Traditional Business Model versus Direct Business Model

Traditional Business Model versus Direct Business Model

I. Introduction

            The Internet supported the development of a number of functions for business firms. These functions are obtainable through the wide-ranging connectivity of the World Wide Web. ( 2001) This means that enterprises now have a venue for directly interacting with their existing and potential consumers. Concurrent to the development of Internet functionalities to business firms is the emergence of the development of new business models encompassed by the general terms e-commerce, e-marketing and e-business. The ease of online transactions has opened the possibility for the direct selling and purchasing of products from any part of the world to by a consumer in another part of the world. Consumers and business firms now become linked through the emergence of a global market since business firms can complete sales transactions using linkages with the banking sector and fulfil sales obligations through logistics collaborations.  Business firms now offer products and services in the international market widening its target market and opening expansion possibilities. Prior to the business functions of the Internet, business firms engaging in the international market commonly adhered to the traditional model of using wholesalers and retailers to distribute their products to consumers. However, with online networking functions, enterprises gained the benefit of having to eliminate intermediaries in its link to end-consumers, either fully or partially. Due to the minimisation or elimination of intermediaries means greater revenue for companies and cost-savings for consumers.

II. Company Background

            Dell Inc. is one company that has always relied upon the direct sales business model to achieve global leadership. The company emerged in 1984 by Michael Dell and developed into a computer manufacturing and assembly firm meeting the customised computer needs of its consumers around the world. By applying the direct sales method, the firm places a high value to its direct relationship with consumers. After taking customer specifications, Dell Inc. meets these through its manufacturing and assembly plants in Texas and Tennessee for the North American market, Brazil catering to the Latin and South American market, Ireland meeting the demands of the European Market, and China for the Asian market. Apart from directly selling to individuals and household consumers, Dell Inc. also sells directly to corporate clients, educational institutions, and government departments. In terms of the diversification of its sales channels, Dell Inc. directly receives and meets at least fifty percent of orders and support service requests through its website and the remaining percentage covers sales through wholesalers and retailers. (2007)

            In 1984, when Dell Inc. was established, it became the first computer firm to operate through direct sales through the Internet. Currently, Dell Inc. has become the leading international company catering to the sales of computers and accessories. To support its online sales activities, the company has employed the concept of virtual organisation by using its online-networked system as a means of managing and monitoring the performance of its manufacturing and assembly plants around the world. Moreover, Dell Inc. has also outsourced its technical and after-sales services to countries such as India and the Philippines by using the virtual organisations principle. Apart from its networked management system, Dell Inc. has also improved its supply chain management to increase efficiency. Dell Inc. does not manufacture all the computer parts so that it has collaborated with computer parts manufacturers able to take advantage of cost-saving strategies to be able to sell to Dell Inc. its products at lower prices that meet the company’s quality standards. Apart from sourcing computer parts from low-priced but reliable firms, Dell Inc. also applies a warehousing strategy that allows the company to monitor with ease the parts that are low on supply and locate these parts in its huge warehouse. Apart from this, Dell Inc. also built its warehouse contiguous or near its assembly plants to save to the time of transporting parts. Dell, Inc. also has a strong logistics strategy to decrease delivery time relative to its competitors. (. 2007) Through the aggregate of these strategies, Dell Inc. has achieved a leadership position in computer sales in the international market. It also expresses the success of combining traditional and direct sales models to enhance revenue generation.

            However, Dell Inc. is experiencing changes as it seeks to put in place its long-term strategy. This finds expression in the decision of Dell Inc. to increase its focus on traditional marketing channels such as retailing (2007) in widely accessible channels such as Wal-Mart in the United States and other large retailers in other countries (2007). This decision was based on the saturation of its current market resulting to the need for new markets and competition is also intensifying for international computer manufacturing and sales firms.   

