Michael Dell Constitutes

The case of Dell constitutes a compelling example for the analysis of competitive advantages. When Michael Dell asserted in his 1999 Book that Dell had “revolutionized an industry”, he had good reason to be sanguine about the recent performance of his company, at the peak of its success at that time. A decade later, however, times of glory seem to belong to the past.

This essay will look at Dell's once unique business model in an attempt to understand its historically limited viability. Given the limited scope of this paper, the following discussion will focus on the aspect of social complexity as a source of competitive advantage.

When Dell entered the computer industry, it introduced an unprecedented business model that fundamentally differed from that of its competitors. Instead of seeking to exploit cost advantages inherent in scale economies, Dell focused upon what Fields (2006, p. 121) terms as “economies of time and speed”. Shifting attention from production to process disrupted the industry, as it not only prevented Dell from having to compete vis-a-vis against its rivals (Joan, 1998, p. 74), but also caused the diminishment of scale advantages (Christensen, c2001, p. 141).

Dell's business model was for a long time based upon a “direct sales” and “build-to-order” strategy, following a “logic of disintermediation” (Fields, 2006, p. 129) and “mass customisation” (Lord, 2003, p. 97). This innovative strategy entailed various operational advantages and allowed Dell to rapidly gain market share and overtake its competitors. Being directly connected to customers enabled Dell to not only reduce costs, time, and risks related to inventory and demand forecasts, but also proved to be an invaluable source of information about customer preferences. Furthermore, it allowed Dell to almost instantly adapt to market changes; a crucial competency in an industry driven by short product life cycles and rapidly depreciating inventory.

Operationally, however, implementing its hitherto unique business model confronted Dell with a challenging task. Assembling computers according to customer choice required close relationships to suppliers, as Dell's strategy of inventory velocity dictated that components be supplied only when needed. In order to meet this requirement, Dell introduced a form of Just-in-Time manufacturing that was based upon vendor-managed-inventory (VMI)[1] and third-party logistics providers (3PLs)[2].

Pioneering the use of VMIs and 3PLs (Fields, 2006, pp. 135-36), Dell found a way to practically externalise its inventory without having to forgo its control and coordination (Manataki, 2007, pp. 12-13). Michael Dell (in Joan, 1998) describes these relationships to suppliers as “virtual integration”, suggesting that this form of collaboration presented an advancement of “vertical integration[3]” - a model at that time pursued by most of Dell's competitors - for it retains its advantages while adding flexibility.

To summarise, Dell's direct sales model and build-to-order strategy, which might at first glance appear relatively simple in concept, could only function because supported by a highly complex and flexible organisational structure (Kraemer, Dedrick, & Yamashiro, 2000, p. 8). This complexity might be the key to understanding how Dell succeeded in sustaining a competitive advantage gained from its innovative business model for nearly two decades, but ultimately failed to prevent its erosion.

In order to fully understand the dynamics that underlay Dell's competitive advantage, it is necessary to extend the focus traditionally applied by the resource-based view. Instead of ascribing the success of firms to idiosyncratic resources held within individual firms (Wernerfelt, 1984; Barney, 1991), the complexity of Dell's business model calls for an examination of inter-firm relationships and dependencies. Complementing the resource-based view, the “relational view” (Dyer & Singh, 1998) holds that close collaboration between firms, often culminating in mutual dependence, can constitute a source of sustained competitive advantage.

An important role for the understanding of this concept plays Teece's (1986) notion of what he terms as “complementary assets”, as it explains the pivotal factor that supplier-relationships constituted for Dell's success. According to Teece, it is not merely the characteristics of an innovation per se, that determine its imitability, but also operational prerequisites necessary for its execution (Teece, 2006, p. 1135). The two pillars of Dell's competitive advantage, namely its direct sales and build-to-order strategy, are supported by three of these operational prerequisites, or “complementary assets” (See Figure 1).

Figure 1 - Complementary assets underlying Dell's strategy

Whereas production and brand image are internal to the firm, the third factor, Dell's supply chain management, relies upon a myriad of relationships with its partners. Consequently, a mere focus upon internal resources and capabilities appears inadequate. Furthermore, the spread of these ‘facilitators' over Dell's network of supply and logistic partners might explain why other firms' attempts to imitate Dell's strategy have, for a long time, been to no avail.

In this sense, Dell's complex network of relationships meets one of Barney's (1991) criteria[4] necessary for sustaining competitive advantage, namely that of “social complexity”. But this is by no means the only characteristic limiting its imitability. Another important role plays the relative scarcity of firms holding required complementary assets, which Duschek (2004, p. 65) describes as being “limited ... within a given period”.

