An Packard’s Business Models: How Is Competitive Advantage Essay Example
An Packard’s Business Models: How Is Competitive Advantage Essay Example

An Packard’s Business Models: How Is Competitive Advantage Essay Example

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Introduction

Dell and Hewlett Packard (HP) are two dominant companies in the PC market. The CEO of HP needs to comprehend Dell's strategy for attaining a competitive edge to effectively respond to it. The purpose of this report is to furnish the CEO with the required information.

The objective of the report is to provide detailed information on Dell as a business and its strategy to the CEO. To achieve this, the main strategies of Dell that provide competitive advantage will be identified. Additionally, a comparison of the business models and e-business initiatives used by Dell and HP will be made. A review of Dell from its emergence to the present time will also be conducted. Lastly, the use of the internet in creating economic value and sustained competitive advantage for businesses like Dell will be assessed. The findings will be synthesized to analyze the

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key elements characterizing successful e-business strategies and initiatives. In the main body of the report, the main strategies used by Dell and how they have helped achieve a competitive advantage will be described. A competitive advantage is defined as an advantage gained over competitors through offering consumers greater value, whether through lower prices or greater benefits and service that justifies higher prices (Tutor2U 2005).

Dell has implemented Direct selling and Just in Time production as part of their strategy to achieve a competitive advantage. This approach has allowed Dell to gain a cost edge over its competitors (Hansen, Nhoria ; Tierney 1999). Direct selling involves Dell directly selling its products to customers, which eliminates expensive intermediaries in the distribution chain. As a result, Dell is able to generate profits that exceed the industr

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average (Enders ; Jelassi 2005). Instead of physical stores, Dell operates solely through its website, reducing overhead costs. Traditional business supply chains typically consist of five components: the Supplier, the PC maker, the distributor, the retailer, and the final customer (see figure 1 in appendix 1).

Dell has achieved a cost advantage by eliminating the retailer and distributor from their supply chain (see figure 2, appendix 1). This eliminates the need for Dell to pay retailers to sell their products. Additionally, this direct selling approach allows Dell to customize products according to customer specifications, effectively addressing customer needs. Furthermore, Dell's adoption of Just-in-Time Production enables them to gain even more cost advantages by building PC's only when there is an order from customers.

Therefore, minimizing inventory costs is achieved by not storing a large amount of stock. The frequent changes in technology and constant introduction of new products in the market are easily adapted through Dell's just-in-time production. This allows Dell to promptly incorporate new technologies into their machines as per customer demand. Further, Dell can swiftly adjust its production output in response to demand fluctuations. An additional benefit of this strategy is that Dell secures an order and payment before placing component orders with suppliers. Consequently, Dell accomplishes a 'negative cash conversion cycle' where it receives payment prior to paying the supplier (Breen 2004).

To summarize, Dell has achieved a competitive advantage through its successful strategy of creating cost advantages. At this point, I will critically evaluate the e-business initiatives and business models implemented by both HP and Dell. A business model refers to the mechanism employed by a business to generate revenue and profits, encompassing

strategy and implementation (Wikipedia 2005). Dell and HP employ distinct business models, described as follows: Dell utilizes a direct sales business model (Dedrick and Kraemer 2001). It directly sells its products to customers via the internet or telephone, tailoring each product to meet individual customer needs. Conversely, HP predominantly distributes its products through retailers but also possesses online selling capabilities.

HP uses a traditional business model while Dell uses a direct business model. Dell's model offers several advantages. The internet allows Dell to reach a wide audience at a low cost. They have automated many of their business functions through the internet, resulting in higher revenues without significant customer service costs. Their online configuration ensures that customers receive exactly what they want. Additionally, Dell's build to order strategy keeps inventory levels and costs low.

