Dell Computer Corporation Case summary As of august 2002, Dell Computer Corporation was the world largest direct
selling computer company. Headquartered in Austin, Texas, Dell had gained a reputation as one of the world’s most preferred computer system company and a premier provider of products and services that costumers worldwide needed to build their information technology and internet infrastructures. Dell was founded in 1984 by Michael Dell, who, in 2002, was the computer industry longest-tenured CEO. The company was based on a simple concept: that Dell could best understand consumer needs and` efficiently provide the most effective computing solution to meet those needs by selling computer system directly to costumers. The traditional value chain in the personal computer industry was characterized as build to stock. PC manufacturers design and build their product with preconfigured option based on market forecast. Products were first stored in company warehouses and latter dispatches to resellers, retailers and other intermediaries who typically added a 2030% mark up before selling to their customers. PC manufacturers controlled the upstream part of the value chain, giving the downstream to the middlemen. Retailers justified their margins by providing several benefits to customers: easily accessed locations, selection across multiple brands, opportunity to see and test products before purchasing, and knowledgeable salespeople who could educate customers about their choices. Turning Michael Dell concept to reality meant rallying a large and dynamic organization around a common purpose and measuring its performance by relevant and concrete measurement (or metrics).
Dell’s scorecard included both financial measures: ROIC, average selling price, component purchasing costs, selling and administration costs, and margins) and nonfinancial measures (component inventory, finished goods inventory, account receivable days, account payable days, cash conversion cycle, stock outs, and accuracy of forecast demand). The scorecard was generated on real time basis, and relevant performance measures were broken down by customers segment, product category, and country.
Questions & answers What is Dell’s strategy? What is the basis on which Dell builds its competitive advantage? Dell’s strategy is Strategic positioning Type of advantage: lower cost most savings are passed through to the end consumer Competitive scope: narrow while the competitive set offered a broad range of computers (PC up to fail-safe servers), Dell focused on PC (96.8% of revenue came from PC sales). Dell employed a cost based focus strategic positioning, Dell’s competitive advantage through lower costs manifested in all of the value chain activities: inbound logistics, input suppliers (suppliers are co-located), assembly (build-to-order), outbound logistics (no unnecessary shipments back and forth), distribution channel (eliminating middlemen), and product service (online and on-site 24/7 support) Eliminating middlemen in distribution resulted in the following savings: • No buyback or price protection since Dell was not dealing with resellers and distributors 2.5 cents on every dollar of revenue, savings of $0.5bn
Total addition to gross margin in 1994 is 12%. When Dell tried to sell through retailers, price in the retail channel was 88% of the price in the Direct Model.
No advertising to resellers and distributors, funding the market development activities of channel players
Based on the concept, the strategies are: Build-to-order manufacturing, mass customization, and partnerships with suppliers Dell customers could order custom-built servers and workstations based on the needs of their applications. Michael Dell believed it made much better sense for Dell Computer to partner with reputable suppliers of PC parts and components rather than to integrate backward and get into parts and components manufacturing on its own. Just-in-time components inventories Dell's just-in-time inventory emphasis yielded major cost advantages and shortened the time it took for Dell to get new generations of its computer models into the marketplace. Direct sales Selling direct to customers gave Dell firsthand intelligence about customer preferences and needs, as well as immediate feedback on design problems and quality glitches. Customer service
Service became a feature of Dell's strategy in 1986 when the company began providing a guarantee of free on-site service for a year with most of its PCs after users complained about having to ship their PCs back to Austin for repairs. Dell contracted with local service providers to handle customer requests for repairs; on-site service was provided on a next-day basis. Dell also provided its customers with technical support via a toll-free number, fax, and e-mail. If a customer preferred to work with his or her own service provider, Dell gave that provider the training and spare parts needed to service the customer's equipment. Extensive data and information sharing with both supply partners and customers. Dell’s blur the traditional arm's-length boundaries in the supplier- manufacturercustomer value chain that characterized Dell's earlier business model and other direct-sell competitors using the strategy. Michael Dell referred to this feature of Dell's strategy as "virtual integration."16 On-line communications technology made it easy for Dell to communicate inventory levels and replenishment needs to vendors daily or even hourly. 1. How do Dell’s control systems help execute the firm’s strategy? o ROIC It provides a reasonably accurate picture of how much cash has been generated from the cash invested by equity and debt holders. ROIC helps strip away all of the non-cash adjustments to income statements and balance sheets that have proliferated under ‘generally accepted accounting principles’. ROIC components identify activities that generate and cash disbursement which are usually related to
assembly process/business activities which are involve all the company components include its employees. ROI measured specifically how everyone could contribute: by reducing cycle times, eliminating scrap and waste, selling more, forecasting accurately, scaling operating expenses, increasing inventory turns, collecting accounts receivable efficiently, and doing things right the first time (Michael Dell,
www.domicity.com) o Average selling price Measuring Dell computer average selling price would provide information about the company product selling price competitiveness in the market compare to its competitor which is enabled the company to evaluate the selling price periodically. o Component purchasing cost Provide information about the component price that are purchased from vendors which will enable the company to evaluate and choose vendors with the most competitive component price, in order to achieve cost efficiency. o Selling and administration cost Provide information that useful to track the activities along the assembly process which are non value-added activities that triggered non value-added cost, that would be the basis for distinguish both of them, and eliminate non value added cost.
o Margins Provide information of how the company performance in achieving cost/expense efficiency to acquire revenue. o Component inventory Component for technologies are rapidly changes. Dell inventory turnover must be maintained in a high level. Type and amount of inventories must be measured periodically in order to enabled the company provide up to date PC’s component. This reflected through Dell’s JIT inventory management. o Finished Goods inventory JIT maintain finished goods inventory to match with market demand. o Account Receivable Days To provide information to control credit limit and collection. If the company could control and maintain its account receivable days as fast as possible, then the account receivable would provide funds to be reinvest to Dell business activities especially in improving its customer service. o Account Payable Days By measuring and control account payable days, Dell could maintain favorable credit terms; credit terms with their suppliers that would be useful when the credit interest rate was high or increasing its credit turnover/avoid delaying credit payment were in very good condition to increase the company’s credit rating. o Cash Conversion Cycle Provide information about how long is the cash conversion cycle takes time, and identify activity that would accelerate the cash conversion cycle time.
o Stock Outs Enable the company to control stock so the company would not experience sort of stocks which would make the company cannot fulfill the market demand.
Conclusions Dell management control system role in executing Dell company strategy: • Its highly efficient supply chain model and Dell’s direct channel to customer permit it to pass the latest technology on quickly and at competitive price. • Dell continue to build out its enterprise service capabilities to address growing enterprise customer needs. • To provide information that is useful in making sound decision about assets employed. For example: ROIC measures, since it compare income to net assets which are employed for the year investment • Dell will continue to enhance its position as one of the leaders in infrastructure computing solutions.