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The "Demand Side" of the Dell Strategy

Obviously, the direct model is an unusual approach to distribution that wouldn't meet the needs of most businesses. Still, other organizations can incorporate vital elements of Dell's model into their own operations. For example, Dell stresses that during tough economic times, it is especially important to understand and anticipate customer demand—a crucial element of Dell's strategic advantage. The problem, says Dell, is that most companies don't really know how to accurately forecast demand:

First, if you just step back from whether it's direct or indirect and you just look at the way business works ... it's based on the assumption that you don't really know when and how the demand is going to occur.

Although gauging customer demand became somewhat easier for some companies once Internet technology transformed assumptions and business models, it continues to be a difficult undertaking for most companies. Again, the evidence abounds: If forecasting demand were easy, the business news would include far fewer stories of excess inventory and multibillion-dollar write-offs. [1]

Nimbleness is a critical ingredient. Dell says it is imperative that companies "be prepared for all possible ... instances of demand whenever and wherever they may occur." Of course, that's relatively easy for a company like Dell, with its "made to order" mentality and model. But Michael Dell argues that, to a large extent, the key to enhancing productivity and profitability for companies without a direct model is the correct use of technology, and in particular, the Internet.

He admits that the Internet was tailor-made for his company, allowing the firm to gauge demand more accurately than ever before. In early 2002, Dell was raking in between $60 and $70 million of sales over the Internet on a daily basis, and Dell is hoping to boost this number substantially within a couple of years. Again, the way he plans to get there has implications for many kinds of businesses:

There are goals to have 100 percent of our sales on line ... that's the only correct goal for us as far as we're we keep driving in that direction .... Evolution follows a couple of different paths. One is machine-to-machine communication.

Another part of the formula is automation, especially in the order process. The goal is to get machines talking to machines. A machine at a client company places an order with a machine at Dell. That triggers the entire made-to-order process, which then becomes more or less automatic. "Over 90 percent of our supply-chain transactions are machine-to-machine transactions," Dell says with obvious satisfaction. Of course, "you have to put some sort of human framework in there. But if all transactions were non-Internet individual purchases [that is, individual orders placed over the phone], the expense would be just enormous."

Based on Michael Dell's experience, there are several things that any organization should keep in mind in order to maximize sales opportunities and keep costs down:

  • FIND BETTER WAYS TO GAUGE DEMAND. The basis of the Dell model is an incredibly firm grasp on demand. Other companies, regardless of their size, can help their own cause by doing a better job of forecasting demand and, in Michael Dell's words, being "prepared for all possible instances of demand, whenever and wherever they may occur."

  • MOVE AS MUCH BUSINESS AS POSSIBLE ONTO THE INTERNET, AND INCREASE THE PERCENTAGE OF "MACHINE-TO-MACHINE" BUSINESS. Dell may never reach his goal of garnering 100 percent of his sales online. But remember that 90 percent of his supply-chain transactions are machine-to-machine. This may be unrealistic for many companies, but moving in this direction can lower transaction costs, while freeing up employees to get more involved with knowledge-based activities that can help the company in other ways.

[1]The great NASDAQ meltdown of 2000–2002 occurred in part because companies built up excessive inventories on the assumption that the voracious demand for technology of the late 1990s would continue into the new century. When demand failed to materialize, companies missed earnings and sales targets by wide margins, and hundreds of billions of dollars disappeared from the stock market as the vast majority of technology stocks plummeted. Dell was not immune; its market capitalization also dropped. In essence, the market reevaluated the true worth of all technology stocks. This took the air out of the NASDAQ bubble, which was caused, in large part, by the exaggerated valuation of Internet stocks.

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