dell's path to a sustainable competitive advantage
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Dell’s Path to a Sustainable Competitive Advantage
Rudolph Ardon Bogantes, Aaron Blackburn, Matt Kincaid, John Nguyen, & Jia Zhang
March 12th, 2012
Overview
The beginnings of Dell Computer Company took place in 1984 in a dorm room
at the University of Texas at Austin. It was in this room where then pre-med freshman
Michael Dell began his business called PCs Unlimited, later to become the multi-billion
dollar Dell Computer Company1.
With its direct-to-consumer model and an emphasis on the large business
consumer, Dell experienced steady growth within the first two years of its inception.2
After only six years, Dell became part of the Fortune 5003. Despite its sudden growth
and success, Dell faced difficulties in 1994 when two of its major products were plagued
with quality issues, leading to decreased sales and a major cash deficit. The sudden
cash deficit forced executives to rethink the way they did business4. This setback
sparked a change at Dell that would reinvent they way companies worldwide manage
logistics.
A new business model was developed with goals of reducing inventory by 50%,
improving lead time by 50%, decreasing assembly costs by 30%, and reducing obsolete
inventory by 75%5. The model revolved around a “sell what you have” mindset and
emphasized control of inventory and consumer lead times. Dell was forcing itself from
1 Dell. Company Timeline. 8th March 2012. http://content.dell.com/us/en/copr/our-story-company-timeline.aspx.2 Thompson, Arthur and A.J. Strickland. Dell Computer Corporation: Company Background. 1999. http://www.mhhe.com/business/management/updates/thompson12e/case/dell3.html.3 Dell. Company Timeline. 8th March 2012. http://content.dell.com/us/en/copr/our-story-company-timeline.aspx.4 Byrnes, Jonathon. Dell Manages Profitability, Not Inventory. 3rd June 2003. http://hbswk.hbs.edu/archive/3497.html.5 Ibid.
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the typical reactionary firm, ordering inventory, then trying to sell it, to a proactive and
innovative company.
The process began with an information database to assist in the targeting of very
specific accounts and customers. Dell excelled in targeting customers with predictable
purchasing patterns and lower service costs. This specific account selection was tied
closely to Dell’s demand management and forecasting6.
Demand management at Dell was run with the “sell what you have” mindset in
the forefront. Sales commission plans were set to equal the production plan, insuring
that very little to no inventory was to be left on hand. When forecasts were askew, the
firm adjusted accordingly. When components inventories rose higher than forecast, the
sales department was incentivized to push those products. When components were
depleting faster than expected, customers were steered to other products, or secondary
suppliers were contacted to match the current demand7.
Dell’s genesis of just-in-time manufacturing became a capability that garnered it
much success. In just four years, Dell revenues went from $2 billion to $16 billion at a
50% annual growth rate. Over a span of eight years, Dell’s stock price increased by
17,000%8.
In a time of need, Dell was able to innovate and create a distinctive capability
that revolutionized the way firms view logistics. Despite this distinctive capability, Dell
has been unable to continue its growth and hold its footing as an industry leader.
6 Kraemer, Kenneth L., Jason Dedrick and Sandra Yamashiro. "Refining and Extending the Business Model with Information Technology: Dell Computer Corporation." 2000. http://www.indiana.edu/~tisj/readers/full-text/16-1%20kraemer.pdf.7 Byrnes, Jonathon. Dell Manages Profitability, Not Inventory. 3rd June 2003. http://hbswk.hbs.edu/archive/3497.html.8 Ibid.
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Problems
Over-Reliance on its Operationally Efficient Supply Chain
Dell was a booming and very successful company throughout the 1980s and
1990s. It did so in large part based on its superior logistics system that reduced prices
to a point no other company was able to match9. During Dell’s most successful period
during the late 1990s, it was only holding one week’s worth of inventory whereas the
competitors were holding between two- and three-months’ worth10. "So the focus shifted
from the 'outside in' [approach of] looking at its position in the market to thinking, 'How
can we maximize earnings out of our existing resources and capabilities'” at the
expense of, rather than in addition to, thinking about what its customers need”11. This
line of thinking has turned out to be damaging for Dell: “Being eclipsed by Apple and the
new iPad goes to the heart of Dell's struggle. Dell has never invented a notable
product. What it has done is deliver a basic product that someone else has invented but
get it to consumers much more efficiently”12.
