BUAD 307





04--The case of Dell Computer

PowerPoint Narration

Dell prides itself on selling online and claims that this method is an effective way to reduce costs.  The evidence for this assertion is missed.

One claim is that by making a custom order computer with only the components that the customer wants, money can be saved.  This assertion holds little merit.  It would probably be cheaper to let each customer choose from one of, say, ten models.  Each customer could very likely get a little bit more than what he or she needs at a lower price than a customized unit since many computer parts are relatively inexpensive today.  Customization is more useful if a customer needs a computer with specifications that cannot readily be found among pre-fabricated ones.

Although shipping to individual customers is costly, this process is considerably faster than going through the distribution system that is optimized for efficiency rather than speed.  It has been estimated that computer parts may decline by as much as 1.5% in value per week due to rapid innovation in the field.  If the time to reach the customer can be decreased by five weeks, up to 5*1.5%=7.5% might be preserved in value.

Overall, the costs and benefits of selling computers online seem to roughly cancel each other out, suggesting that neither is necessarily more profitable.  Many computer makers will therefore use both methods since some customers prefer to buy computers one and others the other way.  Therefore, economies of scale from getting both types of sales turn out to be more important.


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