10: Dell - Business Model

Review the “The Business Model Canvas” excerpt (pp. 1-55) from Business Model Generation by Osterwalder and Pigneur. The Business Model Canvas is an expanded tool that incorporates the Value Proposition Canvas, which we discussed in class. This reading is available on the course web site or from the ebook available through our Library Resource Guide. Familiarize yourself with the “canvas” concept, its use, its elements and their interactions.

Read “Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell” (HBR #98208). Consider the following study questions:

• What are the two key innovations of Dell's business model?
• Describe Dell’s business model in terms of elements of the Business Model Canvas.
• What information was exchanged among the Dell stakeholders and how was this different from traditional computer channels?
• How did Dell’s business model benefit suppliers, manufacturers, and customers?
• What benefits did Dell derive from this model that secured the company’s competitive position in the marketplace?

DUE:

Following the guidelines in the Case Method Overview (posted in Canvas Files), write a concise 2-page essay addressing the question:

What are the two key innovations of Dell’s business model? How did Dell’s business model benefit its supplier partners (e.g., Sony) and customers? Explain.

Submit your essay via Canvas prior to class. This essay must be your own work subject to the University’s Code of Academic Integrity.

Study Questions

1. The Two Key Innovations of Dell’s Business Model

• Direct-to-Customer Sales: Dell bypassed the traditional reseller channel entirely, selling PCs directly to end customers. This approach eliminated the reseller markup, reduced the complexities of managing a large distribution network, and established direct relationships with buyers.
• Build-to-Order Model: Rather than stocking large inventories of finished goods, Dell built machines only after receiving an actual customer order. This strategy dramatically reduced inventory costs, minimized the risk of obsolescence, and allowed rapid adoption of new technologies.
• Virtual Integration: Virtual integration means you basically stitch together a business with partners that are treated as if they’re inside the company.

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2. Dell’s Business Model in Terms of the Business Model Canvas

1. Customer Segments
   • Primarily large corporate and institutional buyers (e.g., Boeing, MCI) seeking reliable IT solutions.
   • Growing base of small businesses and individual consumers, particularly those wanting up-to-date technology and minimal hassle.
2. Value Propositions
   • Customized PCs at a competitive price, built exactly to customer needs.
   • Rapid product updates and lower inventory costs passed on as savings to customers.
   • Direct, trust-based relationships, giving customers a single point of contact and efficient support.
3. Channels
   • Direct sales channels: telephone sales, online ordering, and dedicated account teams for major customers.
   • Minimally relied on third-party distributors, which set Dell apart from other PC manufacturers.
4. Customer Relationships
   • Close, consultative relationships with large accounts, supported by on-site staff or specialized teams.
   • Online self-service tools for smaller businesses and consumers, complemented by personalized technical support when needed.
   • “Premier Pages” (custom online portals) for large customers to streamline ordering and servicing.
5. Revenue Streams
   • Primarily from hardware sales (PCs, servers, peripherals) and associated services (support, warranties).
   • Additional revenues from software, licensing, and custom services, such as loading client-specific software at the factory.
6. Key Resources
   • Highly integrated supply chain, strong brand reputation in direct PC sales, and robust information infrastructure for real-time order and supplier data.
   • Skilled workforce, including sales teams and engineers who collaborate closely with partners and customers.
7. Key Activities
   • Build-to-order assembly and just-in-time manufacturing.
   • Supply-chain coordination: ensuring a near-real-time flow of parts from suppliers.
   • Managing direct relationships (account teams, telephone, and online platforms) to forecast demand and continuously reduce production cycle times.
8. Key Partnerships
   • Close alliances with major suppliers (e.g., Sony for monitors, Intel for processors), often co-locating engineers and integrating systems for real-time data.
   • Logistics partners such as Airborne Express and UPS to synchronize the final delivery of computers and monitors directly to customers.
9. Cost Structure
   • Lean operations with minimal inventory holding costs.
   • Lower overhead from not managing a large retail network or channel inventory.
   • Investments in technology and systems to keep production, forecasting, and distribution highly efficient.

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3. Information Exchanged Among Dell Stakeholders and How It Differs from Traditional Channels

Traditional PC manufacturers often pushed large batches of finished goods into warehouses or retail stores with little real-time feedback about actual demand. Dell, however, developed “virtual integration,” creating information linkages across its supply chain and with customers. Critical data included:

• Real-time order forecasts from large corporate clients (e.g., expected PC configurations and volumes).
• Instant inventory requirements for suppliers, who received daily—or even hourly—updates on component demand.
• Up-to-date technical data and service information shared directly with end users via Dell’s support tools or on-site support teams.

This shift from batch-based production to real-time collaboration allowed Dell to minimize lead times and rapidly incorporate the latest technologies without stranding outdated products in warehouses or retail channels.

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4. How Dell’s Business Model Benefited Suppliers, Manufacturers, and Customers

• Suppliers: Gained stable, predictable demand because of Dell’s just-in-time production model and real-time order information. They could align their production more precisely with actual sales, reducing their own costs and risks.
• Manufacturers (Dell): Lower inventory levels, reduced obsolescence, and the flexibility to respond swiftly to new component releases or technological shifts.
• Customers: Access to more current hardware at competitive prices, because cost savings were passed along and new components were introduced quickly. They also benefited from direct, reliable technical support and easily customized systems.

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5. Benefits Dell Derived That Secured Its Competitive Position

• Lower Cost Base and Higher Margins: By cutting out traditional reseller markups and avoiding retail overheads, Dell could operate at lower costs while still offering competitive prices.
• Stronger Customer Loyalty: Direct relationships let Dell understand and address client needs quickly, improving customer satisfaction and retention.
• Fast Technology Adoption: Minimal inventory meant Dell was never stuck with large quantities of outdated products. It could adopt the latest chips and components ahead of competitors with excess stock.
• Scalability and Growth: Because Dell did not have to invest in large channel infrastructures, it could scale more aggressively and maintain strategic focus on its manufacturing and customer service excellence.