Eco 533 - Dell Computers - Economics for Managerial Decision Making

Dell Computers

Economics for Managerial Decision Making

ECO 533

July 28, 2004

Executive Summary

Although the idea of electronic commerce (E-Commerce) has been around for several years, it is slowly moving up the ranks in terms of how both consumers and businesses conduct business. Electronic commerce is the paperless exchange of business information using electronic data interchange (EDI), e-mail, electronic bulletin boards, fax transmissions, and electronic funds transfer. It refers to Internet shopping, online stock and bond transactions, the downloading and selling of "soft merchandise" (software, documents, graphics, music, etc.), and business-to-business transactions (http://www.businesstown.com/internet/ecomm-definition.asp).

This paper focuses on e-commerce as it pertains to Dell's "direct model" of business. The topic of discussion will then turn to Dell's direct selling medium as the new and improved "economic trend" in our changing world of technology as we know it. Lastly, this paper will analyze product pricing, cost component, market structure, as well as macroeconomic forecasting all with regard to the products and services offered by Dell Computer.

Utility in Customer Service

Evidence indicates that consumers can fulfill specific wants with succeeding units of a commodity but that each added unit provides less utility than the last unit purchased. A product is considered to be of utility if it has the capability of satisfying some kind of a want or desire. In other words, utility is want-satisfying power (McConnell-Brue p. 395). Dell Computer is able to provide utility to consumers by focusing on what is considered crucial to a company's success and overall productivity - customer service.

Dell's Internet strategy is based on three principles - convenience of use, reduced costs, and good customer experience. It is convenient because it allows customers to be effectively connected to the company seven days a week, 24 hours a day. Costs are reduced, as it is the ultimate self-service infrastructure. Customers can also avail of special offers that appear only on the web. Because of the ease of use and reduced costs, the customer has a good experience when buying a computer online from Dell (http://www.business2000.ie/cases/cases/case409.htm#unique).

Impact on Pricing Decision

Concerning the number and closeness of substitute and/or complimentary products and their impact on the pricing decision, Dell does not really share any affiliation. The one main factor that has the biggest impact on the pricing decision of Dell Computer products is the direct model approach of selling. Dell is the leading direct systems company in the world. The direct approach to selling was pioneered by Dell and companies now use this worldwide.

Direct selling involves the manufacturer or supplier selling goods or services directly to the customer. There are no wholesaler or retailer operations and this means that the costs are kept low and the goods can be supplied to the end user at a lower cost. Traditionally in the computer industry, the manufacturer built computers, which were then sent to resellers, and dealers who in turn sold them to final users. Dell set out to change all this by dealing directly with the end customer. Dell uses the Internet, press advertisements, public relations and direct mail catalogues to promote its products (http://www.business2000.ie/cases/cases/case409.htm#unique)

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Price Elasticity

Dell Computers offers products and services that are considered to have a demand that is price elastic. That is, if a specific percentage change in price occurs in a larger percentage in quantity demanded (McConnell-Brue p. 375). One of the main reasons why Dell has the ability to increase the quantity demanded of their products by consumers is because of their extremely efficient supply chain strategy.

Just in time (JIT) manufacture is designed to minimize costs and reduce waste. Everything is carefully planned to ensure that stock is only ordered as required. No stock is held in warehouses.

However, JIT requires a very good relationship with suppliers. Supplies must be available as needed, therefore suppliers must be able to send components every day or every hour as required. This requires close co-operation. Customers get the freshest and most up to date technology (http://www.business2000.ie/cases/cases/case409.htm#unique).

Strategies to Enhance Revenue

One way for Dell Computers to enhance revenue would be for them to improve upon their existing supply chain by using e-commerce. Since 1996 when Dell opened its website www.dell.com for e-commerce the company has had huge sales success. By 1997, the company recorded $1 million in online sales. By 2000, the company's Internet sales had reached $50 million a day (http://www.business2000.ie/cases/cases/case409.htm#unique).

Cost Component

All companies have an associated cost attached to their basic production processes. In order to establish full production capacity, companies need to make certain that they have the proper resources in place in order to achieve total efficiency. Dell Computer has had the unique ability to hedge themselves against the huge costs associated with their production process. Technology through e-commerce has allowed Dell to achieve superiority in the market with regard to its products for consumers.

Dell's costs of producing a specific output depends solely on the prices of the needed resources and the quantities of resources (inputs) needed to produce that output.

It is interesting to note that the law of diminishing returns need not apply to Dell and its production process. The reason for this is simple. Dell relies heavily upon the new expanding technology of e-commerce via the Internet. Through personal one-on-one confrontations with their consumers, Dell is able to satisfy the ever-growing demand for their products and services by simply "taking orders".

Paths to Profit

Supply and demand remain at the heart of Dell's core competencies with regard to how it runs its business. For Dell, the right customers are large corporations and sophisticated consumers who replaced