How Dell pressed CTRL in India

WHEN DELL ENTERED THE PERSONAL COMPUTERS SPACE in India, it was already No.1 in its home market, the U.S., where it had finessed its online and direct made-to-order selling model. In India, however, this model failed to catch on. Customers were encouraged to go to the Dell website, choose a configuration, pay for the computer and then wait till Dell sourced the machines from its Penang factory. This meant a wait of almost a month. Little wonder then that Dell sold just 79,244 laptops and desktops in 2007, its first year of full-fledged operations retail personal computers segment, compared with market leader Hewlett-Packard’s 1 million.

Before Dell appeared on the Indian personal computer stage, the segment was ruled by HP and Lenovo. HP entered India in 1989, when its only competition was IBM. By focussing on price and after-sales service, it established itself as the market leader. Its merger with Compaq added to its product portfolio. Lenovo’s acquisition of IBM’s personal computer business gave it a boost in the Indian market. Both HP and Lenovo had factories in India, and their products were available off the shelf through a vast retail network. More important, because dealers had a huge inventory (the companies supplied machines whether there was demand or not), they offered customers hefty discounts. Sales automatically rose.

Today, Dell sells over 1.1 million desktops, laptops and notebook computers, while HP sells 1 million. This is the story of how Dell did it. The first step was the decision to set up a factory in India, at Sriperumbudur, near Chennai. “Manufacturing locally cut delivery time by almost 50% and improved profitability,” says M.R. Sundaresan, general manager (operations), Dell India.

Manufacturing in India meant that the waiting period for customers has come down to less than eight days. But apart from fixing its supply problems, Dell changed the very way it sold computers. While buying online is still an option, the company has set up exclusive stores across the country—the first time it has experimented with the retail store model—and hired a battery of sales affiliates. Dell ensured that these affiliates, or channel partners, were given enough incentives to sell. The company also made virtually no investment in warehousing, as products are delivered only upon demand, so there’s no inventory in stock. At the same time, it ran a series of ads to woo customers. Once customers could touch and feel the product, it was easier for Dell to convince them to buy. And buy they did. In just four years, the company managed to overtake HP as the market leader in personal computers, laptops and notebook computers. According to International Data Corporation (IDC) reports, in the third quarter of 2010, Dell led the Indian rankings with a 15.3% overall market share, ahead of HP (14.7%).

“We’re the new kid on the block with a fresh mindset. We’re quick and nimble in responding to customer needs and have a maniacal focus on open platform technologies,” says Suraj Sabbarwal, general manager (G500), Dell India.

Dell entered India in 2000, when it focussed on large enterprise and government business. By 2007, the company was doing business worth $250 million in this segment. It also cashed in on the outsourcing wave in early 2000, and had set up four customer care and tech support centres in India for its global customers.

Even as its enterprise and outsourcing businesses in India flourished, Dell wanted a slice of the increasingly lucrative personal computers space. “There was no charter or blueprint and we could not copy our competition. We were asked to go and figure how to build the India business,” recalls Dell India’s former country general manager, Rajan Anandan, who shifted base from the U.S. to India in 2006 to establish Dell here. (Anandan left Dell in 2008 and joined Google India as vice president of sales and operations earlier this year.)

He set an aggressive revenue target of $1 billion within three years. According to him, if Dell crossed the milepost, it would automatically become No. 1 in the market. “Such targets were not heard of within the company and never in the industry. Dell China took five or six years to become a billion dollar business.” Dell ultimately achieved the $1 billion revenue target in 2009-10, a year behind schedule, thanks to the economic downturn.

In 2010-11, the personal computing hardware space is likely to clock revenues of more than $1.2 billion. Though this would be less than 2% of Dell’s global revenue, India is emerging as the fastest growing market for the company. In the third quarter of fiscal 2010, India reported year-on-year growth of 55%, the highest for any Dell market.

THE INDIA GROWTH STORY WAS POWERED by the “billion dollar core team”, which came together in the first six months after Anandan moved here. The team consisted of people from rival companies such as HP and IBM, and even Hindustan Unilever, Whirlpool of India, and Airtel India. Sundaresan, for instance, moved from Whirlpool to Dell, where he got the Sriperumbudur factory up and running in just eight months (the industry average for a plant this size is at least 12 months to 18 months).

On the distribution front, Dell divided the Indian market between 35 master sales affiliates. It sidestepped the established national, regional, and retail distribution model to go the ‘insurance agent’ way. Thousands of individual sales affiliates were registered, who would reach out to retail customers in person and give them a first-hand product experience at their doorstep. “We changed the paradigm of channel partnerships by opting for nonexclusive relationships and protected their margins by avoiding multiple partners in the same area,” says Mahesh Bhalla, executive director and general manager (consumer and small and medium business), Dell India. Had Dell followed the strategy adopted by its competitors, it would have been forced to change its built-to-order model. The result of that would have been squeezed margins, extended credit lines, and rigid incentive structures.

Simultaneously, Dell opened 38 exclusive stores across India, and joined hands with retailers such as the Tata group’s Croma and Future Group’s eZone for a shop-in-a-shop counter for its products. Interestingly, these outlets are franchised to the sales affiliates, who are also responsible for supporting field affiliates. “In a way, these affiliates became an extension of Dell offices in their region,” says Bhalla.

