Case 4 - Dell Computers

8/6/2019 Case 4 - Dell Computers

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Dell: Selling Directly, Globally

"I believe we have the right business model for theInternet age."

- Michael Dell, CEO, Dell Computer

Corporation'

Dell Computer Corporation was into its fifteenth year ofoperation and had expanded from a US$6.2 million US-based business in 1985 to a US$21.7 billion internationalbusiness in 1999. In 1999 it ranked second in both the USand the worldwide PC market. Its success was founded onthe direct business-to-customer model, whichrevolutionised the PC industry, at first in the US and thenin over 170 countries around the world. The Companyhad been setting the standards for pricing andperformance worldwide, despite analysts repeatedlysaying that, "This is an American concept. It cannot workhere!" Then in 1996, Dell again rocked the PC industry bymaking its direct approach even more direct through theInternet. Dell On-line seemed a natural progression forDell. In the first quarter of 1997, Dell reported daily on-linesales of USS I million. For the month of August 1999, daily


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on-line sales had reached US$30 million, translating toUS$11 billion per annum. By the end of 2000, Dell targetedto conduct half of its business in each region on-line.

However, despite its remarkable growth and globalexpansion, there were still many regions Dell needed tobreak into to ensure its future position in the ranks, notably

China. Analysts predicted that China would soon becomethe second largest PC market after the US, generatingrevenues of US$25 billion by 2002. In September 1999,Dell ranked inuithei seven in China's PC market. TheCompany had ambitions to achieve approximately 10 percent of its global sales through the China market by 2002,which would secure number two ranking in China. TheChina market would thus account for 50 per cent ofregional sales by 2002. Fifty per cent of sales were alsoto be achieved through the Internet. Was this timescale

realistic? Was the market mature enough to handle itsbusiness on-line direct? Aaron Loke, Director ofMarketing, was contemplating the expansion strategy forDell to pursue in China. Could the "American model" workin China?


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I "Dell Paves the Way for a New Level of DirectEconomics and Customer Benefits", 14 April, 1997,URL:httpwwww.deli.comicorporate(meala/newsreleasesi 97/9704/14.111M, August 1999.

Pauline Ng prepared this case in conjunction with P.Lovelockunder the supervision of Dr. Ali F. Farhoomand forclass discussion. This case is not intended to showeffective or ineffective handling of decision or business

processes.


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99/53D Dell: Selling Directly, Globally

4

Dell Direct

From Glory to Glory

"I definitely felt that I was diving into somethingpretty major without knowing most of the details.... But I did know one thing. I knew what I wantedto do: build better computers than IBM, andbecome number one in the industry."

- Michael Dell'

In 1983, at the age of 18 and with US$1,000, Michael Dell

realised his life ambition and

started out selling upgraded PCs and add-on components

from his dormitory room at the University of Texas, Austin.This doter-room business officially became Dell ComputerCorporation in May 1984. With the rapid growth of theCompany, Dell went public in June 1988. Ten years on, Dellwas ranked number two and the fastest growing among allmajor computer systems companies worldwide, with morethan 26,000 employees around the globe [see Exhibit 1].Michael Dell earned the reputation of being the youngestCEO ever of a Fortune 500 company. Furthermore, he wasnamed one of the Business Week's "Top 25 Managers of

the Year" in 1997, "Entrepreneur of the Year" by Inc.magazine, "Man of the Year" by PC Magazine, and "CEO ofthe Year" by Financial World.The success of MichaelDell and the Dell Computer Corporation was founded on

the direct business-to-consumer

model [see

Exhibit 2]. The

Direct Model

The Company was founded on a simple concept: that byselling personal computers directly to customers, Dell couldbest understand their needs and provide the mosteffective computing solutions to meet those needs. Dell sold


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directly to customers, dealt directly with suppliers andcommunicated directly with employees, all without theunnecessary interference of intermediaries. To thecustomer, whether a regular consumer or a multinational

corporation, Dell was their single point of contact andaccountability.

Dealing directly with customers meant that Dell knewexactly what its customers wanted.While IBM's PC was an open box designed to allow forexpansion, reconfiguration andContinual upgrading, Dell chose to build PCs to order. Dell

was the first PC manufacturer to

offer free installation of applications software as a standard

service option. By using patented technology, it installednetwork cards to customers' proprietary, in-houseapplications, right on the manufacturing line. Thus, Dellclaimed that it offered its customers more powerful, morerichly configured systems for their money than competitors.Rather than pursuing technology for technology's sake,customers got only what they wanted. Many PCmanufacturers had fallen into the trap of guessing what theircustomers might want.

Dealing directly with suppliers was essential for thesuccessful application of Dell's directmodel. Just-in-time inventory control created advantagesthat had an immediate impact oncustomets. hiventwy costs were kept to a minimum, new

technological breakthroughs (e.g.,

faster chips, bigger disk drives) could be delivered tocustomers within a week as opposed to two months, andobsolete and dated stock holdings were minimised The

threat of being caught in a transition to a next-generationproduct with an inventory of obsolete stock was a perpetualproblem in the industry, but one that the direct model couldavoid. Dell was able to pass along to its customers thesavings from reductions in system component costs quicklybecause it maintained very low inventories. This was ofparamount importance in the PC industry as the rate of


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development of new technology dictated PC prices. Dealingdirectly2 Dell, M., & Fredman, C., (1999), Direct,from Dell:

Strategies that Revolutionized an Industry,

London: HarperCollinsPublishers, p. 11.


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with a few main suppliers on a global basis reinforced Dell'scompetitive advantage. Michael Dell's reasoning was thatthrough closer contact with customers and with moreinfoimation about customer needs, there was less need formassive amounts of inventory.

There were three golden rules at Dell: disdain inventory,always listen to the customer and never sell indirectly. Theformula worked well for Dell. Its build-to-order manufacturingoperation for the US was located in Texas, for Europe inLimerick (Ireland), for Asia Pacific in Penang (Malaysia) andfor China in Xiamen.

