Dell Computer Corporation’s Michael Dell’s decisive and apparently uncontested vision for the sustained growth of the corporation hinges on advancing the Dell Direct Model. A distinct advantage displayed by Dell versus his closest competitors in this arena-Gateway, Compaq, Hewlett-Packard and Digital Equipment seems to be the synergy created by the integration of marketing communication efforts and their ability to accurately adjust sales staff and production levels to meet the corresponding demand.
The primary problem facing Dell and its competitors is the general softening of the PC and PC server/peripheral markets during a time when the industry is in the maturity stage.
The mature industry in this case finds that roughly 50% of U.S. households own one or more PC’s at the present time. While the penetration into the household PC market is not effectively stalled, it has definitely slowed. The rate of replacements, upgrades and new penetration is not expected to continue to grow beyond the 10 to 15% rate in the near term (Spooner, 2001).
1 This market becomes increasingly lowmargin as Dell and its competitors are aggressively marketing the low-end PC models. These “bare bones” models fall into the sub $1000 range (and falling) and include some of the older processing components. In this area Dell has clearly led the field in price competition. The low-end models of the PC market are encroaching upon the market share high-end, high margin models. Industry shipments of notebook computer grew nearly four times faster than the rate for desktops, and Dell claimed a disproportionate share of that volume.
Combined shipments of its Insperon and Latitude notebook computers rose at more than twice the industry average. Globally, the run rate for Dell’s portable computing business is nearly $9 billion, and nearly one in four notebooks sold in the U.S. last quarter carried the Dell name (Dell, 2001).2 This past fiscal quarter Dell overtook its No.1 competitor, Compaq as the world’s leading direct computer systems company and stands as a premier supplier of technology for the Internet infrastructure.
In similar fashion, Dell has been gaining market share in the higher margin PC server market segment, which is closely tied to and compliments the corporate PC market. The PC server market has been dominated by Compaq, Hewlett-Packard and IBM, however Dell announced Q4 Fiscal 2000 results that were surprisingly strong in this product segment. For the quarter, Dell shipments were up 43 percent overall, more than four times the industry rate and at multiples of the industry in all product categories, customer segments and geographic markets. Shipments of Dell Power Edge servers increased 63 percent and Dell accounted for 30 percent of global server growth, expanding at more than three times the industry rate and adding two full points of market share (Dell Delivers, 2001). 3
Companies in industries identified to be in the maturity stage understand that it is critical to increase market share domestically and aim toward expansion in less mature and emerging international markets. Growth at twice or more the overall industry rate in most geographic areas and product markets is a goal for Dell during the 2001 fiscal year.
So, to revisit the problem – a softening, or flat at best, industry market in the context of overall dampened consumer confidence coupled with the fact the PC industry is in a late growth or early maturity stage. The personal computer industry seems headed for a price war in its efforts to adjust to a slowing market. The entire industry is experiencing higher inventories and simultaneously intensifying competitive market environment. Several firms have dropped out of the retail computer market. And Apple has serious financial problems. To a considerable extent, what happens during the shakeout has been predetermined by how well the brand has been positioned in relation to its targeted segments, its distribution system, and its relative cost per unit.
Dell’s long-term goal should be to sustain high levels of cash flow generated by operating activities it all of its market segments and therefore sustain long term profitability. The strategy would require the uncontested vision of a CEO like Michael Dell and not just an expression of unfounded exuberance or corporate hype.
The Dell Direct Model seems to be the vehicle to achieve the goal of capturing increased market share and for further penetration into markets abroad.
The primary alternative should be for Dell to enhance and broaden the fundamental competitive advantages of its Direct Model by increasingly applying the efficiencies of the Internet to its entire business. Dell estimates that about 50 percent of its sales are web-enabled along with about 50 percent of Dell’s technical support activities and about 76 percent of Dell’s order status transactions occur online (Dell-FactPack, 2001). 4 Dell has managed to create a synergy through its web-enabled model, and is a key partner with many of its corporate and individual consumers in helping them deploy the technology they need to capitalize on the efficiencies of the Internet.
The efficiencies of the Dell Direct Model should incorporate a greater focus toward its medium and large business and institutional customers thereby complementing both the replacement and upgrade needs for PC hardware along with further penetration into the higher margin PC server and peripheral market segment.
Dell’s strategy is, and should remain, to be the price leader for the home and small business PC user. At the current time Dell seems to be strangling the competition by its willingness to aggressively cut prices. The capability to sustain its leadership position is enabled by its Dell Direct Model. While competitors have followed this path, it seems that none have moved along the learning curb and achieved the same synergies as has Dell. It is interesting that Dell has been able to achieve a disproportionate growth in its market share for its portable-computing business segment. This fact will position them to use the same pricing strategy in a growth segment of an overall mature market.
Dell is in a good position to continue capitalizing on its overall strategy of aggressive pricing, increasing market share exponentially and extending the Dell Direct Model into all product segments of the business, both domestic and abroad. Dell seems to be in a position to keep costs in line with the narrowing margins created by competition and aggressive price-cutting. Dell needs to be able to predict and pass on the benefit of the price cutting of components from suppliers and stay in control of inventories. This strategy could be bad news for shareholders in the near term as profits are squeezed while at the same time cash generated by operating activities must be channeled to constantly evolving the higher margin product lines such as PC servers, peripherals and notebook PC’s. This alternative is in line with the current Dell strategy. Many of Dell’s competitors in the home PC user market use the retail outlet to market and distribute its product. In recent years the “bare bones” models have posed a challenge to Dell’s comparable products offered online. Dell is showing every indication of going after that market by deeply discounting its competing product line. The danger for Dell is obviously an erosion of margin on an already low margin business. I believe their current market position, and the business fundamentals all point to moving forward with their current strategy. The Dell Direct Model gives them the vehicle to beat the competition.
The model must be constantly refined to assure that they can continue to gauge customer needs better than the competitors and to continually adjust their cost structure and production rates to the market. At the same time, Dell must be guarded with respect to cutting too deep into its design engineering, and customer service departments.