DELL COMPUTER CORPORATION
A Production/Operations Perspective
Tracing its roots back to 1983, when Michael Dell was upgrading computers out of his dorm room at the University of Texas at Austin, Dell Computer Corporation has grown to be a global leader and paragon in the personal computer (PC) industry. With revenues in excess of $31 billion as of February 2001 (according to the company’s 2001 Form 10-K),
Dell has firmly cemented its position as the world’s largest direct computer systems provider of customized servers and ancillary products, storage devices, workstations, notebook and desktop computers, personal digital assistants, peripheral hardware and software, and related customer services.
The secret to the company’s success is its direct business approach. Instead of relying on wholesalers, retailers and middlemen, Dell markets its products directly to consumers via the Internet through its website, http://www.dell.com/. According to the company, the direct business model affords it several competitive advantages:
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Because there are no wholesalers or retailers to support, dealer markups are avoided.
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In addition to eliminating retail inventory costs, the company does not have to compete for valuable shelf space.
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Dell is able to channels its resources into its increasingly efficient procurement, manufacturing and distribution network, thereby minimizing product obsolescence.
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The company is also able to maintain and support a customer relationship database that provides immediate feedback from clients and helps to shape product offerings.
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For purposes of illustration, a comparison between Dell’s direct sales model and Compaq’s indirect sales model is shown in the following graphic:
As the illustration demonstrates, Dell clearly gains competitive advantages from its direct sales model that Compaq does not. Although not shown above, Gateway’s recent problems in maintaining a chain of company retail stores while marketing products primarily through the Internet illustrate the strategic and financial difficulties of attempting to employ indirect and direct sales methods simultaneously.
Prior to implementation of a formal new product development process in 1993, Dell had employed a rather ad hoc approach characterized by:
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Inconsistent and often unpredictable results
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Autonomous teams centered around experienced product developers
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Lack of rigorous risk assessment
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Poorly defined project objectives and goals
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Financial ramifications of new product not taken into consideration
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Lack of timely attention to quality-related issues
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In order to remedy the deficiencies noted above and improve the product development process, Dell adopted a new multiphase procedure to handle products from beginning to end, as shown in the following illustration:
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Each of the six phases was designed to address the deficiencies of the old approach as follows:
Phase I (Profile) – Product development objectives and goals were defined and specified in a 2-3 page “product features guide.” This helped to ensure that everyone shared the same vision before embarking on a new project.
Phase II (Planning) – Financial ramifications of new product were taken into account by developing a detailed business justification for the product. Products would not be developed for which a compelling business reason did not exist.
Phase III (Implementation) – Functional prototypes of new product were developed and tooling orders with long lead times placed with vendors. Documentation and service plans were developed in support of product.
Phase IV (Qualification) – Production prototypes of new product were developed and sales training initiated. Key users would use product and provide input and feedback.
Phase V (Launch) – Complete customer-oriented testing was performed and early product shipments made. Production capacity was increased and product released.
Phase VI (Acceptance) – Customer feedback was collected for up to three months and results compared with product objectives and goals. “Lessons Learned” analyses were performed to improve future product development.
Although it took some time to take hold, Dell’s adoption of a multiphase new product development process marked a complete turnaround from the company’s previously unorganized and unsystematic approach and enabled the company to develop computer systems that enjoyed improved functionality, reliability, serviceability and manufacturability.
Dell’s new product development process was quickly put to the test in early 1993, when the company opted to reorganize its portable computer division to remedy product defects and bolster sagging sales. At the crux of Dell’s decision to revive its notebook division was the question of which features to emphasize. Complicating the issue was the fact that Dell engineers and product developers took into consideration 10 or more
features, whereas customers were interested primarily in only a few features, namely: price, microprocessor variety, battery life, screen resolution and product reliability, as shown in the following illustration:
In light of the company’s initial poor performance in the notebook market, the choice of features to emphasize would play a pivotal role in the eventual success or failure of Dell’s concerted push to reestablish a foothold in the rapidly expanding laptop computer industry. The next section will examine the choice made by Dell.
