Dell Inc. Business Policy Paper
Introduction Dell Inc. is one of the world’s largest information technology firms, serving individual consumers as well as small businesses and large enterprises. The company manufactures and sells PCs and related equipment, including network servers, printers, displays, projectors, and storage systems. Founded from Michael Dell’s dorm at the University of Texas in 1984 with a mere $1,000, Dell’s revenues have grown to approximately $61 billion in 2009. This stemmed primarily from a direct-sales model and a well-managed supply chain, which provided Dell with significant operating margin advantages over competitors.
Despite its historic success and legacy, in recent years Dell experienced difficulties in an evolving marketplace, which necessitated a change in the company’s strategy and culture. Industry Analysis Despite its diversification, Dell’s overwhelming competitive presence resides in the personal computing industry, comprised of desktops, laptops, servers, and handheld devices. In 2007-2008, worldwide PC retail revenues topped $330 billion. Although PC unit sales are projected to continue growing, reaching 384 million by 2014 from 281 million in 2009, revenues are expected to remain stagnant due to considerable price declines.
This dynamic will shape the competitive landscape of the industry as well as Dell’s own position. [i] Buyers. Although Dell recently launched products in retail outlets, direct-sales (bypassing the retailer) remains Dell’s main distribution channel. End consumers – home users as well as private and public businesses – have several options in the marketplace with very low switching costs and are thus quite powerful. In addition, the commonality of technological advances essentially commoditized the computers industry.
Accordingly, customers rank cost as the most important factor when purchasing a PC, followed by customer service and reliability. (See Appendix A: Deciding Factors) This price sensitivity hinders differentiation and fosters little brand loyalty. [ii] Historically, Dell cultivated brand loyalty through a price leadership strategy, building an efficient value chain with just-in-time and similar operational policies and circumventing retail stores. This allowed Dell to consistently offer lower prices than competitors.
Still, Dell recently lost consumer loyalty as competitors and new entrants have bridged cost advantages and offered an ever-increasing number of substitutes. Suppliers. While there are several dozens of computer vendors worldwide, many integral components of a computer are manufactured by a few key players. For instance, Intel and Advanced Micro Ddevices dominate the microprocessor industry. Moreover, fear of retaliation limits a buyer’s (Dell) ability to pit microprocessor producers against one another: a 2003 Dell presentation noted that if Dell were to purchase chips from A. M.
D. , Intel’s retaliation could affect all of Dell’s product lines. [iii] Similarly, in the operating systems industry, Microsoft enjoys near monopolistic bargaining power with PC vendors. Even in industries with several suppliers, computer manufacturers (buyers) do not necessarily exhibit stronger power. Thus, in 2005 several of the world’s largest memory makers were found guilty by the DOJ of price-fixing, which significantly impacted six of the largest PC manufacturers, including Dell. [iv] While such collusion was illegal, it nevertheless remains a part of industry practices.
Accompanied by strong brand names, this renders the bargaining power of suppliers high, forcing computer manufacturers – rather than component suppliers – to absorb downward pressures in PC prices. (See Appendix B: Personal Computer Industry Value Chain) Potential Entrants. With the commoditization of components, lack of brand loyalty and the resulting reduced ability to achieve economies of scale, barriers to entry are fairly low and the threat of entry is high. As a result, many small PC vendors have formed.
These may focus on a product niche – such as low-power usage PCs or ultra-light notebooks – or a geographic location, such as India and the Netherlands, where large manufacturers have not yet fully penetrated. [v] In addition, many suppliers integrated forward and offer products similar to those of their buyers, allowing flooding consumers with clones of the same product to be presented under different brand names. For instance, Taiwan-based computer manufacturer MSI introduced a netbook named the MSI Wind U100 only to have twenty-two exact clones released around the world, some at lower prices. vi] (See Appendix C: MSI Wind and its Variants) While an individual entrant does not significantly impact larger corporations, their presence collectively increases competition and decreases the ability to differentiate, thereby forcing a price war, which ultimately drives price levels downward. Substitutes. PCs and mobile devices – especially music players and smart phones – are converging rapidly. Smart phones, which currently match notebooks in worldwide sales, are projected to surpass the entire personal computer market by 2012.