Dell’s over-reliance on logistical superiority is cited by many. One source states:
“The core of Dell's problem is in the way they think about their business. Back when
Michael was selling cheap PCs out of his dorm room, he came up with strategy to make
computers as cheap as possible by squeezing all of the inefficiencies out of the supply
chain. Dell's efficient supply chain and the way they squeezed those costs out is what
9 Wharton Business School. (2010). Dell's Diversification Strategy: 'A Day Late and a Dollar Short?'. Available: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2584. Last accessed 1 March 2012.10 Ibid.11 Ibid.12 Ibid.
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people began referring to as Dell's unique business model”13. The same source goes
on to say why the once innovative supply chain is not a source of sustainable
competitive advantage. “That's [the efficient supply chain] not a model, any more than
Henry Ford's creative application of the assembly line approach to the manufacture of
the motor car was a model. The efficient supply chain was a competitive advantage
that was non-proprietary, replicatable, and therefore was doomed to be copied”14. In
effect, the supply chain is a product of operational efficiency. Dell fine-tuned it before
others did. It was only a matter of time before its competitors caught up. According to
the resource-based view, a firm’s key resources or capabilities must meet four criteria:
they must be valuable, rare, inimitable, and nonsubstitutable. There is a fifth factor that
is often added, immobile. Dell’s supply chain doesn’t fare well against the “VRINI”
requirements for a sustainable competitive advantage. It is valuable. This is a given
considering how well Dell was able to perform with it in place. It was rare. At the time
of its initiation, Dell was its pioneer in the computer industry; however, it is not rare
anymore. Others have followed suit. Accordingly, it is not inimitable. It was
nonproprietary and able to be replicated by any company that found it to be worthwhile.
It also isn’t nonsubstitutable. Other methods can be used to efficiently get computer
technology to their end users. Lastly, it is not immobile. It is a system that can be
understood and applied worldwide. Consequently, Dell’s efficient supply chain gave it
merely a temporary competitive advantage that has been largely eroded today.
Robust Competition13 Seeking Alpha. (2007). Dell: The Problems Began In China . Available: http://seekingalpha.com/article/25861-dell-the-problems-began-in-china. Last accessed 1 March 2012.14 Ibid.
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Dell faces competition worldwide, but its target market and market share in the
United States is being stripped away by Hewlett-Packard, Dell’s biggest rival. “The
reason why is simple: HP is a U.S.-based firm with the goal of targeting the same
companies as Dell. So far, HP has been far more successful”15. In addition to HP, Dell
is facing an extremely difficult competitor in Apple Inc. which is unquestionably
dominating the consumer electronics industry.
Over-diversification and the Need to Focus
Dell has entered several information technology markets. In many of these
markets, however, Dell is struggling to compete. Dell needs to consider downscoping,
or reducing its business to its core competencies – what it does best. Eliminating the
product categories and segments in which Dell is struggling to compete will allow it to
focus its efforts on computers. “After all, computers were how Dell became the
company that it is today. And it's arguably the product that it understands best. By
focusing its efforts there, Dell can go back to its roots, deliver a best-in-class product,
and then worry about other markets”16.
Michael Porter proposed that there are four different successful generic
strategies that a company can utilize to achieve competitive advantage. They are broad
differentiation, narrow differentiation, broad cost leadership, and narrow cost leadership.
He believed that a firm needed to choose one of these four strategies and not pursue
multiple, emphasizing that a firm would be “stuck in the middle” if it attempted to mix
15 Reisinger, Don. (2010). Dell`s Strategy Challenge: 10 Things We Don`t Get About Dell. Available: http://www.channelinsider.com/c/a/Dell/Dells-Strategy-Challenge-10-Things-We-Dont-Get-About-Dell-17673/. Last accessed 1 March 2012.16 Ibid.
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strategies such that it would not achieve competitive advantage. While this “stuck in the
middle” theory of Porter’s has been proven to not apply in all cases, it does appear to
have some merit with Dell. One article notes: “Dell needs to decide if it wants to
compete on price or on value. In the tech industry, there are two types of companies:
those who are capable of beating the competition with cheaper prices and those that
deliver a superior product for a premium price. Dell is neither. Currently, its computers
and accessories are not premium products offered at a premium price. And although it
still makes fine products, it's not beating the competition on price. Dell is decidedly
middle-of-the-road. That's not a good place to be for Dell”17.