Dell backed this hybrid retail model by extending on-site service (technicians coming to your doorstep) in 650 cities to retail and SME customers as well. Earlier this was offered only to enterprise and public sector accounts. The new distribution model worked for Dell, giving it access to even rural areas, where customers would not order online and where setting up retail outlets was not viable.

The India team realised that both the consumer and SME segments are driven by a strong distribution networks, especially in emerging markets. They looked at Lenovo’s distribution model in China for example, and found that it used its strong channel relationships to penetrate beyond tier III cities into rural markets. There were also complaints of margins being under pressure due to the overcrowding of distributors, delayed incentives, and dumping of stock among other things, in the existing partnerships between national and regional distributors and local retailers. It was good news for Dell.

Advertising experiments followed, with the company opting for real-life entrepreneurs instead of celebrities to endorse its products. The ‘Take Your Own Path’ campaign in 2008 featured corporate role models such as Raman Roy, considered the father of Indian BPO industry, and P. Rajendran, co-founder and chief operating officer, NIIT. “They didn’t have the glamour quotient but were inspirations to many. It was a combination of brand and distribution prowess that worked in India,” says Amit Midha, president (consumer and small and medium business), Dell Asia-Pacific/Japan.

HOWEVER, THE COMPETITION IS NOT READY to let market share slip that easily. Globally, HP and Acer have gained market slices to push Dell down to No. 3, while Lenovo continues to dominate China. It’s Dell India that is moving against the tide. Analysts see the rise as a combination of factors converging at the right time to give the company an edge. “While Dell reorganised itself for challenges in emerging markets like India, it also benefited from the fact that the competition was grappling with its own problems,” says Diptarup Chakraborti, a former principal analyst with research firm Gartner.

Sandeep Mishra of research firm Datamonitor says all vendors have similar strategies. He echoes Chakraborti: “Dell got the timing right. While others cut costs during the slowdown, it revamped its business and invested in building its brand in India. This has paid rich dividends.”

Analysts expect the fight to intensify in the coming quarters as the competition reorganises. “HP cracked the Indian retail market long back and Lenovo has a very strong channel strategy. They are facing a temporary setback (Dell’s rise) and will return with a vengeance,” says Bryan Ma, associate vice president, IDC (Asia Pacific).

HCL Infosystems is taking an integrated solutions approach, while Acer is making forays into the enterprise and government segments. “The market is changing and everyone has to morph accordingly,” says S. Rajendran, chief marketing officer, Acer India.

Meanwhile, HP is fighting to regain its position as market leader. It has made changes in its distribution and retail network. From a one-size-fits-all strategy, it is now paying more attention to what’s selling and what’s not. “We are increasing our product portfolio according to market demand,” says Vinay Chandra Awasthi, director (personal systems groups), HP India Sales. Lenovo, for its part, will neither change its three-layered channel model (a national distributor, a regional distributor and a retailer) nor will it opt for end-to-end services. But it is working towards better relationships and improved trust among partners.

“We will increase engagement with 400 select partners for better customer focus and in the next 12 months to 18 months add 1,000 low-cost exclusive stores in smaller towns and suburbs to expand our reach,” says Amar Babu, managing director, Lenovo India.

Both HP and Lenovo have factories in India; HP’s Pantnagar (Uttarakhand) plant has a total installed capacity of 5.7 million units (personal computers as well as servers), while Lenovo’s Puducherry unit can produce 3 million units. Lenovo shut down its plant in Baddi, Himachal Pradesh, and HP closed its Bangalore plant as a result of cost-cutting due to the economic slowdown. Analysts with Gartner say that the companies had also overestimated the potential of the Indian market.

Globally, Dell too has closed factories as part of its plan to save $4 billion in operating costs. However, it does not plan to shift any of these manufacturing jobs to India. “The thrust is to get a more profitable revenue market share. We are open to partnerships and acquisitions, whatever it takes to bring the cost down, at each level of our offering,” says Sameer Garde, vice president (OEM solutions), Dell. He was part of the team that chalked out the India plan and was managing director of India operations before moving to a global role in the Dell headquarters.

Dell is betting on opportunities due to increased data access and demand for solutions around mobility, virtualisation, and cloud computing. It has been renewing its products and services portfolio since 2007 and has diversified into areas such as smartphones, tablets, and printers. The Vostro range of notebook computers was specifically designed for the Indian small business segment. The strategy worked to Dell’s advantage, and now competitors are following suit. In the last two years, Dell has invested almost $600 million to add new skill sets, service capabilities, and intellectual property through 14 acquisitions. Officials say there’s more to come.

As Dell diversifies its mix of products (IT services, mobile handsets) the nature of competition will change. Companies such as Nokia, Tata Consultancy Services and Infosys will be closely watching Dell’s moves.

For Dell, India has emerged as a local and global service delivery hub. It is the only market outside the U.S. with all business functions—customer care, financial services, manufacturing, R&D, and analytical services—operational at the local level and giving global support. “We evaluated market trends and growth potential, enabling us to invest ahead of the curve in India, resulting in our phenomenal growth,” says Midha.

Sundaresan regrets the lack of a supplier ecosystem in India, which could make pricing competitive. Dell globally sources around 1,300 components worth $26 billion from China. This includes components that arrive at the Sriperumbudur facility. Sundaresan says that if India had manufacturers who could make even 10% of components that Dell alone buys, “it will have a huge multiplier effect on the sector and the entire economy”.