Evaluation of Dell’s Resolution to Increase Efficiency and Reduce Production Costs

Introduction

Cost leadership is a strategy used by businesses to create a low cost of operation within their niche. The use of this strategy is primarily to gain an advantage over competitors by reducing operation costs below that of others in the same industry. Mass customization is a marketing and manufacturing technique that combines the flexibility and personalization of custom-made products with the low unit costs associated with mass production (Porter, 1985).

Evaluation of Dell’s Resolution to Increase Efficiency and Reduce Production Costs

Usually, the more successful companies with innovative products are the ones providing a large amount of variety and customization. This is because all consumer needs are met, making the product available to more consumers. With Dell in the innovative PC market focusing on cost leadership and therefore reducing their customization range, they may suffer some demand loss as more of customers’ needs are not met, and some customers may have purchased a choice that is not available anymore. Additionally, as many competitors have also reduced their product/customization range, some customers may feel that Dell has a unique selling proposition (USP) and that their PCs are the only ones left offering a real variety of choices for customization, which could further damage the company’s future demand (Christensen, 1997). Therefore, focusing on cost leadership could leave Dell in a challenging situation of falling demand. However, Dell’s data has shown that only a small percentage of combinations are wanted by customers, so reducing the variety would only affect the demand very slightly. This means that the fall in demand might be almost unnoticeable, making it reasonable for Dell to focus on cost leadership.

Supply Chain Management and Risk Reduction

Most companies aim to reduce the risks of a constant production flow. In doing so, they simplify the supply chain to minimize the risk of production disruptions. In the PC market, it is rare for one company to produce all computer parts, so Dell must source parts from other places. By not focusing on cost leadership, Dell faced significant challenges with customization, as they had to source many different parts from various locations to meet consumer customization demands. This complexity made it hard to manage all the different suppliers, and with so many parts to the chain, there was more room for errors, potentially causing delays or production disruptions. Either scenario would significantly increase total and unit costs for production. By focusing on cost leadership and reducing customization, Dell could reduce this risk by cutting parts of the chain out, thereby reducing unit costs. Despite this, the number of dissatisfied customers and the risk of supply chain issues likely remain, as the company aims to source materials globally to achieve lower prices. This global sourcing may have increased their risk of production disruption due to the susceptibility of global transport methods to weather conditions (Kotler & Keller, 2016). Therefore, focusing on cost leadership could actually have increased their risk of production delays and dissatisfied customers, which is something that needs to be minimized in a highly competitive market such as the PC one. Hence, they may be wrong to focus on this.

Economies of Scale and Competitive Advantage

Lastly, most companies strive to gain economies of scale—increasing output to create falling unit costs—or to become more productively efficient in some way, as this generally contributes to a company's success. For Dell, a reduction in unit costs is highly needed, as this allows the company to lower their prices and thus create more demand for their products. This is why focusing on cost leadership and reducing their product customization range allows them to produce more for a cheaper cost, thereby bringing down unit costs to achieve lower-priced products. This approach would be highly beneficial to the company, as it could then gain a competitive advantage, which is essential for success in a highly competitive market like the PC one. Therefore, I would argue that focusing on this is advantageous. Moreover, they would reduce overall costs and thus achieve greater profits, which they have struggled to achieve as seamlessly as companies like Apple. This strategy could both increase their dwindling profits and bring them back to a secure level or enable them to reduce their prices to make their price leadership strategy successful again, thereby increasing demand (Barney, 1991). However, if this leads to diseconomies of scale when not managed properly, their unit costs could actually increase, making the focus on cost leadership potentially misguided.

Conclusion

In conclusion, Dell’s decision to focus on cost leadership will create a lower unit cost for each product by offering less variety, enabling mass production and economies of scale. This will allow Dell to lower their prices and gain a competitive advantage, which is extremely useful in such a highly competitive market as the PC industry. This would then give Dell a larger market share and enable them to achieve higher sales revenue and eventually profit, which they appeared to struggle with previously. Despite this, there are potential costs to this strategy. For one, there is a chance of diseconomies of scale occurring if they are unable to manage their operations properly, and this risk is especially high with their sourcing moving globally, making their supply chain even more complicated than it already is. For this reason, I would argue that Dell might actually be wrong to focus on cost leadership, as I feel that the risks associated with doing so could be costlier if they were to occur than the additional sales revenue or profit generated.

References

• Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120.
• Christensen, C. M. (1997). The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business Review Press.
• Kotler, P., & Keller, K. L. (2016). Marketing Management (15th ed.). Pearson.
• Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. Free Press.