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532 VALUECHAINANALYSISoutlet. National and local advertising backed by personal
sales increased selling costs. The customer paid at the
point of sale or through an invoice and was often able
to receive immediate access to the product.
From its inception, Dell used a direct sales business
model that allowed it to bypass the traditional brick-and-
mortar sales model. In 1996 Dell Computers began trans-
forming its telephone direct sales business model to an
e-commerce business model. Dell evaluated its value
chain and determined that its advantages lay with buy-
ing the best products from suppliers, assembling com-
puters, and developing close relationships with customers
(Magretta, 1998). Dell was able to use Internet-based
technology to leverage its existing advantages (Chabrow,
2000). By 1998 online sales had reached more than $5
million a day. At the end of 2001, Dell had a 40% share of
the PC industry in the United States with close to 100%
of its sales transacted online (Serwer, 2002). Dell’s online
model utilized a number of technologies and strategies to
lower costs, increase efficiencies, and enhance customer
relationships. Figure 8 illustrates Dell’s business model.
Dell provides value throughout its value chain. Dell’s
inbound logistical system requires suppliers to use ex-
tranets to link to Dell. To speed delivery Dell demands
that its suppliers locate inventory within 15 minutes of
the Dell factory. Dell minimizes its finished goods inven-
tory and is therefore able to use the latest products and
take advantage of dropping inventory costs.
Dell creates value through the customization of its
computers to individual customers. Dell preloads re-
quired software so that its computers can be unpacked
and run. As market conditions change, Dell can respond
by changing its pricing.
Much of Dell’s outbound logistics is outsourced. Dell
outsources warehousing to third parties that specialize in
running supply chains. Dell has noncustomized products
such as monitors stored and delivered by shippers such
as UPS. All of the companies are linked electronically to
speed information flow.Marketing and sales provide value. Most computer
buyers search for information before they buy. Dell’s Web
site allows those buyers to move immediately to areas that
interest them. In 1997, Dell received one Web visit for ev-
ery phone call inquiry; by 1998 there were 3.5 Web visits
for every phone inquiry. Potential buyers visit the Web
site 5 to 10 times to obtain information, have their ques-
tions answered, and determine prices before they buy.
Because the Web visit is considerably less expensive, the
cost savings are given back to the buyer (Chadderdon,
1998). Dell also gathers customer information to deter-
mine trends in the marketplace and uses databases to sup-
port customer relationship management systems. Both
individual and business buyers can receive customized
interfaces.
Dell squeezed time out of every step in the business
process. Dell’s average sale turns into cash in less than
24 hours. By 1997, Dell was able to receive orders at
9 a.m. on one day, build the computer, and deliver it by
9 a.m. the next day. This increase in speed allowed Dell to
lower inventory costs and prices to its customers. A key
to this strategy was using the Internet to link Dell to both
its customers and its suppliers. Developing a more effi-
cient system resulted in operating costs at 10% of revenue
compared to Hewlett Packard at 21, Gateway at 25, and
Cisco at 46% (Jones, 2003). Dell was able to return $1.54
in profits to shareholders for every new dollar of capi-
tal investment in 1997, whereas Compaq returned only
59 cents and IBM 47 cents. Dell has added to its own value
chain by developing a strong e-commerce-based business
model. Dell Computer identified areas of key competitive
advantage and changed its business model to meet its
customers’ desire for speed of delivery, customized prod-
ucts, and low prices. Dell has named this system “the
model” and plans to expand into new markets includ-
ing storage, networking, and information services (Jones,
2003).
Corporate customers are able to order directly from
Dell using the Internet. Companies such as Pillsbury andSuppliers linked
through Extranet
deliver just-in-time.Customizable Web pages
provide information and
ordering.Payments made online through
Web site using credit card or
invoice speeds cash flow and
shifts risk of non-payment.Product delivered through
independent shippers such as
UPS. UPS drop ships
components such as monitors.
Customer gathers
information and purchases
through Web page.
Individuals and
organizations receive
customized
communication and
products.Dell manufactures
built-to-order
customized PCs and
sells at low price.Information stored in database
to enhance customer
relationships and improve value
chain.Figure 8: Dell’s business model.