Introduction

Dell, Inc. was the world’s market leader in personal computers using direct sales through the Internet and over the telephone until 2005. In 2006, it experienced an unexpected decline in market share in the United States. In 2007, the company had a continuing slide in worldwide market share as it experienced difficulties in penetrating the growing Chinese and Indian markets.
In early 2007 Michael Dell, the founder of the company and still Chairman of the Board, took over direct control as Chief Executive Officer. In addition to making changes in advertising and customer support that had been promised earlier, he made changes in the basic business model. He began selling through Walmart stores in the United States. The company has since begun selling through selected stores in a number of countries worldwide.

In 2010, Dell was operating under a new business model but still experiencing some of the same problems that it had encountered under its previous model. In its fiscal year 2010, both sales and profits declined from 2009 (Dell, Inc. Annual Report 2010). In this case, we look at: 

(1) the reasons for Dell’s success in using direct selling; 

(2) the problems that arose and reasons for changing the business model to include distribution through retailers; 

(3) how the model had been adjusted in three of its overseas markets;

(4) the constraints on its actions as it attempts to turn the company around.

Innovation and growth 

Dell, Inc., founded in 1984, became the world market leader in PC sales through its business model of selling directly to purchasers online or by telephone. The company believed that its direct business model eliminates retailers that add unnecessary time and cost, or can diminish Dell’s understanding of customer expectations.
The direct model allows the company to build every system to order and offer powerful, richly configured systems at competitive prices (www.dell.com, 29 September 2006).
The company further indicated that this model allowed them to introduce new technology more rapidly than companies selling through distributors since there are no existing inventories to consider. Dell attempts to maintain cost (and price) leadership through production efficiency and through using its size and high rate of growth to obtain the best prices on component parts.
By directly interacting with the customers, the company also had success in attracting customers to its website with very low-cost models, and then getting the customers to buy much more expensive models with ‘all the bells and whistles’ (Byrnes et al., 2006, 28). Together, these policies led to rapid growth in sales and increasing profits. Dell’s marketing model was so successful that it was cited as one of ‘The world’s 25 most innovative companies’ by Businessweek (McGregor, 2006). Thomas Friedman, in his book The World Is Flat, devoted a whole chapter to the Dell system (Friedman, 2005).

Dell has three regional business units:

● Dell Americas, with manufacturing facilities in the United States and Brazil, and regional offices in nine countries;

● Dell Europe, Middle East and Africa, with manufacturing in Ireland, and regional offices in 29 countries; 

● Dell Asia Pacific and Japan, with headquarters in Singapore, manufacturing in Malaysia and China, and regional offices in 11 countries.

Dell Americas provides 65% of the company’s revenues, Europe Middle East and Africa, 21%, and Asia Pacific and Japan, 14%. The company was doing very well in 2005. It was the leading seller of PCs in the United States with 33% of the market (Pimentel, 2006a). In Germany, it increased its share of the more fragmented market to 12.6%, putting it in third place behind Fujitsu Siemens Computers and Hewlett-Packard (Ewing, 2006). Overall in Europe, it was number two in the market. In midyear, Dell increased its share of the highly fragmented Japanese market, at least temporarily meeting its long-term goal of passing Fujitsu to become number two in the market for PCs (The Nikkei Weekly, 2006). It was number one in the world overall market for PCs.

In addition to notebook and desktop PCs, Dell produces other standardized product categories, including network servers, workstations, mobility products, printers, and other electronic products and accessories. PCs still provide most of their revenue, and are the major product discussed in this case study. References are made to Dell’s experiences with other products where appropriate to illustrate differing approaches and problems.
In 2006, Dell was displaced as market leader in the United States, and in the world overall, by Hewlett-Packard Inc. In 2002, HP had purchased Compaq Computer Corporation, a major producer and marketer of PCs, for $19 billion. Over the next three years, HP had reduced PC manufacturing costs substantially in order to compete more effectively with Dell, and took the marketing steps noted in the next section. While HP was increasing both sales and market share, Dell lost position. In 2006, for the first time in over ten years, Dell’s sales grew more slowly than the overall US market for PCs (Lawton, 2006; Pimentel, 2006a).

