A New Channel Strategy for Dell
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Operations Innovation Strategy Oct 9, 2007

A New Chan­nel Strat­e­gy for Dell

The PC industry’s increas­ing matu­ri­ty pushed Dell to shift its long­stand­ing direct sales model

Woman places hand over computer keyboard

CSA-Printstock via iStock

Based on the research of

Sunil Chopra

Listening: Interview with Sunil Chopra

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Dell impressed many in its ear­ly years with its dis­tinct mod­el of sup­ply chain man­age­ment, sell­ing cus­tomized com­put­ers direct­ly to cus­tomers to meet bur­geon­ing PC demand. By using this inno­v­a­tive sales mod­el, Dell became an indus­try and share­hold­ers’ dar­ling, a high-tech pio­neer with seem­ing­ly lim­it­less growth. Those days appear to be over: Dell’s prof­its and shares have dropped con­sid­er­ably from their peaks in recent times.

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And when cor­po­rate giants stum­ble, every­one takes note. Com­peti­tors look for weak­ness­es to exploit or lessons to learn. Invest­ment ana­lysts and the pub­lic observe matur­ing com­pa­nies close­ly to decide whether to buy, sell, or hold their stock. Busi­ness pro­fes­sors study such firms to under­stand the forces that made them fal­ter — and what they can do, if any­thing, to recov­er. Such was the moti­va­tion for Sunil Chopra, Asso­ciate Dean for Cur­ricu­lum and Teach­ing and IBM Dis­tin­guished Pro­fes­sor of Oper­a­tions Man­age­ment at the Kel­logg School of Man­age­ment, to exam­ine Dell’s busi­ness sit­u­a­tion and sup­ply chain man­age­ment strat­e­gy more closely.

Specif­i­cal­ly, Chopra posit­ed that the com­put­er man­u­fac­tur­er would have to shift its long­stand­ing direct sales mod­el in the face of the PC business’s increas­ing matu­ri­ty. Chopra sug­gest­ed that to stay com­pet­i­tive, Dell would have to con­sid­er sell­ing through retail chan­nels such as Cost­co or local com­put­er stores. About six months lat­er, Dell announced that it would offer Dimen­sion PCs and Insp­iron note­books through Wal-Mart and Sam’s Club. And in Sep­tem­ber 2007 Dell announced that it would take this chan­nel strat­e­gy over­seas, sell­ing com­put­ers through China’s largest elec­tron­ics retailer.

But what was Dell’s ratio­nale for the recent sales mod­el shift? To answer this ques­tion let’s con­sid­er the argu­ment behind Chopra’s assessment.

Chan­nel Strate­gies in Mature Markets

Chopra’s analy­sis of Dell appeared in an arti­cle in the Octo­ber 2006 vol­ume of Sup­ply Chain Strat­e­gy, a newslet­ter pub­lished by MIT. Part of the moti­va­tion for the arti­cle was Dell’s stock price, which had fall­en over 30 per­cent in the pre­vi­ous year (Fig­ure 1) while rivals such as Hewlett-Packard had per­formed much bet­ter. In the arti­cle Chopra acknowl­edges that Dell could still enjoy com­pet­i­tive advan­tage from cus­tomiz­ing com­put­ers and sell­ing them direct­ly to con­sumers, but notes that the mar­ket for such offer­ings has shrunk, large­ly because cus­tomer needs and relat­ed sup­ply chain costs have shift­ed in the mature PC busi­ness. As such, Chopra endors­es a hybrid mod­el that embraces both direct and reseller chan­nels” for Dell, not­ing that the gen­er­al les­son is that your choice of sales chan­nel should depend on the type of prod­uct you are sell­ing and its lev­el of matu­ri­ty.” In sep­a­rate com­mu­ni­ca­tion Chopra is quick to note that he was not the only observ­er advo­cat­ing a sales strat­e­gy shift for Dell; oth­ers, includ­ing sev­er­al ana­lysts, endorsed a sim­i­lar model.

Com­pa­nies can­not select one chan­nel and expect it to always be successful.”

