Dell Business Model
Dell Business Model

Dell Incorporated is an American privately owned multinational computer technology company based in Round Rock, Texas, United States, that develops, sells, repairs and supports computers and related products and services. Bearing the name of its founder, Michael Dell, the company is one of the largest technological corporations in the world, employing more than 103,300 people worldwide.
Dell sells personal computers, servers, data storage devices, network switches, software, computer peripherals, HDTVs, cameras, printers, MP3 players and also electronics built by other manufacturers. The company is well known for its innovations in supply chain management and electronic commerce, particularly its direct-sales model and its "build-to-order" or "configure to order" approach to manufacturing—delivering individual PCs configured to customer specifications. Dell was a pure hardware vendor for much of its existence, but with the acquisition in 2009 of Perot Systems, Dell entered the market for IT services. The company has since made additional acquisitions in storage and networking systems, with the aim of expanding their portfolio from offering computers only to delivering complete solutions for enterprise customers.
Dell was listed at number 51 in the Fortune 500 list, until 2014. After going private in 2013, the newly confidential nature of its financial information prevents the company from being ranked by Fortune. In 2014 it was the third largest PC vendor in the world after Lenovo and HP. Dell is currently the #1 shipper of PC monitors in the world. Dell is the sixth largest company in Texas by total revenue, according to Fortune magazine. It is the second largest non-oil company in Texas – behind AT&T – and the largest company in the Greater Austin area. It was a publicly traded company (NASDAQ: DELL), as well as a component of the NASDAQ-100 and S&P 500, until it was taken private in a leveraged buyout which closed on October 30, 2013.

HISTORY
Dell traces its origins to 1984, when Michael Dell created Dell Computer Corporation, which at the time did business as PC's limited, while a student of the University of Texas at Austin. The dorm-room headquartered company sold IBM PC-compatible computers built from stock components. Dell dropped out of school to focus full-time on his fledgling business, after getting $1,000 in expansion-capital from his family. In 1985, the company produced the first computer of its own design, the Turbo PC, which sold for $795. PC's Limited advertised its systems in national computer magazines for sale directly to consumers and custom assembled each ordered unit according to a selection of options. The company grossed more than $73 million in its first year of operation.
In 1986, Michael Dell brought in Lee Walker, a 51-year-old venture capitalist, as president and chief operating officer, to serve as Michael's mentor and implement Michael's ideas for growing the company. Walker was also instrumental in recruiting members to the board of directors when the company went public in 1988. Walker retired in 1990 due to health, and Michael Dell hired Morton Meyerson, former CEO and president of Electronic Data Systems to transform the company from a fast-growing medium-sized firm into a billion-dollar enterprise.
The company dropped the PC’s Limited dba in 1987 to be Dell Computer Corporation and began expanding globally. In June 1988, Dell's market capitalization grew by $30 million to $80 million from its June 22 initial public offering of 3.5 million shares at $8.50 a share. In 1992, Fortune magazine included Dell Computer Corporation in its list of the world's 500 largest companies, making Michael Dell the youngest CEO of a Fortune 500 company ever.
In 1993, to complement its own direct sales channel, Dell planned to sell PCs at big-box retail outlets such as Wal-Mart, which would have brought in an additional $125 million in annual revenue. However, Bain consultant Kevin Rollins persuaded Michael Dell to pull out of these deals, believing they would be money losers in the long run. Indeed, margins at retail were thin at best and Dell left the reseller channel in 1994. Rollins would soon join Dell full-time and eventually become the company President and CEO.

BUSINESS MODEL
Dell has managed to become remarkably successful in a short span of time by following a direct "business to customer" model. By selling computers directly to customers, they have been able to best understand their needs and provide effective solutions to meet those needs. Dell built PCs to order, so customers received only what they wanted. Dell's just-in-time inventory system allowed them to order only parts that customers demanded, thus keeping the minimal inventories and enjoying the cost-reductions which in turn were passed to customers. Dell's extensive use of e-commerce contributed to further cost minimization, reduced the order and delivery time for customers, and customization. There are three golden rules at Dell: disdain inventory, always listen to the customer, and never sell indirectly.