III. Advantages and Disadvantages of the Traditional and Direct Business Models of Dell Inc

 

Differences between the traditional and direct business models lie in the type of sales network or channelling applied by the company in building a relationship with consumers. In a traditional business model, a business firm collaborates with wholesalers and retailers to bring their products to the market. (1998) This means that the company develops an indirect relationship with its consumers via wholesalers and retailers. This also implies that the company relies in part on its wholesalers and retailers in developing a good relationship with consumers. If wholesalers and retailers are able to meet the value expectations of consumers, then this creates a positive relationship with the firm resulting to repeat purchases translating into increased revenue. However, if wholesalers and retailers are not able to meet the expected value offering of the company through the damaged or expired goods, then this adversely affects the relationship of the firm with its consumers. In applying this model, business firms need to find intermediaries able to meet its value offering to consumers. In a direct e-business model, the business firm creates a relationship with consumers in a straightforward manner by directly making offers to consumers and addressing consumer demands ( 2001;  2001). A direct relationship becomes possible through Internet functionalities. Companies with websites usually provide information of their products and services directly accessible by consumers together with the availability of transaction options so that the websites also constitute a point of sale for the company. This means minimised reliance on intermediaries allowing the company to concentrate on direct relationship building.  

            Traditional and direct business models offer both advantages and disadvantages to Dell Inc. in terms of product and service accessibility, relationship building, market expansion, revenue generation, and cost savings. Observation of the core benefits derivable from these two models indicates that it is often the case that the advantage of one model is a disadvantage of the other and vice versa. This means that a combination of both models provides a promising model for business firms such as Dell Inc., which wants a long-term strategy.   

            In terms of the accessibility of the products and services of the company, the advantages and disadvantages of these models depends upon the target market of the company and changes to its intended market. Previously, Dell, Inc. targeted a diverse international market from the high to the lower income groups. Since it wanted to gain a large market as possible, it applied the direct sales model through its website. Orders, technical support, and after-sales transactions occurred through the company’s website. Its initial target market coincided with the market reached by the World Wide Web. However, market reach of direct sales have its limitations including the inability to reach populations without access to the Internet or those with limited use of the Internet and computers but constituting potential market based on the economic development in these areas. This resulted to the shift of Dell Inc. to the traditional model of selling through wholesales and retailers. Recently, Dell Inc. has made available two computer models at Wal-Mart within the less than 0 price to target previously untapped markets. This means that Dell Inc. is creating or developing a market to sustain increases in its sales to ensure viability. Dell Inc. is also communicating with large wholesalers in India, China, Japan, and Australia ( 2007). However, traditional sales also carry certain disadvantages such as the non-exclusivity of the distribution agreement since large wholesalers sell a number of brands for the same products without necessarily promotion one of the other. This means that Dell Inc. may not be able to achieve its desired market expansion and revenue generation targets through direct marketing. Nevertheless, through a combination of the traditional and direct models and applying traditional model for its low-cost computers as a first-mover strategy in these new and promising markets, Dell Inc. could support its continued leadership position in the world market.

            With regard to relationship building, Dell Inc. started out as concerned with relationship building by using the direct model. This allowed the firm to take orders and specifications, transmit these to the assembly plant, and from there ship the finished product to the consumer. Apart from this, technical and after sales support are made available to consumers directly through e-mail, fax, or telephone links. However, this offers a number of disadvantages such as communication problems such as the difficulty in understanding customer questions and orders especially on technical matters through electronic means. This is particularly so for customers with limited knowledge on the hardware and software features they need making customisation difficult. This together with the need to look for potential market segments led to the ongoing shift of Dell Inc. to the traditional model. In applying this model, particularly when the Dell Inc. has its own display site with exclusive sales agents who are able to address the questions of customers to satisfy their queries on whether the computers on sale meet their needs and requirements. However, this also involves the disadvantage of limiting customisation since consumers could only select from the two computer models and packages displayed at Wal-Mart ( 2007). Consumers with more or specific requirements would end-up not making the purchase. Again, a combination of the two methods to balance advantages and disadvantages would support the long-term strategy of Dell Inc.