Chopra presents two major fac­tors under­ly­ing Dell’s arrival at this cross­roads: chan­nel trade-offs and PC mar­ket dynam­ics. With regard to the for­mer, he sug­gests that direct sales chan­nels like Dell’s (or Amazon.com’s), have much low­er facil­i­ty and inven­to­ry costs than retail­ers (e.g., your local Bor­ders book­store) but high­er trans­porta­tion costs; retail­ers, in con­trast may have instant­ly avail­able prod­ucts and offer more com­pre­hen­sive sup­port, but can­not prof­itably stock as many dif­fer­ent prod­ucts as direct sell­ers. Chopra’s gen­er­al point: prod­uct type and life­cy­cle stage will always influ­ence both cus­tomer needs and sup­ply chain costs. As such, com­pa­nies can­not select one chan­nel and expect it to always be suc­cess­ful.” To sus­tain advan­tage they must align their cho­sen chan­nels’ strengths with prod­uct and mar­ket characteristics.

Dell stock price influences channel strategy
Figure 1: Dell stock price, October 2005 to October 2007

This is espe­cial­ly true giv­en the PC and con­sumer elec­tron­ics industry’s dynam­ics over the last decade. Accord­ing to Chopra, while the speed of inte­grat­ed cir­cuit devel­op­ment has remained rel­a­tive­ly con­stant — dou­bling about every 24 months, in line with Moore’s law — the rel­a­tive val­ue that con­sumers derive from each more pow­er­ful com­put­ing chip has dimin­ished con­sid­er­ably. For exam­ple, a three-year-old com­put­er today is capa­ble of han­dling most com­mon busi­ness appli­ca­tions such as Microsoft Office.

This tech­nol­o­gy trend has clear impli­ca­tions for cus­tomers’ needs and, in turn, busi­ness mod­els for com­put­er sales. Accord­ing to Chopra, when Dell first emerged con­sumers val­ued cus­tomiza­tion high­ly, and sur­plus stock quick­ly lost val­ue, mak­ing assem­bly-to-order and cen­tral­ized stor­age more prof­itable than sell­ing pre-con­fig­ured PCs in retail stores. But today’s cus­tomers are will­ing to choose from a small­er num­ber of off-the-shelf PCs, and are less con­cerned with cus­tomiza­tion. And, as PC prices have plum­met­ed, inven­to­ry of stan­dard­ized mod­els turns quick­ly, and is less of a fac­tor in prof­itabil­i­ty. These shifts have con­verged to damp­en dra­mat­i­cal­ly the val­ue of the direct sales chan­nel built around cen­tral­ized inven­to­ry stor­age and PC cus­tomiz­abil­i­ty. So it is no sur­prise that Dell’s prof­its and mar­ket share have flagged recent­ly. The inevitable con­clu­sion,” Chopra writes, is that Dell will be forced to con­sid­er the retail chan­nel as it moves forward.”

Chopra presents two poten­tial­ly com­ple­men­tary routes by which Dell could go retail. The first, a hybrid busi­ness mod­el, com­bines direct and retail sales chan­nels to serve both broad seg­ments of the com­put­er mar­ket: those seek­ing stan­dard mod­els and those plac­ing a pre­mi­um on cus­tomiza­tion. Using this approach, Dell would con­tin­ue sell­ing direct but also offer a selec­tion of pre-con­fig­ured com­put­er mod­els through retail stores. The sec­ond mod­el, most effec­tive when cus­tomiza­tion is val­ued, involves the retailer’s per­form­ing the final prod­uct con­fig­u­ra­tion, thus decreas­ing inven­to­ry costs — because sup­plies are main­tained in com­po­nent form — but increas­ing assem­bly capac­i­ty costs. Chopra notes that this mod­el has been used suc­cess­ful­ly in India, where cus­tomiza­tion is val­ued and tech­ni­cians inex­pen­sive to employ.

The bot­tom line, as Chopra notes, is that chan­nel choice must be relat­ed to cus­tomer needs and prod­uct char­ac­ter­is­tics.” As such, he con­cludes that Dell would be best served by a hybrid mod­el that includes the cen­tral­ized chan­nel for wider vari­ety and the retail chan­nel to move pop­u­lar stan­dard­ized PCs and oth­er products.

