Colt is a marketing analyst and freelance writer who's always been interested in examining businesses to help inform others.
In 2013, Dell was ranked 165th in Fortune’s “Global 500,” a list of the largest multinational corporations in the world. Since its incorporation, it has grown steadily and become one of the largest MNEs in the world. As the market leader, it fell from the top spot to the third place behind Hewlett Packard and Lenovo in 2012. This article seeks to detail how it was able to achieve this initial success in the early 2000s and why it eventually declined towards the end of the decade.
The report describes Dell’s successful direct sales business model, superior supply chain management, and other sources of its initial competitive advantage. Dell’s choice in the location of its manufacturing plants operations and decisions in its outsourcing operations are also discussed.
Finally, the reasons behind Dell’s slump as a leading PC maker and loss of its competitive advantage are explained. The report concludes with the possible strategies that Dell could take to restore its competitive advantage.
Did You Know?
Michael Dell's first foray into the computing world was at the age of 7, when he owned his first computer, the Apple II, designed by the great Steven Wozniak. Now, Apple has grown to become one of Dell's greatest competitors.
Replacing Inventory With Information
Replacing inventory with information is a supply chain management concept that seeks to manage and reduce inventory through the use of information. The key is to have the right amount of inventory to satisfy supply and demand without compromising the level of service.
Replacing inventories with information allows for a lean and agile supply: a minimal inventory level that is still flexible enough to adapt to changes in supply and demand. This contributes to cost reduction.
Having a large inventory on hand acts as a buffer and protects against uncertainties in the supply chain. This is because supply and demand is difficult to predict and subjected to variation. However, excess inventory is not an asset and it is in fact considered a liability. Such uncertainties take up 60% of the supply chain cost due to a lack of available information.
Thus, having access to vital information (e.g. market trends, sales data, etc.) can improve forecasting and planning. For example, 3M Canada’s implementation of the i2 Factory Planner and Supply Chain Planner software solutions has reaped rewards. The software solutions provide valuable real-time information about changes in demand and the market. Since then, planning and scheduling productivity has increased by 20% and inventory has decreased by 23%.
With its strategic use of information, such as its internet-based ordering system that updates suppliers with the latest demand trends, Dell was able to perfect the balance between demand and supply. Its inventory was reduced to only three days’ worth, which was the lowest in the industry.
Dell’s Initial Competitive Advantage
As a multinational enterprise, Dell is very competent in executing its global strategy, giving the company a competitive advantage that was unrivaled in the first half of the 2000s.
One of the sources of Dell’s initial competitive advantage can be attributed to its famous direct selling and build-to-order approach. This just-in-time (JIT) strategy allowed it to operate with the lowest inventory level in the industry. Reducing excess inventory provided Dell with a significant cost advantage as component costs depreciate as much as 1% weekly in the electronics industry. Direct selling has also allowed Dell to bypass intermediaries such as wholesalers and retailers, reducing costs even further. In addition, Dell offered customizable options that proved to be customer-centric and attractive.
Dell’s global force of 200 suppliers had access to automated and real-time information such as demand trends and volume expectations for different components. This close relationship with suppliers and the direct selling model has allowed Dell to balance demand and supply remarkably well.
Dell conducts its business operations worldwide in many different foreign markets. One of Dell’s motivations to internationalize was to secure supplies and gain access to low-cost factors. Dell situated manufacturing plants across the world, seeking out location-specific advantages such as low labour costs and highly productive workforces. The manufacturing operations are also in close proximity to important regional markets to minimize delay between purchase and delivery. Dell’s choice of locations had indeed armed it with an initial competitive advantage.
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Dell’s Global Manufacturing Plants
Why did Dell choose to locate its manufacturing plants in certain geographic locations?
Bartlett and Beamish (2011) identify three conditions that must be fulfilled for an MNE to internationalise its operations successfully. One of the conditions is that a foreign market must offer location-specific advantages. Dell operates manufacturing plants in Brazil, China, India, Ireland, Malaysia, and Poland which offer Dell such advantages.
