VALUE ADDED CHAIN IN DELL
SUBMITTED BY: SIDDHARTHA DAS ROLL
NO: 32 BATCH: PGDM (FM) 2010-12
SUBJECT: Project and Infrastructure
Management: Financing, Implementation and Control
Table of Contents Sl. No. | Description| Page No. | 1| VALUE CHAIN ANALYSIS | 3| 2| VALUE CHAIN IN DELL| 4| 3| DIRECT SELLING STRATEGY OF DELL| 5| 4| COMPONENTS OF DIRECT SELLING STRATEGY| 6| 5| ADVANTAGES OF VALUE CHAIN OF DELL| 8| 5. 1| CONCLUSION| 9|
CHAPTER 1: What is Value Chain analysis?
The value chain of a company is the entire product flow of a company beginning from its suppliers to the customers as well as managing the flow of information so that both the customers derives maximum satisfaction while at the same time the company maximizes the profit. The Value-Chain was conceptualized and popularized by Porter in 1985 through his book, “Competitive Advantage: Creating and Sustaining Superior Performance”. The value-chain management tool recognizes that there are two value-adding activities in an organization, the “primary activity” and the “support activity”.
i) The primary activity includes inbound logistics, production, outbound logistics, sales and marketing, and maintenance.
ii) Support activities include administrative infrastructure management, human resources management, research and development team and procurement
Primary Value-Chain Activities:
- Inbound logistics: It is the receiving and warehousing of raw materials, and their subsequent distribution to the processes of manufacturing.
- Operations: It is the processes of transforming inputs into finished products and services.
- Outbound logistics: It is the warehousing and distribution of finished products.
- Marketing and sales: It is the identification of customer needs and the generation of sales.
- Service: It is the support given to customers after the products and services are sold to them.
Support Value Chain Activities:
- The infrastructure of the firm: It mainly focuses on organizational structure, corporate culture, control systems, etc.
- Human resource management: It is the process of employee recruiting, hiring, training, development and compensation.
- Technology and development: It is the development of technologies that can support value-creating activities. Procurement: It is the purchasing of inputs such as materials, supplies and equipments.
CHAPTER 2: Value Chain in Dell
Dell was founded by Michael Dell in 1984. From the very beginning the direct sales model was adopted: In the initial stage, computers were sold over the phone and they were built according to the customer’s specifications. Headquartered in Austin, Texas, Dell has gained a reputation as one of the world’s most preferred computer systems companies and is now the market leader in its segment. Direct selling, from manufacturer to consumer, was a key component of its strategy.
State of the Computer Industry
The level of competition in an industry is defined by:
- The threat of entry of new competitors
- The threat of substitutes
- The bargaining power of buyers
- The bargaining power of suppliers
- The degree of rivalry between existing competitors If we take all these factors into consideration, the computer industry is a highly competitive one as per Porters theory.
CHAPTER 3: Direct Selling Strategy of Dell
The direct model means that Dell does not use the retails channel, but sells its PCs directly to customers through its website, Dell. om. This way the intermediary steps that may add time and cost are eliminated, and Dell is directly linked to its customers. Dell’s direct model of selling and build – to – order supply chain have been the main driving forces. SUPPLIERS DELL CUSTOMERS DIRECT SALES MODEL OF DELL Traditional System Vs Dell Direct Sales Model The traditional value chain in the personal computer industry was characterized as “build-to-stock. ” Computer manufacturers, such as IBM, Compaq, and Hewlett-Packard, designed and built all their components based on market forecasts.
Products were first stored in company warehouses and later dispatched to resellers, retailers, and other intermediaries who typically added a 20–30 percent markup before selling to their customers. But Dell sells directly to all its customers, “from home-PC users to the world’s largest corporations”. Inbound Component Logistics Final Assembly Outbound Supply Logistics Direct Marketing & Sales Product Service Dell’s value chain as per Porter’s Model
CHAPTER 4: Components of Dell’s Value Chain
Dell outsources all of its component manufacturing. But, it does not outsource the final configuration and keeps control over the production and supply chains. Since Dell follows build –to- order and just-in-time, the inventory remains in the supplier’s books till Dell puts the order. Dell’s direct selling model depends critically on lead-time management so that inefficient lead conversion time would not leave the company with overage or underage of components. Dell selects suppliers that have “expertise, experience and the ability to deliver value” and their performance is regularly evaluated against pre-agreed measures.
