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Competitive Advantage through

Channel Management
Developing and sustaining a competitive advantage isn’t just about what product features compa-
nies offer customers. It’s also about how the product is delivered to the customer. This is evident in the
three cases detailed below. Our examples—Dell, Inc., IKEA, and Seven-Eleven Japan—come from
different industries (high tech, consumer durables, and FMCGs (Fast-Moving Consumer Goods), re-
spectively) and different countries (U.S., Sweden, and Japan, respectively). Even so, they share philoso-
phies and practices that give them a competitive edge in delivering products to customers.

Dell, Inc.
Michael Dell is a college dropout. He’s also worth an estimated $13 billion.1

While a freshman at the University of Texas in 1983, Michael Dell began buying PCs at retail,
upgrading them, and selling them to local-area businesses who wanted good-performance machines at
a reasonable price. Within a year, demand from clients was so high that he dropped out of college to
develop the business full time. In 1985, Dell shifted the company to assembling its own brand of PCs.
In 1989, Dell introduced its first notebook computer; in the mid-90s, it pushed into the network-server
and workstation market. In 2003, Dell expanded into printers and then into consumer electronics.
Within 20 years, the company, which started with a $1,000 investment, has grown to $41.4 billion in
revenue (FY04).2

The idea behind the company is deceptively simple: sell directly to customers and build products
to order. Execution, however, is a bit more complex.

To make mass customization economically feasible, Dell starts by understanding its customers
and the inherent differences in customer segments. Eighty-five percent of Dell’s revenues comes from
business customers; 15% comes from consumers.3 Business customers are subdivided into large compa-
nies, government, education, hospitals, and small business accounts. In purchasing computers, large
organizations look for product reliability, and compatibility and stability in technology; small-to-me-
dium organizations and home-office customers trade off performance for price. Within these segments,
users differ in their functional requirements based on the types of tasks they perform; e.g., word-pro-
cessing for secretaries versus computer-aided design (CAD) programs for engineers. But Dell’s under-
standing of its customers goes far beyond buyer type and purchasing requirements. Dell recognizes that
“how a customer uses our product is as important to its features as what they use it for”4 (last emphasis

1
“The World's Richest People,” Special Report, Forbes.com, February 26, 2004. http://www.forbes.com/
maserati/billionaires2004/bill04land.html.
2
Dell Inc., Web page, Company Facts. http://www1.us.dell.com/content/topics/global.aspx/corp/
background/en/facts.
3
…, (2004), Michael Dell Remarks, CIO Breakfast Meeting, Sydney, Australia, March 22, 2004, p. 4.
4
Dell, Michael with Catherine Fredman, (1999), Direct from Dell, HarperBusiness, New York, p. 72.
Copyright © 2004 Thunderbird, The Garvin School of International Management. All rights reserved. This case was
prepared by Lauranne Buchanan, Thunderbird, and Carolyn J. Simmons, Washington and Lee University, for the
purpose of classroom discussion only, and not to indicate either effective or ineffective management.
added). That is, Dell recognizes that customers who use networked computers for team-oriented tasks
are different from those who use computers for individual-oriented tasks such as CAD. This detailed
understanding of customer segments underlies Dell’s ability to provide solutions for individual prob-
lems; it also enables the company to anticipate shifts in customer requirements and demands.

Recognition of the fundamental importance of customers is reflected in the company’s organiza-

tion. As Michael Dell says, “If you organize a company like ours around products, you have to assume
that the people who are running the business know everything there is to know about the customers
who buy those products—not just here, but everywhere around the world. That’s a pretty big assump-
tion. Believing that an organization that is focused on a particular type of customer in a particular
region of the world knows everything about those customers is a lot easier to fathom.”5 In addition to
providing greater customer insight, organizing around customer segments also provides a means of
aligning cost with customer service. Sales models are tailored to each segment. Large organizations are
served by a sales force and supported by technical reps as well as by Dell’s Premier Page (customer-
customized Web pages that allow them to place and track orders, and communicate with their Dell
account rep). Smaller organizations and individual consumers are served primarily by telephone and via
the Internet.

