Saturday, May 19, 2007

Dell’s Dilemma - Part One

World’s leading computer maker Dell is finding itself in troubled waters these days. After loosing Numero Uno position in PC sales to HP [link](Since margin is very less the position keeps swinging...this report says Dell has regained its position), after founder Michael Saul Dell taking over as CEO, Dell appears to be uncomfortable with its legendary Direct to Customer Business Model and is reportedly considering opening retail stores/appointing resellers to promote business. (Ref: Business Standard dated 18-May-2007)

This blogger has decided to come up with a 3 part series in this regard. In the first part I'll do a quick analysis of Dell’s Business Model, in second part we'll analysis merits and de merits of Dell's strategy and demands of current market scenario in detail and in last part, we'll try to come up with a feasible solution for Dell's crisis: possible options and approaches Dell Inc may consider as a part of its future plans such as feasibility of conventional business model for Dell (of via-resellers) and related information.

Quick Background: The main difference between Dell and its competition is that Dell has no middlemen, no resellers, no company showrooms. A prospective customer deals directly with Dell (by phone or website), and gets his/her computer delivered home by Dell. This results in lots of cost saving (which otherwise would have been spent in running a showroom, dealer/reseller’s commission, inventory carrying cost etc) and most of the savings are passed directly to the customers, making Dell products always cheaper than competition for any given configuration. Because of this advantage Michael Dell and his company was able to steal millions worth business from IBM and other PC vendors and reach top of the chart within decades.

There was a time when Dell was envied by rest of the competition. Most of them tried to imitate Dell’s Direct to Customer Business Model while retaining their existing sales stream and failed pathetically (because it is not feasible to mix conventional sales channel with Direct model). IBM eventually had to sell its PC business to Chinese based Lenovo, Compaq merged with Hewlett Packard. These companies worked hard to achieve cost efficiency and brought down the cost advantage Dell hitherto had, by increasing sales volume and by increasing operational efficiency. They had the backing of a robust sales and distribution network which Dell never had. All these factors have eventually led to Dell loosing its Business and suffering losses.

So should Dell change its Business Model? What are the advantage and disadvantage Dell has over its competition? Check it out in Part 2