Case 11.

1 The direct sales model or a dual system model: Dells distribution strategy in
China

1: What are Dells FSAs? What are the macro-level requirements for the direct sales model to be
successful? What are the major advantages of the direct model, compared with the traditional
channel strategy in the computer business?
Dells FSAs: The direct sales model and build-to-order operations are the core of Dells strategy. As
shown in the case, these FSAs should meet certain macro-level circumstances in order to apply the
FSAs to the host country. For instance, the large market size plays the most important role, because
otherwise the direct sales model cannot be transferred successfully. Other requirements might be the
reliability of the suppliers and the quantity of skilled recruitments. These factors are important to meet
the just-in-time management and the good customer relationships respectively. The major advantages
of the direct model are the lower costs and prices of the products, customization and better information
flow. First, the supply chain is much shorter and thus the end-product prices are reduced significantly,
which lead to more competitiveness. Secondly, the assemble-to-order main strength is to customize the
product in order to meet the customers specific demand and so the level of customers satisfaction
increases. Lastly, the lack of retailers and wholesalers brings the better information flow, which is
useful to forecast accurately the demand and consequently to keep fewer components in the
inventories.
2: How did Dell treat its distributors in China during its re-entry into China in 1995? Was there
a vicious cycle of bounded reliability involved? Who should be blamed for Dells initial failure?
Dell treated its distributors as an information source that could provide information and knowledge
about the Chinese market, because this was the main reason for the failure of the first entry. On the
other hand, the distributors knew about Dells intention to apply the direct sales model when there was
sufficient knowledge, and denied to consider long-term relationship. At this point there was a vicious
cycle of bounded reliability, because both parties did not trust each other. The lack of a common target
of those two partners indicated that the strategy would not be implemented properly. Both the MNE
and the distributors had to take responsibility of the initial failure, caused by the cycle of bounded
reliability and by the fact that then the size of the Chinese market was small and worthless to invest in.
3: According to Arnolds seven guidelines, discussed in Chapter 11, what mistakes did Dell
make?
According to Arnolds seven guidelines, Dell had not considered two major points and consequently
two minor points were ignored by both parties. First, Dell did not focus on distributors market
development capabilities and decided to collaborate with distributors from metropolitan areas.

Therefore, between both sides there were no shared interests, because of the partnership based on the
market fit criteria. Secondly, as shown in the case, Dell had no intention to initiate a long-term
relationship with the distributors. The companys target was to penetrate the market as soon as the
knowledge was sufficient. As a result, the distributors did not invest in the market development and
this increased the bounded reliability problems. As a consequence of the first and second mistakes,
Dell decided to not provide resource support for market development purposes, due to the intention to
implement the direct sales model, when the information about the distribution channels and customers
demand was sufficient. Finally, the lack of shared access to the distributors critical intelligence played
important role in the initial failure. As mentioned above, the short-term partners tend to keep the
valuable information secured in order to preserve their position and chances on the market. In this
case, the distributors would not like to share information with Dell and to improve its understanding of
the Chinese market.

4: Given Dells FSAs and Chinas location advantages in the late 1990s, why was the direct
model successful? What has changed since?
- Dells FSAs are the direct sales model and build-to-order operations. The advantages of the
Chinese market were that the PC-market was growing rapidly and that only 10 per cent of
total sales were from retail buyers. This meant that large corporations and government
institutions were the most important buyers of PCs. These organizations do not require
personal service or physical contact with the PCs that they wish to buy. Therefore, they are
very well suited for the direct model that Dell implement. As a result, the direct model proved
to be successful.
- After that, the PC-market still grew, but the largest contribution to this was made by the retail
market. Specifically, the retail sales in smaller cities and towns grew rapidly; a growth of 40
per cent in 2004, when retail sales in large cities grew by only 2-3 per cent. Because
consumers in these more rural areas required more technical service and advice, a move from
Dell to more indirect sales was needed. Dell did so by, for example, start selling PCs through
Wal-Mart.
5: With the changing market situations after 2004, what new location-bound FSAs should Dell
develop to cater to retail buyers in China? Or, alternatively, what complementary capabilities
should Dell expect from its distributors?
The market changed after 2004, the growth rate of PC demand in urban centers such as Beijing and
Shanghai fell to an annual rate of 2-3 per cent in 2004, while the growth rate in midsized cities and
small towns soared to around 40 per cent.(Verbeke, 2013) In that growing market, in midsized, cities
the customers had less knowledge about computer and less money to spend, therefore the customers
wanted to see the products before they buy it. This change required more local responsiveness of Dell
in those rural areas. The location-bound FSA they should develop that time was a domestic network
of retailers and for example kiosks where customers of the segments individual customers were
satisfied with touchable computers and assistance of sellers. Or alternatively, Dell should expect from
their distributors in such areas to be more focused on physical access to local customers.
8: Can you provide an update on Dells distribution strategy in China, using materials available
on the Web?
In 2013Dell Inc. plans to expand into smaller cities and double its sales outlets in China over the next
two to three years to help cushion the U.S.-based company against the steep fall in global personalcomputer shipments(Eva Dou, 2013).
In order to achieve this, they change their distribution strategy in China to the smaller cities to less
developed markets in order to get more sales. This is because in developed markets, customers are
switching to mobile devices instead of using computers. This change lead to innovation like Corp.'s
new Windows 8 touch-based operating system last fall has failed to spur PC demand (Eva Dou, 2013)
so Dell is forced to search for new markets and that resulted in the focus on the small cities in China.
Dell does this by 10,000 sales outlets in more than 1,600 cities in the Greater China region (Eva
Dou, 2013). To reach the customers with less knowledge, distributors have offer those customers also
physical excess to Dell products.
References:
Dou, E (2013). Dell Plans to Double China Sales Outles. The Wallstreet Journal, April 11. Retrieved
from: http://online.wsj.com/articles/SB10001424127887323741004578416173259355806. Last
accessed 17.11.14
Verbeke, A (2013). International Business Strategy (Second edition). Page 348.
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