Dell in China

Sample Case Analysis Presentation

Professor Josh Philpot

April 10, 2008

Agenda

Identification of Key Strategic Issues External Analysis Internal Analysis Summary SWOT Strategic Alternatives & Recommendations Questions & Answers

Key Strategic Issues

Key Strategic Issues

Taking advantage of an international opportunity in a high growth market

Adjusting business-level strategy in light of a rivalry

Leveraging core competencies in a foreign market

About Dell Founded in 1984 World’s largest computer vendor Revenues of $41 billion in 2004 Operates in 13 Asia Pacific markets with sales of $4.3B in

2004 Entered China in 1995 via export Started focusing on China in 1998

In 1998 established a local manufacturing and distribution operation

In 2004, Dell PCs captured 7% share in China

External Analysis

Industry Definition

Dell competes in the PC industry, selling enterprise systems, desktop computers and notebook computers.

General Environment

External Analysis: Key Environmental Factors

Chinese population is 23% of world totalMain opportunities will be in the larger cities

where incomes are higher

Source: China Country Commercial Guide (CCG)

External Analysis: Key Environmental Factors Socio:

Purchasing expectations (try before they buy) Chinese attitudes and culture becoming more similar in purchasing

patterns and work ethic to U.S.

Economic: Chinese economy grew 9.8% in 2005 Total retail sales increased 13% China’s PC market estimated to grow 19% in 2004-2005 Low per capita incomes and unevenly distributed

Average US $1,583 Urban US $5,000 Middle class (200 million people) US $8,000

Source: China Country Commercial Guide (CCG)

External Analysis: Key Environmental Factors (new member of WTO but…)

China’s political system controls unions and financial institutions Legal and regulatory systems can be inconsistent Business based on relationships (guanxi) Intellectual property at risk

Tech Just 2.5% of urban Chinese own a computer Access and use of the internet is increasing

Global Sales opportunity (Asia/Pacific currently just 10% of Dell) China’s attractive low-cost manufacturing capabilities

Source: China Country Commercial Guide (CCG)

The Five Forces of Competition Model

LOW

NONEMODERATE

INTENSE

HIGH

External Analysis: Porter’s Five Forces

Threat of New Entrants – HIGH Foreign and local competitors IBM, Compaq and HP also entered in 1990s Less government policy barriers (China joined WTO in 2002) Potential barriers include:

Access to distribution channels Scale economies (Local production plants)

Substitutes – NONE

Bargaining Power of Suppliers – LOW Dell and most competitors are vertically integrated

External Analysis: Porter’s Five Forces

Bargaining Power of Buyers – MODERATE Few buyers purchase a large portion of industry output

State-owned companies, MNCs and educational institutions Sales account for a large portion of Dell’s sales revenue

50% from government, education, telecoms, power and finance. Brand reputation and product differentiation can mitigate

Competitive Rivalry – INTENSE High profit potential due to industry growth

Main buyers are institutions with more resources than individuals Price pressure from local competitors High fixed costs of production capacity High strategic stakes (focus on market share) Aggressive competitive response

Lenovo adopting Dell’s direct sales model in China Lenovo’s joint venture with IBM to increase it’s share Lenovo’s brand campaign to improve recognition

Competitors Future objectives:

Build market share rapidly Current strategy:

Cost leadership (Lenovo, Founder, Tongfang) Differentiation (HP, IBM & Compaq) Focused on consumer market Lenovo positioning itself to challenge in high-end

Competitors Key Strengths:

Chinese competitors: market knowledge and low cost advantage.

American competitors: technology and brand recognition

Key Weaknesses: Chinese competitors: brand recognition American competitors: higher costs

Customer High-end Customers

State-owned companies MNCs Government Educational institutions Large Corporate Accounts (1,500+ employees in Telecoms, Power

and Finance Individual Consumers Behavior:

Consumer market is price sensitive Prefer a trial use of PCs before purchase Internet purchases were uncommon but internet users increasing Best way to reach is through retailing (Kiosks) Value product quality, especially high-end customers Brand loyal

Internal Analysis

Key Financial RatiosFY 2005 FY 2004 FY 2003 FY 2002 FY 2001

Profitability RatiosGross Profit Margin 18.32% 18.22% 17.93% 17.67% 20.21%Net Profit Margin 6.75% 6.38% 5.99% 5.71% 7.06%Return on Equity 51.24% 42.12% 43.55% 37.92% 40.02%

Liquidity RatiosCurrent Ratio 1.20 0.98 1.00 1.05 1.43Quick Ratio 1.16 0.95 0.96 1.01 1.38

Leverage RatiosDebt to Total Assets 0.72 0.67 0.69 0.65 0.59 Debt to Equity 2.58 2.08 2.17 1.88 1.43 Long-term Debt to Equity 0.40 0.34 0.34 0.28 0.23

Activity (Efficiency) RatiosInventory Turnover 107.20 126.74 115.70 112.12 79.72Accounts Receivable Turnover 11.15 11.40 13.69 13.74 13.16Average Collection Period 32.29 31.58 26.30 26.21 27.37

Key Growth RatesSales 18.73% 17.06% 13.59% -2.26%Net Income 25.63% 24.65% 19.21% -20.89%Current Assets 58.91% 19.15% 13.29% -19.01%Current Liabilities 29.74% 21.97% 18.81% 10.93%

