Dell : Market disruptions that fostered its success.

Dell is an astonishing business success. In 2005, the company is the Number 1 Personal Computer vendor in the world even though it was just an unknown start-up in 1984.Its market capitalisation is exceeding $ 75 millions dollars even though it started with a $ 1000 capital. How is such a miracle possible ? Dell is largely viewed as an excellent success of business model disruption. However, such a success would not have happened without the presence of two other disruptions :  the disruption of the computer industry and the Internet technology disruption.

The business model disruption initiated by Dell is one of the best ever achieved in a long time. It is based on two simple concepts : build-to-order (product manufacturing only starts when a customer order has been received), and direct sales (selling is done exclusively online or over the phone without distributors’ involvement). The build-to-order process eliminates heavy inventory costs while still providing customers with the perception of a customized service. Direct sales creates a strong relationship where customers feel served personally by the vendor ; it drastically reduces costs of sales. There are other famous examples of business model disruptions. In the air travel industry, SouthWest has pioneered the low-cost, point-to-point travel business model. In the retail sector, based on the same principle, hard discount stores (Aldi, Lidl, Ed, Leader Price) have invented the concept of small sized, reduced assortment, low-cost stores. In these last two examples, several competitors within the same market have mimicked the model successfully. In comparison, Dell has reached the achievement of being the only manufacturer in the world to be able to adopt the business model : other competitors such as HP or IBM were never able to copy Dell efficiently.

In order to understand the phenomenon, one has to analyze another simultaneous market disruption : the disruption of the computer industry structure. Until the mid 80’s, the computer industry was vertically integrated. Manufacturers were doing everything (vertical integration). Like IBM, they designed and manufactured all their computers components and sold them through their own sales force. When Personal Computers emerged, the industry moved to a horizontally disintegrated structure. Every item in the value chain was provided by different specialists. As an example, in 1990, processors were provided by Intel, operating systems by Microsoft, networks by Novell, memory chips by Samsung, disks by Seagate, office applications by Lotus, final assembly by Compaq, sales by independent distributors. Thanks to this new structure, Dell was able to introduce a then unique concept. Dell started its activity by assembling PC components according the specific demands of its customers. Initially, this model was only attractive to a small elite of techies. Later, thanks to the marketing effort of the different components suppliers, an increasing number of users got familiar with the technology and felt comfortable with specifying their PC configuration to Dell. At the same time, the indirect channel lost its added value of technical advice to end-users : Dell’s direct sales model ended up strengthened.

In the late 90’s, the Internet technology disruption gave additional weapons to Dell. Internet has become the number one media to establish a direct link between vendors and customers. Dell’s sales organization who was previously taking all orders over the phone ceased the opportunity and created an Internet portal where customers could get all necessary information to configure their PC. It went further by offering services all along the life of the product : financing, custom configuration, on-line help to install, use and maintain. The efficiency of these tools has further reinforced the competitive advantage of direct selling versus a complex distributor network.

The Dell example is a good illustration of the complexity of market disruptions. Disruptions are often the combination of independent trends that add up and topple the markets. It took no less than three market disruptions to give Dell a decisive advantage. One can understand why so few companies are able to anticipate and exploit disruptions.

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