HBS case-dell_direct

HaimMendelsonpreparedthiscaseasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.Copyright©2000byHaimMendelson.Allrightsreserved.Toordercopiesorrequestpermissiontoreproducematerials,emailtheCaseWritingOfficeat:[e-mail]:CaseWritingOffice,StanfordGraduateSchoolofBusiness,518MemorialWay,StanfordUniversity,Stanford,CA94305-5015.Version:(A)11/01/00GRADUATESCHOOLOFBUSINESSSTANFORDUNIVERSITYCASENUMBER:EC-17NOVEMBER2000DELLDIRECTIn1995,amanagerfromaleadingJapanesecomputercompanywasrecountinghiscompany’splanstoconquertheUSPersonalComputer(PC)market:“Wehaveastrongbrandnameinconsumerelectronics,andwhat’smostimportant,webuildmanyofthecomponentsthatareneededinthePCourselves:monitors,audioequipment,CD-ROM,DRAM,andsoon.ThiswillgiveusatremendousadvantageoverAmericancompetitors,whohavetobuyeverythingoutside”[1].Severalyearslater,itlookslikethecompetitiveweaponofthisandotherJapaneseelectronicsgiantshadmisfired.Hitachi,SonyandFujitsuhavespentvastresourcestryingtocracktheUSPCmarket,buthadonlycapturedamarginalshare—andtheyhadlostmoneydoingit.Atthesametime,Texas-basedDellComputerCorporation,foundedby19-year-oldMichaelDellinauniversitydormitoryroom,wasgrowingrapidly,sustainingamuchlargerportionofthePCmarketthanallJapanesevendorscombined.AndwhiletheJapanesePCmanufacturerswereunabletoearnanymoneyintheUSmarket,Dell,whichproducesnoPCcomponents,washighlyprofitable,grewbymorethan50%eachyearoverthe1995-1998period,andsawitsstockgrowabout30,000%inadecade(seeExhibit1forDellfinancialsummary).Delldoesnotmanufactureanycomponents,butitcanproducecustom-builtPCsinamatterofhours.HowdoesDelldoit?WhydiditsucceedwheretheJapanesePCmanufacturersflounderedalongwiththerestofthePCindustry?HowdoesDellusetheInternettoachievecompetitiveadvantage?I.DELLBACKGROUNDThePersonalComputerIn1976,StephenWozniakandSteveJobssoldtheirworldlypossessions(aprogrammablecalculatorandaVolkswagen)sotheycouldstartAppleComputer,amanufacturerofPersonalComputers(PCs).TheApplePCbecamepopularwiththeinventionofVisiCalc,aspreadsheetprogramthatmadeinroadsincorporations.By1980,IBMrealizedthatthePCbusinesswasrapidlydeveloping,anddecidedthatitmustshipitsownPCwithinayear.Tomeetthischallenge,IBMoptedforanopenarchitecture,usingoff-the-shelfcomponentsandsoftwarethatwerepurchasedfromoutsidevendorslikeIntel(the8088microprocessor),Microsoft(theDOSDellDirectEC-17p.2operatingsystem)andTandon(thediskdrive).Moreover,IBMwentbeyonditsownsalesorganizationandusedcomputerretailerslikeComputerlandandSearsBusinessCenterstoselltheIBMPC.TheresultwasthattheIBMPCmetitsone-year,August,1981deadlineafirstforIBM.By1983,IBMcommandeda42%shareofthePCmarket,withApple’ssharebeingdrivendownto20%.ThePCfundamentallychangedthestructureofthecomputerindustryfromacollectionofvertically-integratedcorporationstoacollectionofhorizontal“slices,”eachfocusedonadistinctsegmentoftheindustry’svaluechain.Intel’sChairman,AndrewGrove,whobasedhiscompany’sstrategyonthistransformation,describeditasfollows:ThemodelofwhatIcalltheOldComputerIndustryasitusedtoexistbeforethepersonalcomputerconsistedofcorporationslikeIBM,DEC,NCR,NECandWang,whowouldcompeteinverticalblocksagainsteachother.Eachcorporationwoulddeveloptheirownsiliconcomponents,buildacomputerplatformaroundthatsiliconimplementation,developtheirownsystemsoftware,andtheneitherdeveloptheirapplicationsrunningontheirsystemsoftwareorhavethoseapplicationsdevelopedbythirdparties.Theywouldthenhavetheirownwing-tippedsalespeoplesellthosecomputerstocorporateaccounts.Eachoftheseverticalblocksthencompetedagainsttheotherverticalblocks.Thisishowthecomputerindustryandthebusinessofthecomputerindustrywaspursuedthroughoutitsexistence,untilthemid-80s.Inthemid-80s,thePersonalComputercreatedahorizontallystructuredindustry.ThisNewComputerIndustryislargelybasedonacommonsiliconplatform,uponwhichvariouscompaniesbuildaverystandardcomputerplatform,uponwhichyouputsystemssoftwarethatislargelycommonthroughouttheindustry,uponwhichyousellpackagedapplications,applicationsthatyoubuy,likerecordsorCDs,atastore.Whoeverhasastorefront,telephoneorwarehousecangetintothedistributionbusiness.1ThishorizontalstructureenabledIBM-PC“clones”likeCompaq,ahostofstart-upsandestablishedcomputerfirmslikeHewlettPackardtoenterthemarketandmanufacturetheirown,IBM-compatiblePCs.ThecutthroatcompetitionamongPCmakersshiftedthebulkoftheprofitstotwohighly-concentratedindustry“slices”:theoperatingsystem,whereMicrosofthadavirtualmonopoly,andthemicroprocessor,whichwasdominatedbyIntel.OneofthemanufacturersofIBM-PC“clones”wasDell.Dell:BirthandChildhood(1983-1990)In1983,MichaelDellwasacollegefreshman,whoupgradedIBM-compatiblePCsinhissparetimeinhisdormroomattheUniversityofTexasatAustin.Dellquicklyrealizedthatinsteadofupgradingoldermachines,hecouldbuycomponentsandassembletheentirePCmorecheaplybyhimself.Then,hewouldsellthePCwithhisnameonitdirectlytocustomersata15%discounttoestablishedbrands.Dellsoonstartedadvertisingintrademagazinesandorderskeptcoming.Withinayear,Dellhadtodropo