Half a decade later, Duschek's assertion might still hold, but its signification for the computer industry appears to have become obsolete. Suggesting that a competitive advantage can be “nullified by such [industrial] changes”, Barney (1991, p. 103) adds a second component to the generally held view that the sustainability of a competitive advantage is determined by its imitability. His notion of a changing environment might explain why Dell has lost its competitive edge, and today even outsources its production - a strategy already pursued by most of its competitors, but historically incompatible with Dell's business model.

Having focussed for too long on its single growth strategy, Dell has failed to acknowledge co-evolutionary[5] developments of its competitors that have rendered its once unique strategy and low-cost model uncompetitive. And although it is not long ago that Michael Dell confidently asserted that “Dell's core strength historically will be its core strength in the future” (in Business Week, 2007), it is questionable wether Dell will succed in avoiding the perils of losing what once made it so successful: being different - not in terms of its products, but in terms of its strategy. List of references

  1. Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management , 17 (1), 99-120.
  2. Christensen, C. M. (c2001). Strategies for e-business success. In E. Brynjolfsson, & G. L. Urban (Eds.), Strategies for e-business success (1st Edition ed., pp. 139-150). San Francisco: CA : Jossey-Bass.
  3. Cui, L., Shong-Lee, I. S., & Hertz, S. (2009, Summer). How Do Regional Third-Party Logistics Firms Innovate? A Cross-Regional Study. Transportaion Journal , 44-50.
  4. Duschek, S. (2004). Inter-Firm Resources and Sustained Competitive Advantage. Management Review , 15 (1), 53-73.
  5. Dyer, J. H., & Singh, H. (1998). The Relational View: Strategy and Sources of Interorganizational Competitive Advantage. Academ of Management Review , 23 (4), 660-679.
  6. Fields, G. (2006). Innovation, Time, and Territory: Space and the Business Organization of Dell Computer. Economic Geography , 82 (2), 119-145.
  7. Joan, M. (1998). The Power of Virtual Integration: An Interview with Dell Computer's Michael Dell. Harvard Business Review , 76 (2), 72-84.
  8. Kraemer, K. L., Dedrick, J., & Yamashiro, S. (2000). Refining and Extending the Business Model With Information Technology: Dell Computer Corporation. The Information Society , 16, 5-21.
  9. Lord, D. (2003). Targeting the Individual: Understanding consumer needs, drivers and marketing opportunities to 2010. London: Business Insights Ltd.
  10. Manataki, A. (2007). A Knowledge-Based Analysis and Modelling of Dell's Supply Chain Strategies. Edinburgh: University of Edinburgh.
  11. Teece, D. J. (1986). Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy. Research Policy , 15, 285-305.
  12. Teece, D. J. (2006). Reflections on “Profiting from Innovation”. Research Policy , 35, 1131-1146.
  13. Wernerfelt, B. (1984). A Resource-based View of the Firm. Strategic Management Journal , 5, 171-180.
  14. Zammori, F., Braglia, M., & Frosolini, M. (2009). A standard agreement for vendor managed inventory. Strategic Outsourcing: an International Journal , 2 (2), 165-186.
  15. “co-evolution”A Dictionary of Zoology. Ed. Michael Allaby. Oxford University Press 2009. Oxford Reference Online. Oxford University Press.University of Warwick.5 January 2010
  16. “vertical integration”A Dictionary of Economics. John Black, Nigar Hashimzade, and Gareth Myles. Oxford University Press, 2009. Oxford Reference Online. Oxford University Press.University of Warwick.5 January 2010
  1. VMI (Vendor Managed Inventory) is a logistic strategy that externalises the inventory of a firm by passing its coordination on to supplier(s). This concept is based on the premises that the supplying firm has perfect information about component or product demand of its customer. The advantages of this strategy reside in a more efficient information chain (Zammori, Braglia, & Frosolini, 2009, p. 166).
  2. 3PLs (third-party logistics providers) are logistic firms contracted for supply management of firms who seek to externalise these operations. It is worth noting, 3PLs have been found to not only reduce the need for firms to manage their supply themselves, but also to potentially have a value-adding function (Cui, Shong-Lee, & Hertz, 2009).
  3. The term vertical integration describes an internalisation of production stages normally executed by separate firms. The aim is hereby to increase control over coordination and quality of products (Oxford Reference Online, 2009).
  4. In order to have the potential to serve as a source of sustained competitive advantage, a resource must meet the following four main criteria: it must be valuable, rare, imperfectly imitable, and unsubstitutable (Barney, 1991, pp. 105-6; 110). “Social complexity” is hereby described as a characteristic impeding the imitation of sources.
  5. Co-evolution is a process in biology that describes the “complementary evolution of closely associated species” (Oxford Reference Online, 2009). The underlying principle is strikingly simple: change initiates adaptation. As one firm finds ways of lowering its costs, other firms need to adapt to survive. In this sense, co-evolution can be understood as a positive result of competition.

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