Customizing products to customer needs takes more than an understanding of the customer; it
takes a very sophisticated operation system. Here’s how Keith Maxwell, the man who designed Dell’s
assembly process, describes it: “If you look out at the assembly process, it looks like a water ballet. If you
look at the people doing a water ballet, it looks beautiful on top, and everything’s orchestrated. You go
look underneath the water, and their legs are just thrashing like crazy. That’s what happens below the
surface … there’s huge amounts of activity going on to go drive the demand to equal the supply, and to
continually be revolving the supply base to be able to meet the flexibility we need to go do things in the
time frame we want to.”6

Production on a machine doesn’t start until an order is placed. When the order is received, a
document referred to as “the Traveler” is generated.7 This document contains the customer’s unique
configuration information and travels with the system throughout assembly and shipping. The Traveler
is first sent to manufacturing where the order is electronically broken down into a list of parts. The parts
for each system are placed in a plastic box that travels on a conveyor belt to a team of workers, who build
and initially test the system. The system is then fully tested using Dell diagnostics, and standard or
custom hardware and software are installed and tested. Each part is bar coded and scanned to link it
with the buyer’s name, address, and system specification in Dell’s tech support database, allowing Dell
to notify the buyer about repairs or replacements should a problem arise. And when a buyer calls with
a problem, tech support has system details at hand.

Building systems to order, and fast, could create an inventory nightmare. Dell’s inventory man-
agement is one of those beautiful-on-the-surface activities that is supported by intense activity below
the surface. Dell carries only a few days’ worth of inventory. It schedules every production line in every
factory every two hours, running each one with only a few hours of parts inventory on hand.8 In large
part, this feat is achieved by working closely with suppliers. To better manage these crucial relationships,
Dell concentrates its business with a few key suppliers: its top 30 suppliers represent about 75% of
Dell’s total cost; the next 20 account for another 20%.9 Dell commits to partner with suppliers as long
as they maintain their leadership in technology and quality; performance is closely monitored using a

5
Ibid.
6
“Your Computer, Your Way,” Online News Hour, March 10, 1999. http://www.pbs.org/newshour/bb/
business/jan-june99/dell_3-10.html.
7
Dell and Fredman, Direct from Dell.
8
..., (2001), “How Dell Keeps from Stumbling: It’s the Supply Chain, Says Its Boss, Dick Hunter,” Business
Week, New York, May 14, Issue 3732: 38B.
9
Ibid.

2 A12-04-0019
supplier report card.10 Dell shares its forecasting and sales information via the Web, so that vendors can
keep their inventories down to eight to ten days.11 Michael Dell calls it “virtual integration,” meaning
“You’re basically stitching together a business with partners that are treated as if they’re inside the com-
pany. You’re sharing information in real-time fashion.”12

While sharing information is essential to creating efficiencies throughout the system, it is inevi-
table that glitches occur. Dick Hunter, VP of Dell’s Americas Manufacturing Operations admits that,
“As soon as we issue a forecast, it’s wrong. So, what do you do? If demand is going up, and it’s going to
outpace your supply, we first try to fix the problem with more supply, maybe by expediting … almost
every component has two or more sources. If we can’t solve the demand/supply problem with supply,
and demand is shooting up, eventually we are going to have a shortage.”13 Dell deals with shortages by
selling what it has. If, for example, a 60-gig hard drive is not available, then Dell sells a 80-gig hard drive
at the 60-gig price.14 Dell can offer a promotion on the Internet within a few hours of recognizing it has
a supply problem. At the same time, it works diligently to minimize excess and obsolete inventory. “Dell
writes off between .05% and 0.1% of total materials costs in excess and obsolete inventory—that’s
about $21 million across our global business in a year.... Competitors probably have to write off 2% to
3% worth of excess and obsolete inventory.… Our goal is to replace inventory with information. The
more information we get to our suppliers quickly, the faster we build product, the faster we receive
materials from suppliers, the faster [we] alleviate problems.…”15