Ineffective and Unethical Leadership
The Securities and Exchange Commission (SEC) settled with Michael Dell on
July 22, 2010 on charges of repeatedly "failing to disclose material information to
investors and using fraudulent accounting to make it appear falsely that the company
was consistently meeting Wall Street earnings targets and reducing its operating
expenses"18. Dell agreed to pay $104 million in total, $100 million of which would come
from the company and $4 million from Michael Dell personally; however, six other Dell
employees, including the former chief executive officer and chief financial officer, were
either part of the settlement or have been sued by the SEC19.
The SEC made the following charges against Dell: for 20 straight quarters Dell
would have missed consensus quarterly earnings estimates if it were not for payments
17 Ibid.18 Hess, Edward. (2010). Stark Lessons From The Dell Fraud Case. Available: http://www.forbes.com/2010/10/13/michael-dell-fraud-leadership-governance-sec.html. Last accessed 1 March 2012.19 Ibid.
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from Intel, which Dell had specifically asked for; between the fiscal years of 2003 and
2007, Intel paid Dell over $4 billion in total; Dell’s chairman was asking for and receiving
the money from Intel so it could not only make its quarterly earnings estimates but also
keep its stock price high; and “Dell consistently misrepresented how it has generated
consistent growth numbers resulting in illusory stock values that made possible Michael
Dell's astronomical stock option gains”20.
The above charges levied by the SEC were not inconsequential. They made an
impact beyond just the $104 million dollars Dell needed to pay as a result being that
they were indicative of a profound level of dishonesty and deceit. The board of directors
didn’t handle it well either. The board did not take back Michael Dell’s stock option
profits attributable to the fraudulent accounting, and the board did not elect an
independent chairman for management oversight purposes21. A month after the date of
the settlement, one quarter of Dell’s shareholders refused to reelect Michael Dell as
chairman of the board22. If a significant amount of shareholders don’t want to reelect
Michael Dell as chairman of the board, then it is pretty clear there is some sort of
underlying problem. Shareholders are innately selfish – they want what is best for
them. What’s best for them is what’s best for the company: if the stock price goes up,
they are happy; if the stock price goes up, it is good for Dell. Even if Michael Dell
actually has the skills to be an effective leader, it is difficult for him succeed, and
ultimately for his company to succeed, if the shareholders don’t perceive his
effectiveness.
20 Ibid.21 Ibid.22 Wharton Business School. (2010). Dell's Diversification Strategy: 'A Day Late and a Dollar Short?'. Available: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2584. Last accessed 1 March 2012.
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Analysis
Five Forces and the Personal Computer Industry
The truth of the matter is that, as it has been covered up to this point, Dell does
not operate in a vacuum: having a clear understanding of the industry dynamics in
which the firm develops its activities is crucial to the construction of an effective strategy
for its future23. With this task in mind, this section attempts to determine how much
bargaining power each of the so-called Five Forces have on the Dell Corporation. It is
important to indicate that the relevant market for this introspection is that for which Dell’s
products provide a service solution; in other words, there is no intent at limiting the
discussion to computers alone, but to expand it to goods that are perceived as relevant
to the comprehension of the strategic dynamic present at the moment.
Entry
When it comes to determining the threat that new participants represent to the
market, two factors immediately come to the forefront. The first one is that in reality,
setting up a small firm that deals with building computers in a customized way is not that
hard; in fact, Dell was founded in a similar context, and that hasn’t changed much. Any
individual can go out there and build a PC given the adequate technical knowledge that
is so easy to come by at this time. However, this type of small operation is not where
Dell is situated. Size and scale are the two keywords that present the second factor of
relevance.
23 Hitt, Michael A. and R. Duane: Hoskisson, Robert E. Ireland. Strategic Management: Competitiveness and Globalization - Concepts & Cases. Mason, OH: South-Western Cengage Learning, 2008.