Authors argue that Dell's business model is successful because they offer dependable support, competitive prices, and convenience in build-to-order options (Lee & Thornhill 2005). However, Dell's success is being undermined by a lack of investment in customer service, resulting in a damaged reputation from increasing complaints (Gross 2005).
On the other hand, HP's business model has advantages as it provides customers with more purchasing options, allowing them to buy online or from a store with assistance. While beneficial for customers, this competition between online and traditional channels negatively affects HP's traditional channels (Computer Weekly 2005).
HP's production is based on a build-to-stock approach, which ensures minimal stock shortages (Achtmeyer 2002). However, this also leads to higher inventory costs as they maintain approximately 80 days of stock, which is significantly more than Dell's inventory (Breen 2004).

Both business models, Dell's build-to-order and direct strategies and HP's

focus on customer service, have their advantages and disadvantages. However, I believe that combining the two approaches would be the most successful. By integrating Dell's virtual organization approach with HP's customer service focus, a highly successful model can be created. This section will analyze the emergence of Dell as a virtual organization and its ongoing evolution while critically assessing its current operational performance. It will also consider whether adopting a proactive management style could have effectively addressed any identified issues. A virtual organization is characterized by outsourcing key processes to partners (Beech & Chadwick 2005). In line with this concept, Dell closely collaborates with its business partners and suppliers (Dedrick & Kraemer 2001). The company directly sells to customers through telephone or internet channels without maintaining a physical presence on the high street.

Founded by Michael Dell in 1984, Dell initially sold upgrades of IBM compatible machines. However, by 1985, it started selling its own brand of PCs. From the very beginning, Dell operated using the direct model by taking orders over the telephone. In the early 90s, Dell briefly entered the retail PC channel but later returned to being a direct vendor as it did not yield desired results. To embrace virtuality, Dell first eliminated the distributor in 1994. Subsequently, in the same year after withdrawing from the retail market, Dell began experimenting with the internet and online sales.

By 1995, Dell had established its own website, Dell.com, and within a year, customers were given the ability to shop online and customize their own PCs. Currently, Dell remains a virtual organization and heavily relies on suppliers who provide various capabilities necessary for building, distributing, and supporting

their PCs (Dedrick & Kraemer 2001). The immense advantage for Dell is the ability to benefit from low inventory costs since the company does business with suppliers who are willing to hold its inventory (Breen 2004). However, Dell's performance is currently facing criticism, particularly in terms of technical support, with an increasing number of complaints (Lee ; Thornton 2005). Although some authors recognize Dell for its exceptional customer service (Gross D 2005), others are expressing concerns about the future of the company if customer service is not improved. These concerns are supported by recent surveys that indicate a growing number of frustrated customers within Dell Inc.

According to Lee and Thornton (2005), the reputation of Dell is deteriorating, which has impacted their sales as they missed their sales target in the most recent quarter (Zehr 2005). In my belief, Dell needs to improve their customer service to prevent further damage to their reputation and retain customers. A proactive management approach could have helped Dell by continuously striving to enhance customer service and addressing issues before they arise. Unfortunately, Dell has not taken this approach, resulting in a decline in their reputation. In this section, I will evaluate how businesses like Dell have utilized the internet to create economic value and achieve sustainable competitive advantage through opportunities in supply chain management and customer relationship management.

According to Porter (2001), economic value is essentially the difference between price and cost. The internet has the potential to assist businesses in creating economic value. Porter defines a company's value chain as comprising support and primary activities (refer to figure 3, appendix 1). Support activities involve HR management, procurement, technology development, and

infrastructure. On the other hand, primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and after-sales service. It should be noted that each activity in the value chain contributes to costs.

Dell and several other companies have gained a competitive edge by utilizing the internet to modify their value chain and reduce costs. This can be achieved through various means, such as reducing inbound logistics expenses. The internet enables a strong connection between a business and its suppliers, and Dell has capitalized on this by establishing close relationships with its suppliers. Consequently, Dell can avoid incurring the manufacturing costs themselves. Instead, they receive orders and subsequently produce the goods.

Consequently, by receiving payment upfront and avoiding the need to build or pay suppliers, companies can lower inventory costs and streamline operations. The internet further enables online order placement for companies like Dell, reducing the time interval between order placement and production. As a result, Dell can manufacture products according to specific orders, thereby reducing inventory costs and boosting turnover.

