Dell’s direct business model has been a huge game changer in the computer manufacturing industry. This model bypasses the middle man (distribution channels) and allows them to interact directly with their customers. Incorporated into this model is their approach of virtual integration which allows them to have strategic partners that are treated as insiders within the company. This virtual integration approach allows the company to have access to a wide variety of resources without having to overstock on inventory.
The first building block as defined in the business model canvas is customer segments. The customer segments building block defines different groups of people or organizations an enterprise aims to reach and serve. Dell was able to strategically use a segmented market for maximum effect. They had two different key segments that they served: large customers for example large companies, midsize companies and governments and education and their second segment was small customers either businesses or direct consumers. They used a fast cycle segmentation approach to cut the market into finer and finer segments over time. They realized that segmenting the market this way allows them to tailor their programs to the customers’ needs and allows them to understand the needs of their customers. It helps them produce products that their customers actually want and need and hence reduces the risk of having useless and expensive inventory that produce 0 revenue. Understanding and refining their customer segments also allows them to forecast demand which is highly useful in such a fast paced and competitive industry. For example, they were able to divide their “Large Customers” customer segments into more refined segments such as education, large companies, global enterprise accounts and federal among other
Dell’s value proposition is the reason why their customers choose them among all the other PC manufacturers around. The value propositions building block describes the bundle of products and services that create value for a specific customer segment. Dell’s value proposition lies in its customizations and personalization. Due to how effectively they were able to segment their different customers based on need, they were able to forecast and understand what their different segments want in a computer and deliver the product that they want. Their virtual integration approach with their customers means that they are able to hear directly from them about their needs. For example, one of their major customers, Boeing, has Dell employees that live there and they provide unparalleled customer service. This was purposefully done to make it seem as if Dell is Boeing’s IT department even though it’s a separate company. Such direct interactions with their customers elevate them above their competition. It creates trust in their customer’s eyes. Their value proposition is further emphasized by Dell’s commitment to providing the custom software that some companies require during the manufacturing process rather than delivering the computer without the software which costs the company hundreds of dollars to manually install.
Dell’s business model is based on not having distribution channels and being virtually integrated directly with their customers and allow their customers to purchase directly from them. This allows them to focus more on the customer relationships aspect of the business model canvas. They have a personal relationship with their customers as they walk their customers through needs they may have in their company in order to purchase the best computers for the company. Such personal relationships allowed them to realize that some customers did not necessarily care about slight improvements in performance such as being 2% faster but they cared more about longevity and battery life. This allowed them to deliver the exact product their customers wanted and again puts them ahead of their competition. Their revenue stream is based on asset sale as they sell physical products such as computers. One of the biggest differentiators between Dell and their competitors is how they utilize the key partnerships building block. They are integrators and work closely with partners to supply the best product they can and also reduce unnecessary inventory. For example, their partnership with Sony allows them to have the monitors they need without having to manufacture their own monitors. This is an example of a strategic alliance between non- competitors. The partners are treated as if they are inside the company, almost acting as an extension of Dell. What is also amazing about this is that when they launch a product, their supplier’s engineers are right inside the plants so that if a customer has a problem, they can fix it in real time. This boosts their value among customers and also boosts customer confidence in the company, far outpacing their competitors in this regard and thereby strengthening their market position.
“The Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell”, Harvard Business School, Joan Magretta.
“Business Model Generation”, Alexander Osterwalder, Yves Pigneur