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Dell's Direct Business Model

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Subject: Dell's Direct Business Model

Date: 04/08/05

Will Dell's direct business model continue to provide a competitive advantage as fellow competitors Compaq, IBM, and HP emulate Dell's direct model?

Dell's direct business model bypasses the dealer in the supply chain and sells computers directly to customers, building each to order. Dell does not manufacture the computer components; they merely assemble computers based on components that are available in the market.

Dell's use of technology and information to blur the traditional boundaries between suppliers, manufactures, and users is named virtual integration. To achieve the advantages of an integrated company, Dell treats suppliers and service providers as if they were inside the company. Their systems are linked in real time to Dell's system and their employees participate in design teams and product launches.

Dell measures inventory velocity which is defined as the reciprocal of the average amount of time a product spends in inventory. Accumulating inventory is the fast moving PC computer industry is very risky due to the fact that many components quickly become outdated.

In 1998 Compaq, IBM, and Hewlett-Packard all announced plans to mimic portions of Dell's direct business model, with various build to order plans. All have had difficulty in making the transition. These companies are moving towards a target inventory level of four weeks, conversely, Dell maintains just eight days of inventory.

Dell's direct business model has much strength. By not manufacturing any computer components, it relieves Dell of the burden of owning assets, research and development risks, and managing a large number of employees. Their virtual integration allows them to meet customers' needs faster and more efficiently then any other model. It allows Dell to be efficient and responsive to change at the same time. Also, it allows all members of the supply quicker access to information.

However, there is a weakness inherent in Dell's business model. By bypassing retailers, consumers might be reluctant to buy an "intangible" product that they can not physically see in front of them and touch, or test try. The sale of automobiles can be used to emphasize the importance of seeing a tangible product. Dealerships would face much difficulty



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