Product Development @

Dell Computers
By-: Komal Lahoti
Paresh Raheja
Mukesh Ranjan
Vikash Chauhan
Swapnil Gupta
Faculty –: Prof Pintoo Shome,NMIMS Bengaluru
 The Beginning
 The personal computer industry dates back to the 1830’s and Charles Babbage
with his invention of the first digital computer.
 1970’s and 80’s Apple Computer became a successful leader in commercialized
 IBM followed suit and was always trying to play catch up with Apple
 Dell also released its own branded personal computer in 1983
 It was started by Michael Dell, who at this point in time was a freshman at the
University of Texas
The early days at Dell
 Michael Dell started with upgrading IBM compatible computers and went door to
door selling them.
 Next- Dell decided to assemble his own brand name personal computers and
continued to sell them the way he earlier sold the modified IBM machine.
 This
was the principle mechanism of selling for Dell Computers -eliminate the
middle man.
 Thisprinciple saw Dell grow very rapidly and also ensured huge profits for the
firm.
 Dellassured product quality by extensively pretesting all the configuration
options it offered.
A 24-hour telephone support system comprising well-trained technical
representative provided the first post-shipment level of support.
 Dell
serviced its customers with combination of home based telephone
representative and field based representative.
 Dell
maintained a month’s worth of component inventory but it suppliers
generally carried supplemental buffer stock that could be immediately shipped
 By
1990, Dell computers had a distinctive line of its own personal computers
which won several trade magazine awards for service and products.
 Competitive landscape in the computer
industry during that time
 The success of Dell by 1990 brought in the imitators like Gateway 2000 and
CompuAdd. They too offered Computers directly to end client via mail orders.
 The established players like IBM and Compaq also entered to rob the market pie of
Dell via the direct mail order business
 Dell responded by entering the retail selling segment.
 Although the sales more than doubled by 1992, Dell faced a severe cash crunch due
to this unparalleled growth and reported it’s first ever fall in profits.
Why was new process development
method necessitated?
 In the early 1990s, the market for laptop PCs was growing much faster than the
desktops market, and gross margins for laptops were 3-5% higher than gross
margins for desktops.
 But during 1993, Dell’s first line of portable computers were discontinued since
they were deemed too slow and expensive. The company announced a call back
of some 17000 units.
 In contrast to the overall growing laptop market, laptops fell from 17% of sales
in 1992 to only 6% of Dell’s sales in 1993.
 The hope that using the “Lithium ion” technology will bring a change was a far
fetched thought at this time as the quality of Dell Laptops was let down for the
customers.
 However Michael Dell’s spirit was not to be moved. In the very same year the
desktops division had racked up unit volume increase of about 155% over the
previous year.
 Reasons for the setbacks
 The first problem was that retail selling proved contrary to the spartanism of
Dell’s traditional direct model.
 Dell lost the advantage of being able to turn over inventory 12 times a year-
twice as fast as it competitors making it hard to find a premium
 The second problem was the lack of senior management at Dell which could
guide the firm to maturity.
 Another issue was the lack of structure in Dell Product Development Process
which led to the disastrous foray into the portable computer market.
 The product development responsibility was with a few engineers who were
working in silos without any proper communication
 By 1993, many experts in the market saw Doom’s day coming for Dell
Computers.
What was the method contemplated and
implemented?
 The new product development strategy was much more formal.
 The Core teams were made up of a mix of engineers and managers who had
different views and techniques.
 Each group was held responsible for a project from start to finish and the
team was governed by an outside manager which made the teams
accountable for all their decisions and moves.
 The new process had six phases in which each phase would last around 3
months. The total time for a project was approximately 18 months.
 Dell considered emphasizing battery life as a value-adding feature that
ranked only behind price and microprocessor choice
Six Point Method Implemented
 Profile Phase- Teams would write a guide on the new product and its market
that it would be sold in
 Planning Phase- Teams create a detailed business case for the product which
must be viewed by a senior manager before it is passed onto the next phase
 Implementation Phase- Teams must design and test prototypes of the product
and orders must be made to the suppliers
 Qualification Phase- Teams build production prototypes and key customers
give feedback
 Launch Phase- The customer experience is tested, from opening the product
to setting up and using the product. Early adopters have their orders filled
 Acceptance Phase- Teams collect feedback and reports are compared to
actual results.
Six Point Method - Flowchart
 Dell’s new product development process was quickly put to the test in early
1993, when the company opted to reorganize its portable computer division
to remedy product defects and bolster sagging sales.
 At the crux of Dell’s decision to revive its notebook division was the question
of which features to emphasize.
 Complicating the issue was the fact that Dell engineers and product
developers took into consideration 10 or more features, whereas customers
were interested primarily in only a few features, namely: price,
microprocessor variety, battery life, screen resolution and product reliability
  Mark Holliday, called for a meeting wherein he wanted to discuss about the
future of new Latitude Laptop series based on which battery to go with. The
pros and cons of both options were as below

