The Financial Times
What pathway should a technology company take nearly to double its revenue? In April, Dell Computer said it would take the direct route: extending its powerful direct to the customer business model from PCs into flat panel televisions, laptops, and now printers. To grow from Dollars 49bn to Dollars 80bn by 2009, Dell also said it would roll out its winning model across the world.
Coming a few months after IBM sold its PC business to China's Lenovo, Dell's strategic intent is causing many technology hardware companies to consider how they might out-Dell Dell, by adopting its practices and building on Asia's cost advantages.
But the direct road isn't always smooth. IBM emphasised direct sales of PCs to large customers—and wound up exiting the business. And in the late 1990s Compaq also tried and failed to go direct with commercial customers in Australia. Still, in an industry that is rapidly commoditising, imitating at least some portion of Dell's direct model could be necessary to compete, and is essential for survival.
Just how much to adopt is the key question. To decide, firms should analyse three issues: Is the direct model a real advantage in your business? Do you need to apply it to your whole business, or just specific segments? And, how can you make a smooth transition?
Begin by determining whether channel partners are aggressively pushing products or passively fulfilling customer demand. Ask yourself: Can you sell more of your products to existing customers through a sales model that relies on channel partners? Can you launch new products effectively? Are your customers still just buying boxes instead of wanting solutions? Are your sales and marketing costs competitive with the rest of the industry's?
If the answer to any of these questions is "no," which is likely, then building some direct capabilities should be a top priority.
How widely to apply the direct model is the next consideration. Keep in mind that the shift to a direct selling model requires major investments in logistics, manufacturing, order-fulfilment systems, and customer support. It is important to achieve the highest efficiencies possible in order to keep costs in line with the new competition. Four principles can help companies choose carefully where and how to go direct.
First, find your customers' 'pain points'. Companies must understand how to improve the experience of purchase and ownership. Ruthlessly benchmark yourself against competitors on cost, cross-selling, and capturing new customers.
Second, focus on customer segments where your frontline is a source of competitive advantage. Those vital employees include sales, customer service, and support personnel—people who can turn a first meeting with a customer into a lifelong relationship. The enterprise segment, since it interacts with many of these key employees, is a logical starting point. Such large customers prefer to deal directly with vendors for a variety of reasons: tailored solutions, predictability of product roadmaps, and responsive support. Dell has understood this for a long time - one reason that it already has 25 per cent market share of large business customers in China, compared with 13 per cent for small or medium-sized business customers.
Third, test drive in one market first. The right pilot country will reflect a combination of market readiness, management team capability, and risk exposure. One of the more challenging tasks is reorienting the supply chain. Instead of handling a few large orders from channel partners, suppliers must adjust to providing timely deliveries of massive numbers of orders from end-customers. The sales team also needs to move from the role of tuning the channel to creating demand among end-users.
Fourth, do not abandon or confuse channel partners. In the late 1990's, Compaq's move to go direct surprised its Australian resellers, which accounted for the bulk of the PC maker's sales. They reacted by pushing competitors' products. The company had no choice but to backtrack, and wound up spending valuable resources winning back the loyalty of resellers.
To avoid such predicaments, companies should spell out clearly the rationale for the direct initiative to channel partners.
These directions are easier to map than to put into practice, but the rewards can be large. One computer hardware vendor that switched to a direct selling model for large customers saw a 150 per cent increase in profitability for that part of their business.
Market share in the core business rose, and so did sales of higher-margin products to existing customers. In other words, it pays to be a copycat.
It is easy to forget that Dell's early success came from cloning IBM's PCs. But it did not clone IBM's business model, or Compaq's, or Hewlett-Packard's. Dell just took what it needed. That is a useful lesson for tech companies trying to beat, or at least match, Dell today.
Ravi Vijayaraghavan, based in Singapore, is the head of Bain & Company's technology practice for Asia. Satish Shankar, based in Singapore, is the head of Bain's consumer products and retail practice in South East Asia.