Operations in practice Dell: no operating model lasts forever
When he was a student at the University of Texas at Austin, Michael Dell’s sideline of buying unused
stock of PCs from local dealers, adding components, and re-selling the now higher-specification
machines to local businesses was so successful he quit university and founded a computer company
which was to revolutionize the industry’s supply network management. But his fledgling company was
just too small to make its own components. Better, he figured to learn how to manage a network of
committed specialist component manufacturers and take the best of what was available in the market.
Dell says that his commitment to outsourcing was always done for the most positive of reasons. ‘We
focus on how we can coordinate our activities to create the most value for customers’. Yet Dell still
faced a cost disadvantage against its far bigger competitors, so they decided to sell its computers direct
to its customers, bypassing retailers. This allowed the company to cut out the retailer’s (often
considerable) margin, which in turn allowed Dell to offer lower prices. Dell also realized that cutting out
the link in the supply network between them and the customer also provided them with significant
learning opportunities by offering an opportunity to get to know their customers’ needs far more
intimately. This allowed them to forecast based on the thousands of customer contact calls every hour.
It also allowed them to talk with customers about what they really want from their machines. Most
importantly it allowed Dell to learn how to run its supply chain so that products could move through the
supply chain to the end-customer in a fast and efficient manner, reducing Dell’s level of inventory and
giving Dell a significant cost advantage. However, what is right at one time may become a liability later
on. Two decades later Dell’s growth started to slow down. The irony of this is that, what had been one
of the company’s main advantages, its direct sales model using the Internet and its market power to
squeeze price reductions from suppliers, were starting to be seen as disadvantages. Although the
market had changed, Dell’s operating model had not. Some commentators questioned Dell’s size. How
could a $56 billion company remain lean, sharp, and alert? Other commentators pointed out that Dell’s
rivals had also now learnt to run efficient supply chains (‘Getting a 20-year competitive advantage from
your knowledge of how to run supply chains isn’t too bad.’) However, one of the main factors was seen
as the shift in the nature of the market itself. Sales of PCs to business users had become largely a
commodity business with wafer-thin margins, and this part of the market was growing slowly compared
to the sale of computers to individuals. Selling computers to individuals provided slightly better margins
than the corporate market, but they increasingly wanted up-to-date computers with a high design value,
and most significantly, they wanted to see, touch and feel the products before buying them. This was
clearly a problem for a company like Dell which had spent 20 years investing in its telephone- and later,
internet-based sales channels. What all commentators agreed on was that in the fast-moving and cut-
throat computer business, where market requirements could change overnight, operations resources
must constantly develop appropriate new capabilities. However, Michael Dell says it could regain its
spot as the world’s number one PC maker by switching its focus to consumers and the developing world.
He also conceded that the company had missed out on the boom in supplying computers to home users
– who make up just 15% of its revenues – because it was focused on supplying businesses. ‘Let’s say you
wanted to buy a Dell computer in a store nine months ago – you’d have searched a long time and not
found one. Now we have over 10,000 stores that sell our products.’ He rejected the idea that design was
not important to his company, though he accepted that it had not been a top priority when all the focus
was on business customers. ‘As we’ve gone to the consumer we’ve been paying quite a bit more
attention to design, fashion, colors, textures and materials.’