Some advantages are lower labour costs and a highly productive workforce. For example, labour costs in Malaysia are lower than in neighbouring Singapore, but the quality of labour remains comparatively high. When Dell established its manufacturing operations in Malaysia, it received a 100% tax exemption for five years, an initiative by the Malaysian government to attract investments.
The next advantage is proximity to important markets. Dell chose to locate its manufacturing plants close to such regional markets for better market access, lower shipping costs, and improved responsiveness in delivery. The success of Dell in India was attributed to having a manufacturing plant in the country, which cuts delivery time by 50% and improved its sales dramatically. In the past, customers in India would have to wait for up to a month for their computers, which were manufactured in Malaysia.
However, this choice of location is not without its disadvantages. Locating manufacturing operations beyond the United States comes with certain disadvantages. Bartlett & Beamish (2011) identify the distance and the liability of foreignness as two of these disadvantages. Generally, the greater the distance from the home market, the more difficult it will be to conduct operations.
To elaborate, there may be differences in culture, beliefs, language, political landscape, and infrastructure that can affect Dell’s global supply chain. The geographical distance makes control over the manufacturing operations even more difficult. In February 2007, a major fire broke out at one of the plants in Aisin Seiki, one of Toyota’s main suppliers. The crisis caused Toyota the loss of 70,000 vehicles and ¥160 billion in revenue. However, due to similar culture, beliefs and proximity of manufacturing operations, the recovery effort was incredibly fast with the aid of local firms. If such an accident were to happen to Dell’s global manufacturing plants and caused disruptions in its supply chain, the consequences would be disastrous. Recovery would also be difficult due to the distance and liability of foreignness.
One of the main reasons for outsourcing the manufacture of PC components is the ability to choose good components and suppliers rather than having to produce them oneself. Michael Dell once said in an interview, “If you’ve got a race with 20 players all vying to make the fastest graphics chip in the world, do you want to be the twenty-first horse, or do you want to evaluate the field of 20 and pick the best one?” Dell’s strategy was to build good relationships with its global network of suppliers rather than manufacture components of their own.
Outsourcing would allow Dell to focus on its own competencies, such as managing its efficient supply chain, customer service, research and development of new products, etc.
Louise O’Brien, former Vice President of Dell, emphasized that Dell’s main business is personal computers, and it should not give up its capabilities in production. Since the incorporation of Dell, it has been outsourcing the manufacturing of components manufacture but not the final assembly itself. Dell does not want to outsource its manufacturing operations entirely so as to prevent the unintended creation of competitors. Outsourcing is often described as easy to replicate and the competitive advantage that it provides is not sustainable. Outsourcing is only feasible if it is separated from other supply chain activities, which is what Dell is trying to achieve.
How Dell Lost its Ranking as the Leading Global PC Maker
The desktop computer, which was Dell’s focus, was being overtaken by substitute products such as portable computers in the late 2000s. Dell’s manufacturing and direct sales model was not well suited for the portable PC market. Consumers prefer to purchase laptops in retail outlets, so they can look at and feel the design. Moreover, competitors began restructuring efforts and significantly improved their business models. The decline of the desktop PC was one of the main reasons that Dell lost its ranking as the leading global PC maker.
Dell’s major competitors such as Hewlett-Packard, Apple, Acer, and Lenovo adopted a greater focus on worldwide innovation and learning in the knowledge era. Knowledge as a source of competitive advantage has allowed these MNEs to surpass Dell in market share. They were able to do so as they outsourced their manufacturing operations entirely. However, Dell was still restricted by its decision to outsource only components and desire to have total control over the final assembly. A notable example of a resurgent competitor is Apple, which surpassed Dell’s market cap in 2006 with its catalogue of innovations such as the iMac and MacBook Pro.
Its competitors' cross-collaborative efforts and entrance into foreign markets, caused Dell’s slip in rankings. For example, Lenovo’s acquisition of IBM’s PC Division in May 2005 had a significant impact on PC makers globally, including Dell. Lenovo became the world's third-largest personal computing company overnight, gaining access to foreign markets beyond China.