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For an entrant to become a threat to the incumbent firms (not only Dell), it would
require a game plan that allows it to achieve a large size and production capability very
quickly. Also, firsthand knowledge of how to set up a logistics channel that allows
lowering manufacturing costs is not a trivial matter. It seems rather unlikely that a new
entrant would be able to threaten the establishment in this market in any sizable way
anytime soon. It would require a groundbreaking innovation to make it feasible. For
these reasons, we believe that Dell has a big bargaining advantage in relation to
potential entrants to the market; the barriers of entry to overcome are just too high.
Suppliers
As a general rule, the bigger a company is, the better bargaining position it holds
when it comes to the suppliers for its inputs24. Dell is not a special case: it is a large
firm that, with the exception of a few components of its end products, has many viable
suppliers attempting to score a big deal by partnering with it. Dell should enjoy a
considerable bargaining power with its suppliers.
Customers
The firms in this industry have to face the fact that customers have many choices
to buy from when it comes to this type of good. Whether it be due to price or to a
24 Hill, Charles & Jones Gareth. 2009. Strategic Management Theory: An Integrated Approach. South
Western College
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particular niche specification, customers hold the upper hand. Customers, therefore,
possess a large bargaining power against Dell and its competitors, putting these firms in
a weak position to dictate terms.
Rivalry
As it has been hinted at thus far, this market already has a large penetration,
making it vital for the different players to attempt to steal market share from their
competitors in order to grow. Dell has not been able to competitively play this game for
some time now, consistently losing market share. It is neither competing well on price
nor is it competing well on quality. It seems appropriate to conclude that due to the
extremely competitive focus of the industry and Dell’s lack of progress at gaining ground
in relation to its rivals, the firm’s bargaining power when it comes to its competitors is
low.
Substitutes
This is where the clear definition of the target market pays off for the analysis.
For many years, computers, whether this meant laptops or desktop computers,
constituted the only realistic alternative for businesses and individuals to considerably
increase their productivity. However, with the inception of the smartphone, some
functions that were up to that point exclusive to the realm of computers were now
accessible through these devices. Nonetheless the dramatic challenge to the status
quo takes place with the successful introduction of Apple’s iPad in April of 2010. The
rapid adoption of the device, especially in the business environment, has thrown the
industry in which Dell finds itself into chaos. Computer sales have plunged considerably
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in deference to rapid tablet sales, which could be considered as a major schism and a
coming of a critical shift in the industry of Schumpeterian creative destruction
magnitude.25 The reality is that it is too soon to know for sure if tablets will rise to
eventual supremacy, however there is certainty regarding the standing of the battle for
the tablet crown. Apple managed to exercise its first mover advantage with astonishing
results, essentially shell shocking its would-be competitors. Its mobile operating
system, exclusive to their iPads, command the market share of that industry segment as
it can be observed by the following figure:
26
Android based tablets have been ineffective so far in denting Apple’s lead in any
significant way; to make matters worse, there are a multitude of offerings within the
25 Diamond, Arthur. Schumpeter’s Creative Destruction: A Review of the Evidence. University of Nebraska Omaha. http://cba.unomaha.edu/faculty/adiamond/web/diamondpdfs/schumpevidence06.pdf.26 IDC. http://www.idc.com/
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Android environment, out of which Dell has three offerings, none of which have done
very well. To summarize, when it comes to substitutes, it seems that Dell’s industry at
large is going through a major shift that represents a significant loss of bargaining power
to potential substitutes, in which the firm’s main line of business is located. This is a
significant negative force for Dell’s aspirations.
Business-Level Strategies Within the Personal Computer Industry
Dell became the market leader in the 1990’s pursuing a “low-cost strategy while
simultaneously satisfying customer needs”27. This was a broad-based, integrated
business level strategy. Other competitors had different approaches. Most, such as
HP28 and Acer29, followed a broad, cost leadership strategy. Apple pursued a
differentiation strategy30. Throughout the 1980’s and early 1990’s, Apple appealed
27 Hitt, Michael A. and R. Duane: Hoskisson, Robert E. Ireland. Strategic Management: Competitiveness and Globalization - Concepts & Cases. Mason, OH: South-Western Cengage Learning, 2008.28 Seth, Rorik. http://rorikseth.blogspot.com/2010/04/chapter-4-business-level-strategy.html. 6 April 2010.29 Hitt, Michael A., Duane R. Hoskisson and Robert E. Ireland. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 4: Business-Level Strategy. San Jose, CA: San Jose State University College of Business, 2011. PowerPoint presentation.30 Iliev, Valentin, Andreas Lindinger and Guenther Poettler. Apple Computer Inc. Strategic Audit. Class Report. Dublin, Ireland: Dublin Institue of Technology, 2004. PDF.
