Dell Inc. Case Study

By: Dan McLindon Kyle

McDaniel Jeremy Smiley

Tom Anderson

Ray Moorman

Key Question for Dell

Can Dell overtake HP as the world leader in personal computers with its current

strategies of Build to Order and Direct to Consumer sales?

Secondary Questions• What contributed to Dell’s success and rapid growth in the late 1990’s?• Why is Dell choosing to become more like HP?• What does Dell do well and where does it struggle?• Can Dell ever be successful in B2C market in developing countries with

Direct to Consumer distribution?• What is Dell? A computer manufacturer? A consumer electronics

company? An IT service partner? What is their focus?• What is Dell doing today to set itself apart from the competition in the

highly competitive and rapidly evolving personal computer industry?

Dell Computer Company Overview

Founded 1984 by Michael Dell

Vision PC’s could be built to order & sold directly to customers

2 Major Advantages of Business Concept

1. Bypass distributors & retailers eliminated markups2. B2O reduced risks & costs of having inventory

Sell Direct & B2O Business Model Success

2003 – most efficient procurement, mfg, & dist in PC industry. Gave profit & costs advantage over rivals

PEST Analysis for DellCategory Issue Threats/Opportunities Ranking

(1-5)

Political 2008 Economic downturn Threat – economy also impacting govt. spending

3

Economic 2008 Economic downturn Threat – companies and individuals cut down IT spending

3

Social Rising incomes and demand for IT in BRIC countries, especially SE Asia and Eastern Europe

Opportunity - ½ of world’s population 4

Growth in popularity of social networking and mobile society

Opportunity – increasing demand for servers and network gear

4

Technological Explosion in data information and content

Opportunity – Dell can provide hardware and services to drive

4

Global expansion of Internet

Opportunity – requires installation of millions of servers

5

What is going on in the PC industry?

Industry Overview (Supply)

Porter’s five forces:

Rivalry among existing competitors

High

Threat of substitute products

High

Bargaining powerof buyers

High

Threat of new entrants

High

Bargaining power of suppliers

Low

Porter’s Five Forces

Factor Analysis Impact

Threat of substitute products Growing popularity and sophistication of mobile and smart phones. Servers need to run

the networks behind phones.

Bargaining power of suppliersSeveral suppliers of PC components. Technology has become standardized. Dell has decided to form long term partnerships with key suppliers to take advantage of volume-based discounts

Relationship with suppliers may suffer

as Dell shifts to outsourcing laptop

manufacturing.

Bargaining power of buyers Many options in terms of what type of computer hardware and software to use. B2B customers can also negotiate prices on hardware, software, and service contracts.

With standardization comes

commoditization.

Competitive rivalry Lots of well established players in all markets that Dell competes in. Majority competing on cost in a race to the bottom

Compression of profit margins . As

price decreases sole focus is cutting costs.

Threat of new entrants Growth of white-label PC makers and resellers, especially in Asian market, shows how easy it is to enter market, as industry moves to standardized technologies.

PC companies need to find a way to

differentiate themselves

2007 PC Vendor Market Share

28%

24%6%

5%5%

32%

U.S. MarketDellHPAppleAcerToshibaAll Others

19%

15%

8%

7%4%

47%

Worldwide

HPDellAcerLenovo/IBMToshibaAll Others

Dell’s PC business model has not translated into global leadership.

What contributed to Dell’s success and rapid growth in the

late 1990’s?

Build to OrderAdvantages Disadvantages

Selling direct to customers cuts out the middleman, which increases Dell’s margins.

Customers not able to touch and feel the product, which is a large ticket purchase

Mass customization using standard parts allows Dell to control their costs and enables them to pass savings to customer.

Build to order requires innovation and investment in manufacturing technologies and facilities.

Build to order allows for JIT, reducing costly inventories of components, which may quickly become obsolete.

Competitors have been able to outsource to third party manufactures, pushing the burden of component inventory costs onto suppliers.

Conclusion – Dell has spent its time and money on innovation to become an efficient manufacturer of computer hardware. Was that an effective use of their resources?

Is Dell’s Build to Order model still a competitive advantage or has it

become a liability?

Build to Order

Enabled

success in late

1990’s

•Dell low cost leader.

•Improved reputation for quality. Allowed Dell to control quality and be first to market with new products.

•Competitors tried to copy, but with limited success. Long learning curve.

Still works well in

B2B

•Businesses like to customize a solution that fits exactly what they need.

•BTO gives Dell the ability to control quality and the opportunity to sell additional value adds to enterprise customers.

