Dell is one of the world's largest computer systems companies, which is highly distinguished by its direct channel marketing policy. Furthermore it is globally known for building personal computers, enterprise products like servers as well as storages and IT solutions which are customised per order to match the customer's needs. These services are mainly low cost with good quality and are ones that can be considered good value for money. It is also remarkable to see how Dell that was founded on the basis of direct marketing operations beginning with telephone sales could swiftly embrace the internet as its main direct sales channel.
In recent years, Dell was hit by slower growth and increased competition in its core market segments. In addition, Dell lost its leadership position after HP merged with Compaq to assume the market leader's position.
This report looks at the success story of Dell in its marketing approach, highlighting the key components of its marketing mix as well as its segmentation, targeting and positioning process. Moreover the report will analyse and discuss the company's pricing strategies and objectives in response to the slow market growth and increased competition while exploring and suggesting further options that can increase Dell's revenue and market share.
Dell was founded in 1984 by Michael Dell, a 19-year old teenager, who started his business with a capital of $1000 and the aim of selling IBM PC-compatible computers. He managed to establish Dell as one of the most worldwide successful and profitable companies only after the first years of its function.
The first year gross revenues amounted to $6 million. In 1985 Dell introduced the first computer of its own design- the Turbo PC. Three years later the company made its initial public offering at $8.50 a share and was renamed to Dell Computer Corporation. In addition it managed to expand to 12 different countries by 1990 and by 1996, Dell was the first company to list a website and began selling computers via its web site and offered online technical support at the same time and by the year 1997 Dell was one of the top five computer makers in the world. In 2000 Dell's internet sales reached $50 million per day and by 2001 Dell overtook Compaq as the global market leader in computer sales.
In 2006 Dell lost their market leader position to HP after HP merged with Compaq. A report by Data monitor published in July 2009 indicates that Dell's net profit have decreased by 15.9% over 2008 compared to 2007. The report also suggests that the increased competition and slower market growth in recent years is a major challenge for Dell to restore its leadership position.
Dell's website states that their mission is to be the most successful Computer Company in the world by delivering the best customer experience in all markets they serve, while their website states that their vision is not just to provide the best customer experience in their industry, but to be counted among the best in any business.
The following sections will discuss how Dell aims to fulfil their mission and vision values by using operational excellence as a basic competitive strategy in order to meet customer expectations of high quality, leading technology at competitive prices while providing excellent service and support.
The formula of segmentation, targeting and positioning is the base for strategic marketing. Companies realize that they cannot appeal to all customers but have to identify the customers they are able to serve best and profitably. According to Kotler, "A company must identify the parts of the market that it can serve best and most profitably". (Kotler et al., Principles of marketing, fifth European edition, p. 410, Pearson 2008)
The computer market has various products which can basically be classified into software and hardware categories where each are sub-divided into various product segments. It is clear that Dell is focused on the computer hardware market where it started with the desktop personal computer as its initial product segment. Further product segments such as notebooks, servers and computer peripherals have been added to its marketing mix as revenue increased. In addition, Dell has partnered with major corporations such as Microsoft to ensure their products are equipped with the latest software as per customers' needs.
Dell mainly uses customer segmentation in its market strategy along with the product segmentation where it is targeting several market segments and designing separate products or offers for them. On one hand, geographically, Dell has segmented the market into the US/Americas, EMEA and Asia Pacific-Japan where each area has different pricing and marketing strategies. On the other hand, demographically, there is no age, gender or race bias but income, occupation and education play a role in deciding the customer needs and hence the product offer.
It is also worth noting that from a behavioural view, Dell focuses on the benefits sought by consumers such as low price and good quality and service. It also carefully selects customers with relatively predictable purchasing patterns and low service costs, allowing itself an opportunity to develop a core competence in targeting and keeping a specific database for target customers.
The first is the relationship customer such as large corporations, government and education sectors. These customers provide the largest portion of profit and are therefore supported by dedicated sales representatives or account managers. A large share of Dell's business stems from long-term corporate relationship accounts for which Dell has developed tailored customer-specific web sites such as "Premier Pages" with predetermined custom specifications and budgets, giving them access to product design, order status and product support and service information.