In fact, every quarter Dell meets with its suppliers to provide direct feedback on performance and future expectations. The performance is evaluated through a scorecard that compares each supplier with its competitors based on cost, quality, reliability and continuity of supply. As a reward, Dell’s well-performing suppliers are provided with training and support in order to improve their processes.
(B) Final Assembly:
Dell has designed an integrated supply chain linking Dell’s suppliers very closely to its assembly factories and order-intake system.
With the industry’s most efficient procurement, manufacturing and distribution process, Dell offers its customers powerful, richly configured systems at competitive prices. Every Dell system is built to order only after a customer has placed an order; then lean manufacturing and just-in-time production take place. This means that once an order is placed, configuration details are sent to the manufacturing floor and the assembly begins; once the computer is built and the requested software is downloaded, it is shipped to the customer. C) Outbound Supply Logistics: Once an order matures the sales executive is entirely responsible to run the product chain to ensure it is delivered on time. The pricing is also tailored to the company’s demand forecasts that are strictly monitored on a weekly basis. Dell has eliminated from its value chain the intermediaries, who would charge a 20-30% margin, from the value chain and aligning the supply chain closely to the assembly factories and the order – taking system. By eliminating the retailers, consumers were buying consumers from Dell with out the extra payment for retailers’ margin.
This in turn leads to cheaper computers from Dell compared to its competitors. Dell has integrated the direct- selling model intricately with the supply chain. The company does not have any warehouses and the assembly factories hold inventories for a maximum of two days while the entire operation of assembly takes a maximum of 72 hours of time. (D) Direct Marketing and Sales: What is special in the case of Dell is its relationship to its suppliers, which also facilitates its build-to-order model. Dell fully adopts the approach of the xtended enterprise by viewing its suppliers as an integral part of doing business and a key factor for its success. “The supplier effectively becomes our partner”, as Michael Dell states. Dell distinguishes three rough customer segments: large organizations (large companies or government institutions), small and medium businesses, and personal consumers; the mix of customers served is wide (no customer represents more than 1-2% of Dell’s revenues) and there is a focus on large customers (70% of Dell’s sales corresponds to them). Dell is not going to be just their PC vendor anymore, but their IT department for PCs”, as Michael Dell claims. There are two main facilities that bring Dell and its customers closer: (i) Premier Pages, now called Premier. Dell. com, are customised IT procurement and support sites for big clients, which let them decide and manage their purchases from Dell, thus leaving to salespeople a more consultative role. (ii) Platinum Councils are regional meetings of Dell’s largest customers, where executives, salespeople and technicians discuss their experience with Dell and their needs and expectations from technology. E) Product Service: The Company has facilitated direct technical access for all their large institutionalized clients. They can directly assess the technical expertise of Dell and access their database for solutions to their technical problems. The product service of Dell is considered as amongst the best in the world.
CHAPTER 5: Advantages of Dell’s Direct Sales Strategy
- Dell gained cost advantage from its competitors by eliminating the retailers in the value chain.
- There was vertical integration of supply chain management to demand forecasting.
- Better receivable management since it mostly serves institutionalized clients.
- No need to check quality of reputed suppliers like Sony.
- Coordination and integration amongst various suppliers supplying various components of PC’s like Sony, Intel etc.
- Forecasting of demand accurate due to better interaction with the customers through direct selling.
- Direct buy of customized configured products by customers.
- Helps customers to forecast their own demand for their firms in the future.
- Customer’s needs met faster and more efficiently.
- Responsive to changes in demand and technology in the market.
CHAPTER 6: Conclusion
Dell’s direct selling model has given it a unique position in the industry and it has enabled it to rise to the top of the competition in two decades despite being a late entrant. But to sustain its advantage Dell has to focus more on the enterprise solutions that medium-sized companies are increasingly adopting while concentrating on the storage and server business for large companies. The entry in to the low-end products should be done in a more thoughtful manner. Dell’s buyer profile is tilted towards the technology savvy customer who are either buying a second or subsequent product or replacing the old one.
For these Buyers, Dell’s direct selling model fits in perfectly. The corporate clients make up the bulk of the online sales. The company should realize that with the commodization of the computer market, more players will enter in to the market and the company should now begin to focus more on volumes rather than on margins. The sustainability of the competitive edge, though difficult in the fast- commoditizing industry, depends on the continuation of its power to harness all the resources and capabilities it has developed over the years. On the whole, the direct model has been very successful in the Dell Company.