Struggling in B2C

•Difficulty with distribution in emerging BRIC countries, especially China.

•Competitors have closed the gap on price and product offerings by outsourcing manufacturing.•Dell even

starting to outsource laptops

What has Dell done to separate itself from the competition?

Dell Inc. Product TimelineYear Product Current Position In Market Success of Failure?

1984 PCs 2nd behind HP (15% market share)

Success

1995 Website Revenues greater than Yahoo, Google, eBay and Amazon combined

Success

Late 1990’s X86 Servers 1st domestically, 2nd behind HP globally (11% global market share)

Success

2001 Data-routing switches and Data storage devices

Storage – 5% market shareRouting – 2% market share

TBD

2002 Large Enterprise IT services <1% market share Success, rapidly growing revenues

2002 White label PC N/A TBD, forecast to achieve $380 million in sales (2003)

2003 Printers 20% market share in US, 5% global

TBD

2003 Consumer Electronics N/A TBD

2003 Retail POS systems N/A TBD

Conclusion – Expanding product set into several highly competitive markets with well established players. Strategy is be the low cost leader.

Internal Analysis – Core CompetenciesCore

CompetencyDescription

Build to order •Build to order business model allows for JIT, keeping inventory costs down. Keeping manufacturing in-house enables control of quality and faster new product releases.

Direct to Customer

Sales

•Cuts out retail markup. Allows Dell to maintain higher profit margins and charge lower price.

B2B value added

services

•Services like asset tagging and software downloading differentiate Dell from competitors. Enabled by in-house manufacturing.

Build to order

Direct to Customer

SalesB2B value-adds

Red – Easy for competitors to develop

Yellow – Possible for competitors to develop

Green – Very difficult for competitors to develop

What does Dell do well and where does it struggle?

Dell's Geographic Performance(Operating Incomes)

2000 2002 2004 2005 2006 2007 2008 $(500.00)

$-

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

$3,000.00

$3,500.00

U.S. BusinessLinear (U.S. Business)U.S. ConsumerLinear (U.S. Consumer)EMEALinear (EMEA)Asia-Pacific/JapanLinear (Asia-Pacific/Japan)

$ (in millions)

U.S. Business & EMEA markets showing strongest growth trends.

Internal Analysis – Markets Served

Conclusion – Dell is strong in the US B2B market, but that strategy does not translate to success in B2C. Only 39% of sales generated outside US, compared to 67% global sales by HP.

Internal Analysis - Manufacturing

Build to Order/D2C

Sales

Heavily invested in facilities and technology

Enables value-adds for B2B

No longer low cost leader due to outsourcing

Already starting to outsource laptops

Hampering growth in emerging BRIC

markets

Conclusion – Dell already starting to outsource its competitive advantage. Can it still compete with HP in the B2C market?

Will outsourcing manufacturing impact their advantage in B2B

market?

SWOT Analysis for DellStrengths

•JIT, lean mfg practices lowers inventory costs = less risk for innovations & price increases•Desktop manufacturing•Customer Support – focus on 90% customer satisfaction worldwide (Asia 92%, Europe 90%)•Website sales = 50% of sales•Long term relationships with suppliers – picked top 1 or 2 & stuck with them as long as they kept costs down and innovated product

Weaknesses•B2C in Asian Markets – need to touch & feel•Customer support – US satisfaction = 80%•Outsourcing manufacturing – has lead to quality issues before•Limited distribution network•Laptop manufacturing

Opportunities•2nd billion people coming online•Expansion into new products – focus on inefficiencies in supply chain•Listening to consumers – cont. to utilize IdeaStorm to innovate products & support based on customer feedback•Horizontal Integration – acquire software co’s•White Box PC’s – go to market in China where private label/generic PC’s are strong

Threats•Entering retail sales in 2007 as market share to consumers dropped (forgetting competitive advantage of B2O)•Profit pool HP has to compete with, lower costs of PC’s to undercut Dell and make up for loss with profit from other HP products•Standardizations in technology have allowed competitors to outsource manufacturing, enabling lower prices

Will Dell’s Strategy allow it to achieve the growth it desires?

Which business models are dated and which can still proved a

competitive advantage?

Elements of Strategy

Competition has tried to emulate with limited success

ýAlthough other vendors have not replicated Dell’s strategy, they’ve done enough to close the cost advantage gap.

ýDell’s lean manufacturing techniques work best in production of desktop PCs. Consumer tastes have shifted to laptops.

