sold and its position along its life cycle. Thus, companiescannot select one channel and expect it to always be suc-cessful. Success only follows if the strengths of the channeland the product and market characteristics are appropri-ately aligned.

PC market dynamicsApplying the above logic to the PC and consumer electron-ics industry in the context of Dell sheds light on the com-puter makers current market predicament.

Moores law, based on an empirical observation madeby Gordon Moore, a cofounder of Intel, states that thecomplexity of integrated circuits, with respect to mini-mum component cost, doubles every 24 months. Thisprediction has become a self-fulfilling prophecy, andindustry roadmaps (as of 2001) have predicted thatMoores law will remain valid for several generations ofsemiconductors.

What has changed during the last five to 10 years is therelative value that customers derive from this steadyincrease in computing speed. Here, it is important to thinkin terms of the Pareto principle, which implies that 80 per-cent of the benefits from Moores law result from the first20 percent of the development. From a users perspective,this certainly seems to be true in the electronics industry.Ten years ago a doubling of chip speed allowed a typicaluser to significantly enhance the applications he or shecould use, but todays PCs allow most users to handle allcommon applications. In fact, it can be argued that mosteveryday business applications such as Microsoft Office donot require the latest model PC and can be run quite ade-quately on a 3-year-old machine.

The above trend has fundamentally changed the relativeimportance of variety and inventory in hardware configu-ration. In the past, the ability to customize was highlyprized by customers, and any surplus inventory quickly

8 | supply chain strategy www.MITsupplychainstrategy.com

OV E R T H E L A S T Y E A R D E L L S S T O C K P R I C E H A S F A L L E Nby more than 30 percent while its rival, Hewlett-Packard (HP), has enjoyed a much healthier market per-formance. Does this mean that the direct sales model madefamous by Dell is in decline?

The answer is yes and no. Dell still derives significantcompetitive advantage from customizing products andselling direct to buyers. On the other hand, this market isshrinking and the beneficiaries are companies like HP thatsell through third-party channels such as retail chains.

This shift has occurred because customer needs andassociated supply chain costs elements that are alignedin a successful go-to-market strategy have changed inthe mature PC business. A hybrid model that embracesboth direct and reseller channels now looks to be a betteroption for Dell. For all companies, generally the lesson isthat your choice of sales channel should depend on thetype of product you are selling and its level of maturity.

Channel trade-offsRetail stores are effective at responding quickly to customerneeds since product that is in stock is instantly available andbacked up with sales support. However, retailers find it muchmore difficult to carry a wide variety of products in inventorybecause of the high costs involved. Stores have high facilityand inventory costs but usually lower transportation costsbecause deliveries to outlets can be aggregated.

In contrast, the direct channel, with its more centralizedstorage of inventories, has different strengths and weak-nesses. For example, Amazon.com cannot provide a bookas quickly as a neighborhood Borders store, but it offersaccess to a richer selection of books. Centralized storageallows Amazon to have much lower facility and inventorycosts than Borders (Amazon turns its inventories about12-14 times per year, whereas Borders turns its inventoryaround twice a year) but Amazon also incurs much highertransportation costs.

Clearly, the direct online channel is most appropriatewhen facility and inventory costs are important and thecustomer values variety. Stores excel when the customerwants responsiveness, and inventory costs are less signifi-cant than transportation costs.

The key point is that both customer needs and supplychain costs are influenced by the type of product being

Choose the Channel that Matches Your ProductAs products mature, their market profiles change and so should your route to customers

BY SUN I L CHOPRA

Recent falls in Dells stock price reflect a market shift that supports ahybrid go-to-market strategy involving direct and reseller saleschannels, and puts the company at a crossroads.

The experience of Dell and other computer makers underlines theimportance of product type and lifecycle when deciding which saleschannel to use.