The costs of outbound logistics can be decreased by decreasing the inbound logistics. When suppliers retain some parts, these parts can be shipped directly from the supplier. Dell applies this strategy to certain parts, such as monitors.

The internet enables companies to shift their marketing and sales activities to the online platform. Dell primarily engages in online marketing and sales, which is both cost-effective for the company and convenient for customers (Porter 2001). Moreover, the internet allows businesses to remove a link from the supply chain.

The internet removes the need for a retailer, allowing businesses to have direct access to customers and giving them a competitive advantage by

reducing costs. Additionally, the internet enables businesses to manage customer relationships electronically, which contributes to sustained competitive advantage. This electronic management helps businesses create long-term relationships with customers, reduce customer defections, and cross-sell and up-sell to focus on high-value customers (Porter 2001). For example, Dell maintains a substantial database that tracks purchasing patterns and budgeting cycles of corporate customers, using this information to make demand forecasts with approximately 75% accuracy (Breen 2004).

In summary, the internet can help businesses reduce expenses and achieve cost advantages, ultimately leading to a sustainable competitive advantage. In this section, I will combine my findings and analyze the important elements that define successful e-commerce and e-business strategies. I will also briefly discuss the legal factors companies should consider before entering new markets. The key elements of successful e-commerce/e-business strategies include direct selling, which eliminates intermediaries from the supply chain and allows businesses to keep all revenue from sales without sharing with retailers.

The business can reduce costs by implementing Just In Time production, which allows them to pass on these savings to the final customer. An e-commerce/e-business strategy can also benefit from incorporating Just In Time production, as it enables the business to tailor products to meet individual customer requirements. This approach helps in reducing costs as products are only made once they are ordered, thereby minimizing inventory costs. Customer relationship management plays a crucial role in a successful e-business/e-commerce strategy, emphasizing the significance of providing high-quality customer service and support.

If a business fails in this aspect, it will damage their reputation. For instance, Dell's reputation has recently suffered due to poor customer service (Zehr, 2005). A negative reputation inevitably leads to

a decrease in sales. Customer Relationship Management (CRM) can be conducted electronically, enabling businesses to gain a competitive advantage by profiling customers and making accurate sales forecasts.

There are several legal factors that companies must consider when seeking to enter new markets:

  • A business with a website that collects information from users must have a privacy policy as mandated by the Federal Trade Commission (FTC). This policy outlines how the information is used and stored.
  • If a business intends to sell products online through their website, they must comply with FTC regulations for mail order, including having a returns policy.
  • Hence, having user agreements or terms and conditions on websites is essential.

According to entrepreneur.com (2005), in order to use the site, each user must agree to a contractual agreement by clicking "I agree". This agreement allows the business to regulate how the site can be used, such as limiting its use to individuals above 18 years old. Additionally, the business may have to ensure that their website is accessible to all users and may require warranties. Ultimately, Dell attains competitive advantage through its direct sales and just in time production strategies.

The absence of retailers in Dell's direct selling strategy contributes to its competitive edge compared to HP. While HP's sales involve retailers, Dell doesn't incur losses from such arrangements. A key advantage Dell holds over HP is their just-in-time production approach, as they exclusively manufacture PCs after receiving orders. This results in a significantly smaller inventory for Dell, unlike HP which maintains a larger inventory due to their differing production method. As a consequence, HP incurs higher inventory costs as

the inventory size increases.

Despite having more purchasing options and a good reputation for customer service, Dell is currently facing major weakness in customer service. Numerous recent complaints have highlighted this issue. In contrast, HP does not seem to have the same problem and enjoys the strengths of offering various purchasing options and having a positive customer service reputation. This report successfully achieves its objective by identifying Dell's main strategies and how they contribute to gaining a competitive advantage.

I have also discussed the potential economic value that can be generated through the use of the internet. I suggest that the CEO of HP should capitalize on Dell's customer service issues by providing exceptional customer service at HP. Additionally, the CEO could explore ways to reduce inventory and leverage the internet to transform the value chain, thus reducing costs.

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