Hewlett-Packard (HP), the world’s leading PC manufacturer, is criticized for not positioning itself to capitalize on the next great phase of the computing revolution. [vii] Since the industry is incorporating possible substitutes into its own product lines, real substitutes are vanishing. Thus, the power of substitutes is low. Industry Competition. Industry competition in the computing industry is fierce and dominated by five players: HP, Acer, Dell, Lenovo, and Toshiba. However, due to new entrants, the market share held by the top five companies decreased from 58. 9% in 2003 to 41. 1% in 20093. viii] (See Appendix D: Global PC Vendor Market Share) This translates into fierce competition between these large players as each strives to maintain market share and utilize factory capacity. Sustainable competitive advantage is limited since competitors quickly imitate others’ successful advances. For instance, all major manufacturers have implemented variations of direct sales and efficient operations – Dell’s main competitive advantages. Retaliation is prevalent, as well: when Dell entered the printer business, HP severed its supplier contracts of printers, cameras, and scanners with Dell. ix] Thus, strategic actions are often undermined. Conclusion. While still one of the largest in the world, the PC industry is clearly saturated. Four of the five forces affecting industry profitability are high, lowering industry profitability and establishing an unfavorable environment for existing players. To have success in the industry a company must rely on the following key success factors: (1)value chain management, (2)management, (3)technological innovation, (4)reliability and support, and (5)comprehensive product offerings. For further detail refer to Appendix E: Key Success Factors in the PC Industry) Firm Strategy Historically, Michael Dell’s built-to-order concept – selling personal computers directly to enterprises and government organizations as well as, to a lesser extent, individual consumers – drove the evolution of the company’s strategy. Dell believed that integrating vertically and reaching customers directly would allow the company as a whole to offer greater value than the sum of its parts. Cost savings were directly related to successful integration and effective inventory management practices.
Furthermore, harvesting information about customer needs created potential for repeat business and cross-selling. [x] Recently, Dell was forced to break from its historical roots by shifting focus away from large organizations and seeking shelf space at retail locations for pre-built computers, reducing or altogether forfeiting many of the competitive advantages that originated in its unique value chain. As a result, Dell morphed from a manufacturer of customizable, differentiated computers to a vendor of commodities. [xi] Corporate Strategy.
Vertical integration formed the basis for most of Dell’s corporate-level decisions. By strictly adhering to a “just-in-time” production method, components would be purchased from and delivered by suppliers as needed, and the finished product was immediately shipped from the factory to the customer. Thus, Dell kept minimal stock of components, allowing the company to maintain small warehouses and reserve space in production facilities. Moreover, since the rapid advancement of computer technology meant frequent obsolescence of core components, Dell was able to minimize such inventory risk. [xii]
The direct-sales strategy provided an opportunity to establish value-added relationships with customers beyond mere delivery of the physical product. These were particularly beneficial to Dell with enterprise and government clients (the vast majority of the company’s customer base). Often, a large organization would receive technical support from permanent on-site Dell employees who were thus able to gauge the organization’s needs and transfer the information to Dell’s corporate headquarters. This cultivated brand loyalty and increased switching costs, thereby reducing the risk of losing an important client to a competitor. xiii] Business Strategy. Though large organizations comprised a critical segment, Dell targeted the growing base individual and small business consumers, as well. Prior to 1995, Dell marketed to these consumers primarily through catalogues and magazines and received orders by phone. The decision to launch Dell. com to market the company and receive orders online was a major milestone in the company’s business-level strategy. Ultimately, the Internet provided a unique platform that complemented Dell’s built-to-order and total customization foundation perfectly: Internet sales reached an average of $4 million daily within 3 years.
To further target this segment, Dell launched a series of television advertising campaigns in 2000. [xiv] Functional Strategy. The company’s functional strategies were designed to support the basic tenets of built-to-order manufacturing, complete customization and just-in-time delivery. Since the mid-1990’s, Dell operated its production facilities with a “cell” organization. This system, which employed a team of technicians who worked together on a single product at a time, facilitated substantial advancements in productivity and reductions in assembly time. xv] Core Competencies & Competitive Advantage. Dell’s core competencies resulted from its strategic decisions, all of which reinforced vertical integration. Historically, the level of customization, speed of delivery and technical support competencies led to a clear advantage over the competition. However, in the changing industry environment, the contributions of Dell’s core competencies to its competitive advantage have reportedly vanished; Michael Dell’s return to the helm in 2007 supports this argument.