Strategies for Sustained Competitive Advantage
Strategies and measures that Dell undertook to address its loss of market share were many. For example, it reduced reliance on direct sales by selling through retail channels and launched laptops and netbooks.
Bartlett and Beamish (2011) describe three types of strategic approaches that an MNE can use to respond to challenges, defend worldwide dominance, challenge the global leader, and protect domestic niches.
In the competitive PC market, Dell was forced to develop new capabilities such as selling through retail channels and playing catch-up to its competitors’ new products. However, doing so eroded its core competencies. Instead, Dell should defend and reinforce their existing capabilities rather than developing new ones.
Dell can do so by taking extra steps to improve its customer service. For example, it introduced a concierge service for customers in April 2013 that provided personalized and remote services for customers. Instead of seeking ways to improve sales through retail channels, Dell could enhance its direct sales model by using social media.
Dell is renowned for its direct sales model that provides lots of customizability. Taking advantage of this strength, it can delve deeper into this niche by providing customers with more customizable options online. For example, Dell acquisition of Alienware in 2006 allowed it to tap into the highly profitable but niche PC-gaming market. PC Gaming Alliance reported that the PC gaming industry hit record revenues of $6.8 billion in 2012.
Dell can strive to protect its domestic niches and defend against its competitors’ global advantage. By responding to local needs, Dell can reshape its personal computers to suit the consumers’ taste.
To offset competitors’ advantage, Dell can employ defensive strategies such as lobbying for changes and assistance. In 2007, Dell lobbied for the Indian government to reduce its PC tax. Finally, it can also go into mergers or joint ventures with other global MNEs. For example, it entered into a partnership with one of its competitors, EMC, that led to sales of more than a billion dollars worth of midrange and entry-level storage products.
Forecasts for the personal computer industry are bleak and IDC expects the sales of personal computers to fall till at least until 2017. The advent of new products such as smartphones and tablets are out shadowing PCs.
The impact on Dell's business is great, and it becomes more important for Dell to restore its competitive advantage. Dell has a gargantuan task of catching up with the rapid changes in technology and the evolving strategies of its competitors.
Dell was not able to gain a sustained competitive advantage due to its reliance on the direct sales model and traditional business strategies. Like its competitors, it must invest more effort in learning and innovation. It should also evolve its global strategy such as responding to local needs and adopting other transnational strategies.
Dell’s rise and fall in PC industry have sent an important message and reminder to itself - that a sustained competitive advantage, motivated by constant changes, is crucial for the future of the company.
Hill CWL, Cronk T, Wickramasekera R, 2011, Global Business Today: Asia-Pacific Edition, 'Restoring Dell's Competitive Advantage', pp 531-34, McGraw-Hill, Sydney.
Bartlett, CA & Beamish, PW, 2011 Transnational Management: Text, Case and Readings in Cross-Border Management, Cengage Learning, Melbourne
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
Chester on May 12, 2020:
Dell has tried to put those problems behind it. In 2005, it announced it was taking a $300 million charge related, in part, to fixing and replacing the troubled computers. Dell set aside$100 million this month to handle a potential settlement with the Securities and Exchange Commission over a five-year-old investigation into its books, which will most likely result in federal accusations of fraud and misconduct against the company’s founder, Michael S. Dell. What strategy he used and why?
Moderately secure on May 31, 2019:
Jacob Frye on August 24, 2018:
Wow nice piece. Glad to find some quality writings here.
Mike Short on May 11, 2016:
Dell is a classic "Innovator's Dilemma" case. Switching from a supply chain advantage to a value added strategy is nearly impossible for Dell who doesnt have the innovative structures of HP labs or Cisco's network labs or other new product development arms.
Linda Crampton from British Columbia, Canada on October 12, 2013:
This is an interesting analysis of Dell's situation. I've noticed the decrease in the number of Dell computers that are available. I haven't thought about why this decrease has happened until now, though. Thanks for sharing the information.