Dell’s Business Model

Back in the old days pc makers were relying on retailers to sell their products (see exhibit 1). Dell, however, created a cost-efficient way to sell their pc’s by bypassing retailers and distributors and offering their computers directly to customers (see exhibit 2). As a result Dell is able to lower its inventory costs and marketing costs by a significant amount and pass these cost savings on to their customers.

Traditional pc makers assemble pc’s using parts they have in stock. Hence they needed a warehouse with three to four months of pc parts inventory in the distribution channel. Dell on the otherhand is able to produce a pc only when a customer orders and pays in advance. Basically, these funds are used to buy the pc parts from its suppliers and in the end Dell is able to cut down on its financing costs and thus creating a negative cash conversion cycle.

Due to fast technological developments in the pc market,