Growth and Expansion Beyond the US

"Our success was, in fact, something of a crisis point.-- Michael Dell'

Rapid growth and expansion were necessary if the Companywas to survive. The Company started out targeting thesmall- to medium-size businesses in the US market. Whileits competitors were aiming at the top end of the market (i.e.,the large corporations), Dell chose to lead aprice/performance revolution from the bottom up, bringing

new technology at affordable prices to the widest possiblegroup of customers. The strategy worked well in the US. Bythe end of 1986, Dell had achieved US$60 million in sales.Michael Dell was concerned about the next step for hisCompany because staying small would make themvulnerable to the consolidation that was taking place in thePC industly. hi the fall of 1986, he called together theexecutives of the Company and held a brainstormingmeeting. Three key realisations materialised that were to mapthe course that Dell was to take:

1. Dell had to target large companies if the business wasto grow;

2. To do this, they had to offer the best support in theindustry;3. Despite the fact the Company was only two-and-a-half

years old, it needed to expand globally and to grow


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beyond the US.

"Many people told us the direct model would fail invirtually every country we expanded into ... Themessage was always the same: Our country isdifferent, your business model won't work here."

- Michael Dell'

In June 1987, Dell ventured out of the US for the first timeand started business in the UK. Journalists and analystsspeculated that Dell's direct model might work in the US, butnot in Europe. However, 11 more international operationsopened over the period 1987 to 1991. By 1994, Dell hadinternational subsidiaries in 14 countries, and sold andsupported its products in more than 100 additional marketsthrough partnering agreements with technologydistributors. In 1995, construction began on the Asia PacificCustomer Centre (APCC) in Penang, Malaysia. In the first halfof 1995, Dell opened offices in six La/unities in the legion.Malaysia became the hub of a comprehensive Asia Pacificmanagement, sales and marketing network that included

Australia, China, Hong Kong, India, Indonesia, Korea,Malaysia, NewZealand, the Philippines, Singapore, Taiwan and Thailand.

The intention was to begin on aselected basis and to extend out from country to countryover time. In 1998, the Xiamen manufacturing and servicecentre (China Customer Centre) was opened. The regionalheadquarters of Dell Asia Pacific remained in Hong Kong.In 1998, Dell operated sales offices in 33 countries andserved customers in more than 170 countries and territoriesaround the world.

3Dell, M., & Fredman, C., (1999), p. 26.4 Dell, M., & Fredman, C., (1999), p. 28.


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Results that Spoke forThemselves

"Dell Computer Corporation defies gravity. Whether youmeasure its growth

in sales, profits, market share, or stock price, theCompany is simply

weightless."- Business Week, 2 November, 1998

Dell went through extremely rapid growth throughout theCompany's history [see Exhibit 3]. Its build-to-order, direct-sales approach allowed it to far outpace industry growthrates. In 1995, a Company press release reported that Dell'sstock value had appreciated by more than 700 per cent since

the Company's first public offering in 1988.5 In the sameyear, Fortune Muguzine ranked Dell for "best investment"with an 81.2 per cent "total return to investors"over the previous year. By December 1997, Dell hadovertaken IBM and became the second-largest supplier ofdesktop PCs worldwide, with a 9.7 per cent share of themarket and a 1015 per cent price advantage over its majorcompetitors who distributed their products through indirectchannels.' [See Exhibit 1.] Between 1988 to 1998 the

Company's stock value increased by 36,000 per cent. Inthe same period, it had grown from a US$159 millioncompany to a US$18 billion company.'

By February 1998, the Company reported a sales increasein Europe of 61 per cent in thefourth quarter of the 1998 financial year, bringing salesclose to USS1 billion. Sales from

Asia Pacific increased by 79 per cent itt the 1998 financialyear compared to the previous

year, an increase that was more than in any other Dellregional business, albeit from a small base. In August 1999,the Company announced that it was number one in PCshipments within the UK. [See Exhibit 4 for a breakdown ofrevenue by geographic region.]

For the quarter ended 31 July, 1999, the Company reported


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revenue of US$21.7 billion. It became the number one PCvendor to businesses in the US. Dell again led industrygrowth in unit shipments, revenue and earnings. Shipmentsincreased by 55 per cent, two times analysts' estimates of

total industry growth. Dell's operating income was 11.3 percent of revenue, and operating expenses declined bynearly one percentage point. Return on investment was260 per cent, four times higher than that of Dell's nearestmajor competitor. At quarter end, Dell held six days ofinventory. [See Exhibit 5 for details of Dell'sachievements.]

Selective Expansion

Dell had applied an expansion strategy that involved

selective introduction of the direct model, country bycountry. The strategy followed the same pattern in eachcountry: in the first instance, Dell would make use ofdistributors (e.g., currently in India). The benefits of thedirect model over the indirect model (such as reduced costsand increased attention to customer experience andsatisfaction) were obviously lost. The decision to apply thedirect model depended on the "readiness" of thecountry/region and would rest on a number of factors,including:

y The size of the market, current and potential.y The availability of resources, especially a sales force that

was capable of applying the direct-sales model: the PCindustry was dominated by vendors selling throughindirect

channels The skills-set required for relating to customers

needs and translating those

needs into customised products and services was not

readily available.

Be Quick and Focused; Global Markets SurgingAhead, Dell CEO Says", (27 January, 1995), URL:www.dell.comicorporatemediainewsreleases/95/9501/27.htm, August 1999.6 US Department of Commerce, "The


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Emerging Digital Economy", 15 April, 1998,URL:http://www.ecommerce.gov/emerging.htm,

August 1999.7

Dell, M., & Fredman, C., (1999), p. 225.