            In relation to market expansion, Dell Inc. experienced the advantage of the direct model in expanding its global market that allowed the company to achieve a top position among the international computer manufacturers. The direct model allowed Dell Inc. reach diverse market segments due to its online accessibility and low prices. However, there is also a downside to direct marketing through the Internet, specifically the difficulty of concentrating on particular market segments or niche markets to develop a customer base. Although Dell Inc. is able to increase its sales, this does not mean that it is able to expand its market to segments untapped by the Internet. In China, ninety percent of the population still do not have computers or access to the Internet (2007). Through the traditional model, Dell Inc. establishes wholesale and retail points that introduce Dell computers and Internet functions to consumers as well as sell assembled computers. This allows Dell Inc. to target or rather to create new market segments starting with informative relationships that should end up in actual purchases, a process that is less possible through the direct e-business model. Capitalising on the benefits of both models supports the goal of Dell Inc. to maintain its competitive position.         

            In terms of revenue generation and cost savings, Dell Inc. increases its sales through the direct model through volume by tapping into the large online market. Since online sales involve lesser cost than the traditional model, the company is able to increase its revenue while minimising sales allowing for optimised profit generation and lower costs for consumers. The company also stands to increase its revenue by moving its focus to the traditional model. Sales largely depend upon the market reach of the retailers so that by selecting popular and reputable points of distribution, Dell Inc. would maximise the exposure of consumers to its products that could result to actual sales. This involves greater cost on the part of consumers. This means that the advantages and disadvantages to the company and consumers of these models in terms of revenue generation and lower cost respectively depends upon the strength of these models in creating new customer relationships and maintaining its existing  consumer base.

IV. Improving Direct Business Model

            Since Dell Inc. is currently solidifying its engagement in the traditional model after starting and developing through the direct business model, this means that while this move supports the achievement of the long-term goals of the company, there are areas in its direct business model that requires improvements, specifically on its online linkages with intermediaries instead of relying exclusively on its website.

            A new trend in e-business is emerging that involves the engagement in a new type of intermediary such as blog service providers and technical or marketing blogs sponsored by Dell Inc., which provide information, tips, reviews and comments on computers and the Internet. Sponsored blogs also provide links to the company website for recommended computer models, accessories and specifications. Blogs provides a number of benefits to the company. First is its interactive set-up that allows readers to make comments or post questions to the blogger (2006). This allows potential Dell consumers to ask any questions they want on any topic that relates to the company or its products. Second is the informal nature of blogs that provides a relaxed and conversational atmosphere for consumers allowing for greater and longer interaction (2006). This allows Dell Inc. to expose readers to its advertisements and links. Third is the ability of blogs to reach niche markets (2005). Even if Dell Inc. initially targets technical blogs, it could later on establish links to other blogs catering to various topics and segments.

            By widening its network partnerships, Dell Inc. is able to increase its market reach through the direct model. Establishing a relationship with new consumers and maintaining existing relationships involves the communication and fulfilment of firm, brand and product comparative value. Communications occurs through enhanced network partnerships. With a wider market reach, all that Dell Inc. has to do is to fulfil these value communications with its products and services. If Dell Inc. wants to engage a greater number of the Chinese market to purchase from the company, it can tap into Chinese blogs for communicating its values and providing links to the company.

V. Conclusion

            The relative advantages and disadvantages of the traditional or direct model depend upon the context of the business firm. In the case of Dell, it emerged and developed through the direct model by capitalising on the growing online market. This means that as the company was growing, the direct model offered more advantages relative to its disadvantages or the advantages of the traditional model. As Dell is moving towards the next decade, it recognised the need to apply the traditional model to tap into an even wider market, especially with the intensifying competition among computer manufacturers and assemblers. Much like business developments in other areas, this shift implies the need to develop holistic models that incorporate both traditional and direct models as an alternative approach. This is supported by the experiences of Dell Inc. of experiencing greater actual and potential benefits from combining these two models to optimise its networking activities to reach wider markets and continuous increase its revenue generation. 

 

 

 

 

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