IT Strategy

Dell’s Turnaround Strategy

April 8, 2008 by Raj Sheelvant

Michael Dell declared his interview in 2006 with Knowledge@Wharton that supply chain efficiencies and direct sales gave the company a competitive edge. If you use Porter’s Generic Strategy, clearly supply chain efficiencies and direct sales model allowed Dell to pursue Cost Leadership Strategy.

By late 2006, Dell started loosing market segment share (MSS) to HP. In a dramatic shift from its direct sales model, Dell in June of 2007 started selling its PC through retail chain Wal-mart. In the article ‘Can Dell’s turnaround keep HP at Bay?’ Wharton School professors illustrate that Dell’s supply chain efficiency became less dominant with it move from direct sales model to multiple sales channel model. So does this means that within a year there was a realization within Dell that supply chain efficiencies and direct sales model does not give Dell a competitive edge? Or was moving to retail sales model a knee jerk reaction to loosing MSS? Will Dell be able to regain back its leadership position in MSS? In other words is there a turnaround strategy?

Dell has recently tried to allay any fears that its effort to turn round its flagging business model is working. Financial Times article dated April 7^th, 2008 titled ‘Analysts assess Dell’s new strategic thinking‘ states that “The company has been struggling to right itself for more than two years after its belated response to fierce competition and changes in customer buying habits led sales and profits to slip. Plans include $3bn in cost cuts, a new product design strategy and a renewed push into some of the fastest-growing segments of the PC business, such as services, emerging markets, and small- and medium-sized businesses”.

The article concludes that “For years, this ‘direct model’ was a near religion at Dell. It allowed Dell to ship custom-built machines, while avoiding the costly inventory that weighed on the profits of rivals. Ironically, Mr Dell said last week that it was the flexibility of the direct model that had contributed to Dell’s troubles.”

This is a surprising capitulation by Michel Dell about Dell’s failed strategy and its tunnel vision in achieving Cost Leadership only using direct sales model. Granted Dell had a huge lead time in achieving supply chain optimization and streamlined for direct sales. But by focusing only on direct sales by optimizing supply chain, Dell left other sales channels wide open for competition to chip away its MSS.

Here is a tough lesson for all organizations. Organizations should not put all eggs in one basket as far as implementation of its Business Strategy is concerned. Of course companies need to take advantage of their core competencies but at the same look for opportunities use their core competencies to broaden their strategy implementation. In Dell’s case they should use their core competencies to implement Cost Leadership Strategy by pursuing multi sales channel opportunities. Finally Dell is doing just that, but now it’s in a reactive space trying to claw back to regain leadership position in MSS.

Updated May 19, 2008

Also check out my blog article titled Dell’s Game PC Turnaround Strategy

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