Dell Makes a Decision

Appar­ent­ly Dell shared much of Chopra’s think­ing. In a New York Times arti­cle on May 25, 2007, the man­u­fac­tur­er announced that it would begin offer­ing two PC mod­els through Wal-Mart stores in June. In a sub­se­quent New York Timesarti­cle, Dell announced that it would sell Insp­iron note­book com­put­ers through Wal-Mart’s Sam’s Club out­lets. And most recent­ly the com­pa­ny announced that its com­put­ers would be avail­able in major Chi­nese cities through fifty Gome Elec­tri­cal Appli­ances stores, China’s largest elec­tron­ics retail­er, start­ing in ear­ly Octo­ber 2007. Dell also plans to extend its inter­na­tion­al retail strat­e­gy by open­ing its first retail store in Rus­sia. Although the actu­al num­ber of Dell prod­ucts offered through the ini­tial retail chan­nels is small — just two low-end Dimen­sion PC mod­els were to be avail­able at Wal-Mart, for exam­ple — the sym­bol­ic impor­tance of the move is sig­nif­i­cant, reflect­ing a rethink­ing of the direct sales strat­e­gy Michael Dell pio­neered and rode to great fame and for­tune. In an April memo to employ­ees, Dell, who returned in late Jan­u­ary 2007 as the firm’s chief exec­u­tive, sug­gest­ed, The direct mod­el has been a rev­o­lu­tion, but it’s not a reli­gion.” (NYT 5/25/07) This sen­ti­ment is in line with Chopra’s belief that Dell would have to look beyond its bread-and-but­ter sales mod­el to sus­tain prof­its in today’s mature com­put­er market.

Chopra presents two major fac­tors under­ly­ing Dell’s arrival at this cross­roads: chan­nel trade-offs and PC mar­ket dynamics. 

Anoth­er Dell exec­u­tive was quick to point out that the lim­it­ed move to retail was not an indi­ca­tion that the direct-sales mod­el was bro­ken” (NYT 5/25/07). In fact, Dell’s hes­i­ta­tion to enter the retail chan­nel may have result­ed from unsuc­cess­ful or incon­clu­sive past exper­i­ments. In the ear­ly 1990s Dell prod­ucts were avail­able through Best Buy, Cost­co, and oth­er retail­ers, but the com­pa­ny stopped this dis­tri­b­u­tion in 1994 due to low prof­it mar­gins. Last year Dell opened a mall-based store in Dal­las where cus­tomers could see and use com­put­ers or oth­er prod­ucts, but ulti­mate­ly had to order these online through the store rather than tak­ing them home with them.

Despite clear­er moti­va­tion for Dell to enter the retail chan­nel today, as Chopra’s arti­cle makes clear, some indus­try observers point out the risks of this move. They don’t want to get their brand name too close­ly asso­ci­at­ed with Wal-Mart,” a For­rester Research ana­lyst points out, cit­ing the dan­ger of Dell’s prod­ucts being viewed as the market’s val­ue-end. (NYT 5/25/07) Oth­ers note that it may take some time for Dell to real­ize much finan­cial gain from its retail offer­ings, giv­en their lim­it­ed nature.

Risks aside, Dell’s move into Wal-Mart, while retain­ing the cen­tral­ized direct sales mod­el, is a clear response to the trends Chopra points out, and the tac­tic com­plete­ly aligned with his endorse­ment of a hybrid chan­nel mod­el. As anoth­er indus­try ana­lyst sug­gests, Dell is final­ly lis­ten­ing to its cus­tomers.” (NYT5/25/07) Either that or tak­ing the time to read the occa­sion­al Sup­ply Chain Strat­e­gy arti­cle by a Kel­logg professor.

Editor’s Note: For a more recent take on the future of Dell, hear what Chopra has to say in this blog post.

Featured Faculty

Sunil Chopra

IBM Professor of Operations Management & Information Systems, Professor of Operations

About the Writer

Sachin Waikar, is a freelance business writer living in Evanston, IL.

About the Research

Chopra, Sunil (2006). “Choose the Channel that Matches Your Product,” Supply Chain Strategy, 2(9): 8-9

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