Dell has made its share of mistakes. It was late entering the consumer market, allowing Gateway to
make inroads there. A foray into retail distribution—through CompUSA, Price Club, and Sam’s—
proved disastrous, and Dell quickly pulled out of this channel. Its first laptop was a disappointment to
consumers and was quickly withdrawn from the market. The Olympic line—a product that spanned
desktop, workstation, and server markets—proved to be more that mere mortals needed. But the com-
pany learned from each mistake and became stronger. “Make failure acceptable as long as it creates
learning opportunities,” says Michael Dell. “There’s no risk in preserving the status quo—but there’s no
profit, either.”16

IKEA
IKEA, the Swedish furniture giant founded in 1943, is the largest furniture retailer in the world, with
about 200 stores in 32 countries and estimated sales of $12 billion.17 But its founder, Ingvar Kamprad,
is notorious for being, well, cheap. He insists on flying coach, taking the subway to work, and driving a
ten-year-old Volvo.18 He doesn’t need to pinch krona: he’s worth $18.5 billion (U.S.), which places him
Number 13 on the Forbes list of richest people in the world.19

Kamprad’s goal, when founding IKEA, was to democratize the furniture industry. “A dispropor-
tionately large part of all resources is used to satisfy a small part of the population … IKEA’s aim is to
change the situation.”20 Today, IKEA’s vision still reflects this objective: “The IKEA business idea is to
offer a wide range of home furnishings with good design and function at prices so low that as many

10
Jacobs, Daniel G., (2003), “Anatomy of a Supply Chain,” Transportation and Distribution, June; 44, 6: 60.
11
Anonymous, (2003), “LogisticsTODAY’S 10 Best Supply Chains,” Logistics Today, December; 44, 12: 20.
12
Magretta, Joan, (1998), “The Power of Virtual Integration: An Interview with Dell Computer’s Michael
Dell,” Harvard Business Review, March-April, p 75.
13
Jacobs, “Anatomy of a Supply Chain.”
14
Ibid.
15
…, “How Dell Keeps from Stumbling.”
16
Dell and Fredman, Direct from Dell, p. 136.
17
Hoover’s Online, IKEA International A/S. http://premium.hoovers.com/subscribe/co/factsheet.xhtml?
COID=42925.
18
Daniels, Cora, (2004), “Create IKEA, Make Billions, Take Bus,” Fortune, May 3; 149, 9: 44.
19
“The World's Richest People,” Forbes.com.

A12-04-0019 3
people as possible will be able to afford them. And still have money left!”21 The combination of quality
and low price makes IKEA a favorite among consumers in their twenties and early thirties. But the
company’s understanding of its customers goes beyond demographics. As explained by IKEA spokes-
person, Pamela Diaconis, “Customers come to IKEA to shop for furniture based on changes in their
life—getting married, getting divorced, having a child, having children move out, buying a new home.”22

IKEA’s ability to provide quality at a reasonable price is in large part due to its management of its
supplier network. IKEA’s philosophy is to: (1) find low-priced materials, (2) buy supplier capabilities,
and (3) develop long-term relationships with suppliers.23 Finding low-priced materials entails substitut-
ing less expensive, but still high-quality, raw materials; for example, substituting oak or pine for teak
woods. It also entails finding the most efficient global suppliers. IKEA focuses on Viet Nam, for ex-
ample, as a source of everything from wooden outdoor furniture and laminated bamboo flooring to
ceramic vases, soft toys, nylon tents, and metal cutlery.24 Its supplier alliances in Viet Nam allow IKEA
to take advantage of the natural resources of southeast Asia, while providing a competitive source of
supply to China, its largest Asian supply center.

Buying supplier capabilities means that IKEA doesn’t buy products from suppliers; instead, it
buys production capabilities.25 Rather than using the same suppliers as its competitors, IKEA seeks out
alternative suppliers who are capable of producing the quality of products needed, but are willing to do
so at a lower price. For example, IKEA employs ski suppliers to manufacture tables and shirt manufac-
turers to provide cushion covers. The high-volume, steady orders offered by IKEA help these manufac-
turers to fill excess capacity and lower their costs. IKEA, in turn, benefits from lower prices.

