Refining and Extending the Business Model With Information Technology: Dell Computer Corporation

The Information Society, 16:5–21, 2000
Copyright c
° 2000 Taylor & Francis
0197-2243/00 $12.00 + .00
Re ning 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 ef 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
The exceptional performance of Dell Computer in
applied to achieve speed and exibility in an industry in which time
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 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-
of other leading PC makers and distributors to develop
works, Rockwell, Seagate Technology, Sun Microsystems,and Systems
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

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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 con 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 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 con 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 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: rst, excess
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 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 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 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 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.

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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, pro ts, and market value for the company. Sales
tive cash conversion cycle in which it receives payment reached $18.2 billion in 1998, with pro 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 signi cant channel in the early 1980s, the
from 3% in 1995 to 9.2% in the 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 nal customer and built
to explain how Dell executes that model and particularly
PCs to users’ speci 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 modi ed mainder of this article uses a case study approach to look
and re 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 re 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 rst quarterly loss in 1993
check and con 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 Pro les, or public docu-
money doing so. Dell decided to withdraw from the retail ments such as annual reports and audited 10-K reports 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 pro 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 of 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,
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 Paci 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 dif cult to attribute speci c performance results to
dividual business users to order PCs directly rather than speci c IT initiatives in any company, and this case is no
having to go through a central purchasing of 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 bene 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 dif cult to isolate the speci 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.

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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 ll each order to meet cus-
and small rms providing sales, marketing, service, and
tomer speci 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 dif cul-
force. Only after establishing a strong brand name with
ties other 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 pro 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 pro 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 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 pro 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
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

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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-Paci c 6%
Asia-Paci c 7%
Asia-Paci 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 of 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 speci c components as they
assist the customers in choosing systems that match their
are needed to 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 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 re 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 pro 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
con 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-
con guror ensures the items chosen are compatible with
facturing and just-in-time production, which were 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

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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 noti 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 con 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 Paci 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 le that is updated
meet the requirements of build-to-order is critical to Dell’s
with information about the speci 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 identi 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 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 speci cations; and means through 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 ve for the entire system.
Re ning the Model: Business Process Improvement
· Shortened cables to create more room in the chas-
sis for ease of assembly, expansion, and replace-
Dell continually re 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-
ber optics.
ages and enable process improvement throughout the value
· Reduced number of machine touches by over half
chain.
through process redesign.

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REFINING AND EXTENDING THE BUSINESS MODEL WITH IT
11
· Added software to Microsoft Windows 98 to test
and outbound distribution (Rollins, 1998). It has devel-
all hardware installations in the factory, reducing
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 pro 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 re 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 rst routed to the nance department, where the
for 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 con 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 con 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 re 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 con 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 re ne nal order is updated by bar-code scanning of information,
and extend—not rede ne—the business model.
which facilitates tracking the performance of components,
suppliers, and manufacturing and test cells. Each PC is
Re ning 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 les, diagrams,

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12
K. L. KRAEMER ET AL.
TABLE 2
Re 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 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 noti 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
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 ef 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 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 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
Extending the Business Model
the rms’ operations through customization. Dell provides
custom Web pages (called Premier Pages) for over 200 of
Dell’s IT people do not see themselves as only re 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 of 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

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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 Con 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 ef 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 con 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 con 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 con 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.

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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-
Global Centralization of IT
sion to reorganize the company along regional lines. The
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, pro 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 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, 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 nancial of 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-
ed application environment throughout the company. The ployment is dif 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 dif cult to get business units to be willing
tegrated applications, including 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

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