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lost value as newer components became available. Thiscreated a business model based on the centralized storageof inventory that was assembled to order much more effec-tively than a model where pre-configured PCs were soldthrough retail stores. Clearly, Dells direct approach wasideally suited to such a scenario and enjoyed a significantcost advantage over HP and Compaq.

Today, however, most customers are happy to choosefrom a few standardized, off-the-shelf PC models. Demandis no longer splintered by multiple computer configura-tions, but instead is concentrated around a much smallergroup of standardized offerings. Also, a few years agodemand was typically low for each product variant; noweach standardized model enjoys relatively high demand.Finally, the price of PCs has dropped significantly. As aresult, inventory of standardized models now moves fastand is less of a factor in the profitability of the PC business.

This shift in emphasis changes the viability of the cen-tralized direct channel relative to selling PCs throughstores. The power of the direct channel to deliver cus-tomization is less relevant in todays more standardizedmarket. This is why Dells competitive edge is being erodedby players such as HP that sell through retail stores.

Moreover, Dells problems are exacerbated by the com-panys expansion into consumer electronics. LCD televi-sions, for instance, have moved from the initial product lifecycle stage to a more mature phase. Given the unstabledemand in the early days, Dells centralized model was wellsuited because it lowered inventory costs. As these prod-ucts mature, however, demand is increasing and retailstores are becoming a more effective channel. Also, theseproducts are not amenable to customization.

The inevitable conclusion is that Dell will be forced toconsider the retail channel as it moves forward. The successof Apple reinforces this view. Even though Apple is consid-ered to be on the cutting edge of design and innovation, itssuccess has come with relatively little product variety.Excluding accessories, an Apple store probably sells lessthan 25 SKUs, with each SKU having high demand.

Two-tone modelThat is not to say that the centralized channel has no role toplay. A hybrid business model that combines the comple-mentary strengths of the two channels will likely be the mosteffective in this evolving business.Eighty percent of the mar-ket that is satisfied with standard models is best servedthrough retail stores. The other 20 percent that values cus-tomization is better served through the centralized channel.

Further evidence for the emergence of such a hybridapproach comes from the mistakes of another direct-sellPC manufacturer: Gateway. When the company first

opened Gateway Country Stores in 1996, it targeted cus-tomers who were less tech-savvy and valued the sales sup-port that these outlets offered. Buyers could try out displaymodels of Gateway computers at the stores, but could notmake a purchase since the machines had to be ordered forhome delivery later on. The problem was that althoughGateway harnessed the channels support strength, thecompany did not exploit the supply chain capability todeliver fast-moving products like standardized PCs. MostGateway store customers were satisfied with one of thestandardized models, but were disappointed that theycould not leave a store with their chosen PC. Gatewaywould have been better served by stocking the standard-ized models with high demand at its stores, while supply-ing customized configurations through its centralizedmodel. This way it could have combined the strengths ofrespective channels. By having two channels but only onemode of delivery, the company missed this opportunity.

In-store customizationAnother possible structure when customers place a highpremium on customization is for stores to complete the finalproduct configuration. This is done in India, where storesassemble PCs to customers orders. Such an approachdecreases inventory costs because inventories are kept incomponent form, but increases the cost of assembly capac-ity, which is now decentralized. Such a structure makes sensewhen the cost of capacity is low relative to the cost of inven-tory. This is the case in India, where technicians are relativelycheap to employ. The structure is also appropriate for high-end electronics components where inventory is expensiveand customers want it customized to their specifications.

The bottom line is that channel choice must be related tocustomer needs and product characteristics. This leavesDell, in particular, at a crossroads. The companys productsand markets have evolved to a point where certain fast-moving units may be better sold through retail stores.Going forward, a hybrid model that augments thestrengths of the centralized channel for high variety withthe strengths of the retail channel for fast movers is a betteroption for Dell. Do not be surprised if you see the familiarDell logo in Costco outlets or in your neighborhood com-puter store. u

Sunil Chopra is Senior Associate Dean for Curriculum and Teaching,

IBM Distinguished Profes