(Kotler et al., Principles of marketing, fifth European edition, p. 326, Pearson 2008)
The second is the transactional customer who is price-sensitive looking for low cost, more reliable, quality service and added value products. These are mainly individual customers who are more likely to access, choose and buy online as a mean to fulfil their product requirements and customer needs. To obtain stable demand in this segment, Dell used the latest technology products to target buyers who had regular upgrade purchase patterns, required little technical support, and paid by credit card.
This report suggests that Dell's customer segmentation is the main factor in their market strategy as it is able to use these segments to understand the market needs and demands, this can consequently influence its product segmentation strategy and the customised product offers that Dell can introduce. Clearly it makes sense that Dell does not target a product segment until demand and development standards have been established so it does not affect its brand image and value proposition.
Dell's value proposition is offering equivalent quality computers at a lower 'price for performance'. (Kotler et al., Principles of Marketing, fifth European edition, p. 443, Pearson 2008) As many large corporations, Dell had to alter its positioning to maintain its competitive advantage as well as its main value proposition. Therefore in the early days, Dell positioned itself as a premium computer company through an easy and convenient internet-based sales medium and outstanding service. Gradually this further growth and increased advertising managed to establish Dell's position in consumers' minds and presented it as an aggressive, value-oriented computer manufacturer.
Even when later this initial advantage has disappeared as more competitors caught up with online marketing and price strategies. It is clear that Dell's flexibility in extending its product segments while maintaining its brand image and positioning towards its targeted customer segments have enabled the company to maintain revenue and market share growth.
Dell offers its customers a wide range of computer systems workstations, servers, desktop computers and notebook computers as well as storage products and solutions.
Dell also extended their selection by adding computer hardware peripherals, computer software as well as support services. Never the less, Dell does not manufacture the components of its final products, but instead it relies on a number of trusted suppliers who have convenient warehouse facilities within 15 minutes of Dell's production centres. Analysts at Data monitor and Valanium associates have been critical about this approach and considered Dell's dependence on third party suppliers as a major threat to its long term success, however Kraemer and Tuckwell have praised this cost effective approach and its positive impact on Dell's pricing strategies.
The place or distribution channel is one of Dell's distinct advantages in their marketing mix. This is because Dell uses a direct channel model where it sells its products directly to the customer without need for a distributor or a middle man. Though it initially started with selling products over the phone using a toll free number that customers can call free of charge, they were the first to adopt advanced technology and use the internet as a direct channel to sell its products.
The direct channel model enabled Dell to reduce costs and minimise inventories and so it has been able to pass these savings to customers in the form of lower prices.
Price is the amount of money charged for a product or service, or the sum of the values consumers exchange for the benefits of having or using the product or service. (Kotler et al., Principles of marketing, fifth European edition, p. 639, Pearson 2008)
In this case Dell provides high quality computer systems at the lowest price to match the customer's expectation of value for money. It is also able to supply products at low price by cutting out all costs of manufacturing parts as well as costs associated with retailers and distributors.
As pricing remains a major factor in the customer's buying decision, Dell uses the internet to get a reasonably accurate idea of the market's supply and demand, hence reflecting on its price changes and promotions.
Promotion is the most important component of the four P's so it is crucial to understand and be able to promote a product. Here it can be seen how Dell uses many different promotional methods to market their products, such as advertising on television, on the internet, in magazines and newspapers as well as direct mail ad campaigns. It even uses sponsorships in professional sports as well as product placements in films and television in the marketing techniques. Perreault et al suggest that direct sales channels and direct customer relationship approach has enabled Dell to fully understand its customer's requirements and preferences as well as to maintain its competitive edge. (Perreault et al, Essentials of marketing, 12th edition, 2009)
It is clear from the above details that Dell's current marketing mix is one of the main factors that contribute to its competitive advantage. The way the company is able to use its marketing strategy should allow the company to leverage its competitive advantage in its core market segments. However, Dell should take advantage of the market opportunities that could potentially increase the business revenue and strengthen its market position. These opportunities will require changes in the market strategy in order to fulfil the market demands, hence increasing profits and market share. These suggested changes are further elaborated in the following section.
The pace of change and development of technology in the IT systems market makes it very difficult and challenging to maintain a competitive advantage. Although Dell continues to use price and service as a differentiator, these are becoming less significant as competitors catch up on prices and services. There are various market segments available that could be valuable opportunities for Dell without damaging its strong brand value or market position, such as:
Dell already offers selected products through indirect sales channels such as retail stores as well as partnerships with telecom companies to provide combined offers.
