Dell’s Value Chain
The value chain was a concept initially proposed by McKinsey and later developed and made public by Harvard strategy guru Michael Porter. According to Porter, the value chain is defined as the complete flow of products from the suppliers to the customers and management of the information flow in a way that maximizes the consumer satisfaction with the increase in the profit margins of the company. Simply, it includes a series of value-adding activities connecting a company’s supply side (raw materials, inbound logistics, and production processes) with its demand side (outbound logistics, marketing, and sales).
And these activities are supported by the infrastructure of the firm, human resource management, technology and development, procurement. The value chain model is a useful analysis tool for defining a firm’s core competencies and the activities in which it can pursue a competitive advantage. Firstly, we mention about cost advantage. A firm may create a cost advantage either by reducing the cost of the individual value chain of activities or as what have been said before reconfiguring the value chain to suit lower production costs.
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Once the value chain is defined, a cost analysis can be performed by assigning costs to the value chain activities. The costs obtained from the accounting report may need to be modified in order to allocate them properly to the value creating activity. In this way, cost advantage is achieved by the firm in the industry it is operating. Porter identified 10 cost drivers related to value chain activities such as: economies of scale, learning, capacity utilization, geographic location…ect.
And a firm develops a cost advantage by controlling these drivers better than the competitors do. A cost advantage also can be pursued by reconfiguring the value chain. Reconfiguring means structural changes such as a new production process, new distribution channels, or a different sales approach. Secondly, in order to gain competitive advantages, a firm has to have a differentiation. A differentiation advantage can arise from any part of the value chain. For example, procurement of inputs that are unique and not widely available to competitors can create differentiation.
A firm must either provide a similar value to its client, or perform the activities in a unique way that create a higher value for the client that allows the firm to ask the better price. This is the differentiation. Porter identified several drivers of uniqueness: policies and decisions, linkages among activities, timing, location, interrelationships, learning, integration, scale and institutional factors. Many of these also serve as cost drivers. Differentiation often results in greater costs, resulting in tradeoffs between cost and differentiation.
There are several ways in which a firm can reconfigure its value chain in order to create uniqueness. It can forward integrate in order to perform functions that once were performed by its customers. It can backward integrate in order to have more control over its inputs. It may implement new process technologies or utilize new distribution channels. Ultimately, the firm may need to be creative in order to develop a novel value chain configuration that increases product differentiation.
Thirdly, technology also plays an important role for the firm to gain competitive advantage over its competitor in the industry. Almost if not all modern firms employ technology in all its value creating activity. Technologies have a very significant role in the organization, changes in technology can impact competitive advantage by incrementally changing the activities themselves or by making new possible configurations in the value chain. There are various types of technologies used in both primary activities and support activities.
There is the inbound logistic technology which involves transportation, handling, storage communications etc. Technologies that are used in the production of the products and services are labeled as operations technologies. Production process, materials, machine tools used, packaging and maintenance are examples of production stages that employ technology. If there is an inbound logistics technology, there is also an outbound logistics technology. Outbound logistics refer to as the delivering of the product from the production area to the market or to the buyer itself.
Outbound logistics employ almost the same technology used by the inbound logistics, it also requires transportation technologies, the handling, packaging, communication and information systems. Marketing the product and selling it to the market also requires technology through the use of media and information systems. The role of the firm usually do not stop after a consumer purchased a firm’s product, after-purchase services are important and product innovation is a constant process if the firm is aiming to stay at a competitive advantage from its competitors.
After-purchase services and product innovation also requires the use of technologies. Because of technologies, innovation and creation of new products to suit customer satisfaction are made faster. We can note that technology is widely used across the value chain, and to the extent that technology affects uniqueness of the product, and this leads to competitive advantage. Moreover, value chain activities are not isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones.
Linkages may exist between primary activities and also between primary and support activities. The firm may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced. Through such improvements the firm has the potential to develop a competitive advantage. Dell’s value chain is one of a kind, they outsource all there components across the world and then assemble and sells it directly to the customers.
Dell works in a very complex manner by directly supplying to the customer and by this they skip the market middlemen. They achieve value addition at the same time because of incurring low on total expenditure. This ensures dell to get the maximum advantage in the market. Dell’s advantages in its value chain activities are based on two models below: direct selling strategy and build to order. These create differentiation for Dell Computer. While other computer manufacturers were using the traditional value chain, Dell changed activities in its value chain.
Computer manufacturers, such as IBM, Compaq designed and built their products with preconfigured options based on market forecasts. Products were first stored in company warehouses and later dispatched to resellers, retailers, and other intermediaries who typically added a 20–30 percent markup before selling to their customers. But Dell is different. It never used retail channels for distribution like its competitors, according to dell they waste unnecessary cost and time which could be saved. And Dell’s solution is its unique direct to customer model.
The creation of the model was the major reconfiguration of the traditional personal computer value chain, which computer manufacturers and Dell competitor are using. By employing the model, the company outsourced all components but it still performed the assembly. In the process this eliminated retailers and directly shipped the computers from its factories to end customers. This action leads Dell into Cost leadership among the players in the industry. By eliminating the retailers, consumers were buying consumers from Dell with out the extra payment for retailers’ margin.
This in turn leads to cheaper computers from Dell compared to its competitors. As the Internet is becoming more popular in daily life, businesses rely on the Internet for commerce and real-time information exchange; customers go online to shop, bank and conduct personal correspondence. Because of this Dell began to take customized orders for hardware and software over the phone or via the Internet. And it designed an integrated supply chain linking Dell’s suppliers very closely to its assembly factories and order-intake system.
With the industry’s most efficient procurement, manufacturing and distribution process, Dell offers its customers powerful, richly configured systems at competitive prices. Every Dell system is built to order. Customers are getting exactly what they want. Dell uses knowledge gained from direct customer contact before and after the sale to provide award-winning reliability and tailored customer service. By reconfiguring the traditional value chain model of computer manufacturers, Dell Computers defined its biggest core competency and the activity in which it can pursue its competitive advantage.
First Dell gained cost advantage from its competitors by understanding cost drivers (retailers) in its production and squeezing them out. The implementation of the direct to consumer model solved the problem of expensive computer born out of the margins asked by the middlemen. Dell Computers also realized the differentiation advantage by focusing on their efficient model as its core competency which resulted to Dell outperforming its competitors. Another differentiation of Dell is its better access to technology compared to its competitors.
Dell introduces the latest relevant technology much more quickly than companies with slow-moving indirect distribution channels. Currently Dell’s initiatives include moving even greater volumes of product sales, service and support to the Internet; using the Internet to improve the efficiency of Dell’s procurement, manufacturing and distribution process and further expanding an already broad range of value-added services. By taking its direct business model and its associated customer experience to even higher levels, through the Internet.