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y Sufficient management resources at the local level:senior management required knowledge of thebehaviour of the local market, the training potential andneeds of the local labour force, as well as other cultural,physical and political limitations that had to be overcome.

y Local acceptance of Dell's direct model: potentialcustomers who had not heard of the Dell brand wouldfind it difficult to pick up the telephone and order Dell PCswithout having seen one. This applied even more so incountries/regions where the cost of a PC was two or threetimes an individual's monthly salary. From Dell'sexperience, customer trust had to be earned. This wouldinitially entail significant resources mobilised to ensure

face-to-face contact with potential customers.However, once

trust wasestablished through product and service satisfaction,

customers were happy to make

repeat orders through the telephone.y Suppliers' ability to deliver parts at short notice: Dell's

direct model was dependent to a large extent on just-in-time inventory management.

y

Adequate arrangements with carriers to ensure timelydelivery of orders: Dell's average order-to-delivery timewas six days. Dell had made arrangements with authorisedcarriers (American, Airborne, Conway, Eagle, First Air,FedEx, RPS, UPS and Watkins) to expedite deliveriesaround the globe. DI IL, FedEx and Bax Global were usedextensively in the Asia Pacific region.

y Operating costs.

Timing for entry to new markets was therefore essential given

all the factors that had to be considered. However, theunderlying motivating force at Dell was that, given the righttiming and the readiness of the market, all countries/regionsin the world would accept the direct model for selling PCs.The PC had become a commodity and the globalisation ofthe PC market would, in the future, be comparable topurchasing a can of Coca Cola or a pizza. In the past, major


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barriers for Dell have included government regulations,lack of human resources, inadequate telecommunicationsand transportation infrastructures, and unavailability orinaccessibility of parts.

While planning for global expansion, the impact of theInternet explosion rippled through Dell.

www.dell.com

"Dell, the Company, seems to have been bornand evolved with an anticipation of the Internetage."

- Andrew S. Grove, Chairman, Intel Corporation

"Our PC consumer shipments grew more than100 percent in the quarter [ended 31 July, 1999],and about one-half of those sales were generatedonline, through www.dell.com."

- Michael Dells

Very early on Dell saw the advantages of the Internet andexploited them before others in the industry. For Dell, this newtechnology presented a medium through which it could geteven closer to its customers and enhance its direct-salesapproach. It was a logical extension to the direct model,making it even more direct.

In June 1994, Dell launched www.dell.com. This was phaseone of Dell's plan to link with its customers through the Net.The site presented customers with simple product and pricelists, almost like an on-line catalogue.

"Internet Benefits to Customers, Company Expanding;

On-line Sales Reach $30 Million Per Day", Dell Computer

Corporation, URL:

http://www.dell.comicorporate/mediainewsreleases/99/9908/17.htrn, September 1999.


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Since July 1996, Dell customers could configure and order acomputer directly through Dell's Website. This was phase twoof Dell's plan. Within a year, daily sales over the Net totalled

over US$3 million [see Exhibit 6]. Dell was the firstcomputer company to provide a comprehensive on-linepurchasing tool.

Phase three included on-line technical support, orderstatus information and on-line downloading of software.Dell's electronic commerce strategy was beginning to takeshape [see Exhibit 7 for the sitemap of www.dell.com]. Itwas developed to work seamlessly with the Company'sexisting systems, providing real-time pricing and order status.

Its goal was to make the internal operations of the Companyagile enough to respond to the ever-increasing and ever-changing needs of customers. On average in 1998, Dellresponded to over 120,000 technical support queries a weekthrough its Website. Interestingly, 90 per cent of salesthrough the Net were placed by small businesses andconsumers. Corporate customers chose to use the Websitefor gathering product information, order status and technicalhelp rather than to place orders.

For Dell, the benefits of the Internet were enormous. Eightyper cent of the consumers and half of the small businesseswho purchased on Dell's Website were first-time buyers.Undoubtedly, www.dell.com brought in additional revenues.Providing product infonnation, pricing and technical supporton line helped to lower sales and marketing costs. Basiccustomer service and technical support functions providedthrough the Internet helped to lower service and supportcosts. Dell estimated that 20,000 customers who would check

their order status on-line would present savings for Dell ofbetween US$6,000 to US$10,000 per week, and 30,000software requests that could be downloaded on-line wouldsave Dell US$150,000 per week.9

By mid-1998, all Dell customers had individual files of theirsystem configurations on-line. Customers were able to take


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advantage of the very latest technology and immediatecomponent price reductions. In addition, it offered 24-houron-line service and support. It removed inter-companyboundaries and achieved speed-to-market in ways that were

not possible before. In April 1997, Dell established a newjoint-venture leasing company called Dell Financial Services,which provided a range of flexible leasing options directly toDell customers in the US and eventually worldwide. ItsInternet offerings included more than 6,500 products from itsDell Ware catalogue.

Dell's application of Internet technology to its direct modelcreated a fully integrated value chain. It allowed a three-way"information partnership" with suppliers and customers by

treating each player as a collaborator to improve efficiencyacross the entire supply and demand chain, thus sharing thebenefits. For example, at Dell's manufacturing site in Ireland,uidets weft received via the Web and call centres, Doll wouldrelay to its suppliers details of the components required, allthe components were delivered to the site, and completecomputers would be shipped out, all within a few hours.

Customisation

The Internet also provided great potential for enhancing

customer relations and opened up new selling possibilities.Through its Website, Dell refined the services tailored to itscustomer segments. Dell offered capabilities, service andcontent tailored to the needs of its customers, including largecommercial accounts, government, educational institutions,small/medium businesses and home buyers. To attract thecorporate clientele, Dell created customised "Premier Pages"that allowed them to make purchases from the company'sown Intranet. Microsoft was one company that made use

of its customised Premier Page.9US Department of Commerce, (1999).


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levels of system uptime, streamline the customer supportprocess and decrease the total cost of system ownership.

