dell inc. case study

Dell Inc. Case Study

By:Dan McLindonKyle McDanielJeremy SmileyTom AndersonRay 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 downturnThreat – economy also impacting

government spending and infrastructure investments

3

Economic 2008 Economic downturnThreat – companies and individuals

cut IT spending3

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, content, digital revolution

Opportunity – Dell can provide hardware and services to drive 4

Global expansion of InternetOpportunity – 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

Low

Bargaining power of suppliers

Low for genericsHigh for key parts

Porter’s Five Forces

Factor Analysis Impact

Threat of substitute products

Mobile and smart phones may replace the common PC for certain segments.

Servers need to run the networks behind phones.

Bargaining power of suppliers

Standardized technology. Long-term value chain partnerships. Key components suppliers have more power.

A shift to outsourcing may destroy key relationships.

Bargaining power of buyers

Commodity status.B2B customers can also negotiate prices on

hardware, software, service contracts, bundles.

With standardization comes commoditization.

Competitive rivalry Lots of well established players in markets which Dell competes. Competing on cost.

Compression of profit margins. Cost reductions

strategies rule.

Threat of new entrants Slim profit margins.Commodity status.

Well established players.Differentiation will be key!

WHAT IS HAPPENING WITH DEMAND?

Currently A $1.5 Trillion IT Industry

Hardware, $560B

Software, $327B

Services, $613B

• Explosion of the digital era• World’s data doubles every 3 years• Social networking craze• Blogs, online video, My Space, Facebook• Emerging markets with ½ the world’s population• All working together to create DEMAND!

1980

1990

2000

2002

2004

2006

2008

2010

2012

0

50

100

150

200

250

300

350

400

450

PC's Shipped

Shipments of PC’s(millions) 1980 - 2012

Is There Further Growth Out There in the PC Market?

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. But the growth opportunity is there!

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

MarketSuccess 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 Competencies

Core Competency

Description

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 Sales

B2B 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

51%

10%

25%

14%

Net Revenues

Americas B2B

US Consumer

EMEA

Asia-Pacific/Japan

62%

1%

25%

12%

Operating Income

Americas B2B

US Consumer

EMEA

Asia-Pacific/Japan

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/D

2C Sales

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 Dell Strengths

•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 PROVE 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.

Cooling Warming

Contribution towards a future competitive advantage…

Dell’s Strategy

Cost Efficient Build to Order


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.

Cooling Warming


Dell’s Strategy

Partner with

Suppliers


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.

Cooling Warming


Dell’s Strategy

Direct Sales

Elements of Strategy Industry is 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.

Cooling Warming


Dell’s Strategy

Expansion of products

and services

Elements of StrategyDell’s growing pains with off shoring support

services are behind them. Processes and best practices standardized world wide.

Voice of the customer – regional forms, IdeaStorm

Custom websites for large customers, product design services, value add services

ýBelow customer satisfaction goal in Americas

Dell’s Strategy

Customer Service

and Technical Support

Cooling Warming



Advocate for customers needs – useful, cost effective technologies

Quality Control streamlines the assembly process and reduces costs

Growing budget -- $600M in 2008

Facilitates entry into new products and services

Dell’s Strategy

R&D focused on customer

needs

Cooling Warming



More cost effective than proprietary technology

Standardized technologies are upgradeable

ýStrategy is easily replicated

Dell’s Strategy

Use of Standardized Technologies

Cooling Warming


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


Cooling Warming


HOW DOES DELL’S CURRENT POSITION COMPARE TO HP?

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 vs HP

US Market Share – Dell vs. HP

1998 2000 2002 2004 2005 2006 20070

5

10

15

20

25

30

35

40

DellHP

% o

f M

arke

t S

har

e

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 Imag-ingPersonal Comput-ing SystemsEnterprise Systems and SoftwareHP ServicesLinear (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% Accen-

ture3%

Fujitsu2%

HP2%CSC2%

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?

Recommendations1. Acquire a larger IT services company to supplement Dell's

current IT services department - CSC is a possibility Gain immediate market share

2. Focus on critical customers by creating dedicated department head's with authority to meet the demands of the following groups: Large Companies (larger than 400 employees) (already exists, continue

current services) - Small-Med companies (less than 400 employees) - Government Agencies - Higher Education Universities - K-12 Primary School Systems

Focus on speed of service, customization to meet needs of each organization, build loyalty with groups who have more frequent demand and servicing needs.

Recommendations3. Hire product development specialists from

product/branding focused companies. Helps Dell to get a fresh perspective on their product and new

ideas for development.

4. Redesign laptop and PC brands to make them more exciting for personal use consumers.

Dell's competing with HP and Apple who are creating products customers desire.

Financials indicate consumer products are struggling vs. competition.

Increase R&D budget to create more exciting models.

Recommendations5. Sell only a couple standard model PC's and laptops in retail

centers like Wal-Mart and Best Buy – out of sight, out of mind mentality for consumers.

Allows Dell to appeal to everyday customers who don't desire custom computers.

Use suppliers/manufacturers to build these standard models with no changes to the specs – keep costs down.

Continue to build PC’s and custom laptops in-house to take advantage of logistics and efficiencies

This also builds brand awareness with consumers who may want custom computers.

Allow current marketing programs to target higher-end users who desire personalized PC’s.

6. Acquire Chinese PC/laptop maker to enter Chinese market – Increase revenues from Asia-Pacific/Japanese market.

dell inc. case study

Documents

pc industry

key question

key parts7porters

key relationships

industry explosion

key components suppliers

competitive rivalry

profit costs advantage