Key Resources Key tangible resources:

WW market leadership & financial resources ($8B in China) Direct sales system and customer service Local production plant in China Alliance with Oracle Manufacturing (“Build-to-order) and low inventory” strategy “Just-in-time” model (6 days vs. 40 days of supply) Portfolio of award-winning products

Key intangible resources: Strong brand Reputation (“Dell experience” of high-quality products, support and

service) Innovative in its technology, business practices and customer service

http://www.dell.com/content/topics/global.aspx/corp/en/home?c=us&l=en&s=corp

Core Competencies

Ability to simplify PCs and the supply chain since their beginning

Ability to understand customer needs and deliver innovative technology and services

Ability to use technology to simultaneously improve customer experience and contain costs

Ability to operate a direct business model

All are valuable, rare, costly to imitate and Nonsubstitutable.

Value Chain Analysis

Primary activities of value: Operations: Manufacturing processes contain costs well Outbound logistics: Direct sales model Service: High responsiveness to customer needs

Support activities of value: Technological development: Innovative web site and IT

infrastructure Firm infrastructure: Visionary founder and management

team

Summary SWOT

SWOT Analysis

StrengthsStrengths

WeaknessesWeaknesses

OrganizationalOrganizationalanalysisanalysis

OpportunitiesOpportunities

ThreatsThreats

EnvironmentalEnvironmentalanalysisanalysis

Strengths & Weaknesses Strengths:

Reputation Manufacturing plant (build-to-order capability, JIT) Direct sales model (on line and phone order capability) Strong sales revenue in 2003 ($8 Billion) Strategic alliance with Oracle Product performance (Best Overseas PC Corporation

Award) Weaknesses

No low cost advantage that will allow them to compete in the consumer segment

Possible cost advantages not realized from their China plant

Opportunities Large population in China and economic growth potential

(Dell’s fourth largest market) PC market expected to grow by 19% Only 2.5% of urban Chinese own PCs

Sales potential in larger cities

Reduction in tariffs on IT products makes it less costly to export to China

Expansion into Japan, Korea and Taiwan

Risks Low GDP per capita in China Weak government protection of IP Moderately high threat of entry of new competitors Intense rivalry among competitors Lenovo-IBM joint venture Lenovo’s copying of Dell’s direct sales model Lenovo’s attempts to boost brand recognition

Strategic Alternativesand Recommendations

General Problem Statement

Dell faces a rivalry from Chinese PC firms, in particular Lenovo’s (Legend) attempts to copy Dell’s direct sales approach and build brand recognition. (At risk is Dell’s dominance of the high end market)

Will require a cost advantage to re-enter the low-cost segment. (At risk is the Dell customer experience of product quality and service levels or accepting declining profits)

Strategic Alternatives

Lower costs to be viable and establish a presence in the low-end (consumer market) before competitors

Abandon the low-end and put all resources on defending the high-end (corporate market) where Dell currently has an advantage

Challenge Lenovo in other Asian markets that are important to it while increasing product quality and services in China

Strategic Recommendation:

Expand and defend the high-end of the market

Implementation Continue Dell’s business level strategy of differentiation

Based on product quality, build-to-own capability and direct sales method Continue to innovate and outpace the Lenovo-IBM partnership Build brand recognition in China as Lenovo’s doing worldwide Grow direct ordering via the internet (increasing Chinese web usage) Leverage penetration in LCAs (>1,500 emp.) for increased “share of wallet” Challenge Lenovo in other important Asian markets while increasing product quality and

services in China Prepare for wireless/mobility trend and strengthen notebook offering Eventually broaden reach to penetrate low-end and rural areas

Develop the infrastructure to service, support and sell (different than urban areas) Requires a low-cost, differentiated product line (e.g. AMD, no Windows OS) Learn the Chinese market to overcome “foreignness” and local rivals Explore alternative sales channels (besides direct) to reach small cities

Questions & Answers

Dell to build second factory in China New facility will double Dell's current production capacity in China

By Sumner Lemon, IDG News Service

March 25, 2005

Dell announced on Thursday plans to build a second manufacturing plant in southeastern China. The new plant will be constructed in Xiamen, Fujian province, where Dell already has one factory, according to the company. The new manufacturing plant will produce PCs for Dell customers in northern Asia, including China and Japan, the company said, adding that the new facility will double the company's current production capacity in China. The company did not disclose what that capacity is.

China is the world's second-largest PC market, after the U.S., and continues to grow at a healthy clip. According to Gartner, 14.9 million PCs were sold in China last year and shipments grew by 14.9 percent. Dell has the largest market share of any foreign PC maker in China, but rivals IBM and Hewlett-Packard closed the gap last year by growing faster than their rival from Round Rock, Texas, according to market analysts Gartner and IDC.

Despite the best efforts of foreign PC makers, the Chinese PC market continues to be dominated by local players, with Lenovo Group holding the largest share of the market.

http://www.infoworld.com/archives/emailPrint.jsp?R=printThis&A=/article/05/03/25/HNdellchina_1.html

From April 3 ’08 Analyst Meeting

2008 27% revenue groth in BRIC