Dell’s Direct Model

Touted as a "brilliant managerial model" and an innovation in the
distribution business, the Dell direct model is what makes Dell distinct among
the motley of PC manufacturers. Essentially, the model is different because, the
products are shipped directly from the manufacturing factory to the customer,
eliminating the need for intermediaries. A customer logs on to the company’s
Web site, and orders a PC or multiples of the same, with the specifications. And
as soon the order is received, it is "built-to-order" at Dell’s
factory using the supply stock reserve and delivered to the customer the same
day, or within a maximum of 10 days from the date of ordering the system. Dell,
a $25-billion dollar company, has used this model for large corporates and for
the single PC-requiring homes in the consumer segment. The company passes on the
cost benefit to the customer as there are no retailers or resellers adding to
the cost and time in the supply chain. This not only makes the customer happy
but also the company very profitable. Says Chip Saunders, president, Dell,
Asia-Pacific, "We have about 50% of the profit pool of the whole PC
industry."

Dell started the commercial launch of the direct model as early as 1996 in
the US, which proved to be an instant success. In less than a year of
introducing this model, the company’s worldwide market share for PCs went up
to number three from the earlier number eight position. In 1996 and 1997, Dell
was the top performing stock among the Nasdaq100, and represented the top
performing US stock on Dow Jones. The company’s financial performance and
higher market share was unbeatable by competitors. Because of its adopting this
model, the company has no need for price protection, and does away with
inventory pile-up or technology obsolescence, key issues to determine the
success in the distribution business. The company addresses five issues in the
direct business model, which include price for performance, customization,
service and support, latest technology, and superior shareholder value. At one
of the annual general meetings with the stockholders, Michael Dell, CEO, Dell,
made a presentation with just one slide about Dell stock performance. That’s
all I have to say, he concluded much to the astonishment of the stockholders.

Direct in Asia

While Dell’s model was a roaring success in the US, thanks to the
well-developed infrastructure, high penetration of computers and a good chunk of
Internet users; Dell’s challenge was to execute the model in rest of the
world. Dell launched its direct model in Asia a few years ago. While skeptics
had their doubts, Dell has successfully replicated the direct model in several
countries across the Asia-Pacific. The company, nevertheless, had to "sell
the idea" to the corporate in these countries through sales force, by
getting the top brass to order the PCs on the Internet. Again, unlike in the US
market, Dell is not competing to make it to the number-one slot in the Chinese
market. Also, the company’s entire focus is on the huge corporate segment and
not the less-affluent home segment. The company started off by wooing large
corporations and public sector units, such as insurance companies, banks and
government organizations with factors of "speed, convenience and
service". The key advantage is its manufacturing plant in Xiamen, where the
assembly of the PCs takes place, soon after receiving the order. Care is taken
to deliver the goods before the tenth day of the date of order placement.
Although the degree of profitability is not known, notably in the first year of
introducing the Dell direct model in China, the company made its way into the
top ten PC vendors, at number eight position, despite its premium price when
compared to Chinese brand PCs in the market.

India is its latest target. Recently, Dell launched the Direct Dell in India.
Processes have already been set in place for Dell to invoice customers in the
local currency. The company has also set up toll free numbers for customers in
India for direct sales, service and technical support. If other companies try to
replicate the Dell model, then it could mean the end of the channel players.
Luckily for the channels, efforts by other vendors have not been successful.