Dell Business Model
PCs Limited advertised its systems in national computer magazines for sale directly to consumers and custom assembled each ordered unit according to a selection of options. The company grossed more than $73 million in its first year of operation. The company changed its name to “Dell Computer Corporation” in 1988 and began expanding globally. In June 1988, Dell’s market capitalization grew by $30 million to $80 million from its June 22 initial public offering of 3. 5 million shares at $8. 50 a share.
In 1992, Fortune magazine included Dell Computer Corporation in its list of the world’s 500 largest companies, making Michael Dell the youngest CEO of a Fortune 500 company ever. In 1993 to complement its own direct sales channel, Dell had plans to sell PCs at big-box retail outlets such as Wal-Mart which would have brought in an additional $125 million in annual revenue. However Bain consultant Kevin Rollins persuaded Michael Dell to pull out of these deals which would be a money loser in the long run.
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From 1997 to 2004, Dell enjoyed steady growth and it gained market share from competitors even during industry slumps.
Dell attained and maintained the #1 rating in PC reliability and customer service/technical support, according to Consumer Reports, year after year, during the mid-to-late 90s through 2001 right before Windows XP was released. In 1996, Dell began selling computers through its website, and in 2002, it expanded its product line to include televisions, handhelds, digital audio players, and printers. Dell’s first acquisition occurred in 1999 with the purchase of ConvergeNet Technologies. Dell surpassed Compaq to become the largest PC manufacturer in 1999.
In 2002, when Compaq merged with Hewlett Packard (the 4th place PC maker), the combined Hewlett Packard took the top spot but struggled and Dell soon regained its lead. Dell grew the fastest in the early 2000s. In 2003, the company was rebranded as simply “Dell Inc. ” to recognize the company’s expansion beyond computers. In 2004, Michael Dell resigned as CEO while retaining the title of Chairman, handing the CEO title to Kevin Rollins who had been President and COO since 2001. Under Rollins, Dell began to loosen its ties to Microsoft and Intel, the two companies which were responsible for Dell’s dominance in the PC business.
During that time, Dell acquired Alienware, which introduced several new items to Dell products, including AMD microprocessors. To prevent cross-market products, Dell continues to run Alienware as a separate entity, but still a wholly owned subsidiary. However in 2005, while earnings and sales continued to rise, sales growth slowed considerably, and the company stock lost 25% of its value that year. By June 2006, the stock was trading around $25 which was 40% down from July 2005 which was the high watermark of the company in the post-dotcom era.
The slowing sales growth has been attributed to the maturing PC market, which constituted 66% of Dell’s sales, and analysts suggested that Dell needed to make inroads into non-PC businesses segments such as storage, services and servers. Dell’s price advantage was tied to its ultra-lean manufacturing for desktop PCs, however this became less important as savings became harder to find inside the company’s supply chain, and as competitors such as Hewlett-Packard and Acer made their PC manufacturing operations more efficient.
Throughout the entire PC industry, declines in prices along with commensurate increases in performance meant that Dell had fewer opportunities to upsell to their customers (a lucrative strategy of encouraging buyers to upgrade the processor or memory). As a result the company was selling a greater proportion of inexpensive PCs than before which eroded profit margins. The laptop segment had become the fastest growing of the PC market, but Dell produced low-cost notebooks in China like other PC manufacturers which eliminated Dell’s manufacturing cost advantages.
CNET has suggested that Dell was getting trapped in the increasing commoditization of high volume low margin computers which prevented it from offering the more exciting devices that consumers demanded. There has also been a decline in consumers purchasing PCs through the Web or on the phone, as increasing numbers were visiting consumer electronics retail stores to try out the devices first. The lack of a retail presence stymied Dell’s attempts to offer consumer electronics such as lat-panel TVs and MP3 players. As well, many analysts were looking to innovating companies as the next source of growth in the technology sector. Dell’s low spending on R&D relative to its revenue (compared to IBM, Hewlett Packard, and Apple Inc. ) which worked well in the commoditized PC market prevented it from making inroads into more lucrative segments such as MP3 players. Increasing spending on R&D would have cut into the operating margins that the company had emphasized on.
Dell’s reputation for poor customer service, since 2002, which was exacerbated as it moved call centres offshore and as its growth outstripped its technical support infrastructure, came under increasing scrutiny on the Web. Although the original Dell model was known for high customer satisfaction when PCs were selling for thousands, by the 2000s the company could not justify maintaining that level of service when computers in the same lineup were now selling for hundreds.
By 2006, Dell had spent $100 million in just a few months to improve on this, as well as rolling out DellConnect to answer customer inquiries more quickly. There was also criticism that Dell used faulty components for its PCs. A battery recall in August 2006, as a result of a Dell laptop catching fire caused much negative attention for the company, although later Sony was found to be responsible for the faulty batteries. 2006 marked the first year that Dell’s growth was slower than the PC industry as a whole.
By the fourth quarter of 2006, Dell lost its title of the largest PC manufacturer to rival Hewlett Packard whose Personal Systems Group was invigorated thanks to a restructuring initiated by their CEO Mark Hurd. After four out of five quarterly earnings reports were below expectations, Rollins resigned in 2007 and founder Michael Dell assumed the role of CEO again. Dell announced a change campaign called “Dell 2. 0,” reducing headcount and diversifying the company’s product offerings. Business Model