As all laptop computer owners know, short battery life is one of the product’s major inconveniences. Traditionally powered by nickel hydride (NiHi) batteries, most laptop computers will operate for no more than two to three hours without recharging. Although the option to carry an additional battery does exist, most laptop owners would prefer to have a battery that allows them to work all day uninterrupted. Fortunately, the
development of lithium ion (LiOn) batteries has made that possible. Nevertheless, at the time Dell was first considering this option, LiOn was an unproven technology that held great promise as well as significant risks. Not only did they occupy more space –a valuable commodity on laptop computers- than traditional batteries, but LiOn batteries were also supplied predominantly by Sony, which had only recently initiated battery testing and production. For Dell to throw its reputation behind this untested technology was a
significant risk indeed.
Options
Although Michael Dell was keen on using the new LiOn technology, there were other options available, as shown in the following illustration:
Option 1 – The first option was to continue placing nickel hydride batteries in laptops. On the plus side, the company would be going with proven, well-tested technology. In addition, NiHi batteries would occupy less space than lithium batteries, thereby freeing up room to place additional features. Another positive was that the supply of NiHi batteries was dependable. On the negative side, reliance on traditional batteries would not address customer concerns regarding limited battery life,
nor would it do much to differentiate Dell products from those offered by competitors. This approach was expected to bring in $485 million in revenues.
Option 2 – The second option was to place the new LiOn batteries in laptops. On the plus side, longer battery life would address customer concerns and would help to differentiate Dell notebooks from those offered by competitors. If successful, this approach could bring in as much as $584 million in revenues. On the negative side, LiOn batteries were untested and unproven; supply was limited to one vendor, Sony; there was only a 60% chance that the batteries would work as intended; the
batteries occupied more space than nickel batteries, thereby limiting the number of additional features that could be added; and failure could tarnish Dell’s reputation for years and effectively end its bid to reenter the highly competitive laptop market. If the technology failed, Dell could expect revenues of no more than $234.5 million.
Option 3 – The third option was for Dell to straddle both positions and essentially hedge its bets by deferring commitment to either battery technology until it had more information upon which to make an informed decision regarding the performance and reliability of LiOn batteries.
One approach was to design laptops to accept either battery. The problem was that this would require significant reengineering and would increase space demands, resulting in a much heavier and bulkier notebook. In fact, the increase in size was expected to cut into profit margins by as much as 2% per unit.
The second approach was two create two laptop versions: one powered by traditional NiHi batteries and the other by the new LiOn batteries. Due to the additional expense and burden of developing and supporting two product lines, this approach was expected to reduce revenues by as much as $2.5 million. Also, if one battery proved to be superior to the other, then Dell would be forced either to support both versions for the foreseeable future or drop support for the inferior battery. Neither of these
alternatives was very palatable.
The different advantages and disadvantages of the three options –(1) continue with proven NiHi battery technology; (2) proceed with new LiOn battery technology; or (3) design to accommodate either battery- were analyzed with a view to minimizing risks to Dell’s reputation and financial position and maximizing the company’s return on its financial and engineering investment. After careful consideration of the three alternatives, it was proposed that Dell proceed with placement of proven NiHi
battery technology in new laptops until reliability, performance and supply of LiOn batteries could be assured.
Although LiOn batteries are a promising new technology, they were unproven and presented a significant risk to Dell’s financial position and reputation. Moreover, adoption of unproven LiOn technology would have diverted financial and engineering resources away from a proven battery technology. Given the negative repercussions of the company’s initial foray into the notebook market, it could ill afford to take a gamble on an unproven technology that held only a 60% chance of success.
Adoption of LiOn battery technology would have committed the company to relying on supply from only one vendor. Not only would this have exposed the company to the possibility of defective batteries (which could have adversely affected the company’s reputation) and component shortages, it would also have reduced the company’s ability to negotiate advantageous pricing with suppliers.
Customers ranked price and choice of microprocessor ahead of battery life; therefore, adoption of a risky, unproven technology to satisfy a need that customers ranked third on a list of preferences made little sense. Instead, it was better for the company to gain a competitive advantage in the notebook market by channeling its efforts toward reducing price and improving microprocessor quality and availability.
From a financial perspective, the revenue difference between a completely successful launch of unproven LiOn technology ($584 million) and continuation of proven NiHi technology ($485 million) was less than $100 million, whereas projected revenue could have dropped by $349.5 million (to $234.5 million) if LiOn technology had failed. Besides the purely financial cost, the cost to the company’s reputation would have been incalculable.
For all of these reasons, adoption of immature, unproven LiOn technology was unwarranted at that time.