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Marketing Management/Essentials of Marketing

Notes Additionally, Dell has embraced the Internet like no other company. Today, Dell sells
computer equipment of worth over $50 million via web every day.
Dell’s success has compelled its competitors to reconsider their business strategies. In order
to compete with Dell, other PC makers are compelled to reduce their prices and employ
methods to cut down their costs. Profit margins are shrinking across the industry, and many
analysts wonder whether (a) Dell will be able to continue decreasing its prices to gain
market share, and (b) whether any competitors will go out of business trying to keep pace.
Michael Dell adopted the direct sales model and was able to eliminate middlemen, keep
prices low, and make product deliveries faster than its competitors. In 1988, Dell Computers
sold its stocks in public. By 1993, Dell Computers became one of the five top manufacturers
of PCs in the world. Its stock, which sold originally for $8.50 per share, was worth $100 in
1995.
Dell was one of the first companies to sell its products over the Internet, www.dell.com in
1996. Meanwhile Dell Computers continues to expand into foreign markets, such as Central
America and China, and introduces new products like workstations and network servers.
Dell Computers, which became the top sellers of PCs in 2001, has now revenues in excess
of $50 billion.
The advent of the Internet facilitated the direct sales approach of Dell Computers also had
given it a means of reaching customers and suppliers. Dell computer uses the Internet not
only to promote and sell but also orders components and parts from numerous, sometimes
even on an hourly basis. Using the Internet for procurement has facilitated Dell Computers
to keep very low inventory and deliver made-to-order PCs with pre-loaded software in as
little as three days. Customers are delighted because they get what they want and Dell is
not left with any unwanted computer stocks.
Dell maintains stock for just four days of operations, while Compaq carries stocks for
24-days. This difference gets translated into enormous cost advantage for Dell. Besides,
Dell has the advantage of delivering finished product fast, it collects payments from
clients before long it pays suppliers. This would mean that the company would make
money as a result of its positive cash cycle even if it did not turn a profit on its product
sales.
Dell Computers maintains close contact with its suppliers and is able to pass along cost
savings to its customers in as little as one day. A Dell executive explained, “Michael focuses
relentlessly on driving low-cost material from the supplier through the supply chain to our
customers.” Once Michael Dell noticed that one supplier had brought pastries to a meeting.
Michael Dell complained, “Take those back and let us knock the price off the next shipment
of materials you bring in. We don’t need food. We want a better price.” Dell’s emphasis on
cost control, has led to expense ratios that are much lower than competitors. Dell Computer’s
ratio of ten cents for every dollar compares favourably to 21 cents for HP.
In an attempt to capture more market share, Dell slashed prices by 20% in late 2000,
forcing competitors either to follow suit or lose sales. Many competitors tried to match
Dell’s prices, but changed their tactics within a few months. Most companies were forced
to lay off employees. By 2001, the market shares of Compaq, Hewlett-Packard, and Gateway
had dropped and Dell’s share increased by almost one-third.

Compaq was the market leader and had been aggressively slashing the prices as well as
cutting down the inventory and increasing direct sales efforts. Dell had enormous cost
advantage and Compaq was unable to keep up with Dell, and was acquired by Hewlett-
Packard in September 2001.

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