users while Dell dealt with larger companies. Dell reduced costs and created an efficient system.