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mostly to techies and artists, but starting in the late 1990’s it started moving towards a
broader market by advertising more to college students. Sony had a more broad cost
leadership strategy, but has been “now targeting business customers”31. This was
perhaps a reaction to the presence of so many competitors in the broad, cost-leadership
sphere and the need to find a niche that they could dominate. So while Apple moves
from a focused to a broad strategy, Sony has taken an opposite approach. What has
emerged over time is a business level strategy matrix where competitors have been
moving relative to each other in an attempt to establish their markets. Dell’s
movements have been part of its decline in performance.
Eventually Dell focused more on “cost reduction through its supply chain”32. The
objective was to increase operational effectiveness in an area they had already
dominated. However, HP increased market share because it had “learned how to
manage its supply chain to lower costs…But it also provided a broader portfolio of
goods and services that better satisfied customer needs”33. Because HP had already
improved the operational effectiveness in its supply-chain, it was able to concentrate on
increasing differentiation that appealed to customers. Dell’s shift of focus prevented it
from taking steps to protect the differentiation side of its strategy. Firms earn above
average returns when they create value for their customers. Dell’s supply-chain cost
reduction lead to lower prices, but this was less visible when HP already had exceeded
in its low cost strategy. What was more visible to customers was HP’s product
diversification, which would explain why HP gained market-share over Dell.
31 Billups, Scott, et al. Computer Industry Analysis. Sacramento: California State University - Sacramento, 2006. PowerPoint presentation.32 Hitt, Michael A. and R. Duane: Hoskisson, Robert E. Ireland. Strategic Management: Competitiveness and Globalization - Concepts & Cases. Mason, OH: South-Western Cengage Learning, 2008.33 Ibid.
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One method Dell has used to earn back differentiation is through acquisition.
This is especially true with their purchase of Alienware. Alienware was founded in 1996
and specializes in customizable personal computers for gaming enthusiasts, a very
focused differentiation strategy34. Dell, who had been trying to compete in the same
market, made a horizontal acquisition of Alienware in 2006. This has allowed them to
cater to this market without having to devote the resources and sacrifice the low-cost
strategy. Another benefit is that Dell has obtained a unit with an entrepreneurial
mindset, keeping the original management team. Alienware’s autonomy allows it to
respond to its customers’ needs more quickly than Dell could alone. The success of the
acquisition is due in part to both organizations’ desire to customize products for the
customer. It has allowed Dell to enter a focused market quickly. However, if Dell
makes more acquisitions, then it might become a substitute for organic growth and
distract management from solving issues in its core business.
Strengths, Weaknesses, Opportunities, and Threats for Dell
Strengths
34 Smith, M.S. Bright Hub. 11 May 2011. http://www.brighthub.com/computing/hardware/articles/68645.aspx.
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One of the greatest strengths of Dell is its operating methods. Dell operates on
the customer focused direct business model35. It believes in maintaining direct contact
with its customers and the model enables the company to offer a direct relationship with
customers. Their strategic method provides for internet and telephone purchasing.
Since the market is becoming more educated, and more than ever individuals are
wanting a product that can target their specific needs, this model allows consumers to
fully customize their laptops. Dell made it possible for each buyer to order directly from
the factory36. So a customer selects a generic PC model and then adds items and
upgrades until the PC is kitted out to the customer’s own specification.
In addition to this customization, this model has a remarkably low operating cost
relative to revenue because it cuts out the retailer and supplies directly to the
customers, and it also provides a fast delivery37. Customers place their orders either by
telephone or through the website and the customized product reaches their doorstep
within seven days. Components are made by suppliers and laptops are assembled
using relatively cheap labor. The assembled products are directly shipped from the
warehouses of the company to the customers. By contacting customer service,
customers can even track their delivery.
Moreover, the company can get direct feedback from customers by this operating
model38. The feedback from customers helps the company in developing and refining
Dell’s products and marketing programs for specific customer groups. Dell also uses
information technology to capture data on its loyal consumers.
