Customized and Built to Order: The Case of Dell

Abstract

Two key aspects characterized the U.S. computer industry of the mid-1980s: product standardization/modularization on the one hand, and indirect distribution channels on the other. Standardization implied the usage of common architectural interfaces and standard components, which also allowed PC makers to outsource purchasing and production steps. However, this led to very low potentials for differentiation. Similarly, the indirect distribution model was the dominating approach and permitted little differentiation among PC makers. Manufacturers such as IBM, Compaq and HP relied on standardized components from suppliers as key resources, while their key activities were related to the PC-manufacturing process. The final products then went to distributors, who in turn sold them to a variety of retailers, resellers and integrators, who finally reached the end-customers. Yet even with accurate forecasting, the indirect distribution model was plagued by the need to hold high inventories at each step within the value chain. As time was not perceived as a competitive advantage, companies using indirect distribution did not treat inventories as a significant problem. Inventories were an expression of “business as usual”, and time lags represented the industry standard. Delays were acceptable, as long as the other vendors had similar cycles, but did constitute a tremendous cause for value reduction. The launch of Dell in 1984 and particularly Dell’s subsequent pioneering of direct distribution challenged all of this.