Key Issue(s)

China had been identified as a very promising market and Dell has set the goal to improve its rank from seventh to second place in this PC market. However, Dell faces many challenges in this market. The Chinese government actively promotes the Chinese PC maker "Legend" who dominated the market; penetration of the Internet is relatively slow; software piracy is rampant; competition is intense. In addition, there is fierce competition for market share and Dell's competitors have started imitating Dell's business model. Dell needs to determine how it should modify its strategy to succeed in the Chinese market.

Alternatives and Evaluation

1. Open up Dell Retail Stores
The Chinese are uncomfortable with purchase high-ticket-price products that cannot be viewed before purchase. This is one of the reasons that Dell has invested in door-to-door sales calls. If Dell were to open up retail outlets they would be able to keep the costs of their computers down (avoiding retail mark-ups in China) and they would be able to remain loyal to their three golden rules. This option would allow for customers to come into a store and view the computers in person, which is something that they are more comfortable doing. The computers in the store could serve as models and sales representatives would be able to assist customers with making the online purchase right there in the store, allowing the customer to get a customized computer. There would be a large financial investment with this option, but it may compare with the amount of money that they are spending with their current door-to-door approach. Another consideration is that there is a shortage of qualified sales personnel in China. This option also doesn't capitalize on the strengths Dell has associated with online purchases. In addition, there is the added challenge of getting the customers to choose to come to the store.

2. Focus on Involving Customers in Leasing Computers through Dell Financial
In some of the regions that Dell operates, they have a leasing program through Dell Financial. Leasing allows a company to transfer residual risk and implement a disciplined approach to technology rotation, and it provides flexible end-of-lease options. If Dell were to allow this to occur in China, customers may be more likely to choose Dell products because this is in a sense a "try before you buy" opportunity for potential customers, which offers the customers a little more security. Also, since customers are making monthly lease payments, there isn't as much of an upfront capital investment. In addition, this option helps Dell establish longer term relationships with their customers because when it comes time to upgrade their computer systems, customers will likely stay with Dell products. This may be a difficult option to implement because Dell would be introducing a system that is foreign to their customers. Dell needs to figure out how they can demonstrate to its customers why they would want to lease a Dell computer rather than buy and own another. Another thing to consider is possible problems associated with consumer credit and options that are available to deal with customers that choose not to pay.

3. Further Segment and Build Relationships with the Large Corporate Accounts (LCA) Segment
The LCA segment is where Dell is seeing some repeat buyers. Trust and confidence are important to LCA customers. If Dell were to further segment this market, they would have a better understanding of those customers and what their specific needs are. Currently, four main industries within this segment account for 50% of Dell's business in China. By further segmenting their markets they will be able to build real and meaningful relationships directly with their customers and present even more tailored offerings. This option will also be affected by the lack of qualified people in China and there will still be issues related to low internet accessibility and the tendency to use credit cards. It will also reduce the amount of cost savings associated with having all corporate accounts in one segment. This will, however, allow Dell to allow Dell to gain a more intimate knowledge of their customers and continue with the direct business model. It will allow Dell to capitalize on a strategy that has already proven to be successful even more.