Nickel Metal Hydride (NiHi) Lithium Ion(LiOn)

Advantages Disadvantages Advantages Disadvantages

Takes up less space then Provide limited product

the LiOn differentiation in an increasingly Longer rechargeable lives Unproven and more expensive
competitive market technology. More risky choice

Allows for more accessories Such as

communication control and memory Short battery life, normally less Production commitment to Sony
management than 3 hours. Can recharge to full potential for at least a year

Would involve no delays in

Production demand Can only recharge a fraction of full Could possibly boost sales Takes up more space than
capacity conventional batteries

If not disposed of properly they Differentiating factor from

could release heavy metal toxins in competitors. First mover No production demand studies
A less risky choice to the environment. advantage completed

Battery Comparison
Issues and Decision Tree
OPTION 1
 The first option was to continue placing nickel hydride batteries in laptops.

 On the plus side, the company would be going with proven, well-tested
technology. In addition, NiHi batteries would occupy less space than lithium
batteries, thereby freeing up room to place additional features.

 Another positive was that the supply of NiHi batteries was dependable.

 On the negative side, reliance on traditional batteries would not address customer
concerns regarding limited battery life, nor would it do much to differentiate Dell
products from those offered by competitors.

 This approach was expected to bring in $485 million in revenues.

OPTION 2

 The second option was to place the new LiOn batteries in laptops.

 On the plus side, longer battery life would address customer concerns and would help
to differentiate Dell notebooks from those offered by competitors.

 On the negative side, LiOn batteries were untested and unproven; supply was limited
to one vendor, Sony; there was only a 60% chance that the batteries would work as
intended

 These batteries occupied more space than nickel batteries, thereby limiting the
number of additional features that could be added; and failure could tarnish Dell’s
reputation for years and effectively end its bid to reenter the highly competitive
laptop market.

 If successful, this approach could bring in as much as $584 million in revenues.

 If the technology failed, Dell could expect revenues of no more than $234.5 million.
OPTION 3a

 The third option was for Dell was deferring commitment to either battery
technology until it had more information ,upon which to make an informed
decision regarding the performance and reliability of LiOn batteries.
 One approach was to design laptops to accept either battery. The problem
was that this would require significant reengineering and would increase
space demands, resulting in a much heavier and bulkier notebook.
 In fact, the increase in size was expected to cut into profit margins by as
much as 2% per unit.
OPTION 3b

 The second approach was two create two laptop versions: one powered by
traditional NiHi batteries and the other by the new LiOn batteries.
 Due to the additional expense and burden of developing and supporting two
product lines, this approach was expected to reduce revenues by as much as
$2.5 million.
 Also, if one battery proved to be superior to the other, then Dell would be
forced either to support both versions for the foreseeable future or drop
support for the inferior battery. Neither of these alternatives was very
palatable.
RECOMMENDATION

 Dell should choose 3rd Battery option because ,Option 3 Defer commitment to
either battery. Under this option both plans are considered i.e. to "overdesign" the
battery space & secondly involved maintaining dual designs for the laptop one for
the existing battery technology and another for the new LiOn technology.
If Dual Development paths Estimated additional fixed cost `=$2.5 million

If product is overdesigned Estimated additional variable cost `= 0.5% of revenue (2% of margin)

Gross margin (if LiOn works) 990,000 units x $600/unit `=$594 m (before additional costs)

Gross margin (if LiOn fails) 825,000 units x $600/unit `=$495 m (before additional costs)

 Although LiOn batteries are a promising new technology, they were unproven and
presented a significant risk to Dell’s financial position and reputation. Moreover,
adoption of unproven LiOn technology would have diverted financial and
engineering resources away from a proven battery technology
RECOMMENDATION (Contd…)
 Based on the decision tree analysis, which provides a cost/risk based preferred
solution, option 3 is the preferred plan of action because it illustrates the
advantage of the "no risk" approach.

 It has not considered value of beating the competition to the market with a
unique product of LiON Battery technology ,which may play a major role in
penetrating into a market ,the decision tree analysis also has not considered
the opportunity cost of taking resources away from other projects.

 So in order to minimize risk and also seek for competitive advantage in parallel,
options 3 seems to be preferred.

 If the opportunity cost of taking additional resources away from other product
developments is considered to be $100M or more, then option 1 would be the
preferred choice.
Brief Update of Dell to recent times
 In 1996, Dell began selling computers via it’s website ,generating $1 million in
sales per day just six months after site is live
 In 1999, Dell overtook Compaq to become the largest seller of personal
computers in US
 In 2006,Dell was 25th in Fortune 500 list
 Dell has grown by both ,increasing its customer base and through acquisitions
Core Elements of Strategy

 Supplier Integration

 Direct Sales

 Inventory Management

 Customer Service

 Extensive data and information sharing with both supply partners and customers

 Together these allow for maximum effectiveness with minimum cost

DELL Sales Model
QUESTIONS