35 GlobalData. "Dell Inc. - Financial and Strategic Analysis Review." 2011. PDF.36 Ibid.37 Ibid.38 Ibid.
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Dell also has a strong product portfolio and a wide range of IT hardware
products, making it a leader in this market39. Dell is not only one of the world’s biggest
laptop producers, but also produces mini net books, desktops, keyboards, mouse(s),
and monitors. It is a distributor of toners, GPS products, mouse(s), digital cameras,
gaming consoles, mobile phones, PDAs, televisions, etc. It is also a third-party vendor
of operating systems, besides selling software solutions including anti-virus suite and
Internet security ware. In addition, Dell provides services to its customers including
configuration, installation, and maintenance services.
One of Dell’s strengths in targeting the business executive category is that over
half of all sales revenue comes from large businesses and government organizations40.
Thus, Dell has good relationships with several large firms. In turn, these companies
pass the relationship on through their employees by providing Dell products to them.
Therefore, Dell gains an extensive base of users.
Weaknesses
One of the Dell’s biggest weaknesses is attracting the college student segment of
the market41. Its marketing strategy focusing on the corporate and government
customers made it less able to build relationships with educational institutions. Since
many students purchase their computers through their schools, Dell cannot take
advantage of this market. Another weakness is that Dell is a computer maker, not a
manufacturer. It just simply buys components from different manufactures42. Though
Dell can focus on marketing and logistics by this business operation, the company is 39 Ibid.40 Ibid.41 Ibid.42 Ibid.
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reliant upon a few large suppliers and is unable to switch suppliers. Although the direct
model provides Dell many advantages, Dell’s greatest weakness is that buyers cannot
physically touch or see the product they want to purchase43. Dell lacks solid retailer
relationship due to their operating model. Customers cannot go to retailers because
Dell does not use distribution channels. They cannot personally examine before
purchasing. Additionally, buyers may not be willing to wait the few days it takes for their
computers to be delivered.
Opportunities
Dell focuses on acquisitions that complement its existing business44. In April
2011, Dell signed an agreement to acquire Dell Financial Services Canada Ltd., a CIT
Vendor Finance and Dell partnership45. Under the agreement the company acquires
CIT Vendor Finance which finances these related assets, sales and servicing functions
in Europe; these assets will ultimately enable global expansion of Dell’s direct finance
model. Last year, Dell also acquired Compellent Technologies, Inc. and SecureWorks
Inc. The acquisition will allow Dell to easily enter a new market and give the company
industry–leading capabilities.
The company focuses on minimizing its cost and is working on selling low–cost,
low–price computers to PC retailers in the United States46. The computers are
unbranded and should not be recognized as being Dell when the consumer makes a
43 Ibid.44 Ibid.45 Ibid.
46 Ibid.
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purchase. Rebranding for retailers, although a departure for Dell, gives the company
new market segments to attack with the associated marketing costs.
Computers are becoming a necessity now. They are being purchased and used
more than ever before. The market for laptops is growing much faster than that of
desktop computers47. This is a good opportunity for Dell’s laptop business to grow.
Customers are getting more and more educated. The number of second time buyers is
growing. Consumers who have purchased computers in the past know what they want.
Dell’s model can provide consumers with fully personalized computers compared to
other computer makers.
Threats
Competition is intense in a shrinking IT hardware market. Dell competes with
companies such as IBM, HP and Apple, which enjoy significant market position and
financial strengths. With so many market players, companies compete in terms of
pricing48. This could have an impact on its margin. What is worse, the price difference
between brands is getting smaller all the time. Other companies are finding ways to
combat the low costs of Dell, and they pass savings to their customers. As a result, Dell
may lose its low cost strength.
Another serious threat is that the growth rate of computer industry is slowing49.
The global economic slowdown could impact the business operations of the company.
Though the global economy began to recover in 2010, fears of a sovereign debt crisis
have surfaced in some European countries which could lead to increasing deficit and
47 Ibid.48 Ibid.49 Ibid.
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debt. Even now, Greece and Italy have serious financial problems. If the market slows,
competition for market share would intensify. If Dell cannot differentiate its brand from
competitors, it will be very hard for it maintain any kind of significant market share.