One major difficulty for Dell was that it remained overly dependent on its home market where HP was particularly strong. Dell also continued to struggle in the rapidly growing markets of China and India where people prefer to buy in person from vendors rather than over the Internet or by telephone (Slagle, 2006). In the two countries in which its market share had increased, Germany and Japan, Dell had adjusted its business model.
Dell’s problems and successes appear to be the result of a combination of the changes in the types of computer demanded by the US market, and by culture-specific factors in other markets. In the United States, the problems included changes in the types of PC demanded, problems related to quality and service, and the company’s reluctance to change its business model in the face of changing market conditions. In Germany, its success appeared to be due to modifications to its basic marketing model that provided a better fit to the German culture (as discussed below).

In Japan, Dell is providing PC models well suited to current Japanese customer preferences. There the availability of the unique delivery-and-payment system provided through the ubiquitous convenience stores (again as discussed below) facilitates direct sales. However, the rapid growth in private brands sold by major Japanese consumer electronics retailers is a threat. In China and India, its basic business model of online and telephone ordering is not consistent with consumer preferences.

Problems and possible responses in the US market

Dell’s declining market share in the United States was the result of a combination of factors: changing market demands; problems with customer satisfaction regarding sales and service; and increasing competition.

Sales to businesses (rather than individuals) have been Dell’s primary target market and account for 85% of its revenue. Its model of keeping marketing costs low through selling over the Internet and by telephone was very successful. With the large number of desktop units typically sold to any given business, a small Dell sales staff could, if necessary, go to the purchasing company’s offices to meet with appropriate decision makers. Additionally, with the large numbers of units in any given company, arrangements for service were relatively easily made. With the desire of most companies to have the same brand and similar models of computers at every workstation, the preferences of individual workers were of little or no importance.

Dell also made sales to individuals, though this was not the primary market. There were drawbacks to Dell’s traditional model that were of concern to a number of potential individual customers. The purchaser did not have an opportunity to compare Dell computers with other brands at retailers. Some parts were only available directly from Dell and some repairs had to be made at Dell’s factories or service centers. Thus an individual purchaser might have to send his or her computer back to the company for service, involving additional trouble and the loss of the computer for possibly long periods of time while it was gone.

A shift in demand in the United States away from desktop models to laptop models exacerbated the problem for Dell. An increasing share of the sales of laptops is being made to individuals rather than to companies. While individuals make up 30% of HP’s sales of PCs, they provide only 15% of Dell’s PC sales. Individual consumers tend to like to compare, hold and test PCs, and, particularly with laptops, often want to take their purchase with them when they have made their selection, but Dell has not had its computers in stores. The share of direct sales of notebook computers in the United States has fallen from 50.2% to 43.7% in two years (direct sales by all companies included). The problem for Dell is growing: it is forecast that sales of laptops to individuals will be substantially higher than those to companies by 2010 (Lawton, 2006). An attempt to boost profits in fiscal year 2005 by deeply discounting prices increased unit sales but reduced profits for a period of time. Elasticity of demand with respect to price for PCs in the United States was lower than expected and prices of component parts did not drop as rapidly as the company expected. Unit sales in Europe and China did increase for a period of time, but Dell subsequently lost market share in China (McWilliams, 2005).

Dell also experienced increasing problems with customer satisfaction regarding sales and service. As a cost-cutting strategy, Dell had changed from using a majority of full-time employees at its call centers to 75% part-time employees. Turnover had reached 300% by late 2005 (Lawton, 2006). One former large customer who switched to HP complained that Dell PCs and servers proved too hard to maintain and operate. He felt that Dell had tried to produce too many different products at once (Byrnes et al., 2006). Their problems in introducing plasma screen TVs, a product probably not well suited to Internet and telephone sales, would seem to be a case in point.