Just as Dell had revolutionised the PC industry with its direct

model and with www.dell.com, Dell intended to use theInternet to revolutionise the customer support experience.Internet-enabled support was to provide customisedcapability to easily automate and speed up the supportprocess. These included Dell On-line Knowledge Base, AskDudley, Resolution Assistant and HelpTech. Supportinformation was unique to each system and could be foundat support.dell.com [see Exhibits 8a-8d for details of E-Support services].

Dell was named as one of 1999's Ten Best Web Support Sitesby the Association of Support Professionals, a national bodythat examined industry support trends. Dell was the only PCvendor to win the award. In the same year, Dell was alsoawarded an "A" in Web Support by the CNET Editor's Choicefor Service and Support. The Company also announced that itwas leading the industry by resolving 80 per cent of technicalsupport issues without despatching service technicians,much higher than the industry average of 27 per cent.

Within the industry, there was growing consensus that thefocus of business was shifting beyond the box-sellingmentality.

"The old model of making PCs is no longer viable."

- Mr Anderson, IDCI3

Global expansion through the Internet, however, had itslimitations. This was especially true for regions whereInternet usage was still low in terms of population density.

The Second-largest PC Market in the World

"If we're not in what will soon be the second-biggest PC market in the world, then how can Dellpossibly be a global player?"

- John Legere, President, Dell Asia Pacific"


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The PC market in the Mainland had seen rapid growth. [SeeExhibit 9 for growth of China'scomputer industry between 1990-1996.] In 1996, PCvendors sold 2 1 million desktop PCs,

notebooks and servers in China, an increase of nearly 40per cent from the previous year. Thetotal value of the market in 1996 was US$3.34 billion, anincrease of over 20 per cent from the previous year. In threeyears' time, it was estimated that China's market size wouldbe around 10 million PCs. The major Chinese PC makers,such as Legend, Founder and Great Wall, ranked within thetop 10 in terms of PC shipments. All PC vendors competingin China sold through distributors who carried many brands.

For example, Compaq had engaged 21 distributors at onepoint during 1996.

In June 1998, the Market Information Centre (MIC) reportedits prediction that by the year2000, Mainland China's annual PC production would reach7.6 million, making it the third-largest in the world after the US and Japan. Furthermore,

if Japan's economic slump

continued, China could take second place in global PCproduction. If PC shipments in China continued to grow at 30per cent per annum (as it had between 1996-1999),China's PC market would surpass Japan's by 2004. Noteven the Asian financial crisis had slowed down this growth.

As at June 1999, China was the fifth-largest PC marketbehind the US, Japan, Germany and Britain.

However, China and her PC market were characterised by anumber of factors:

13 Ong, C., "Cruch Time for Resellers as Direct PC SellingGrows", South China MorningPost, 20 April, 1999.

14 Chowdhury, N., "Dell Cracks China", Fortune, 21 June,

1999.


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y Retail buyers only accounted for 10 per cent of sales."y The price of a PC was the equivalent of two years of aperson's savings.16y Chinese managers were becoming more and more tech-savvy on their own.y The problem of software piracy in China was rife:

Microsoft estimated that 95 per cent of the software usedin Chinese corporations was stolen.

y China's nationalistic politics made US companies inChina vulnerable to the ups and downs of Sino-Americanrelations.

y The Chinese Government made no secret of the fact thatnational PC vendors would be promoted.

y There remained the tensions between the immenseeconomic opportunities in China and the constraints onbusiness activity, including the shortage of skilled labourand the immature legal and institutional frameworks.

y In 1995, PCWeek On-line reported in an article that"...building close and trusting relationships is critical tosucceeding in China.' However, five years on, times hadchanged and many foreign companies in China weresucceeding without having the connections.

y The government required users of the Internet to registerwith the police when opening an account, and there waswidespread belief that user activity was monitored by thegovernment. Many commentators predicted that one ofthe key obstacles to future growth of Internet usage inChina was the issue of government control.

y The credit payment system: China's Ninth Five-Year Planmade it a priority to establish a series of "Golden"projects, one of which was the "Golden Card". Thisproject was aimed at developing a nation-wide credit-cardnetwork that would also provide debit and electronic pursefacilities in China. It was reported in 1997 that the smartcards were scheduled to be operational before the end of2002, and that 250-300 million cards would be in use bythen_tg China had embarked on the largest smart bankcard in the world. Having said that, it seemed unlikely that


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the smart card would be readily issued to the averagecitizen, but mainly to corporate bodies and people of highsocial standing.

y On the Internet front, Chinese Internet usage was

proliferating. Between 1997 and 1998, according to IDC,the number of Internet users increased by 71 per cent tomore than 2 million.

y Analysts predicted that China would contribute the largestInternet growth in the first part of the 21 Century."

Dell in China

DellTakes theDirect Model toChina

In February 1998, Dell announced its intention to extend intothe world's most populous country, China. Reporters andanalysts told the Company that the Western concept wouldnot work in China. China's regulation was that if goods werenot manufactured in China they could not be sold directly inthe Mainland. Hence in August, a new 135,000 square-footfacility was opened and a China Customer Centre (CCC) wasestablished to produce, sell and provide service and technicalsupport. The intention was to place the Company closer to itscustomers in markets that presented long-term potential. Inthe previous three years, Dell's

15 Chowdhury, (1999).16 Chowdhury, (1999).

17 Hamm. S., (1995). "Sound the Gong". PCWeek On-line, URL: h :// .zdnercom/pcweek/inside/0724/tgong.html,September 1999,18 Tse, S., & Tsang, P., (Last Update 2 July, 1997) ''lnternetand WWW in China: All the Right Connections", AUUG95 &

Asia-Pacific World Wide Web '95 Conference & Exhibition,

URL:

http://www.csu.edu.au/special/conferenceiapwww95/papers95/stse/stse.html, September 1999.19 Tse, S., & Tsang, P., (Last Update 2 July, 1999).


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99/53C Dell: Selling Directly, Globally

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business in the Chinese market had grown steadily andsales of computer systems were through distributors.

Xiamen was chosen for its ideal location, half way between

Hong Kong and Shanghai on China's southeastern coast inFujian Province. It was one of China's first four SpecialEconomic Zones established in 1981. Xiamen was a rapidlygrowing city with a vigorous economy and a fully-moderninfrastructure. It boasted of excellent highway connectionsto major cities in China and an efficient domestic airport.Furthermore, it had a number of reputable universities andover 20 per cent of Xiamen's population were graduates ofhigher education. The telecommunications network in Xiamen

was excellent, providing over 1,000 telephone lines to theCCC.Through negotiations with the government, two powergrids supplied electricity directly to the CCC.

The CCC mirrored the manufacturing and professionalfunctions found at the Asia Pacific Customer Centre (APCC)in Penang. The CCC allowed Dell to pass on the benefits ofthe direct model to its customers in China, including cuttingout the costs of the distributors, being able to make-to-orderwithin three to four days and providing upgraded systems to

customers within a week. An order could be off the productionline within two days. Most deliveries, using contractedcarriers, were by road. Furthermore, 70 per cent of Dell'sparts were supplied from within the Mainland throughmanufacturers who had global agreements with Dell. Qualitywas therefore not sacrificed.

In August 1998, direct sales and technical support operationsbegan in nine areas of China, including Beijing, Shanghai,Guangzhou and Xiamen. Through these locations, Dell

covered over 80 per cent of the potential user population.The Company also launched toll-free sales and technical-support telephone numbers to provide immediate local-language assistance to customers. The Xiamen operationemployed a little under 500 people. Around 200 were"outside sales" staff, engaged in door-to-door visits, lookingafter corporate customers, The balance worked at the CCC


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and included engineers, production staff as well as "insidesales" staff. The latter engaged in taking on-line andtelephone orders. Staffing was a major challenge for Dell.It was difficult to find experienced direct sales people,

because direct sales was a new profession in China.Despite this, 96 per cent of the workforce were recruitedlocally, the remainder consisting of management level staffwho were mostly from Hong Kong. Over 60 per cent wereuniversity graduates.

Another problem encountered in China was the bureaucracyand red tape involved in securing government contracts, thegovernment and government-owned corporations beingmajor customers in China's PC market. The negotiation

process could be extremely lengthy while the teems of thecontracts were often one sided and non-negotiable in anycase.

Dell's range of OptiPlcx desktops and Latitude notebookcomputers and PowerEdge network servers were madeavailable to customers in all nine areas [see Exhibit 10 for afull list of Dell's systems]. Additional products and serviceswere to be introduced in response to market demand andtechnology advancements. In fact, in April 1999, Dell

introduced its award-winning range of Dimension desktopsspecifically targeted at home and small business customers.

Contrary to popular belief, most of Dell's sales in China and Asia were not to consumers buying over the telephone.While many vendors were targeting the general market, Dellresolved to focus initially on corporate customers. It was,therefore, questionable whether a like-for-like application ofthe direct model could be achieved in China. This tacticrattled Chinese PC vendors such as Legend and Founder by

nibbling into their most valuable client base: state-ownedenterprises. Unlike the US market, where two in 10 PCssold by Dell were to consumers, the consumer segment inChina was very different. The price of a PC could


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cost the equivalent of three months of a person's wages.The average consumer could not afford the investment andvery few had a bank account let alone a credit card. Ifconsumers wanted to buy a Dell PC, they would often visitthe nearest Dell office to see one first. Alternatively, theycould refer to Dell's Website or newspaper advertisements.

Although Dell had stopped using distributors, retailers werepurchasing direct from Dell and selling systems on toconsumers at marked-up prices.

Dell's customer groups were divided into three segments:

y Large Corporate Accounts (LCA): companies with 1,500-plus employees.y Preferred Accounts Division (PAD): companies with 500-1,500 employees.y Home and Small Businesses (HSB): establishments withfewer than 500 employees.

The segment in which Dell was seeing some repeat buyerswas in the corporate accounts. Initially, resources weremobilised towards maximising face-to-face contact,establishing good customer relations and promoting the Dellbrand on a personal level. This "relationship sales" strategy

was required for the LCA and PAD segments to honebusiness deals. Some business deals were made throughcustomer relationships and recommendations, while otherswere made purely through pricing advantages. Once trustand confidence were established, Dell expected that thesesegments would require less face-to-face contact and thatmore oideis would be placed through the telephone or cvcnthrough the Net, thus reducing Dell's operating costs. Withincorporations, Dell targeted the IT managers who seemed to

have some knowledge of the latest PC technology and knewwhat specifications were required for their companies.

Within the LCA segment, four main industries or sectorsaccounted for 50 per cent of Dell's business: government,education, telecommunications and power, andfinance/banking. Two-thirds of Dell's corporate customers inChina were state-owned enterprises. Dell Asia Pacific had


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targeted for revenues in China to constitute approximately 10per cent of global sales (representing 50 per cent of sales forthe region) by 2002, making it the second largest PC vendor(in terms of volume) and possibly the largest supplier to

LCAs. But to achieve this target, senior managers at theCCC debated the need to further segment the market tobetter serve their customers.

In 1999, Dell ranked seventh in China [see Exhibit 11 forrankings in China's PC market in 1999]. Dell saw orderscorning in from nearly 100 of the Mainland's biggest cities viathe telephone, the Internet and from the sales staff, whichwas still the most common method of selling. In the fourthquarter of 1998, Dell's sales in the Mainland grew by 100

per cent, albeit from a small base. In the second quarter of1999, Dell recorded year-on-year unit growth of 561 percent. If Dell could sustain that pace of growth, it wasanticipated that it would achieve sales of more than US$100million in 1999.

China On-line?

However, just as Dell had been careful to identify thetimeliness of making the transition from using distributors tousing the direct model, so the timing and market readiness for

electronic commerce had to be assessed from country tocountry. Dell anticipated that, whereas 50 per cent of itsbusiness (by volume) in the US would be conducted on-linewithin one to two years, this same target would be achievedin two to three years in Asia Pacific. [See Exhibit 12 fordetails of Internet usage in the US and Asia-Pacific.] Themajority of Dell's business in Asia Pacific came from large-and medium-sized corporations. Dell's Website supported16 country-specific sites for Asia Pacific, using three

languages, including Chinese and Japanese.


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Part of the problem was that the Chinese were uncomfortablewith credit card sales, especially of high-price-ticket productsthat could not be viewed before purchase. Many resourceshad therefore been invested in door-to-door sales calls tocorporations. The operating costs were obviously higher forDell in China than in, say, Europe or the US, where themajority of sales were placed through the telephone or on-line. Until China caught up with the West in terms of Internetpenetration and credit card usage, the costs of enforcing thedirect model would continue to take a tidy chunk out of Dell'searnings. Furthermore, these limitations would restrict thepotential reach of the direct model.

Some large corporations in China had Premier Pages.These preferred to buy through the Net as it wasconvenient and fast. While the majority of customerscould buy through www.dell.com, there were limitations.Payment had to be made by credit card, cheque ortelegraphic transfer. Apart from large corporations who weregiven credit facilities, other customers had to pay up-front.This created complications and delayed the orderingprocess. Also, access to the Internet was expensive, andonly senior executives were granted usage.

In 1999, Internet sales accounted for less than two per centof total sales in China, compared

to 25 per cent worldwide. Undoubtedly, the future potentialfor Internet growth was huge. However, the timing remaineduncertain. So far, only Premier Pages and DellWare had beenlaunched on the Net.

Copy-Cats

"Yes, we're using Dell's direct-selling model

when we target Chinese government companiesor multinationals in China."

- Mary Ma, Chief Financial Officer, Legend2

Competition in the Mainland PC market was intense.Legend, the government-backed company, remained innumber one position and looked set to remain there for a


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27

while yet. All the major vendors, such as IBM, HewlettPackard and Compaq, were vying for position, while agrowing number had established manufacturing plants inChina. Still others felt the best way to do business in China

was to form joint ventures with local companies (e.g.,Digital and Founder).

Dell was hoping that its experience and knowledge with the

direct model, particularly with

the leadership it had in on-line direct-selling, would givethem a clear run in the medium term at least. However, withthe insignificant volume of on-line sales in China and thesimplicity of the direct model, it was only a matter of timebefore the competition would try to beat them at their own

game. Legend announced to Fortune Magazine that it wasrapidly adopting the just-in-time delivery model, sellingdirectly to its corporate customers and being able to cutcosts and reduce inventory holdings in the process. [SeeExhibit 13 for details of Legend's sales growth.]

Compaq, on the other hand, opted to selectively adopt thedirect model. In May 1999, the

company announced that it had slashed its US distributors

from 40 to four to cut costs, in an

attempt to better manage inventory and as a positive steptowards applying the direct model. In China, however,Compaq continued to sell through distributors and value-added resellers.

"The US is a whole different market and it requiresa different model to be efficient. Here in GreaterChina, we will continue to be committed to ourchannel partners."

- Tony Leung, Marketing Director Greater China,Compaq'

2u Chowdhury, N., (1999).

21 Ong, C., "Compaq Axes US Retail Outlets, but Keeps

China Plan", South China MorningPost, I I May, 1999.


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However, in June, Compaq cut its list of resellers inGreater China from 30 to 10. In July 1999, Mr Leungconceded that "The trend to go direct is inevitable...". But

unlike the Dell direct model, Compaq chose not to bypassits resellers. Instead, the "partner-direct" model linkedCompaq to its partners' systems so that orders could beinput from its customers online. In this way, access tocustomers would not be limited, said Compaq's chiefexecutive.

In June 1999, IBM announced that it would open a newassembly plant in Shekou at the end of 2000. This was a

joint venture between IBM and Great Wall. Being thesecond-largest PC vendor after Legend, IBM hoped thatthe new facility would help to reduce inventory holdingsto less than four days. While IBM had announced that itwould apply the direct model to its North American market,company officials commented that it would take some timebefore the direct model would be adopted in Asia, where 80per cent of its PCs were sold through traditional channels

Talking about the potential for taking their business on-line,

an IBM official said:

"We have to look at market readiness. The environmenthere is different

from the one in the US. And Asia-Pacific is notas comfortable right now with e-commerce theway the US is.""

IBM reported Internet sales of US$3.3 billion in 1998, andthe company anticipated that this figure would grow to

US$10 billion for 1999.

In the midst of a tense PC market in China and bearing inmind that Dell's three golden rules (disdain inventory, listento customers and never sell indirectly) were not to bebroken, Aaron Loke was to report to the Asia-Pacificregional head office on the strategy for expansion. Could


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the direct model take Dell to the number two position? Wasthe target for on-line sales realistic and how could this beachieved? Was Dell to be a box-seller in China or was therea demand for services and support? How should Dell

pursue its on-line global strategy?

22 Ong, C., "Crunch Time for Resellers as Direct PC Selling

Grows", South China MorningPost, 20 April, 1999.

23

Ong, C., "Asia Not Affected by IBM Direct-Sales Plan",South China MorningPost, 13 April, 1999.


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30

EXHIBIT 1US AND WORLDWIDE PC SHIPMENTS2ND QUARTER, 1998

Top Five Vendors, US PC Shipments

Rank Vendor 2nd Qtr,1998

Market

-

Top Five Vendors, Worldwide PC Shipments

Rank Vendor 2nd Qtr,1998

Market

-

AllVendors 20 077 100.0

Notes:y Shipments are branded shipments and exclude OEMsales for all vendors.y Data for NEC/PBNEC includes shipments for Packard

Bell, NEC, NEC Japan, NEC China and ZDS.y

Data for Compaq includes shipments for Compaq, DigitalEquipment and Tandem.

Source: International Data Corporation, Q3 1999.


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31

EXHIBIT 2DELL'S BUILD-TO-CUSTOMER ORDER

Start Here with the CustomerDell customers communicate and buy from

Dell in three ways www.dell.com Voice-to-voiceFace-to-face

Just-in-time InventoryDell receives only the materials it is immediatelyready to use and only those specified as desirable

to that particular customer

Custom-Designed ComputersThe Traveler is a sheet that contains all of thecustomer's unique configuration information. This

Kitting

Based on the Traveler, all internal parts andcomponents required to make the system arepicked and placed into a tote

Build-to-Order A team of workers uses the kit to assemble and

Testing and System IntegrationSystems are then extensively tested using Dell

Boxing, Shipping and Delivery- -


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Portables

23%

nterprise13%Desktops

64%

EXHIBIT 3DELL COMPUTER CORPORATIONFINANCIAL YEARS ENDED 1995 1998

US$ millions/Percentage ofnet revenue

Financial YearEnded

29 Jan., 1 Feb., 1 Feb., 28 Jan., 29 Jan.,

-

--Non-system netrevenue,

7% 9% 10% 11% 12%

Net Revenue by Product Line for year ended 29January, 1999


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34

Americas68%

US$ millions/Percentage of net revenue

nanc a ear n e

1 Feb., e ., 29 Jan.,1995

Net revenue, by region-Americas

- E u r o p e- Asia-Pacific & Japan

26%

28 Jan.,29 Jan.,

EXHIBIT 4

DELL COMPUTER CORPORATION

REVENUE BY REGION

Net Revenue by Region for year ended 29January, 1999

Source: URL:

http://www.dell.com/...financials/financialSummReport.ht

m, August 1999.


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35

EXHIBIT 5DELL'S RANKING ACHIEVEMENTS

No.1 supplier of PCs to the US corporate market segment(2Q 1997)No.1 supplier of PCs to the US federal, state andgovernment market segment (2Q 1997)No.2 for shipment of PCs to large and medium businessesworldwide (2Q 1997)No.3 supplier of notebooks in the US (June 1998)

No.3 supplier of servers worldwide (1998)No.2 supplier of servers in the US (1998)No.1 supplier of workstations in the US (1998)No.1 supplier of PCs in the UK (1999)

DELL'S ACCOLADES OF INDUSTRY AND BUSINESSAWARDS

y The "Readers' Choice" award for Overall Service andReliability, Fortune TechnologyBuyer's Guide

y

The "Readers' Choice" award for Service andReliability for both desktops and notebooks, PCMagazine

y No. 1 in Web-based support, Computer Worldy The "Reliability and Service Award" for work PCs, home

PCs and notebooks, PCWorldy Highest customer satisfaction rating for servers,

desktops and notebooks from industry analyst firm,Technology Business Research

y "Delivering the Best Return on Investment to

Shareholders" award among the Fortune 500 (1994)y The "Most Admired Companies" award since 1995,

Fortuney The "Best Performing Information Technology

Company" in the world award, 1998, Business Weeky Top performing stock among the Standard & Poor's 500

and Nasdaq 100 in 1996 and 1997, and top performing


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36

US stock on the now Jones World Stock Index

Note: This list is not conclusive

Source: "Dell Redefines the Low-cost Consumer PCMarket", 15 June, 1999, URL:littp.//www.dell.cono/corporatc/media/newsreleases/99

/9906/15.htm, August 1999; "Major

Publications, Independent Surveys Declare D ell aWinner, 16 December, 1998, URL:http://www.dell.com/corporate/media/newsreleases/98/9812/16.htm, August 1999; Dell Direct World Access: DellManagement (M. Dell), URL:

http://www.dell.com/corporate/acce...1mgnt/offcceo/mdell/mdellbioj r.htm, August 1999.


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EXHIBIT 6DELL'S DAILY ON-LINE SALES ANDWEEKLY TECHNICAL SUPPORT VOLUMES1997

" nd rd th++

Tech.support/

30,000 45,000 60,000 120,000

Visitor

213,000 225,000 250,000 400,000

sales 0% 5% 10% 17%

Source: US Department of Commerce, "The EmergingDigital Economy", 15 April, 1998, URL:http://www.ecommerce.gov/emerging.htm, August 1999.


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Q . U M W

G Search

WOREAVADI PRODACID STORE SUSICAI ATE MAP seacc ee CONLACT

C01011420 SioaiSDHome/Hcrne OfficeG Small BusinessD Business

10FederalGovernmentHeahhcare

GHigher Education

G K.12 Education

G State & LocalGovt

, r i t Y q c a T

J PSystem Specific SupportPagesG SelfDiagnostic ToolsGComponent & Software SupportFile Library

D.Frequently Asked QuestionsService Parts

PDell Web Talk

D Large Business > 400G Small Business Investor Relations

P Research & Derelopmen1

DPrivacy Practicesn.ii

cownct ________________

Contact

eat 1n,9 Doi ,,pure. co,r,y, right, reaserk,, T0 , 005 0 U00) Or0i0. 0 0 +. 0. ,0

11;!drAdr.:

EXHIBIT 7www.dell.com SITEMAP


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EXHIBIT 8ADELL COMPUTER CORPORATIONE-SUPPORT SERVICES

1DOLL SUPPORT

D AskDudley!

DEellKnowled e

Order StatusSvslem

IdenlificalionHole

neiLuAkDE-Nail Dell

DContact

.11261...1113110060131 91000

Ina = 11111111EIZIE=111111111111

For US nystornera only.'''psatelb.t 1999 De0Computer Carporatien, Oil

nehts reserved. (Terms ofUse) Online arivetvorectlees

lanyeri


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40

Tics on Askingr cheek m t sp ole ngeytek,ev esterorolo ey .

4e,

C=1111E=IN IEL,Ez-111WANT INSTANT ANSWERS?

Duicaisrvil

Just type in your support question and click "Ask",,

,111141, One comp lete and eon.* sentence 001 g ive id , bans

r e s u l t s . f o r e xem p l a r " W i t t d i d my C D , R OM s t op vo tn g y

? aka a peak at vha tma t t :ov ate are asking nueta v r ight nov g

ow do I i n s t i l l N i c rodo f I o f f i ce 20007

egge Puede...Ono Ml rights "pervert

ettodevdro f MOP* , 34441-0011 smote. Ott ." f _

EXHIBIT 8BDELL COMPUTER CORPORATION

E-SUPPORT SERVICES

For etwomers,419110tIt 1999 DellComputer Corporation,

All rights reserved,(Terms of WO) QjNinePlnes, Rrastions


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41

EXHIBIT 8C

DELL COMPUTER CORPORATION

E-SUPPORT SERVICES

IF YOU ARE LOOKING TO...

Obtain answers tocommon questions askedofDellTechnicians.

J r_t type in olr and

Deor.olood deoero,Glens ut ,too )o,rrDell so

Re:See stop by oleoomtrocopos riooroosirroissues withyourDer siorme

tadout in or:quo r,r recent 0Ser ph :55 wep Dell

Order Upgrade and Reolsx.eirort carts for yourDell system,

Review technical informationonDell supported components,

peripherals and ADiliiVatP. (1.1anth.AMINS611. PoriphatAix et)

Receive and fax technical and troubleshooting documents

directly fromour site,

whatourDell engineers are saying shod the latestdegree

Get quick access toonline support fromothervendors in theindustry

Review thevarious plansDell has tooffer

sewthevarious contractsDell has tooffer

e details shoat this serece and support pins for ISpr Is

Transferownershipof yourDell systemusingonline Mires

VisrtGigabuys.comtoInd peripherals, upgrades, and

accessories for yourDell system.

1.91Arsrati

esearch &lopment

Selected VendorSupped Sites

Servire Corrects

men only.

co~r~v,e1949 D.11 computerIrPOY4b:C., all ngho. reserved,rrem LI


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42

6E248

39.56

EXHIBIT 9GROWTH OF CHINA'S COMPUTER INDUSTRY BETWEEN1990-1996

70

60 50;96,5 0 1-

40 ____ 28..0 30 ____

9n' V 1 7.638

10 _0

1990 1993 1994 1995 1996

Source: Buchel, B., & Raub, S., (1999), "Legend Group andthe Chinese Computer Industry", Asian Case ResearchJournal, Vol. 3, Issue 1, May 1999, p. 51.


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43

rff Tc.) lalortwear :roc. vie

SwrChrtiee or Calk.1teo.WWW-ef41.

WOUSTICION S

OS 110:16,07

EXHIBIT 10DELL COMPUTER CORPORATIONPRODUCT LIST

DIMNSIONK)Penormanceand value

comestandardwith theteversatiledesktops forthe homeand lie airier

P DimensionProduct Line

Quorum PCompareCurrentDimensionModels Sideby Side

OPTIPLEXOIndustry-.standard,dependable

managedPCsdesigned forreliability andcompatibilityin networkederiaircnenents.OptiPlokProduct LinoOverierowP CompareCurrentOpliPlexModelsSide bySide

DELLPRECISION'WORKSTATIONS A

pairedpartner fortheprefessidnalwho needshigh-endvideo andamazing PCand PDgraphics.PPf9tIS1611ProductLineCverirew PCompareCurrentPrecteionModels Side

by SideP Dimension, Optiliffer ur'ffiorkStation? Which one is right-

fur you?


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44

INSPIRON"Inspirennotebooks

- -

LATITODEVDurablenotebooks

DELLWAREOFrom

POWEtttGOV&Let aPerwerEdgesewerservice yournetworkneeds.

P

PowerEdgeProductLineCannier: PInlematCaching

ApplianceSide by SideComparisons

,WorkyrzupFramersEnterpriseServers

POWERVAUL1' .

Ahigh.perfortrance storagesolution forbusiness.driticelenvironments

_ (SCSIsubsystems,fibre channel& tapebackup)PPokkonenabltProduct LineCr/owlets.

DellServicesIntl can talpprorid. arc

AO, theaddiont younsee, ontime and ontudlet !tomteas no nowitnrsInttosiimIsamotogyconAltin toadallaton.ard mo,1!

P Mt.

Dpentianage60.1.1snegoovt., man.genrnt!oiut.enn fat 04114.14, pr.

Arm 09&apesystcrgshnipa hmer thetotal 351

CI.Pttellf Ana rravolla'ohmosilloility forour surkmvs.

P moreCorpor


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45

NPAL11.01 . WOILDIMS11.91tE4

ateInhumation P

Yeartesty

litsora end

DoArkprnot

WartatlieEtTESSEIMIEMIMICE=MillIEE02211117E1ME=11

en I `. Deo Ws, put, vyht5reserv.rec (T,mr, ruf)


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46

EXHIBIT 11RANKINGS IN CHINA'S PC INDUSTRY IN 1999

Ranking Q2 1999 Mark

'"d'd -ththth

Total 1 203 95 100.0

Ranking Q2 1998 Market

'"drd -

4th

Com

56,04th

Total 1 023 551 100.0

Source: International Data Corporation, Hong Kong


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8000

6000m on

r - t0 ) 0 ) 0 ) 0 ) 0 )0 ) 0 ) 0 ) a a s

-

EXHIBIT 13

LEGEND'S SALES GROWTH

Source: Buchel, B., &Raub, S., (1999), "Legend Group and

the Chinese Computer Industry", Asian Case Research

Journal, Vol. 3, Issue 1, May 1999, p. 59.

Documents

Case 4 - Dell Computers