Building long-term relationships is achieved by improving suppliers’ efficiency so that everyone

benefits. IKEA provides both technical advice and financial support. It helps suppliers find the best and
cheapest raw materials and to design, build, and operate manufacturing facilities. In return, IKEA
demands that vendors control costs, encouraging them to “transcend” personal business relationships
and shop around for raw materials. Pham Phu Thao, a planner at Binh Thanh Textile Factory in Ho Chi
Minh City, explains, “When you work with IKEA, you learn how to get a low price. When we buy
fabric, for example, we have to compare the price from many, many suppliers.” Although meeting
IKEA’s demands is “very hard,” the payoff is worth it. Binh Thanh’s IKEA-related revenue increased
from $300,000 to over $5 million within four years.26

Managing its supplier network isn’t the only way IKEA excels in delivering products to customers.
IKEA creatively defines its own role in the production process, shaking up the usual mix of who does
what, when, and how. With its eye on cost-saving, IKEA took the design function in-house, rather than
relying on craftsmen who focus on uniqueness and intricacy of design. It pioneered the use of catalogs
and in-store displays to aid customers in their decision-making, rather than providing extensive (and
expensive) in-store service. It sells furniture in knock-down kits for customers to transport and assemble
in their own homes, rather than delivering fully-constructed furniture to customers’ homes.

And IKEA demonstrates an uncanny understanding of how customers shop and, more impor-
tantly, what discourages them from shopping. Home furnishings add up to a significant investment,
even at IKEA prices, so customers need access to product information and time to think. Display areas

20
Bartlett, Christopher A. and Ashish Nanda, (1990), “Ingvar Kamprad and IKEA,” Harvard Business School
Publishing, Boston, Case 9-390-132.
21
http://www.ikea-usa.com/ms/en_US/about_ikea/our_vision/better_life.html.
22
Roach, Loretta, (1994), “IKEA: Furnishing the World,” Discount Merchandiser, October; 34, 10: 46.
23
Bartlett and Nanda, “Ingvar Kamprad and IKEA.”
24
Cohen, Margot, (2003), “IKEA Expects Vietnam Business, with its Cheap Supplies, to Surge,” Wall Street
Journal, September 24, B13E.
25
Bartlett and Nanda, “Ingvar Kamprad and IKEA.”
26
Cohen,“IKEA Expects Vietnam Business, with its Cheap Supplies, to Surge.”

4 A12-04-0019
are designed to show customers everything that they’ll need for a finished décor, with details on each
item. Store layout and amenities encourage customers to spend more time in the store rather than
giving up and going home. The store’s unique floor plan with its circular design encourages shoppers to
go through the entire collection. Supervised play areas for children and fully equipped nursery and
baby-changing facilities allow parents to stay focused on shopping. In-store cafes offer a chance to take
a break from shopping without leaving the store. Even the Web site helps prepare shoppers for the store
visit, offering maps and to-do lists (take measurements of rooms; make sure there’s room in the car to
carry large purchases, etc.).

Despite its consumer savvy, IKEA has stumbled occasionally. When entering the U.S. market in
1985, IKEA sold products designed for European lifestyles and physiques. Kitchen cupboards were too
narrow for American dinner plates, and drinking glasses were too small to accommodate ice.27 Beds
were too narrow, and European-size curtains didn’t fit American windows. “Americans just wouldn’t
lower their ceilings to fit our curtains,” jokes Kamprad.28 IKEA learned from its experience and adapted
products to the American market. Turning a profit for the first time in the U.S. in 1993, IKEA now
enjoys over $1 billion in U.S. sales. U.S. stores attract as many as 40,000 to 50,000 visitors a week.29
Success creates its own problems: lines on Saturday morning are sometimes long and inventory isn’t
always available. But as Kamprad has said: “Only while sleeping one makes no mistakes. The fear of
making mistakes is the root of bureaucracy and the enemy of evolution.”30

Seven-Eleven Japan
With over 10,000 stores, 3.6 billion customer visits and more than 1 billion rice balls sold last year,
Seven-Eleven is the leading retailer in Japan. Its annual sales are over $21.28 billion (U.S.) with roughly
52% of sales from original items available only from Seven-Eleven.31