MODEL DIED
Dell management must be suffering from whiplash.
Once one of the “four horsemen of tech”, the computer company rose to prominence by selling standardized boxes to enterprise customers. The model was operational discipline and minimal R&D.
In the 80s and 90s it worked like a charm. And then the 00s came, and the world was turned on its end.
Now, with a $24.4 billion buyout offer on the table, led by CEO and founder Michael Dell in partnership with Silver Lake and Microsoft, this one-time stock market darling is slinking out of view of the public markets, in the hopes of making the changes that have eluded the company to date.
The nexus of innovation shifted from the enterprise to consumers, and the dominant computing platforms shifted from the desktop to smartphones and tablets. A proliferation of cloud-based offerings have reduced the amount of hardware most companies require, as enterprise customers began to grasp that they wanted computing power and storage, not servers, and if they could buy the former without buying the latter, they would do so.
In short, Dell is a casualty of the changes wrought by the successes of Apple (AAPL, $475) and Amazon (AMZN, $262) and the failures of Microsoft (MSFT, $28). The one thing Dell has to be thankful for is that with its coherent story and more manageable size, it has a wider range of options to deliver shareholder value than does struggling tech giant Hewlett-Packard (HPQ, $17). * Apple: having taken over as the engine of innovation from the Wintel duopoly, Apple has also appropriated the majority of the profits from IT sales, securing premium pricing for its products. The company that lived and died by innovation is now dominating the market through both innovation and the network effects of a large and growing entrenched user base. Dell has no such advantages. * Amazon: Through its Amazon Web Services, Amazon has brought robust, enterprise-level computing and storage capability to its customers without the hassle of buying and maintaining the hardware. In the 90s one of the first items a startup spent money on was hardware, but Amazon has eliminated that need, while also offering larger enterprises the tantalizing possibility of substantially reducing IT spending without sacrificing organizational capability. * Microsoft: For years Dell and Microsoft were strong partners, with Dell providing the boxes that ran Microsoft software and Microsoft taking on the burden of R&D. As Apple products, in particular the iPad tablets, gain traction, that approach has broken down. Concerned with the lack of progress from its hardware partners, Microsoft has embarked on its own tablet, the Surface.
Dell was always somewhat miscast as a tech darling. An operationally focused company generally does not garner the type of hype that Dell once enjoyed, but the explosive growth of PC sales demanded shareholder attention. That growth obscured the fact that Dell was and remains a fast follower, perhaps with more of an emphasis on the “follower” than the “fast”.
When asked in 1997 what he would do if he were in charge of a then faltering Apple, Michael Dell said: “What would I do? I'd shut it down and give the money back to the shareholders”.
I bring up this quote (which has been cited a great deal lately), only to illustrate the dramatic change in the tech world since those comments in 1997. * In 1997, the deepest pool of profit for computer companies was in selling to enterprise customers, and enterprise customers wanted standardization and volume. * Consumer products are now clearly the drivers of innovation. Corporate CIOs are increasingly supporting whatever tablets and smartphones employees prefer, killing the value proposition of standardization and volume that Dell relied on. * The “Wintel” (Microsoft Windows and Intel chips) duopoly created a virtuous upgrade cycle in which faster chips permitted larger software packages which demanded faster chips and so on. * Windows 8 has been a disappointment, and enterprise customers have become increasingly frustrated with software upgrades that add little value but entail considerable costs. Additionally, the growing use of tablets has thrust Dell into competition with onetime partner Microsoft (via that company’s Surface tablets). The virtuous upgrade cycle has ground to a halt.
Need for a Change * Valuation: If you believe a turnaround is feasible, the $24.4 billion offer currently on the table implies a paltry EBITDA multiple of 5.5x. Given the tax advantages of a more leveraged structure, as well as the strong background of investor Silver Lake in the nascent field of technology company turnarounds, the buyers have positioned themselves for windfall gains if they are successful. Granted, this is somewhat better than prior to rumors of a buyout, but it is hardly a robust valuation. * Performance: Revenue (ttm) of $58.7 billion is under pressure, with quarterly revenue growth at -10.7%. Profitability is minuscule, with an operating margin of 5.74%, though operating cash flow is strong at $3.7 billion and total cash is robust at $11.3 billion.

Conclusion
Shareholders of Dell are in many ways suffering from the fact that their company was just small enough for a buyout to be feasible, and had struggled long enough for a bargain basement price to still represent a premium to the share price prior to the announcement. But the success of this investment is not assured. Dell’s profitability is weak and its revenue growth is negative, though the company does continue to generate strong cash flow and maintains a sizeable cash balance.
Turnarounds are messy, and tech turnarounds doubly so. Dell is a company that needs to make considerable changes in its structure in order to return to an acceptable level of profitability. The type of wholesale restructuring that is needed is best done out of the glare of the public markets. The hope for this company is that the buyout will permit Dell to execute a comprehensive restructuring out of the glare of the public markets.

I recommend that Dell implements option 2 and focus on involving customers in leasing computers through Dell Financial. I make this recommendation based off of Dell's business model, Dell's strengths, and the current environment in China. Dell has already successful implemented in this program in other regions that it is operating in. This option addresses the hesitance of customers to make such a large purchase for a product brand that is not well established in China. This option will allow customers to transfer residual risk and implement a disciplined approach to technology rotation. I believe that for China, customers will be more likely to choose Dell products because this is in a sense a "try before you buy" opportunity. There won't be such a large initial investment, plus they can feel secure that the purchase they make will not become obsolete technology in the near future. I believe that this option will help Dell established a more recognized, stronger brand name and that it will allow Dell to establish long-term relationships with their customers. This option is in line with Dell's plan for growth in China and will allow Dell to leverage its strengths to make it a successful strategy.