HBS-Matching-Dell-(9-799-158)

DONOTCOPYHarvardBusinessSchool9-799-158June6,1999ProfessorsJanW.RivkinandMichaelE.PorterpreparedthiscasefrompublicsourceswiththeassistanceofResearchAssociateFaramarzNabaviasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.ThecasedrawsonareportpreparedbyCharlieBruin,MarkusCappel,TomGalizia,andLailaWorrell,allMBA1998.Copyright©1999bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685orwriteHarvardBusinessSchoolPublishing,Boston,MA02163.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,usedinaspreadsheet,ortransmittedinanyformorbyanymeans—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1MatchingDellBetween1994and1998,therevenueofDellComputerCorporationrosefrom$3.5billionto$18.2billion,andprofitsincreasedfrom$149millionto$1.5billion.Thecompany’sstockpriceroseby5,600%.Duringthesameperiod,Dellgrewtwiceasfastasitsmajorrivalsinthepersonalcomputermarketandtripleditsmarketshare.Inthefirsthalfof1998,DellreportedoperatingearningsthatweregreaterthanthepersonalcomputerearningsofCompaq,Gateway,Hewlett-Packard,andIBMcombined.1OnForbesmagazine’slistoftherichestAmericans,MichaelDell,the33-year-oldfounderofDellComputer,rankedfourthwithanestimatedworthof$13billion.HetrailedonlyBillGates,WarrenBuffett,andPaulAllenonthelistandwasworthmorethanGateshadbeenatthesameage.2DellComputerhadpioneeredthewidelypublicized“DirectModel”inthepersonalcomputer(PC)industry.Whilecompetitorssoldprimarilythroughdistributors,resellers,andretailsites,Delltookordersdirectlyfromcustomers,especiallycorporatecustomers.Onceitreceivedanorder,Dellrapidlybuiltcomputerstocustomerspecificationsandshippedmachinesdirectlytothecustomer.ThesuccessoftheDirectModelattractedtheintensescrutinyofDell’scompetitors.By1997,headlinessuchas“NowEveryoneinPCsWantstoBeLikeMike,”“CompaqReengineerstheChannel:WillItBeEnoughtoSlowDell’sMomentum?”and“InSearchofGreenerPastures,GatewayMovesonDell’sTurf”pepperedthePCtradepress.3Bylate1998,virtuallyeverymajorPCmanufacturerhadtakensomesteptomatchDell’sapproach.ThePersonalComputerIndustryHistory.ElectroniccomputersemergedfrommilitaryresearchundertakenduringWorldWarII.In1949,themagazinePopularMechanicspredictedthat“Computersinthefuturemay…perhapsonlyweigh1.5tons.”Forthefollowingthreedecades,largemainframeandminicomputers,producedbyverticallyintegratedfirmssuchasIBMandDigitalEquipmentCorporations(DEC),dominatedthemarket.Aslateas1977,KennethOlsen,founderofminicomputermakerDEC,opined,“Thereisnoreasonforanyindividualtohaveacomputerintheirhome.”4DONOTCOPY799-158MatchingDell2However,electronichobbyistswerealreadypurchasingmail-orderandretailkitswhichallowedthemtoassembleprimitivecomputersathome.Thesekitspiecedtogethercomponentsthatwereeitheraltogethernewornewlyaffordable:microprocessorsmadebystart-upssuchasIntel,random-accessandread-onlymemories,powersupplies,andsoforth.(AGlossaryattheendofthecasedefinestechnicalterms.)Between1975and1981,aseriesoffirmsbegantoofferincreasinglyintegrated,pre-assembledpersonalcomputers.5Start-upssuchasAppleComputerandMITS,andmidsizefirmssuchasTandy/RadioShackandCommodore,ledtheearlymarket,gainingpopularityamonghobbyistsandeducationalinstitutionswitheasy-to-usemachinesforordinarypeople.EstablishedfirmsincludingTexasInstruments,Hewlett-Packard,Zenith,NEC,Xerox,IBM,Toshiba,Sanyo,Sony,Olivetti,Wang,andDECsoonjoinedtheentrepreneursandbegantoproducePCs.IBMlauncheditsfirstPCin1981and,twoyearslater,held42%ofthemarket.Withaworld-renownedcorporatesalesforceandserviceorganization,IBMcommanded61%ofthemarketformainframecomputersandproducedmanyofthecomponentsforitsmainframes.6InlaunchingitsPC,however,IBMpurchasedmanycomponents.Itcommissionedastart-upsoftwarefirm,Microsoft,towritetheoperatingsystemforitsPCandadoptedamicroprocessorarchitecturedesignedbyIntel.PublishingmostofthespecificationsforitsPCsystem,IBMestablishedan“openarchitecture”toencouragesoftwaredeveloperstowriteprogramsfortheIBMPCandtospurotherfirmstomakecompatibleperipheralssuchasprinters.MostoftheindustryrapidlyralliedaroundtheIBMstandards.By1983,themajoralternativestandard,aproprietarysystemchampionedbyApple,heldonly20%ofthemarket.7IBMuseditshugesalesforcetosellpersonalcomputerstolargecorporateaccounts.VolumediscountsencouragedlargefirmstocentralizePCpurchasesthroughcorporateMISdepartments,withwhomIBMsalespeoplehadstrongrelationships.Toservesmallbusinessesandindividuals,IBMturnedtoretailstoressuchasSearsandComputerland.8Italsoencouragedthedevelopmentofanetworkofdistributorsanddealersknownasvalue-addedresellers.TheseresellersnotonlysoldPCstocustomers,butalsoguidedthemthroughthepurchaseofwhatwasstillanunfamiliarproduct.Resellerscommonlyhandledinstallation,configuredsoftware,piecedtogethercustomernetworks,andservicedmachinesonanon-goingbasis.Insmallandmidsizebusinesses,employeesrarelyhadtheskillstodowhatresellersdid,andfewcompanieshadenoughPCstojustifyhiringtrainedpersonnel.Asdemand