Dell Computer Corporation was founded in 1984 by Michael Dell. From the early 1990s until the mid-2000s, Dell was ranked as a PC market leader relying on their distinctive marketing pattern “Direct Model” which undertook direct communication with customers and provided customized products. Recently, the PC industry is facing inconceivable worldwide competition, and Dell is gradually losing their competitive advantages by using its direct model in critical business segments. The company is facing shrinkage of growth, increasing competition, declining quality of customer service, and limitation of expansion.
These issues have an enormous impact on Dell’s position as a technological giant in the PC industry. Problem Definition Generally, in order to consolidate its top market position, Dell Computer Corporation has to keep its competitive advantage and figure out the issues which come from the internal and external environment. First, as globalization continues to develop, it is bringing both opportunities and threats to companies worldwide.
The PC market is experiencing constant renewal and replacement and this results in the reducing of differentiation and the increase in price wars among competitors.
In the early 1990, Dell was positioned as “focused differentiation” in the PC market and attracted a lot of customers by using their superior customer service. However, Dell’s competitive differentiation from its competitors, which is based on its “customized product”, is not its core competence anymore in 2007 since Dell’s remarkable direct model has been imitated by other companies. Second, although the PC market is a highly competitive and rivalrous market, the profitability is still attracting the attention of companies to squeeze into this market.
Therefore, Dell is facing the challenging threat of new entries into the market. Additionally, due to the diversified products, customers have more options on computer brands, styles, and functions in the current market. This also forces Dell’s position to move from supplier power towards buyer power. In brief, when an industry is growing, more rivalry is likely to enter the market. Third, internal erroneous decisions will negatively impact Dell’s long-term operations as well. In 2001, Dell decided to move its support center to India, and this directly resulted in a declining perception of the company’s customer service.
Although the company is providing its “superior customized product”, the quality of customer service is another key element for keeping customer loyalty. Finally, the traditional direct model strategy is not appropriate in the current PC market. The direct model mainly focuses on operational efficiency and organizational restrictions on individual customers, but this limits the company to step into new business segments for long-term operation. This model has restricted Dell from gaining market share in the “single consumer” segment, and has resulted in an inability to offer more customized products to diverse customer segments.
Furthermore, globalization is creating additional opportunities for the PC market. The United States is Dell’s primary market and yet the company is competing in the global computer market. Therefore, Dell will need to consider expanding its market globally in order to develop its differentiation advantage outside of the U. S. Diagnosis Dell’s accomplishments through the mid-2000s caused its rivals to take notice and action. IBM and Lenovo launched a direct distributive initiative and created the Authorized Assembly Program which improved their inventory turnover rate.
Compaq also optimized its distribution model by building orders only after they were received which declined their inventory holding. HP began selling PCs directly to business customers online and initiated a toolkit to increase consulting and sales training. Gateway focused on individual customers rather than large corporations. Acer eventually bought Gateway and differentiated itself as “100% indirect” company that specialized in producing inexpensive notebooks. Dell positioned itself as a successful differentiator; however, its competitive differentiation is no longer an advantage for it due to the ease of their Direct Model imitation.
Home and corporate users dominate the five categories of buyers on PC consumption. There are large amounts of these buyers in the market that are price sensitive and have low switching costs on their products which raises overall buyers’ power. However, in the case of Dell, many customers became frustrated with Dell. For example, Dell’s call centers received manyf discouraged clients’ comments. One reason: many service representatives were trained to solve only one category of a problem, so almost 45% of calls had to be transferred from the agent who answered the call to someone with the knowledge needed to help the customer.
Richard L. Hunter, who was brought in to improve Dell’s customer service, called the situation “terrible”, explaining that it was comparable to “delivering materials to the wrong factory 45 percent of the time. ” Worse, to slow the tide of calls from customers, Dell tried removing its toll-free service number from its website. Customers’ reactions showed up in Dell’s declining market share and slumping customer satisfaction ratings (Certo, 2013). Moreover, when Dell went on to expand its tech support outsourcing with other call centres in India, customers began complaining.
Consequently, Dell stopped being perceived as an American role model (Munarriz, 2012). Overall, in recent years, Dell has started to experience problems with its direct sales model and has steadily been losing ground to HP, who now occupies the number one spot in the PC sales market. Analysts had felt that the innovative sales model developed by Dell had made it the industry favourite and also a high indicator of good sales growth. However, industry insiders have now observed that those upbeat days appeared to be over for Dell as the company’s profits and share prices had dropped considerably.
The diagnosis, then, is that Dell’s traditional direct model is failing because the market, the competitors and the consumers have changed and yet Dell still uses the same model which Michael Dell invented in the early 1990s. Cause-Effect Analysis As companies such as Compaq, HP, Lenovo and Acer imitated Dell’s direct model for sales of their PCs, this quickly began to cut away at Dell’s competitive advantage. Dell’s direct model brought in large profits for the company and gave them “the title of worlds biggest computer maker” (Sorensen, 2013).
However with the other computer makers vying for the top spot in the competitive PC manufacturing space, the direct model “spawned a host of imitators—several who proved to be better equipped to take advantage of the business model Dell thought it had perfected. ”(Sorensen, 2013) The adoption by other PC makers of cutting out the wholesaler and selling directly to the consumer caused Dell to “relinquish the title of world’s biggest computer maker to HP in 2006. ” (Sorensen, 2013) In the below graph representing more recent years of the top 5 PC makers shows that Lenovo has also now surpassed Dell in market share. (Peitsch, 2012)