Tuesday, January 22, 2013

Dell's Fall From PC Dominance to Potential Buyout

Dell, once one of the most prominent PC manufacturers due to its streamlined and highly efficient supply chain, is currently negotiating a potential buyout from the Silver Lake Partner's investment group, which includes Michael Dell in an aim to take the company private.  Known for their innovative and direct to consumer business model, Dell managed to eliminate the unnecessary proponents within it's supply chain making it a model of efficiency.  Through taking customer orders with only specific variations available along with a quick assembly turnaround Dell was able to create a very efficient supply chain with a known demand.  

However, over the years many competitors have emulated this process eliminating Dell's greatest comparative advantage.  More importantly though, cheaper production processes and supplies coupled with improved supply chain management from it's competitors have driven down the cost of personal PC's and laptops.  Companies producing their products overseas can now compete, in terms of price, which was once an impossibility only a few years ago.  Even consumer preferences have changed, customers today prefer mobile devices (i.e tablets and laptops), rather than PCs, that are not only practical but aesthetically pleasing.  In 2012 PC sales dropped by 3.5%.

As Jan Rivkin, a professor at Harvard Business School has noticed, "Dell beautifully aligned their entire model to fit a particular world. When that world changed they found it very hard to alter the model." Dell's over compensation towards efficiency in the efficiency versus responsiveness spectrum made adapting to changing preferences and practices almost impossible.  This is evident in their declining sales.  They focused so much on reducing variability that when the laptop market evolved altering Dell's preconceived notions of service level, response time, product variety, price, and innovation they were simply unable to match their competitors like Apple, Hewlett-Packard, and Asus. Their lack of flexibility  especially in their facilities and philosophy towards innovation proved to be an expensive mistake.  

By taking the company private it would allow Dell to restructure their current operating procedures and supply chain management while not having to worry about quarterly profits and shareholders.  They have in the past tried to expand into other areas with little success.  

Source: http://online.wsj.com/article/SB10001424127887324595704578244174200133296.html

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