Another problem is changing competition. Hewlett- Packard, second in the US market with a share of 27% and increasing, has made key changes in its position in the market (Pimentel, 2006a). In addition to cutting costs and prices to become competitive with Dell, as noted above, it added additional features to its laptops in order to make them more attractive. HP has also stepped up marketing efforts. It opened build-your-own PC operations within a number of Walmart stores, directly challenging Dell’s strength in building to order. It sent district managers to meet with retail stores to improve customer service and provide greater assistance to customers during back-toschool times. Other PC makers such as Lenovo and Acer Group are also growing and eroding Dell’s cost advantage by obtaining notebook PCs from some of the same Asian original equipment manufacturers that Dell uses. Dell’s competitors are making such powerful PCs that Dell’s made-to-order pitch may be losing its cache (Byrnes et al., 2006). Dell is taking a number of steps to try to fix their problems.

The company is spending money on improving customer service by hiring more support people and offering an over-the-Internet support service for Dell PC owners.
It is overhauling its website, changing its pricing structure, and increasing advertising. Until 2006, Dell refused to make PCs with anything except Intel processors, even though an estimated 20% of the market prefers PCs with processors from AMD. Now it has begun to offer some PCs with processors from AMD (Pimentel, 2006b). Finally, Dell experimented with two retail stores that displayed its products and where customers could place orders for computers. However, potential customers still could not compare different brands there, and even if they decided they wanted a Dell PC they could not actually leave with one since the stores carried no inventory. In 2005, it sold some PCs through Costco Wholesale Company for the first time, but it indicated that this was a one-time deal for PCs coming to the end of their product life cycle (Lawton, 2006; Slagle, 2006). How successful any or all of these programs may be has yet to be determined.
The major problem with Dell’s approach in the US market was considered to be top management’s continued strong adherence to the traditional model that served it so well in the past. That is, the company still seemed to remain ‘slavishly loyal to its core idea of ultra-efficient supply-chain management and direct sales to consumers’
while competitors’ sales through stores appeared to be increasingly effective in the changing market (Byrnes et al., 2006, 27). Former Dell managers indicated that new ideas that move away from the direct sales model were discouraged.

Approaches in the German market 

Dell entered the German market in 1988, but initially had problems in gaining market share. In 2006, conditions were improving under Alain D. Bandle, the Swiss citizen who now runs Dell’s German operation. Dell was the only company there, besides HP, to be increasing sales in the declining market for PCs, and moved from 5th to 3rd place in market share. The key appeared to be that Bandle was allowed to make adjustments to the company’s basic approach.
Bandle understood that German customers, including the business customers who account for 90% of the revenue, still prefer a high level of personal contact at the beginning of business relationships. Once a business has made an initial purchase from a salesperson, it is willing to make further purchases over the Internet. Additionally, while most Germans are willing to deal with foreigners on technical issues, they prefer to make purchases from native speakers. Bandle thus hired almost 500 new salespeople to serve business customers. Though the company has an existing facility in Bratislava, Slovakia, he opened a new center in Halle, Germany, to promote sales to small businesses and government offices. Bandle also managed to increase sales to individuals.

He discovered that one of Dell’s models had features attractive to advanced computer game players. Additional promotion of that model made it a best seller. He also advertised the advantages of Dell’s build–to-order system. This system is able to provide custom-made PCs with more power and options than the discount chain offerings of basic identical PCs selling at very cheap prices. The promotion has increased sales in this area. (This section drew largely on information in Ewing, 2006.)

Approaches in the Japanese market 

Dell’s current success in Japan is based on an approach that is different from that taken by the German subsidiary and differs in some ways from that used by the company in the United States.
Many Japanese are reluctant to buy over the Internet or by telephone if they must make an advance payment.
The major concern is about the security of giving out credit card information over the Internet, and there is also some concern about whether suppliers will actually make shipments after they have received payment. The 7-Eleven convenience store chain developed a service in which customers can order products over the Internet and have them shipped to a nearby 7- Eleven store. The customer then pays the store for the goods by credit card, or in cash as many Japanese prefer, when picking up the merchandise. The store then forwards the money, minus a small fee, to the marketer. The system works efficiently because of a combination of factors. Most Japanese live within a short distance of, or pass by on the way to and from work, at least one of the over 10,000 7- Eleven outlets in Japan (see Case study 4.2). Private delivery systems are quick and reliable and, with the difficult-to-find addresses of many individuals in Japan, it is easier to deliver packages to the stores than to individual homes. The store benefits from the small fee and, more importantly, from additional purchases made by many of the people stopping by to pick up merchandise. This system, which is widely used by the Japanese, facilitates Dell’s Internet and telephone sales model.