How does the chain do it? According to Seven-Eleven Chairman Toshifumi Suzuki, it begins with
truly grasping the needs of customers.32 In Seven-Eleven’s vision, what customers need is a dedicated
domestic partner, attuned to their likes and dislikes, smoothing their progress through an increasingly
hectic schedule. Customers can satisfy all of their everyday needs—meals, bill-paying, ATM transac-
tions, Internet shopping—at their Seven-Eleven convenience store (combiniensu stoa, or more simply,
combini).33 They can even pick up a package ordered over the Internet. “Americans might say, ‘Why
would you have an Amazon book delivered at Seven-Eleven?’ But in Japan people may pass three combinis
on the way home” (from a mass transit station), says Kaoru Hayashi, president of Digital Garage Inc.,
an e-commerce consulting firm.34 In a country where consumers prefer cash to credit, banks close on
weekends and holidays, and land-line telephones remain expensive, Seven-Eleven—with its ubiquitous
locations and 24/7 operation—is an ideal portal to the e-marketplace. Internet access and a cash-pay-
ment option for on-line purchases make this combini the next-best thing to a personal shopper.

Innovative services draw customers into Seven-Eleven, but its biggest sales come from an endlessly
evolving variety of prepared foods, including rice balls, breads, pasta, and box-lunches. The lunch and
snack business exploded once quality-conscious Japanese consumers realized that these take-out treats

27
Anonymous, (1994), “Furnishing the World,” The Economist, London, Vol. 333, Iss. 7890: 79.
28
Flynn, Julia with Lori Bongiorno, (1997), “IKEA’s New Game Plan,” Business Week, October 6; 3547: 99.
29
Haley, Fiona, (2003), “Fast Talk,” Fast Company, December, 77: 57.
30
Bartlett and Nanda, “Ingvar Kamprad and IKEA.”
31
Seven-Eleven Japan, 2004 Annual Report.
32
…, (2003), “Convenience Stores Falling to Earth From Retail Heaven,” International Herald Tribune,
September 1.
33
Sparks, Leigh, (1995), “Reciprocal Retail Internationalization: The Southland Corporation, Ito-Yokado
and 7-Eleven Convenience Stores,” The Service Industries Journal, London, October; 15, 4: 57.
34
Landers, Peter, (1999), “In Japan, the Hub of E-Commerce Is a 7-Eleven—Without Credit Cards,
Shoppers Order Online and Pick Up at a Local Convenience Store,” Wall Street Journal, Nov. 1: B1.

A12-04-0019 5
could be as good as home-made. Since freshness is a key ingredient to taste, Seven-Eleven stamps the
time of production and maximum time to sale (in hours) on the labels.35 How does the chain create
variety and deliver freshness without a kitchen on site? In large part, the answer is in its relationships
with suppliers.

According to Suzuki, “we do not have the ability to develop merchandise on our own. We can
only convey consumer needs to our suppliers. So we are teaming up with manufacturers … to develop
products.”36 Exclusive relationships with vendors are common; some even build production facilities
expressly for Seven-Eleven. Since many vendors are too small to satisfy the chain’s volume demand or
meet its standards, the company encouraged them to unite as the Japan Delicatessen Food Cooperative
Society. Banding together was a difficult move for the vendors, who were initially suspicious about
sharing information with competitors. But they found that by working together to update production
facilities, quality control processes, and distribution systems, they could compete more effectively.37

In order to keep its vast supply network in-sync, Seven-Eleven ties it together through an elec-
tronic network that keeps suppliers apprised of what’s selling right now.38 As a result, vendors like
Delica Ace can deliver meals just five hours after an order is placed—even though it requires 12 hours to
prepare meals from start to finish. Access to Seven-Eleven’s historical sales trends and real-time sales
information allows vendors to anticipate hours in advance what orders will be placed.39

Such timely production would lose most of its value without timely deliveries to stores, so Seven-
Eleven worked to reinvent Japan’s complex and inefficient distribution system. According to Suzuki, “it
was fortunate that our founders were outsiders to the distribution industry. They were not imbued with
industry customs and were able to solve contradictions in the industry step by step.”40 Traditionally,
each supplier’s goods were delivered separately. To accommodate small-lot deliveries, Seven-Eleven be-
gan mixing different suppliers’ products on the same vehicle. The system later evolved into a dedicated
distribution operation that organizes deliveries by product temperature rather than by producer or
wholesaler. Fresh fast-food items and perishables are delivered three times a day; canned foods are
delivered once a week. As a result, the number of deliveries dropped from 70 to around ten per day. Not
only is the number of deliveries minimized, products are delivered at peak sales times, and stores are
able to adjust their product mix to real-time customer demand.41