Path to a Sustainable Competitive Advantage
For Dell to be able to have a sustainable competitive advantage, they will have to
address the problems that have lead to their market decline. Personal computers are a
fast-cycle market. As such, sustainable competitive advantages are quickly eroded, if
they can be found at all. Dell’s well-tuned supply chain was copied by competitors such
as Acer50 and HP51. This has hurt the cost leadership portion of their business level
strategy. Industry-wide mass customization52 has duplicated Dell’s pioneering efforts.
Therefore the firm’s differentiation has suffered. As such, the company’s integrated
business-level strategy has left them without a strong association with either strategy in
the customers’ minds. The firm will have to decide which business-level strategy works
best for them.
The best choice for a business-level strategy is one that leverages the firm’s
strengths into a competitive advantage. Since Dell already has a large variety of
products53, it would make sense that they would lean more on a differentiation strategy.
Further proof of differentiation’s power over cost leadership within the computer industry
50 Hitt, Michael A., Duane R. Hoskisson and Robert E. Ireland. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 4: Business-Level Strategy. San Jose, CA: San Jose State University College of Business, 2011. PowerPoint presentation.51 The College of St. Scholastica. manalac.com/dell_rethink.pdf. n.d. PDF.52 Billups, Scott, et al. Computer Industry Analysis. Sacramento: California State University - Sacramento, 2006. PowerPoint presentation.
53 GlobalData. "Dell Inc. - Financial and Strategic Analysis Review." 2011. PDF.
19
is Alienware’s performance. It has remained successful even after the acquisition by
continuing to focus on personal computers designed for the gamer niche market54. The
switch in business-level strategy would also address the problem of focusing too much
on supply chain efficiency. Although efficiencies lower costs, customers may not
acknowledge a resulting price reduction. Consumers looking for the most economic
option have a crowded field of competitors to choose from. However, those customers
who are willing to pay a premium for a specialized computer notice differentiation more.
The issue then is to find the differentiation that will earn the firm above average returns.
Having the right kind of differentiation is just as important as finding the right
business-level strategy. This is especially true in Dell’s case, where one of their
problems has been over-diversification, and yet one of their strengths is a well-rounded
product portfolio. The solution then is to downscope the firm’s activities to those that
are most profitable. Dell has already seen how this might work. Its subsidiary,
Alienware, is successful because it designs computers for gamers, by gamers. There
are other niches that could be exploited as well, such as music producers, graphic
artists, and researchers. Dell could use it extensive industry relationships to bring
together the right hardware and software components market segments want. These
business units would need to be led by experts in those fields, not only because they
better know the needs and desires for those niches, but also to address Dell’s
leadership issues. This could be further entrenched by giving leadership within the
subsidiaries ample managerial discretion to make decisions in the best interest of those
units. Another benefit of diversification through separate units is that if one of the
54 Smith, M.S. Bright Hub. 11 May 2011. http://www.brighthub.com/computing/hardware/articles/68645.aspx.
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subsidiaries fails, then it could be closed without draining resources from the more
profitable sub-organizations. Only by finding those market segments that will provide
above average returns will Dell be able to be an industry leader once again.
The subsidiaries will need protection though, or they will only be copied in the
fast-cycle personal computer industry. They will be able to build some customer loyalty,
but even that is erodible. Customers will need more of a reason to choose one of Dell’s
specialized holdings over an competitor. Therefore Dell should offer upgrade insurance
that is specific to Dell products to ensure further consumption. This allows for additional
revenue for protection of the customer’s investment and incentive for them to continue
to return in the future. The operation would include the customer returning their
machine. Dell could then refurbish the computers to sell as “pre-owned” to
economically strapped market segments. That way they could possibly receive multiple
streams of revenue for the same machine.
Conclusion
The personal computer industry has seen explosive growth followed by decline
thanks to newer generations of technology. As technology continues to improve,
computing will become more specialized. While there will always be a demand for
hardware and software to manifest technology, their forms and functions will continually
change. Although being a personal computer company was very modern at the end of
the twentieth century, at the beginning of the twenty-first it is increasingly becoming
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antiquated. The only hope for Dell in the long-run is to transition from a personal
computer maker to a technological solutions provider.
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