In Japan, Dell sells to business and government users who require substantial personal interaction before making initial purchases. They adjusted their marketing to business and government users appropriately. For individual consumers, Dell targeted the markets for inexpensive desktops with simple specifications and low-end laptops.

An article in The Nikkei Weekly noted that many of today’s PC buyers in Japan are in the market for an additional machine or a replacement, and are looking for ‘a machine with barebones specs’ (The Nikkei Weekly, 2006). Japan’s brand-name manufacturers, such as NEC, Fujitsu, and Toshiba, have focused primarily on multi-function PCs costing two to three times as much as the lower-end PCs.

The Japanese market share of the more expensive PCs is presently declining, though the long-run trend is not clear. The major threat to Dell Inc. in the low-end desktop market is from private-brand manufacturers serving as original equipment manufacturers for retailers. In early 2006, Dell replaced Fujitsu as number two in the market, in part due to a one-time order from the Japanese Defense Agency (ibid).

Problems in the Chinese market 

The market in China is large and growing rapidly. Dell entered the Chinese market in 1998, initially focusing on corporate customers. They did use some ‘outside sales’ staff making visits to organizations, the largest being governmental bodies and government-owned corporations.

But in order for an individual to purchase a PC, he or she had to visit a Dell office or contact the company through their website or through newspaper advertisements. At first, Dell did use some distributors, but subsequently stopped using them. Some retailers purchased directly from Dell and then resold the PCs at higher prices. Dell had hoped that after dropping distributors and stopping sales to unauthorized retailers, it could use its US business model of direct selling. However, direct selling did not result in a satisfactory level of sales. (Ng et al., 2003).

Dell’s model of direct selling via the Internet and telephone is still not working well in China. The Chinese market is growing rapidly, but even among business people there is a strong preference by buyers for seeing the products before they make purchases. Competitors Lenovo, HP, and Founder are selling through retail stores in both large and smaller-size Chinese cities. Lenovo, the market leader, has over 4,800 retail outlets, and also has installed education software on a desktop model designed specifically for families. Consumer demand is growing more rapidly than that of the businesses that comprise Dell’s primary target, and relatively few Chinese have credit cards and fewer still are used to buying over the telephone or Internet (Lee et al., 2005). While China has an increasing number ofn7-Eleven stores, the pattern of distribution does not appear to make the Japanese model of distribution feasible. With the rapid growth of manufacturing by Chinese companies, the lower end of the market may become too competitive to provide an acceptable level of profit unless Dell can become even more efficient. It appears that Dell must make substantial adjustments to its model if it is to succeed in China.

Constraints in addressing the worldwide problems 

By the end of 2008, Dell’s market share of the worldwide market for PCs had dropped to 14.2% while HP’s had increased to 18.8%, and Acer was challenging with 12.5% (Scheck and Vranica, 2008). Some cost cutting, including reducing the number of employees, has kept the bottom line from falling further. Unfortunately, one legacy from the past business model has kept Dell from making even greater cuts in costs. A key advantage of its online and telephone model was a build-to-order system that allowed the company to provide a quick response for specific capabilities in each PC. As part of this system, Dell did not keep inventories. It kept up with increasing demand by building more US plants in the United States while competitors were shifting production to cheaper Asian countries. Dell is now stuck with higher manufacturing costs than its competitors, thus keeping its profit margins lower.

Dell had tried a number of initiatives in its overall business. It had placed high hopes on becoming a leader in the growing market for servers, which is making money for them and providing a higher profit margin. HP has taken the lead in the market, but Dell still hopes to grow its server business. Dell had looked at entering the mobile phone business but was held back by concerns over the high cost of entry (Scheck, 2008). How well Dell can deal effectively with its various problems remains to be seen.

Questions
1. Should Dell have made changes to its marketing model in the United States earlier?

2. What problems may Dell encounter in its change in approach in the United States and elsewhere?

3. Is the use of native speakers, as in Germany, important elsewhere in Europe?

4. Is Dell’s Japanese marketing model likely to be successful in the long run?

5. What marketing model should Dell use in China?

6. What marketing model should Dell use in India?