Vendors are not the only ones to benefit from Seven-Eleven’s cooperative approach; franchisees
also receive a high level of support. The company typically recruits independent store owners and
converts their stores under a long-term contract. Stores are developed in clusters of 50 to 60, allowing
the company to dominate an area and gain efficiency in local advertising and logistics. Franchisees pay
royalties for trademarks and lease fees for information systems, display racks, refrigerated cases, and
thousands of new products. In return, Seven-Eleven provides management advice, technical (POS)
systems, and a minimum guaranteed annual gross profit.42

But the customer remains the focus of the system, and innovation to better meet customer needs
is constant. As much as 70% of product lines are replaced every year. Suzuki believes that good manage-
ment resides in “self-reformation;” constant experimentation is one of his key management philoso-
phies.43 Store personnel propose products they believe will be successful. Store owners work with field
35
Ishikawa, Akira and Tai Nejo, (1998), The Success of 7-Eleven Japan, World Scientific Publishing Co. Pte.
Ltd., Singapore.
36
…, (2003), “Innovation Drives Seven-Eleven,” Nikkei Weekly, September 8.
37
Ishikawa and Nejo, The Success of 7-Eleven Japan.
38
Eisenstodt, Gale, (1993), “Information Power,” Forbes, June 21, 151, 13: 44–45.
39
Ibid.
40
…, “Innovation Drives Seven-Eleven.”
41
Sparks, “Reciprocal Retail Internationalization.”
42
Ibid.
43
Ishikawa and Nejo, The Success of 7-Eleven Japan.

6 A12-04-0019
counselors (liaisons between the store and corporate office who visit stores every week) to test market
these products. Sales data are analyzed at the corporate level to determine which new products are
successful, and product assortments are then adjusted at the store level. The result is a constant stream
of new and successful products, especially important in foods, where product cycles are short. Most new
items remain “hot” only about seven weeks.44

For continuous evaluation of product performance, an extensive POS system captures data on key
product and customer characteristics: items purchased, time of sale, and type of customer (age and
gender). Store owners can access real-time sales of each item by customer base and by time period. They
also can access aggregate sales trends over longer periods.45 These analyses do more than help Seven-
Eleven reduce inventory of low-turnover items and opportunity costs associated with out-of-stock items.
Based on analysis of sales trends, Seven-Eleven can fine-tune product assortment; for example, using
up-to-the-minute weather forecasts, Seven-Eleven advises store owners to stock more cold drinks for
hot days.

With all its success, Seven-Eleven has had some notable failures. During the 1990s, Seven-Eleven
Japan offered Tiffany necklaces, Rolex watches, and Florsheim shoes by mail order, but soon gave up
due to poor response.46 It introduced small items—pencils, erasers, scissors, and even toothbrushes—by
designer Philip Starck, but limited consumer response led to discontinuation of the line.47 While some
criticize Seven-Eleven Japan for these ventures away from its core business, these tangents are all part of
Suzuki’s management philosophy. After all, Suzuki cautions, you have to “change your way of thinking
in order to respond to change.”48

Discussion Questions
1. Why have these companies been successful in developing a competitive advantage? What philoso-
phies and practices do they have in common?

2. More specifically, how have these companies used their channel relationships to create a competi-
tive advantage?

3. Is this advantage sustainable? Why aren’t more companies able to use their channel relationships to
create a competitive advantage?

44
…, (2001), “Seven-Eleven Japan: Blending E-Commerce with Traditional Retailing,” The Economist, May
24.
45
Ishikawa and Nejo, The Success of 7-Eleven Japan.
46
Landers, “In Japan, the Hub of E-Commerce Is a 7-Eleven.”
47
Reinmoeller, Patrick, (2002), “Design with Markets! Leveraging Knowledge for Innovation,” Design
Management Journal, Spring, 13, 2: 38.
48
Ishikawa and Nejo, The Success of 7-Eleven Japan.

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