Kevin Rollins A part of Dell’s team from 1996-2007, Kevin Rollins played an integral role in many of the company’s successes and failures during a key period for the industry. Mr. Rollins was initially brought in as a consultant following poor performance in 1993, when industry consolidation signaled a need for diversification. Shortly after, Rollins oversaw a massive expansion into the overseas market – including the establishment of manufacturing plants globally – and was appointed president of Dell Americas in 1996.
In addition, Rollins was involved with one of the most important strategic maneuvers in Dell’s history: selling PCs online. Dell. com allowed consumers to receive support and track shipments via the web. As President and COO, Rollins may have foreseen financial issues that would befall the PC industry in the early 2000s. Noting that other IT markets provided higher margins, Rollins oversaw the 2002 acquisition of Plural, a web-integration company that gave Dell a foothold in the services market. xvi] Under Rollins’s leadership, Dell used its expertise in operations efficiency to weather the difficult environment at the turn of the century. Eliminating inefficient practices, slashing over 1,700 jobs, and restructuring outdated operations models kept Dell at the forefront of a price war that many others lost. With prices below the tolerance levels of competitors like HP and Compaq, Dell claimed the top in market share for the first time in 2001, at 13. 3%. [xvii] Despite Dell’s strong market position and solid financial footing, investor concerns led to a tremendous decline in Dell’s stock value.
In 2002, Rollins responded by focusing on corporate governance with an initiative called “The Soul of Dell”, which doubled as a marketing tool and internal ethics review. Stock prices rebounded, reaching a high in 2004. [xviii] Of the many successes Rollins had at Dell, the main failure during his tenure as CEO (2004-2007) likely led to his ouster from the company. In early 2005, Fortune named Dell as the “Most Admired Company” while the company’s stock price and profits were soaring. [xix] By November, however, Dell was experiencing the most difficult financial issues in its history, ailing to meet earnings forecasts for the first time. Analysts surmised that in its dedication to cost-cutting and efficiency, Dell had compromised customer service and product quality. As high-quality rivals, such as Apple, and low-price competitors, such as Acer, gained share, Dell’s 15-year position as an industry leader was in question. [xx] The trouble continued in 2006, as the SEC launched an investigation into misstated earnings. Investors were disappointed with the lack of transparency at Dell, which remained tight-lipped on the course and scope of the check and delayed financial reporting to the SEC and NASDAQ. xxi] In early 2007, Dell completed a restatement of financial results from the start of fiscal year 2003 through the first quarter of 2007, reducing revenues by $359 million and cumulative net income by $92 million. [xxii] Mr. Rollins already resigned in December 2006, paving the way for Michael Dell’s return, and the company started an aggressive restructuring. Michael Dell Upon his return, Mr. Dell established units for different segments and geographic markets and began developing a corporate-level strategy to effectively lead the businesses.
By leveraging the company’s unique resources and sharing knowledge, the units would benefit from a sustained competitive advantage and achieve superior performance. Dell’s growth would originate in targeted acquisitions, where the company would add tangible value and enter new fields early. [xxiii] In addition, Mr. Dell hired experienced executives from major competitors – such as Oracle and Motoroa – to manage the company’s individual businesses. [xxiv] This structure positioned Dell to compete with HP and IBM by offering a complete solution to its customers. Historically, Dell cultivated notable resources.
One relates to the company’s massive scale, which promotes supplier relationships and reportedly one of the strongest negotiating powers in the world. [xxv] Coupled with Dell’s superior use of capital, this allowed the company to achieve cost advantages that rivals were able to minimize yet not fully replicate. [xxvi] Still, unlike HP, Dell’s ability to consistently transfer its cost advantages to other businesses was not clear. [xxvii] Other distinctive resources include Dell’s impressive customer base, which numbers the world’s largest corporations, such as Yahoo and Microsoft. xxviii] In addition, the company boasts an extensive distribution network with presence in virtually every corner of the globe. [xxix] As a result of its growth, Dell accumulated over $9 billion in cash reserves by mid-2009 and supplemented these with $1 billion in bonds. [xxx] