The Information Society, 16:5–21, 2000

Copyright ° c 2000 Taylor & Francis

0197-2243/00 $12.00 + .00

ReŽning and Extending the Business Model With

Information Technology: Dell Computer Corporation

Kenneth L. Kraemer, Jason Dedrick, and Sandra Yamashiro

Center for Research on Information Technology and Organizations (CRITO), Graduate School
of Management, and Department of Information and Computer Science, University of
California, Irvine, Irvine, California, USA

Keywords build-to-order, business model, clockspeed, customer

The exceptional performance of Dell Computer in recent years relationships, Dell Computer, direct sales, distribution
illustratesan innovative response to a fundamental competitive fac- channel, information technology, time-basedcompetition,
tor in the personal computer industry—the value of time. This ar- virtual integration
ticle shows how Dell’s strategies of direct sales and build-to-order
production have proven successful in minimizing inventory and “It isn’t so much that we have a new economy, as we have
bringing new products to market quickly, enabling it to increase a new understanding of the importance of technology in the
market share and achieve high returns on investment. The Dell economy.” Paul Roemer, quoted in the Wall Street Journal,
case illustrates how one business model may have inherent advan- May 1999.
tages under particular market conditions, but it also shows the “Dell Computer Corporation is perhaps the purest exam-
importance of execution in exploiting those advantages. In partic- ple of the efŽ ciencies made possible by information technol-
ular, Dell’s use of information technology (IT) has been vital to ogy.” New York Times, 2 January 1997.
executing both elements of its business model—direct sales and
build-to-order—and provides valuable insights into how IT can be
applied to achieve speed and  exibility in an industry in which time
The exceptional performance of Dell Computer in
is critical. Many of the insights gained from this case can be applied recent years illustrates an innovative response to a
more generally to other time-dependent industries, suggesting that fundamental competitive factor in the personal computer
the Ž ndings from the Dell case will have implications for a growing industry— the value of time. Product life cycles in the per-
number of companies and industries in the future. sonal computer (PC) industry have shrunk from about 22
months in 1988 to 6 months in 1997 (Mendelson & Pillai,
1998), and the price/performance of key components has
continued to double every 18 months or less. As a result,
excess inventory depreciates rapidly. In addition, getting
Received 1 December 1998; accepted 15 July 1999. new, quality products to market on time is critical to main-
The authors gratefully acknowledge the assistance of interviewees taining competitiveness in an industry where customers
at Dell Computer, the Boeing Company, IBM, Seagate Technology, are willing to pay a premium for the latest technologies
Solectron, and Western Digital, as well as the anonymous reviewers of and reward quality by repeat purchases.
this manuscript for The Information Society. This researchhas been sup- Dell’s strategies of direct sales and build-to-order pro-
ported by grants from the CISE/IIS/CSS Division of the U.S. National duction have proven successful in minimizing inventory
Science Foundation and the Industry University Cooperative Research and bringing new products to market quickly, enabling
Program in the Center for Research on Information Technology and it to increase market share and achieve high returns on
Organizations (CRITO) at the University of California, Irvine. Indus- investment in a highly competitive industry. The impact
try members of the Center include ATL Products, the Boeing Company,
on the industry of Dell’s success is seen in the efforts
Bristol-Myers Squibb, Canon Information Systems, IBM, Nortel Net-
works, Rockwell, Seagate Technology, Sun Microsystems, and Systems
of other leading PC makers and distributors to develop
Management Specialists (SMS). their own direct sales and/or build-to-order capabilities
Address correspondence to Kenneth L. Kraemer, Graduate School (Stafford, 1999).
of Management, Center for Research Information Technology and Or- The Dell case illustrates how one business model may
ganizations, University of California, Irvine, Irvine, CA 92697, USA. have inherent advantages under particular market condi-
E-mail: kkraemer@uci.edu tions, but it also shows the importance of execution in

5
6 K. L. KRAEMER ET AL.

exploiting those advantages. In particular, Dell’s use of in-

formation technology (IT) has been vital to executing both
elements of its business model—direct sales and build-to-
order—and provides valuable insights into how IT can
be applied to achieve speed and  exibility in an industry FIG. 1. Indirect distribution channel of the PC industry.
in which time is critical. The importance of IT in time-
dependent industries has been conŽ rmed by Mendelson
and Pillai (1999), who surveyed 67 business units and nical information and supply base. The difference among
found a strong correlation between an industry’s “clock- PC companies was determined increasingly by the second
speed” and the use of IT to enhance internal and external factor—the structure of distribution.
communications. 1 The traditional distribution system of the PC industry
Many of the insights gained from this case can be ap- is an indirect model often referred to as “the channel”
plied more generally to other time-dependent industries, (Figure 1). The PC maker sells its products to distributors,
such as fashion clothing, publishing, transportation, food who buy products from many manufacturers and then sell
service,  owers, and many segments of the electronics them to a variety of retailers, resellers, system integrators,
and communications industry. As more products incorpo- and others, who sell products and services to the Ž nal cus-
rate digital technology, and more commerce is conducted tomer. This distribution system was an effective means for
electronically, it is likely that more industries and markets distributing high volumes of PCs with a variety of conŽ g-
will be characterized by the kind of time-based competi- urations to reach a broad customer base.
tion that marks the PC industry (Curry & Kenney, 1999). However, it had inherent weaknesses that left it vulner-
This suggests that the Ž ndings from the Dell case will able in a time-based competitive environment. First was its
have implications for a growing number of companies reliance on market forecasting to drive production. Even
and industries in the future. 2 the most successful PC makers, such as IBM, Apple, and
Compaq, were chronically bedeviled by their inability to
TIME-BASED COMPETITION IN THE PC INDUSTRY accurately forecast demand in a market driven by ever
shorter product cycles. They were either caught with short
The PC industry is driven by rapid technological improve- supplies of hot products, causing them to lose sales to com-
ments in components, particularly microprocessors, other petitors, or stuck with excess inventories of slow sellers,
semiconductors, and storage devices. The improved per- which clogged the distribution channels and often had to
formance of hardware has been matched historically by in- be sold at a loss to move them out. Even with the best
creased complexity of software, creating demand for the forecasting, the indirect model was plagued by the need
latest hardware. This means that time is a critical com- to hold inventory at each step in the channel in order to
petitive factor in the industry in two ways: Ž rst, excess Ž ll orders. In the early 1990s, it was common for PC mak-
inventory loses value (at an estimated 10% per month; ers to have up to 90 days of inventory on hand and in the
Gutgeld & Beyer, 1995) and costs money; second, prod- channel.
ucts incorporating the most advanced technologies are in The high inventory costs and lack of responsiveness of
high demand and carry a price premium. As a result, com- the indirect channel meant that there was an opportunity
panies that minimize inventory and bring new products to for someone who could Ž nd a way to circumvent the chan-
market faster can reduce costs, increase market share, and nel. The company that seized this opportunity was Dell,
maintain higher margins (Curry & Kenney, 1999). which pioneered a new business model based on selling
Two factors come into play in determining the abil- PCs directly to the Ž nal customer, and building the PC only
ity of PC companies to manage inventory and introduce when an order was received (Figure 2). Selling directly re-
new products. The Ž rst is the standardized, modular na- moves two links in the supply chain where inventory could
ture of the PC. PCs are built from standard components, build up and also enables Dell to know its Ž nal customers,
using common architectural interfaces determined largely provide better service to them, and promote repeat or ex-
by Intel, Microsoft, and, earlier, IBM. PC makers also can panded sales to them. Build-to-order production allows
outsource much of their production and purchase compo- Dell to introduce new technologies as soon as customers
nents from a well-established production network of con-
tract manufacturers and components suppliers (Dedrick &
Kraemer, 1998a; Langlois, 1992). This makes it quite easy
for PC companies to introduce new PCs with the most
advanced technologies. By the 1990s, PC makers could
no longer gain much of an edge by virtue of design and
manufacturing, as everyone had access to the same tech- FIG. 2. Dell’s direct distribution channel.
 REFINING AND EXTENDING THE BUSINESS MODEL WITH IT 7

want them and makes it possible to adjust production to it expanded its markets internationally and developed suc-
demand very quickly. It also means that Dell does not pur- cessful notebook and server product lines.
chase components and assemble PCs until it has received The result has been an extraordinary run of growth in
payment from the customer, giving the company a nega- revenues, proŽ ts, and market value for the company. Sales
tive cash conversion cycle in which it receives payment reached $18.2 billion in 1998, with proŽ ts of $1.46 bil-
from customers before it must pay suppliers. lion, and Dell’s share of the worldwide PC market grew
Already a signiŽ cant channel in the early 1980s, the from 3% in 1995 to 9.2% in the Ž rst quarter of 1999.
direct channel increased from 25% in 1984 to 35% of the Dell’s stock price grew by over 40 times from 1994 to
PC market in 1998. 3 The use of the Internet as a direct 1999, and the company’s market capitalization topped
sales channel is likely to mean continued growth in direct $100 billion.
sales as a share of the PC market, as direct sellers can reach Dell’s success has garnered the admiration of Wall Street
additional potential customers at a low marginal cost. and made it a favorite subject of the business press, which
has offered a variety of explanations for that success.
DELL COMPUTER: BACKGROUND AND HISTORY Michael Dell himself has weighed in with a 1999 book
titled Direct from Dell: Strategies That Revolutionized an
Michael Dell founded Dell in 1984 while he was still a col- Industry. Most of these explanations have focused on the
lege student at the University of Texas in Austin. From the advantages of Dell’s business model, yet the analyses fail
beginning, Dell sold directly to the Ž nal customer and built to explain how Dell executes that model and particularly
PCs to users’ speciŽ cations. This basic business model has how it uses IT as a key competitive tool to do so. The re-
not changed over the years, although it has been modiŽ ed mainder of this article uses a case study approach to look
and reŽ ned as the company has grown. more closely at exactly what constitutes the Dell model,
Dell started with telephone sales of upgraded IBM- how the company continues to improve its operations, and
compatible PCs, then shifted to assembling and marketing how it uses IT to reŽ ne and extend the direct model.
its own brand of PCs in 1985. It provided customers with a The case study utilized literature review, buttressed by
24-hour hotline for complaints and guaranteed 24- to 48- interviews with key Dell executives, interviews with se-
hour shipment of replacement parts. As its customer base lected Dell customers and suppliers, and plant visits. Such
grew, Dell also implemented a direct toll-free technical an approach runs the risk of being caught up in the opti-
support line. In 1990, Dell shifted course when it began mistic views of the business press and Dell itself (or him-
selling through retail outlets such as CompUSA, Circuit self ), but we sought to maintain healthy skepticism about
City, and Price Club. Revenues grew rapidly, but problems what we heard and read. Some of the data in the case relies
arose in managing what had become a billion-dollar com- directly on Dell as a source, and we made every effort to
pany, and Dell experienced its Ž rst quarterly loss in 1993 check and conŽ rm it with other sources. Other data come
(Dell, 1999). from analyses of the PC industry and of Dell’s strategy and
In 1994, Dell concluded that even though it was suc- performance by IDC, McKinsey, Dataquest, Forrester Re-
cessful selling through retail channels, it was not making search, and Hoover’s Company ProŽ les, or public docu-
money doing so. Dell decided to withdraw from the retail ments such as annual reports and audited 10-K reports Ž led
market and return to its roots as a direct seller, a move by Dell. Descriptions of Dell’s IT practices and organi-
that not only helped the company’s proŽ tability but also zation were provided by Dell IT executives (current and
enabled it to put all of its efforts into executing the direct former). Finally, because Dell is sometimes a source for
model. Dell also brought in a new chief operating ofŽ cer, independent news stories, we evaluated all stories in terms
Mort Topfer from Motorola. Topfer led Dell’s efforts to re- of what we knew from industry studies, our interviews,
Ž ne its internal operations and tighten its integration with and our personal knowledge of the PC industry— having
suppliers and business partners. studied the industry in the United States and the Asia-
Dell has focused on improving service and support to PaciŽ c region for the last 8 years (Dedrick & Kraemer,
its large business customers by installing custom software, 1998b).
keeping track of customers’ PC inventory, allowing in- It is difŽ cult to attribute speciŽ c performance results to
dividual business users to order PCs directly rather than speciŽ c IT initiatives in any company, and this case is no
having to go through a central purchasing ofŽ ce, leasing exception. We have reported as accurately and objectively
computers, and allowing electronic payment via the Inter- as possible how Dell uses IT, what beneŽ ts it reports, and
net. As put by Michael Dell, “We are becoming the PC out- what problems it has experienced. We also acknowledge
sourcing company, not just the PC supplier” (Heidrick & that it is difŽ cult to isolate the speciŽ c effects of IT from
Struggles, 1997). The company also revamped its design, Dell’s business model or its execution. However, we have
manufacturing, procurement, and logistics processes to re- tried to develop concrete examples that show logical link-
duce costs, and speed up the entire supply chain. Finally, ages with IT that permit attributing some results to IT.
8 K. L. KRAEMER ET AL.

DELL’S BUSINESS MODEL that way (rather than using the Internet) as a federal gov-
ernment/Department of Defense contractor, and because
Other than its unsuccessful venture into the retail chan-
Boeing staff are familiar with EDI. Dell also has incorpo-
nel, Dell has stayed faithful to its original business model, rated its product information into Boeing’s in-house pro-
which combines direct sales and build-to-order produc-
curement catalog, again adjusting to Boeing’s way of do-
tion. This business model is simple in concept, but is quite
ing business. As a result, Dell is able to capture new and
complex in execution. While other PC makers rely on re-
replacement PC business because it is easy to do business
sellers, retailers, and other agents to carry much of the
with Dell, and contracting with another vendor would in-
burden of marketing and sales, Dell has to reach out to volve switching costs.
customers largely through its own efforts. And while other The drawback of direct sales is that Dell lacks the ex-
PC makers can run high-volume assembly lines to achieve
tensive reach of the channel, which has thousands of large
economies of scale, Dell must Ž ll each order to meet cus-
and small Ž rms providing sales, marketing, service, and
tomer speciŽ cations, a process that puts heavy demands on
support to customers of all sizes in all markets. To over-
shop  oor employees, suppliers, logistical systems, and in-
come this problem, Dell has segmented the market by size
formation systems. It has taken Dell 15 years to achieve and focused much of its own marketing efforts on large
its present skill in making the direct model work, a point
customers who could be reached directly by Dell’s sales
driven home by Michael Dell himself and by the difŽ cul-
force. Only after establishing a strong brand name with
ties other Ž rms have had in trying to imitate parts of the
larger customers and developing the online infrastructure
model. A closer look at the direct sales and build-to-order
to reach new customers at a low marginal cost has Dell
processes helps illustrate how Dell makes them work in- seriously targeted the widely diffused small business and
dividually and in concert with each other.
consumer markets. Dell also sells to resellers and inte-
grators in some cases and works with distributors to offer
Direct Sales non-Dell products such as software and peripherals. For
example, Dell is reported to be the second largest reseller of
The direct sales approach is built on two key elements: Hewlett-Packard printers (Schick, 1999). This  exibility
direct customer relationships, and products and services helps Dell expand its marketing reach while maintaining
targeted at distinct customer segments. Direct sales means its direct sales strategy for the bulk of its business.
that Dell must reach out to potential customers, either
through its own sales force or through advertising and other
marketing efforts. Dell does sell through resellers and inte- Customer Segmentation for Sales and Service
grators in some cases, especially outside the United States, Dell segments its customers into Relationship, Transac-
but for the most part it does not use the services of the chan- tion, and Public/International customers. 6 Dell’s segmen-
nel, nor does it support the proŽ t margins of the channel. tation of customers helps it respond to changes in demand
among different customers, to develop new customer seg-
Direct Customer Relationships ments, and to “grow” the most proŽ table segments.
Relationship customers are Fortune 1000 companies
Dell’s use of the direct approach reportedly provides it with that purchase at least $1 million annually. They currently
nearly a 6% cost advantage compared to indirect sellers number about 50 companies, including Boeing, Exxon,
(Kirkpatrick, 1997). It also provides Dell with detailed Ford, Goldman Sachs, MCI, Microsoft, Mobil, Oracle,
knowledge about its customers. 4 Vendors that sell through Procter & Gamble, Sears, Shell Oil, Toyota, and Wal-Mart.
resellers and retailers often don’t know who their Ž nal cus- Relationship customers accounted for 70% of Dell’s sales
tomers are, so they must rely on secondary market research in 1997, up from 59% in 1992, re ecting Dell’s empha-
to identify their own customer base. The direct approach sis on growing its business with large proŽ table clients
also allows Dell to identify customer trends early so it can (Table 1). Dell concentrates its resources on these cus-
respond with the desired products before its competitors tomers, offering highly customized services to gain and
can.5 keep their business.
The direct approach allows Dell to build a relationship, Relationship customers are serviced by Ž eld-based
which makes it quick and easy for customers to do business sales representatives in customer sites, and an equal num-
with Dell. IT staff at Boeing report that Dell has adapted ber of telephone service representatives is dedicated to
its IT systems, user interfaces, and procurement processes these accounts. Each sales representative is dedicated to
to Boeing’s, making it easy for Boeing employees to buy a single customer (or a region in some instances), and
Dell computers because they can use a familiar process. is responsible for understanding its IT environment
Dell uses EDI for processing orders directly into its order and service needs. For instance, about 30 people take care
management system because Boeing is required to operate of Boeing’s 140,000 Dell PCs and operate as its PC
 REFINING AND EXTENDING THE BUSINESS MODEL WITH IT 9

TABLE 1
Dell’s global sales characteristics

1992 1993 1996 1997 1998

Net sales ($M) (global) $2,014 $3,475 $7,759 $12,327 $18,243

By market segments Relationship 59% Relationship 64% Relationship 70%
(U.S. market only) Transaction 41% Transaction 36% Transaction 30%
By channels Direct 85%
(global) Indirect 15%
By markets U.S. 73% U.S. 71% Americas 66% Americas 69% Americas 68%
(global) Europe 27% Europe 27% Europe 28% Europe 24% Europe 26%
Asia 0% Asia 2% Asia-PaciŽ c 6% Asia-PaciŽ c 7% Asia-PaciŽ c 6%
Note: From interviews at Dell Computer Corporation; Das Narayandas and V. Kasturi Rangan, “Dell Computer Corporation,”
Harvard Business School Case No. 9-596-058 (Boston, MA: Harvard Business School Publishing, 1995, Rev. March 11, 1996;
Table 4); and Dell Annual Report, Fiscal Year Ending January 1999.

department—forecasting future PC purchases, managing suppliers to restock parts only as they are needed, and of-
the current inventory, and securing needed service and ten to maintain ownership of parts until they are used. In
support. 7 Each sales representative at the customer site effect, the PC company is pushing the upstream inven-
is paired with an inside representative at Dell who is re- tory problem onto the suppliers, a practice that is viable at
sponsible for order processing. least for larger vendors who have the clout to make such
Transaction customers, which represent 30% of U.S. demands (Kraemer & Dedrick, 1998).
sales, are small and medium-sized enterprises (about 20%) Dell’s build-to-order strategy goes even farther than
and home ofŽ ce customers and consumers (about 10%). lean production, however, in order to achieve mass cus-
Transaction customers are served by several thousand in- tomization of products. Build-to-order requires Dell and
side sales reps who can call up historical sales records to its suppliers to have available speciŽ c components as they
assist the customers in choosing systems that match their are needed to Ž ll an incoming order. For instance, while
prior purchase pattern. Compaq or IBM might order hard drives in batches of
International markets are served by a combination of different models for different production runs, Dell must
stand-alone subsidiaries and distribution agreements tai- have on hand enough of each drive model to quickly Ž ll or-
lored to local business and government environments. A ders of varying and unpredictable sizes. This requires very
more  exible approach is needed because the notion of close coordination between Dell’s sales and manufactur-
buying directly from the manufacturer is a new concept ing arms and between Dell and its suppliers. It achieves
in many international markets. Also, the infrastructure to this by reŽ ning its business processes, developing close
support the direct model is lacking. However, Dell has relationships with a limited number of suppliers, and us-
chosen to enter both China and Brazil with direct sales, ing IT to facilitate communication within and outside the
feeling that these large emerging markets will support the company.
direct model. Dell has continually worked to improve the speed and
By selling directly, incorporating the right technology  exibility of its production system. The build-to-order pro-
as it becomes available, and timing the changeover well, duction system is the focal point of Dell’s business oper-
Dell can take advantage of higher proŽ t margins on new ations, the common contact point for sales, procurement,
technology while also taking advantage of falling prices logistics, manufacturing, and delivery.
on components. The process is illustrated by what happens when cus-
tomers place an order via the Internet. They are aided by
Build-to-Order Production conŽ guration management software that enables them to
choose from a menu of hardware and software options. The
Dell’s production system applies principles of lean manu- conŽ guror ensures the items chosen are compatible with
facturing and just-in-time production, which were Ž rst em- the rest of the system and prices the system, permitting the
ployed by Japanese manufacturers such as Toyota and have customer to iterate through various choices. They also can
been applied extensively in the U.S. PC industry. These call Customer Service, which can link directly into Dell’s
principles aim to minimize parts inventories by requiring inventory to determine whether the required components
10 K. L. KRAEMER ET AL.

are available. If not, a sales representative can push avail- Procurement, Logistics, and Inventory. The build-to-
able inventory at a lower price, promote newer components order process drives Dell’s supply chain. The  ow of or-
at a higher price, or provide them at the same price in order ders and production determines how many of each part
to close the sale. Also, suppliers will be notiŽ ed to restock and component are needed, and suppliers must plan and
those components. adjust their own manufacturing, procurement, and logis-
After Dell receives an order, the conŽ guration details tics accordingly. Dell’s supply chain reaches around the
are sent to the manufacturing  oor. Assembly starts in “kit- world, and especially across the PaciŽ c, where it report-
ting” with a chassis and a spec sheet (bill of materials, spe- edly purchased $1.6 billion in systems, parts, and compo-
cial instructions, and software to be loaded) for the order nents from Taiwanese companies alone in 1998 (Dell set
that travels with the chassis throughout the process. The to boost, 1999). Managing such a far- ung supply chain to
spec sheet is printed from a computer Ž le that is updated meet the requirements of build-to-order is critical to Dell’s
with information about the speciŽ c components installed success, and requires close coordination and information
and the employees doing assembly for each machine at sharing with suppliers.
each step in the process. This enables quick identiŽ cation Dell has streamlined both procurement and inventory by
of the relevant components, suppliers, or employees when redesigning its computers so that different models utilize
problems develop in assembly or later in system use by as many of the same components as possible (Zuckerman,
the customer. In kitting, parts such as cables, connectors, 1997). This reduces the number of inventory parts and
motherboard, and memory are pulled from inventory to go the complexity of managing their procurement. Between
with the chassis as it moves down the line. In “build and 1992 and 1997, Dell reduced its 200-plus suppliers by
test,” other components such as hard drive,  oppy drive, 75%. Fifteen of these are key suppliers who provide about
CD-ROM, or DVD are inserted. 85% of Dell’s materials. Dell works with these suppliers
After all the hardware has been installed, the system is in multiyear planning and negotiating, thereby reducing
sent to software downloading where the operating system, the complexity of managing its supply chain.
applications, diagnostics, and even customer software are Dell has tough standards for its suppliers— quality must
loaded onto the hard drive. After the software is loaded, be world class or a supplier is dropped, the bulk of com-
the system is powered and tested, after which it is sent ponents must be warehoused within 15 minutes of Dell
to “boxing.” Here the completed system is placed in a factories (McWilliams, 1997), and suppliers must ensure
box, the keyboard, mouse, external cables, manuals, and 2 hours of inventory in the plant at all times. These re-
warranties are loaded, the shipping label is placed on the quirements reduce inventory costs for Dell and support
box, and the box is shipped. An electronic message is sent its just-in-time production processes. Through these part-
to an outside, independent producer of the monitor for nerships and others with transportation companies, Dell
the system to ensure that the monitor is delivered to the has achieved virtual integration of its operations from in-
customer at the same time as the system. Once the system bound logistics to production to outbound logistics and
is shipped, customers can log onto Dell’s web site and transportation.
track their orders through Federal Express.
To sum up, using direct sales eliminates inventory in the Product Design and Process Engineering. Dell spends
channel, provides Dell with information on and access to about $250 million annually on what it calls R&D.8 The
the Ž nal customer, and allows Dell to offer other services to aim is to evaluate new technologies to determine whether,
the customer. Using build-to-order allows Dell to offer the when, and how to incorporate them into new products;
latest technologies, which carry a higher margin; allows it improve product quality and reliability from components
to customize its products to user speciŽ cations; and means through Ž nished product; reduce cost throughout the value
that Dell doesn’t lay out cash for parts until it receives chain; and improve the speed of assembly, repair, and ser-
payment for the PC. Together, direct sales and build-to- vicing. Some illustrations of Dell’s R&D output include
order help create a strong relationship between Dell and the following product and process improvements:
its customers, as both require direct interaction and allow
Dell to gather information on its customers’ needs.
· Redesigned PCs to reduce the total number of
screws to Ž ve for the entire system.
ReŽning the Model: Business Process Improvement · Shortened cables to create more room in the chas-
sis for ease of assembly, expansion, and replace-
Dell continually reŽ nes the direct model through business ment.
process redesign and continuous process improvement. It Reduced software download time 75% by using
also makes extensive use of IT to support information link-
· Ž ber optics.
ages and enable process improvement throughout the value Reduced number of machine touches by over half
chain.
· through process redesign.
 REFINING AND EXTENDING THE BUSINESS MODEL WITH IT 11

· Added software to Microsoft Windows 98 to test

all hardware installations in the factory, reducing
and outbound distribution (Rollins, 1998). It has devel-
oped performance metrics to analyze production opera-
customers’ setup time from 45 minutes to 2 or 3 tions, balance inventory between suppliers and customers,
minutes (Dell, 1999). manage cash collection, and monitor proŽ tability, market
The ongoing improvements in design and production share, and return on invested capital. Dell also continually
processes have helped Dell cut the estimated production monitors margins, average selling price, and selling over-
cycle time for a desktop computer—from beginning of the head by customer segment, product, and country. Table 2
build process to placement on a delivery truck—to 7 hours outlines how Dell uses IT to reŽ ne its business model.
(McWilliams, 1997). At the newest Austin plant, named Dell also uses information to manage relationships with
Metric12, sometimes a PC can be built, software installed customers. It outsources customer service but operates as
and tested, and everything packed in a box for shipping broker between the customer and the third-party maintain-
within 5 hours (Ramstad, 1997). ers (TPMs) that actually provide service. Dell’s call center
service people trouble-shoot the customer’s problem and
Sales and Service. The customization that occurs in trigger one electronic message to ship the needed parts
production is carried over to sales and service. For in- and another to dispatch a TPM to the customer. As a re-
stance, Dell installs custom software on the machines that sult, Dell knows the kinds of problems customers face,
it builds for corporate customers. It also maintains an the parts causing the problems, and the performance of
inventory of its customers’ computers and has a sales its TPMs. Dell uses this information to develop computer-
and engineering staff dedicated to servicing key corporate ized sets of frequently asked questions (FAQs) and prob-
customers. 9 It seeks to lower the total cost of ownership lem solutions, to train service representatives, to identify
for its corporate customers by helping them manage their problematic suppliers, and to identify problematic TPMs.
PC inventories and offering technologies that reduce the Advanced IT systems are in evidence throughout Dell’s
cost of hardware and software maintenance in networks business processes. Orders are entered by sales represen-
(Dell outlines strategy, 1997). tatives or directly by the customer online into the Dell
Dell provides a toll-free technical support line, 30-day Order Management System (DOMS). In the DOMS, the
money-back guarantee, and next-day, on-site service (free order is Ž rst routed to the Ž nance department, where the
for Ž rst year of ownership) (Why Dell is a survivor, 1992). customer’s means of payment is checked. If approved,
Dell avoids having to staff a large service and support orga- the order then goes to engineering, which reviews it to be
nization by working with service partners such as Wang, sure that the desired conŽ guration is technically feasible.
Unisys, NCR, and BancTec. It has managed its service Then it goes to the plant, where a worker receives a print-
operations so well that in the 1997 PC World Reliability out of the order, with complete information on hardware
and Service Survey, Dell was ranked as Best Overall in and software conŽ guration and any special requirements.
reliability and service (In PC World’s semi-annual, 1997). The order is then checked against inventory to ensure that
The foregoing improvements in logistics, procurement, the required parts are available in the build area.
inventory, product design, production processes, sales, and Information on the order is available on PCs to the two
service are keys to Dell’s success in the PC market. An- builders and one tester in each assembly team. The printout
other is Dell’s use of information and technology to sup- travels with the parts and the computer as it is assembled,
port these improvements and to enable the use of new tested, burned-in, downloaded with software, and pack-
business processes such as Internet sales and service. The aged for shipping. After the PC is assembled and tested,
result is the reŽ nement and extension of the business model an Ethernet cable is attached to download software from
through IT. a bank of servers in a nearby room. Corporate customers
can have software preloaded, including their own propri-
etary software, and can have startup screens and various
DELL’S USE OF INFORMATION AND interfaces conŽ gured so that the machine is ready to use
TECHNOLOGY
out of the box. Finally, the PC is ready to be shipped to the
The direct model is simple in concept but involves great customer, complete with shipping label and bar code for
complexity and precision in actual execution. Thus, Dell’s the customer. As each build stage is completed, the origi-
management and IT people believe they have to help reŽ ne nal order is updated by bar-code scanning of information,
and extend—not redeŽ ne—the business model. which facilitates tracking the performance of components,
suppliers, and manufacturing and test cells. Each PC is
ReŽning the Business Model shipped with a service tag number on it. The customer can
type that number into Dell’s Web site and get a customized
Dell uses information to drive operating practices, all the Web page that has all the support information for that PC.
way from customers and far- ung suppliers to shop  oor This includes documents with help tree Ž les, diagrams,
12 K. L. KRAEMER ET AL.

TABLE 2
ReŽ nement of the Dell model
Business
strategy Information links IT applications Performance effects

Direct sales Customer orders are transmitted Call center automation, Accurate forecasting of
directly to Dell, where Premier Pages, Dell On-Line, demand
program does second check Dell Product Services (DPS) Segmentation of demand
for technical and Ž nancial Early indication of shifts in
feasibility demand
Build-to-order Order information travels Dell Order Management Better control of operations
with product through the System (DOMS), e-mail, Reduced inventory and transit
build process, enabling Lotus Notes points
inventory control, the meeting Better communication during
of special customer build process
requirements, download of Improved monitoring and
custom software, etc. evaluation of production and
supplier quality
Direct Information sharing notiŽ es Dell Logistics System, Lotus Accelerated outbound
distribution suppliers to ship monitors to Notes, e-mail logistics
arrive with PC No inventory
Aggregation of information Information to Run the Optimization of production,
includes orders, inventory Business (IRB) quality, and distribution,
turnover, production globally and locally
throughput, supplier quality,
on-time distribution

and graphics of the machine so that customers can solve Ž nding ways to extend business with existing customers,
many of their own problems (Brandt, 1998). to reach new customers, to reach new geographic markets,
While the use of IT greatly increases efŽ ciency in and to offer new products and services geared to those
production processes, it also is increasingly important in markets (Table 3).
linking Dell to its broader network of suppliers, busi- One example of how Dell extends the business model
ness partners, and customers, thereby enabling Dell to is its addition of Internet sales to sales through Ž eld reps
achieve “virtual integration” throughout the entire value and telesales, thereby extending the reach of direct sales.
chain (Magretta, 1998). Suppliers now have real-time win- Internet sales represent another option for customers that
dows into Dell’s information systems and can track sales enables Dell to reach people in remote locations where it
of products or components they provide. This enables sup- does not have Ž eld reps and to reach people who prefer to
pliers to build and ship inventory in response to changes shop via the Internet. Yet the Internet enables customers to
in demand faster than if they had to wait to receive a pur- easily bump up to telesales if they desire to speak to a tele-
chase order from Dell. Access to Dell’s order information sales representative. Thus, the Internet not only provides an
helps the supplier to better manage its own inventory and additional channel to reach customers, but it also provides
helps both Dell and suppliers to avoid missing out on sales a channel that extends customer options for reaching Dell.
opportunities because of inventory limitations. A second example is its Internet Web pages for cor-
porate customers, which extend direct sales farther into
the Ž rms’ operations through customization. Dell provides
Extending the Business Model
custom Web pages (called Premier Pages) for over 200 of
Dell’s IT people do not see themselves as only reŽ ning the its largest relationship customers (Magretta, 1998), and
business model, because the execution of the direct model therefore the IT departments, and in some cases individ-
must continually adapt to new conditions. According to ual employees, of large corporate customers can access a
chief information ofŽ cer (CIO) Jerry Gregoire, they are Dell Web site set up especially for their company—a cus-
also involved in extending the business model. This means tomized version of the site at www.dell.com. The customer
 REFINING AND EXTENDING THE BUSINESS MODEL WITH IT 13

TABLE 3
Extension of the Dell model
Business strategy Information links IT applications Performance effects

Integrate with Daily and long-term Dell Integrated Logistics, Accelerated inbound
suppliers forecast of demand i2 Technologies Rhythm logistics, better forecasting,
forecasting reduced inventory,
reduced supplier risk
Information sharing in real Dell Order Management Faster, better decisions
time System and information  ows,
streamlined ordering system
Integrate with Real-time information about Dell ConŽ gurator Greater customer service,
customers buying patterns DellPlus satisfaction and loyalty,
Customized direct order, Premier Pages retention of relationship
service, and support Dell Online, Internet customers
Inventory of customer PC
assets globally
Reach new Direct order, service, and Same as above Increased market share in
geographic markets support transaction customers and
and customer segments internationally, increased
revenues
Virtually integrate Real-time information The entire information Greater efŽ ciency across the
across the value chain sharing within Dell, forward infrastructure of value chain and globally
and globally to customers and backward the company
to suppliers on a global basis

has access to product and service information tailored to a shift from telephone or other sales methods is unclear, but
that company, and can order PCs directly from a menu the per-transaction cost to Dell is reduced when a customer
of conŽ gurations preapproved by the company without orders over the Internet rather than through a salesperson.
going through normal purchasing channels or paperwork. Dell’s share of the global direct market was 31.3% in
The popularity and demand for such customization subse- 1997 and is expected to increase further as a result of
quently led Dell to develop tools to help customers set up Internet sales, where the company was an early innovator.
their own customized versions of dell.com, of which there The Internet not only enables Dell to reach new customers,
were reportedly 7000 as of 1998 (Magretta, 1998). it also provides a new means of providing service and
A third example is IT inventory management for rela- support to existing customers.
tionship customers. Because Dell handles large volumes A broader example of extending the Dell model to cus-
of PC sales to some corporate customers, it knows the tomers is selling the notion that large companies can be run
computer conŽ gurations at different locations on a world- on PC-based networks. Dell runs much of its operations
wide basis and maintains this inventory in its Global Data on its own servers and uses its G-2 architecture to demon-
Repository. Therefore, corporate customers can get in- strate the potential of PC networks to corporate customers,
formation from Dell on how much they have spent for taking many of them on tours of the Metric12 plant. In this
what products in what locations over a given time period, way Dell has a powerful vehicle by which to sell corporate
thereby enabling them to better manage and plan replace- executives and CIOs not only on buying Dell PCs but also
ment of their computing inventory.10 on outsourcing PC service, support, and management to
Dell also uses the Internet as a sales channel through its Dell.
completely automated Dell Online service. Customers can
go to Dell’s Web page, try out and price various conŽ gu- DELL’S ORGANIZATION OF IT
rations, and then call in the order or even place the order
directly over the Internet. Started in July 1996, Dell’s In- Dell’s IT systems serve both to support and to extend the
ternet sales reached $14 million per day by 1999. 11 The business model, but aligning its IT with the business model
proportion of these sales that are entirely new sales versus and with changes in organization is a major challenge.
14 K. L. KRAEMER ET AL.

Over time, Dell’s IT strategies have evolved in response Regionalization and IT

to changes in its business and its organizational structure.
In 1995, Dell’s SAP plans were thrown off track by a deci-
sion to reorganize the company along regional lines. The
Global Centralization of IT
company was broken into four major regions: Americas,
The need to balance control and  exibility in the organi- Europe, Asia, and Japan. The Americas region, by far the
zation has been evident in the evolution of Dell’s infor- biggest (with about $8 billion of Dell’s $12 billion in 1997
mation technology systems. In the early 1990s, IT was so sales), was then further subdivided according to business
decentralized that management lacked even the basic in- markets (large business, government/international, small
formation needed to make decisions and run the company. business). This reorganization was accompanied by a de-
There were a data center and some common applications, cision to push more authority and responsibility down to
but most of the applications had been developed indepen- the regional managers, with each region having its own
dently in various user departments. sales, manufacturing, service, and other functions. Given
This extreme IT fragmentation was at odds with Dell’s responsibility for their own operations, proŽ ts, and losses,
organizational structure, which was centralized globally the regional managers, not surprisingly, wanted to have
on a functional basis, with sales, manufacturing, service, control over their own IT budgets and applications as well.
and other functions all reporting directly to Austin. The Such a decentralized organization went against the grain
company’s growth was outpacing the ability of IT to pro- of adopting the highly integrated SAP systems, which re-
vide information needed to manage the business. To bring quire uniform processes throughout the company. It was
some order to its IT house, the CIO moved quickly to feared that SAP would not have the  exibility needed to
implement an information system, called Information to handle the diversity in business practices in the different
Run the Business, or IRB, as a Ž rst step in giving Dell’s regions (and countries within the regions) and could be-
managers some basic indicators such as product qual- come an obstacle to growth. As one Dell IT executive
ity, Ž nancial performance, and product margins. The CIO stated, “SAP is like cement,  exible when it’s poured but
then developed a three-phase plan for evolving IT in the rigid once it hardens.” Ultimately, the board of directors
company. told management that it “must not put an information sys-
Phase one was to stabilize the current environment by tem in place that would jeopardize Dell’s ability to sustain
installing common hardware and operating systems, and its desired growth rates.”
software and tools to manage it. The new infrastructure The CIO left the company in the summer of 1995 and
was composed of Tandem and Sun servers, with the over- chief Ž nancial ofŽ cer (CFO) Thomas Meredith managed
all network controlled by Tivoli network management soft- Dell’s IT functions directly for almost 2 years while the
ware. Phase two was an interim upgrade aimed at building Genesis Project continued. Jerry Gregoire was then hired
capabilities, including DellNet, a virtual private data net- as vice-president and CIO in early summer of 1997. After
work owned and operated globally by AT&T; new data an initial period of reexamination and discussion with re-
centers in Austin, Ireland, and Penang, Malaysia; and up- gional managers, Gregoire pulled the plug on SAP, except
graded staff skills to operate in the new environments. for the human resources component that was already in
Phase three was the development of next-generation ap- place. Beyond SAP’s incompatibility with the new decen-
plications that would achieve tighter integration of data tralized organization, Dell’s rapid growth was also an issue
to allow better integration of business functions. At the in the decision, as stated by another IT executive: “Dell
core of this process was the decision to adopt an enter- was $2.5 billion when the Genesis project was started and
prise system—SAP/R3—as a means of developing a uni- was a $10 billion company by the time of deployment. De-
Ž ed application environment throughout the company. The ployment is difŽ cult to handle when a company is growing
attraction of SAP is that it offers a full suite of tightly in- that fast. It is difŽ cult to get business units to be willing
tegrated applications, including Ž nance, human relations, to do business one way worldwide. Business growth led
sales and marketing, manufacturing and distribution, and to segmentation and a customer orientation that was not
customer service and support. Dell was hoping to bring its consistent with the enterprise (SAP) model.” A 1997 Wall
disparate IT functions together into one seamless system Street Journal article claimed that Dell canceled the project
through SAP. after its budget swelled and tests showed that it couldn’t
The SAP implementation was dubbed the Genesis handle expected sales volumes (White et al., 1997).
Project, and involved a 140-member staff pulled together Abandoning SAP did not eliminate the need for better
from corporate and regional information systems units. integrated systems, however. The regions themselves were
The team had gone as far as implementing the SAP human becoming large companies, and there was still a strong
resources component when a change in business strategy need for corporate information systems to support top
caused a reconsideration of the whole project. management decision making within each region as well
 REFINING AND EXTENDING THE BUSINESS MODEL WITH IT 15

as across the company. Something needed to be devel- The G-2 architecture enables the company to run “best-
oped that would allow better data sharing and coordination of-breed applications” rather than only a single enterprise
without creating a straitjacket that could inhibit growth. system. It also makes it possible to “run Dell on Dell,”
Gregoire’s answer was a new IT architecture called G-2. using the products that Dell and its strategic partners sell:
Dell servers, desktops, and laptops; Windows NT and the
Explorer Web interface; and Oracle databases. The G-2
Dell’s IT Architecture architecture has extended the life of Dell’s legacy applica-
tions, such as the DOMS and Dell Product Services (DPS),
According to Gregoire, G-2 is a blueprint for how to archi-
which are written for Tandem hardware, even as other ap-
tect systems, execute development, and implement rollout
plications are shifted to Windows NT servers, because the
that delivers on the failed promises of client-server com-
message broker layer allows these different systems to talk
puting, that is, low cost to build and manage and easy
to each other. Also, migration from legacy applications to
to use. Gregoire says that in an environment of 60% an-
NT-based applications can be done incrementally, migrat-
nual growth in transactions processed, one cannot afford
ing individual functions over to new applications one at a
IT projects that take 2 years to implement. The G-2 archi-
time, rather than having to rewrite entire applications or
tecture was designed to be  exible, meaning that changes
move entire databases all at once. Such  exibility enables
could be made iteratively, without having to shut down
Dell to expand the capabilities of its information systems
whole systems or retrain workers. The G-2 architecture is
to meet the demands of rapid growth without major dis-
layered, with a Web browser user interface sitting on top
ruption to the business’s functioning. Creating and main-
of an applications layer, a message broker, and a database
taining all of the linkages and interfaces required for this
(Figure 3).
 exibility is reported to be complex and costly, and prob-
The key to this structure is the message broker layer,
lems sometimes result, but Dell’s IT people seem to have
which is based on an IBM MQ series application integra-
made application integration work to serve the company’s
tion system. It serves as an information bus, linking all
needs.
applications and databases to each other, so they don’t all
have to talk to each other separately. It also allows new data
engines or applications to be added to the system without
Dell’s IT Organization
having to make changes throughout the system. For in-
stance, a new database on customers (e.g., how much they Like the company as a whole, the IT is decentralized. Gre-
have spent on various products in the past) can be added at goire’s management philosophy is that “all IT is local.”
the data engine level and be linked via the message broker He argues that when companies have highly centralized IT
to Dell’s customer service representatives’ order manage- departments, there are hundreds of other invisible IT de-
ment system. This information can be made available as an partments scattered around the company, doing whatever
extra button on the Web browser interface without needing they want with no coordination among them. He prefers
to change the users’ applications or retrain the users. to keep IT decentralized, and follows the 100-person rule,
which states that whenever an IT department gets larger
than 100 people, it is time to break it up. Such a structure
is decentralized, yet is easier to coordinate than hundreds
of invisible units. Still, Dell’s IT people admit that while
their decentralized matrix structure is good for supporting
growth and innovation, it can be hard to maintain control.
There are clearly trade-offs, and Dell has decided that in
such a fast-changing business, it is worth sacriŽ cing some
control in return for greater  exibility.
The resulting complexity of Dell’s IT organization is
illustrated by the Dell Americas’ IT structure in Figure 4.
Dell’s IT subunits are organized in a matrix structure, cut-
ting across business functions and markets, sitting on top
of an integrated systems services layer and a functionally
oriented applications layer. The Ž ve functions are prod-
uct design, manufacturing, sales, service, and corporate
systems, while the three business markets are relation-
FIG. 3. Dell’s G-2 architecture. ship (large customers), transaction (consumers and small
16 K. L. KRAEMER ET AL.

FIG. 4. Matrix structure of Dell Americas’ IT organization.

businesses), and international/public (non-U.S. markets; regions make their own choices as to what systems best
government, education, small- and medium-sized enter- suit their needs. So far, there are no hard rules, but in
prise (SME)). Each of the three markets represents a sub- general,  exibility and decentralization are given priority
division of the Americas region, and each must be sup- over standardization. For instance, the DOMS, developed
ported by applications in some or all of the Ž ve functional in the United States, is used in the United Kingdom but
areas. not in France or Germany, and a manufacturing system
The IT System Services functions are those that sup- that was developed in Europe is used in Asia but not in the
port the whole business, such as network services, the help Americas.
desk, database administration, and the data center. The ac-
tual interactions within the matrix structure are less neat
than the Ž gure suggests. For instance, the DOMS applica- CONTRIBUTIONS OF IT TO DELL’S
tion supports both customer services and sales, while sales PERFORMANCE
commissions applications must be linked to Ž nance and
The contributions of Dell’s IT investments to the Ž rm’s per-
human resources. However, with Dell’s G-2 architecture,
formance are difŽ cult to disentangle systematically from
it is possible to link applications and data to the necessary
the other inputs to production and from the many process
functions via the message broker layer.
innovations continually made at all stages of the value
IT is highly integrated within Dell’s regional operations,
chain. However, it is clear that IT and the information
and less so across regions. Still there is a great deal of
it provides, along with process improvement, have con-
data sharing across regions to support corporate functions
tributed to Dell’s exceptional performance. The contribu-
and to share useful information throughout the organi-
tion of IT to operational efŽ ciency is re ected in measures
zation. Regional IT executives answer primarily to the
related to procurement and inventory, manufacturing pro-
regional business manager, who makes budget decisions
duction, cash management, and administrative overhead.
and choices about what types of applications to develop or
adopt. However, CIO Jerry Gregoire maintains the author-
ity to enforce architectural standards across the company
· Procurement and inventory: Dell’s days of inven-
tory dropped from 32 in 1994 to just 6 by the
and to ensure that long-term infrastructure projects are end of 1998. 12 This inventory level is the lowest
carried out. in the industry (Table 4) and re ects the aggres-
The company must decide to what extent it wants to sive supply chain management strategies noted
standardize applications across the company versus letting earlier. These strategies are made possible by the
 REFINING AND EXTENDING THE BUSINESS MODEL WITH IT 17

TABLE 4 than the consumer (transaction) market between

Inventory turnover, 1998 1991 and 1997. Relationship customers accounted
for 59% of net sales in 1991, whereas they ac-
PC counted for 70% in 1997. Relationship customers
Dell Gateway Compaq industry have been speciŽ cally targeted for growth through
the use of IT to support customer reps in the Ž eld,
Inventory turnover 55.5 27.9 12.9 23.6 for direct orders placement by large corporate cus-
Days cost of goods 6 13 28 15 tomers themselves, for customized service and
sold in inventory support of individual users, and for PC asset man-
Note: From Hoover’s Online (1999). agement for the corporations.
Sales growth by product line shows a similar pat-
· tern. Although desktop PC sales still dominate,
on-line, real-time sharing of information on or-
Dell is slowly shifting from sales of desktop PCs
ders and production not only within the company,
to an increasing proportion of more proŽ table lap-
but also throughout Dell’s supply chain. This ex- tops and servers. Over the past 3 years, the pro-
tensive and timely sharing of information through portion of company revenues from desktops and
linked computer systems for procurement, supply, workstations has declined from 81% in FY 96 to
and order fulŽ llment essentially enables informa-
73% in FY 97 (Q3).
tion to substitute for inventory.
· Manufacturing: Dell’s production cycle time is · Sales growth has also occurred in international
markets, which accounted for 27% of Dell’s over-
7 hours, on average, while its order turnaround all sales in 1990, and 32% in 1998. Dell’s sales
time is 7 days, on average. The automation of pro- in Europe grew by 72% in 1998, as it moved
duction processes contributes to the speeded-up into second place in unit sales (GartnerGroup’s
cycle times.
Dataquest, 1999). Dell even managed to expand
Cash management: According to CFO Thomas
· Meredith, Dell has a cash conversion cycle of ¡ 8
its Asia-PaciŽ c sales during the Asian Ž nancial
crisis of 1998.
days.13 This is because Dell often receives pay-
ment from a customer on an order before it pays The overall effectiveness of Dell’s IT-supported direct
its suppliers for parts used to fulŽ ll this order. On model is indicated by the company’s growth in sales and
average, Dell converts a sales transaction into cash market share. Over the last 10 years, Dell sales have in-
in less than 24 hours (McWilliams, 1997). In con- creased from a mere $389 million in Ž scal year 1990 to
trast, indirect PC sellers must buy components to $18.2 billion in Ž scal year 1999 (ending January 1999;
produce PCs, then push the PCs into the channel we refer to this as 1998 data in comparative Ž gures to
and wait for payment. provide comparability with other companies’ annual data;
Administrative overhead: While Dell has grown
· tremendously in revenues, it has continually
other years are adjusted accordingly) (Figure 5) (Hoover’s
Company ProŽ les, 1998). Net income increased from just
reduced its administrative overhead, deŽ ned as
SG&A, such that it is among the most efŽ cient
Ž rms in the industry. Dell’s SG&A declined from
15% in 1993 to 9.8% in 1998. By contrast, over
that same time period, Gateway’s SG&A has in-
creased from 7 to 14%, and Compaq’s SG&A held
steady around 12% until jumping to 20% in 1998
due to the acquisition of Digital Equipment Cor-
poration (which came in with much higher over-
head levels). 14
The effectiveness of IT uses aimed at extending the busi-
ness model is suggested by historical patterns of sales
growth by customer market, product line, and international
markets.

· The highly proŽ table corporate (relationship)

customer market has exhibited greater growth
FIG. 5. Sales revenue, 1990–1998, in $millions. From
Hoover’s Company ProŽ les.
18 K. L. KRAEMER ET AL.

TABLE 6
U.S. market share in % (based on unit shipments)

1994 1995 1996 1997 1998

Compaq 12.6 12.2 13.3 16.9 16.1

IBM 9.0 8.3 8.7 8.7 8.0
Dell 4.2 4.6 6.9 9.4 12.7
Packard-Bell 11.4 a 11.3 a 11.6a 9.2b 8.0 (Q1–3)b
Gateway 2000 5.2 5.1 6.3 7.2 8.4
Hewlett-Packard n.a. n.a. n.a. 6.5 7.5
Note: From Dataquest, various press releases.
a Includes Packard-Bell only; merged with NEC in 1996.
b Includes Packard-Bell/NEC.
FIG. 6. Net income, 1990–1998, in $millions. From
Hoover’s Company ProŽ les.
growth in Dell’s share price shown in Figure 7 re ects the
$5 million in Ž scal year 1990 to over $1,460 million in market’s recognition of the shareholder value that Dell
Ž scal year 1999 (Figure 6). has created with the continuing reŽ nement and extension
Table 5 provides the worldwide market shares of se- of the business model.
lected companies for selected years between 1985 and
1998 and shows the increasing market share of Dell as
well as the growing dominance of Compaq in the PC in- CONCLUSIONS
dustry over this period. Dell has grown rapidly to become one of the top three
In the U.S. market, Dell has pushed its way into the num- vendors in the PC industry, and has seen an extraordinary
ber two spot, with 12.7% of the market in 1998 (Table 6). increase in share price and market valuation. While many
other PC companies have been unable to handle the de-
Shareholder Value mands of time-based competition, Dell has continued to
thrive in such an environment. The key to Dell’s success
Dell has been doing very well in increasing shareholder has been its direct sales and build-to-order business model.
value, whether measured by return on invested capital, This model is simple in concept but highly complex in its
earnings per share, or share price growth. Michael Dell be- execution, especially under conditions of rapid growth and
lieves that return on invested capital (ROIC) is most re ec- change. Dell has continually reŽ ned and extended its busi-
tive of shareholder value and has been structuring business ness model while striking a balance between control and
decisions around ROIC for several years (Dell Annual Re-  exibility.
port, 1997) with strong results. According to Dell’s 1999 Dell’s use of IT plays a vital role in the implementation
annual report, ROIC increased from about 37% in FY1995 of its business model. The company has used IT to coordi-
to 195% in FY1999. 15 nate its build-to-order processes from order taking through
Dell’s earnings per share, a second measure of share- procurement, logistics, production, service, and support.
holder value, have shot up from $.05 in FY 1995 to $.53 in Doing so has enabled it to reduce inventory, speed up lo-
FY 1999 (Hoover’s Online, 1998). The continued dramatic gistics and product cycles, understand user markets, and

TABLE 5
Worldwide market share in % (based on unit shipments)

1985 a 1990 a 1995 a 1996 b 1997 c 1998 c

Compaq 3 4 10 10.1 13.1 13.8

IBM 25 13 8 8.6 8.6 8.2
Dell Less than 1 Less than 1 3 4.0 5.5 7.9
Hewlett-Packard 2 1 4 4.0 5.3 5.8
a Dedrick and Kraemer (1998b).
b Dataquest (1998).
c GartnerGroup’s Dataquest (1999).
 REFINING AND EXTENDING THE BUSINESS MODEL WITH IT 19

One question that naturally arises is: How much of

Dell’s success is due to its business model versus its ex-
ecution of that model? The advantages of direct sales are
highlighted by the difŽ culties faced by Compaq as it tries
to implement its own build-to-order processes. Compaq
risks alienating the channel that accounts for most of its
sales if it sells direct, so it has tried to develop a hybrid
build-to-order system in concert with key distributors and
resellers. However, it has been unable to improve its in-
ventory turnover and has caused confusion among its cus-
tomers in the process. Meanwhile, Dell has pushed ahead
to improve its processes and develop new business lines
such as services and online retailing of other companies’
hardware and software. This suggests that Dell’s business
model provides a major advantage in time-based compe-
tition. On the other hand, other direct sellers such as Gate-
way and Micron have not come close to Dell’s performance
in recent years. This suggests that execution is a key factor
in differentiating companies with similar business models.
FIG. 7. Dell’s share price, 1993–1998. From Wall Street Re-
In the end, Dell has succeeded because of both model
search Net (1998).
and execution.
A second question is whether Dell can sustain its per-
offer additional services to customers. It also has used IT formance in the face of new challenges such as the boom
to achieve virtual integration with suppliers and strategic in sub-$1000 (or $500) PCs or a possible shift in demand
partners by real-time information sharing. The company from full-featured PCs to simple information appliances.
has extended its reach to millions of potential customers If customers no longer demand the latest technologies, will
at low marginal cost through its use of the Internet. These Dell still have an advantage? Dell already appears to be
reŽ nements and extensions have been made possible by implicitly responding to that possibility by recasting itself
the development of a novel IT structure that is  exible, as a PC outsourcer, emphasizing its service and support
expandable, and still adequately integrated to support key capabilities to corporate customers. It also has opened a
corporate functions. second Web site called GigaBuys.com that sells a variety
Decisions about IT at Dell are subject to the demands of of third-party hardware and software. In effect, Dell is al-
the larger business strategy. Thus, when the company felt ready recasting itself as a service and retail company rather
that adopting SAP would limit its  exibility, the project than just a PC maker. In this effort, Dell’s past investments
was halted and a new IT strategy was developed. Yet the in IT are particularly important, as it has the infrastructure
IT organization is deeply involved in extending the busi- to support this new extension of its business and is known
ness model, and it plays more than a mere support func- to customers as an Internet-savvy company.
tion in the company. IT is a key element of many business This leads to a third question: Is Dell an exemplar of the
strategies, from using the Internet as a marketing chan- network economy or an anomaly? This can be answered
nel to giving suppliers a direct link to Dell’s information by looking at three key elements of Dell’s business—direct
systems to being a model for other enterprises to follow. sales, build-to-order, and Internet commerce. Direct sell-
In fact, Dell’s use of its own PC-based technology to run ing will offer advantages in any industry where clockspeed
much of its own business is a valuable marketing tool to is critical and where products, services, or information can
show customers the capabilities of its product line. be delivered more quickly by eliminating intermediaries.
It is very difŽ cult to separate the impacts of invest- Build-to-order production, or mass customization, should
ments in IT from other factors such as changes in business also gain footholds in more industries as companies look
processes, effective use of human resources, and general to differentiate their products and avoid pure price compe-
acceptance of the direct model by users. Still, a close ex- tition. Most important, the use of the Internet for market-
amination of Dell’s operations makes it clear that IT is ing, sales, and supply-chain integration will undoubtedly
fundamental to the functioning of the direct model, and be embraced by large segments of the economy. The eco-
that IT has been a key element in the continued reŽ nement nomics of Internet commerce mean that up-front costs may
and extension of that model. It simply would be impossi- be high, but marginal costs of transactions are negligible.
ble to coordinate such a complex set of business processes Companies such as Dell that are industry leaders in Inter-
at such a high speed without using IT extensively. net commerce will be able to expand their customer base
20 K. L. KRAEMER ET AL.

and increase their business with existing companies at a People who are not familiar with the details of the direct model some-
low marginal cost. They also can reduce the cost of coordi- times think it refers only to “direct sales to individual end users or
nating their supply chain through electronic linkages. This consumers” instead of this more complex and nuanced reality. In other
will enable them to offer incentives to customers and sup- words, the direct notion refers more to the fact that Dell largely (though
pliers to do business electronically and continue to drive not completely) bypasses the traditional distribution channels (distrib-
utor, value-added reseller, systems integrator, retailer) rather than that
their own costs down.
it goes directly to the individual end user.
In the long run, Dell might slip up and make mistakes 7. Magretta (1998). The information on Dell’s relationship with
that allow competitors to pass it by, just as many other Boeing was conŽ rmed by author interviews with Boeing personnel.
successful IT companies have done. However, the forces 8. Dell interviews; Magretta (1998, pp. 82–83).
behind Dell’s success will continue to apply to compa- 9. Dell interviews.
nies and industries in which time is a key competitive 10. Dell installs equipment tags during assembly for some com-
factor. panies and maintains the inventory records for them through on-site
staff. For most companies, however, Dell simply has an inventory of
what was sold to whom and where; it does not maintain records beyond
NOTES the initial purchase, for example, when equipment is moved from one
location, department, ofŽ ce, or individual to another.
1. Clockspeed is a term attributed to Fine (1998). In Mendelson 11. Dell web site: http://www.dell.com/corporate/access/factpak/
and Pillai (1999), clockspeed is determined by three factors: (1) the index.htm. Michael Dell in keynote speech at the Networld + Interop
rate of decline in input prices, (2) product life cycles, and (3) share of show, reported in Smith (1999).
total revenues that came from products introduced in the previous 12 12. Dell Annual Report (1997, 1998); Hoover’s Online (1999).
months. 13. Barr (1998). Cash conversion is measured as follows: Using the
2. The growing recognition of the signiŽ cance of the Dell case is metrics of days of sales outstanding (DSO), days of sales in inventory
highlighted by a recent Wall Street Journal article that describes how (DSI), and days of payables outstanding (DPO), Dell adds DSO and
academics, consultants, and industry executives outside the computer DSI, then subtracts DPO, to determine the cash conversion cycle.
industry are trying to understand what Dell means for their companies 14. SG&A data from McKinsey & Co., Computer Industry Report
and industries, wondering whether they will be “Dellized” by some (1994, 1998) and from company proŽ les of Dell, Compaq, and Gateway
company in their industry, and concerned with how to ensure that they on Hoover’s Online (1999).
are the “Deller” rather than the “Dellee.” The article also is the source 15. Dell Annual Report (1999). Hoover’s Online gives Dell’s ROIC
of the quote by Paul Roemer at the beginning of this article, in which for FY ending in 1998 as 56.1%, while Dell reports 185%. According to
he articulates the broader signiŽ cance of cases like Wal-Mart, Dell, Hoover’s, return on invested capital = net income divided by invested
Amazon.com, and Cisco in the economy. See Wysocki (1999). capital (long-term debt + preferred equity + common stock equity).
3. Silverman (1998). Much of the growth was attributed to Dell Dell does not deŽ ne ROIC in its annual report.
and Gateway’s success in McWilliams (1997).
4. Dell not only has data on its customers and potential customers,
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