Dell’s Strategy

Cost Efficient Build to Order

Cooling Warming

Contribution towards a future competitive advantage…

Elements of Strategy

ýIBM, HP, Sony, Toshiba, Fujitsu abandoned vertical integration for strategic outsourcing of components in the early 1990s.

Partnering with suppliers to utilize their expertise is a given at this point, no contribution to competitive advantage.Dell’s

Strategy

Partner with Suppliers

Cooling Warming

Contribution towards a future competitive advantage…

Elements of Strategy

þCompetitors have not been able to shorten their supply chain as effectively as Dell

þCompetitors have had difficulty implementing the sell direct strategy because it cannibalizes other sales channels.

ýDisadvantage in some foreign markets where small business and individual customers want more of a hands on shopping experience.

Dell’s Strategy

Direct Sales

Cooling Warming

Contribution towards a future competitive advantage…

Elements of Strategy Industry is constantly evolving with new products.

Dell has demonstrated success in entering product segments and succeeding as the low cost provider. Examples are servers and networking equipment.

Name recognition from desktops and notebooks gives consumers confidence to try other products.

Opportunity for growth is large outside of PCs and servers where Dells market share is negligible. Market share is ≤5% in data storage, networking, printers, and IT services.

Dell’s Strategy

Expansion of products and

services

Cooling Warming

Contribution towards a future competitive advantage…

Elements of Strategy

ý

Dell’s Strategy

Customer Service and

Technical Support

Elements of Strategy

ý

Dell’s Strategy

R&D focused on customer

needs

Elements of Strategy

ý

Dell’s Strategy

Use of Standardized Technologies

Dell’s Strategy

Cost Efficient Build to Order

Partner with Suppliers

Direct Sales

Expansion of products and

services

Customer Service and Technical

Support

R&D focused on customer needs

Use of Standardized Technologies

Elements of Strategy

Cooling Warming

Contribution towards a future competitive advantage…

HP Dell

Operating philosophy

Build to Stock, outsource manufacturing, large

distribution network of retailers and resellers

around the world

Build to Order, control manufacturing, direct to customer sales on own

website

Key productsGlobal leader in PCs,

servers, and printers. 67% sales outside USA.

US leader in PCs and servers, 2nd behind HP globally . 39% of sales

outside USA.

Market Share in PC Sales 18.8% Globally23.9% in USA

14.9% Globally28% in USA

Financials $104.3 billion revenue, $7.3 billion profit (2007)

$61.1 billion revenue, $3 billion profit (2008)

Key Acquisitions

2002 – Compaq2008 – EDS

2005-2008 - $7 billion on other software, tech, and

service companies

2007-2008 spent $2 billion on software capabilities for value-added services

Dell V. HPS

US Market Share – Dell vs. HP

0

5

10

15

20

25

30

35

40

1998 2000 2002 2004 2005 2006 2007

% o

f Mar

ket S

hare

DellHP

World Market Share – Dell vs. HP

0

2

4

6

810

12

14

16

18

20

1998 2000 2002 2004 2005 2006 2007

% o

f Mar

ket S

hare

DellHP

• Conclusion – From 2005 declining trend in both US & World Market Share for Dell. HP has gained market share during that time. Possible reason for HP’s success is acquisitions (Compaq 2002, EDS 2008)

Contributors to HP's Operating Income

2001 2002 2003 2004 2005 2006 2007

$(1,000.00)

$-

$1,000.00

$2,000.00

$3,000.00

$4,000.00

$5,000.00

Printing and Imaging

Personal Computing Systems

Enterprise Systems and Software

HP Services

Linear (HP Services)

$ (in millions)

Dell should continue focusing efforts on growing IT services business and look for acquisition of IT services company to continue to compete and hold market share against HP.

HP acquires EDS

Leading Providers of Information Technology (2007)

IBM7%

EDS3%

Accenture3%

Fujitsu2%

HP2%Computer Sciences

Corp. (CSC)2%

Dell1%

All Others79%

Acquisition of CSC would give Dell increased IT services market share of 3.3% vs. HP’s 5.3% combined market share (with EDS)

What does Dell need to do in order to take the lead again?

Recommendations Develop a focus. Examine where the company is creating the

most value for customers and invest in that business line Focus on growth in B2B channel and the continued

development of value-added IT services Stay true to the Build to Order business model. Use it as a

tool to create value for customers, not as just a cost control tool.

Pull out of retail stores immediately. This goes against every strategy and value that makes Dell what it is.

Fix problems in laptop manufacturing to keep competitive advantage in-house.