Dell Stakes Success On Build-To-Order Strategy
Sept 21, 1998 Informationweek magazine. (thanks to Lester Fong)
techweb.com
September 21, 1998, Issue: 701
Section: Hardware
Dell Stakes Success On Build-To-Order Strategy
Jennifer Mateyaschuk
After 18 quarters of revenue growth, with quarterly increases
topping 40% and profits that more than tripled from 1995 to
1997, Dell Computer seems unstoppable. But can this ambitious
PC vendor keep grabbing market share from competitors such as
Compaq, Hewlett-Packard, and IBM?
Dell's success is attributable to its direct sales structure, in which
the company does its own sales, cutting out the resellers,
distributors, and third-party manufacturers that frequently get
between PC makers and their customers. The return on this
model has been high customer praise for Dell's Internet business,
customer-service strategy, and build-to-order PC model.
In a recent purchase of PCs and servers, Sprint found that "Dell
was the only build-to-order manufacturer with solid, dependable,
and interchangeable parts," says Lorin Olsen, senior manager of
enterprise network services for the telecommunications
company, which already has more than 30,000 Dell machines.
Analysts agree that Dell's business model is responsible for its
success. "Dell's business model is what most suppliers are trying
to achieve," says Nimisha Patel, a senior analyst for the
Aberdeen Group. "PCs are all somewhat the same. It's the
business model and the ability to satisfy customers that can
determine success."
Dell's Internet business jumped from about $1 million a day to
$6 million a day in the last 18 months. Online purchases keep
costs down and customers satisfied, Dell says.
Dell has two types of Internet customers. The first is the
transactional consumer and small business, which tend to order
individual products. The second is large companies that use
Dell's Premier Page initiative to order parts, machines configured
to their specifications, updates, and customer service. They can
track orders to see where they are in the process.
For example, Shell Oil Corp., has its own customized Web page
that contains a purchase program with which employees can
order machines configured to Shell's specifications. Sprint, too,
has a Premier Web Page, but uses it for information only; it buys
equipment through a sales rep.
"The majority of our Internet customers are from transactional
oriented consumers and small businesses," says Kevin Rollins,
Dell's vice chairman. However, only about one-quarter of Dell's
total business is in that sector; larger companies and institutions
make up the rest. Dell plans to derive half of its business from
the Web in the next five years by providing dedicated salespeople
to customers and by designing custom Web sites.
Tech support over the Internet has been particularly successful
for Dell, with only 20% of its tech support requiring an on-site
technician. "These problems can be addressed via the Net,
leaving an opportunity for us to reduce costs," says Ro Parra,
VP of America's sales and Dell services strategy.
Dell receives more than 40,000 E-mails for service and support
each month. It averages five Web-site visits for every phone
call-at a savings of $8 for every customer who uses the Web
instead of the phone.
Simultaneously, customers are satisfied with Dell's service. Dell
got top ratings in Technology Business Research's survey of 243
U.S. technology managers, outranking IBM, HP, and Compaq in
customer satisfaction.
Manufacturing Efficiency
Dell's manufacturing and distribution processes also keep costs
down. The build-to-order approach resulted in a return on
investment of 217% last quarter and let Dell hold inventory to an
eight-day average.
Kmart Corp. this summer bought a "point and purchase" system
running on Dell OptiPlex PCs and PowerEdge servers to let
customers browse and place orders. "The kiosks needed a
specific application for Kmart customers," says Parra. "Most
vendors would have to take the box off the assembly line, unbox
it, put in the requirements, and then ship it." But Dell configured
the systems as they rolled down the line, so when they got to the
stores, they were up and running, says Parra.
Dell's direct sales model also leads to efficiencies. It segments its
customers into categories such as consumer, medium business,
large corporate, enterprise, and education. Each segment has its
own sales, marketing, and technical support teams. "This method
lets us tailor our marketing, sales, and services strategy to the
uniqueness of that customer type," says Parra.
Desktop systems accounted for two-thirds of Dell's revenue for
the second quarter of fiscal 1998. Server sales show steady
growth, accounting for 12% of revenue in the second quarter-up
8% year-over-year-and 11% in the first quarter of 1998.
Dell is increasing its emphasis on storage and Fibre Channel
products. Earlier this year, the company partnered with Data
General to make Fiber Channel-based storage systems. Dell has
more than 30 accounts and expects general availability late this
month.
The PC maker also plans to increase its international presence.
The company could raise its growth rate if it captured the same
share of the market worldwide as it holds in the United States,
says Rollins. Dell held nearly 13% of the U.S. desktop market in
1997, according to Dataquest, and its revenue mix is highly
concentrated in the United States. "We're pushing toward a more
normal mix of 50% in the U.S. and 50% for the rest of the
world," Rollins says.
Just last month, Dell opened a manufacturing facility in China
and kicked off direct sales in nine Chinese cities. Only 6% of
Dell's revenue now comes from the Asia-Pacific region, so the
company plans for major growth there. Dell also plans to expand
in South America and will soon unveil a new manufacturing
facility in Brazil.
What can hold Dell back? Customers continuing to spend on
year 2000 in lieu of hardware purchases, for one, analysts say.
Dell's growth, as well as the growth for the PC industry,
"depends on what's going to happen over the next two years with
year 2000 and how PC demand is affected," says Aberdeen's
Patel.
But as far as Dell is concerned, it will continue to expand the
direct model to deliver products ahead of competitors; focus on
customers relations; bring new technologies to market; and push
into international markets. The company sees a tremendous
opportunity for growth, says Carl Everett, senior VP for the
personal systems group. And Dell won't slow down, he says,
because its strategy is aimed at preventing the company from
becoming lethargic. |