Expanding indirect retail channels offers a great potential for revenue growth through extending the market reach and brand visibility.
Virtualization software solutions are gaining importance and are highly in demand by leading organisations; this is due to its improvement to hardware utilization and operational efficiency. Dell already has a presence in this market segment but further expansion in such a growing market would increase revenue and allow for market share growth.
The market for mini-notebooks or net-books is expected to grow further and faster due to increasing demand in comparison with other personal computer products. Dell should expand further in this market as it would provide for a steady revenue flow.
This is a high profitability segment which has gained further growth due to globalisation effect. Most corporate customers are likely to pay a higher price as long as they get quality service such as computers uptime and reliability. Although Dell already provides good service and support models, this is an area for revenue growth though providing more complete service and support solutions for its corporate customers as well as expanding into consulting.
The global call for environmentally friendly products and the need for energy efficiency and reduction in carbon emission have provided an interesting opportunity for market growth. Dell already has major contributions in this area, with their "Zero Carbon Initiative" where Dell's target is to reduce its carbon emissions by at least 15 percent by 2012, as well as its "Plant a tree for me" program in Europe. Dell has a great opportunity to gain more revenue as well as market share if they expand their environmentally friendly "green" products.
The ability of price to affect consumer decision and its flexibility makes pricing strategies important in meeting Dell's objectives in such a competitive environment. The main objective of Dell is to produce the low price and value for money products for the customer while maintaining profitability for the company.
The price strategies vary depending on the market segment where it is segmented in the US and Americas into Corporate and US consumer, while outside the US it is segmented geographically into EMEA and Asia Pacific-Japan.
Meanwhile, allocating production sites across the globe, such as in China, Brazil and Ireland have allowed for the product pricing to be adjusted to reflect the affordability of local customers, without incurring added costs. The fact that Dell does not produce their computer components is actually of good benefit for the company in the current economic environment as the pressure is on the suppliers to reduce their costs and prices while Dell would be able to pressure them more to lower the prices further.
As competitors lower their prices and consequently their profit margin, Dell is able to match the price reduction or even lower without greatly impacting their own profits.
This is mainly achieved by Dell's ability to utilise its relationship with its suppliers to cater immediately for the market's supply and demand. Dell has built these relationships over a number of years which cannot be easily replicated by its competitors.
The article "Just-in-Time Inventory Management" by David Broyles et al suggests that Dell's direct sales approach which cuts the middle man's costs and their efficient JIT (Just-In-Time) inventory methods has enabled them to reduce costs further and provide lower prices to the consumer. In addition, the internet based marketing strategy provides a reasonably accurate idea of supply and demand, which enables Dell to execute a successful pricing strategy.
However, the profit margin is not that high in computer hardware and Dell would be wiser to invest more into after sales support and services where the real profit lies.
The corporate segment is an area were Dell can alter its low cost pricing strategy by offering more services for a higher price or combining hardware, software and services into a bundling offer, which would still be regarded as good value for money. This strategy can even be broken down into multiple tiers which would suit different corporate customers depending on service level agreements.
Over the years, Dell had successfully managed to maintain its integrity and brand equity as a provider of quality solutions at reasonable prices. Their strategy of low cost and direct customer relationship has been and remains the main reason for their continuous success, so it would be wise for Dell to continue using the same strategies for as long as they are successful.
However, the increasing challenges from competitors such as HP/Compaq and the global changes such as the latest economic recession should be an incentive for Dell to explore new horizons on the global market, whether by expanding their indirect sales channels or focusing on new or upcoming product segments which has the highest market demand and which provides more opportunities for revenue growth and continued market leadership.
For example, focusing on saving the earth or improving it by providing environmentally friendly, energy efficient products while maintaining the core brand value of quality at lower prices should be Dell's priority. Dell would have a competitive advantage in this niche market as it has already taken the initiative in this area and should be able to use its global brand image to attract this market segment.
Overall, Dell has been and still is the leader in direct marketing channels with excellent market strategy that allowed it to continuously identify and target the right product segments to complement their brand image and innovation aspects. Dell should not fix what is not broken so they would continue to provide high quality products at lower prices through direct sales channels, while at the same time expanding their global presence through indirect channels of selected partnerships in new markets.
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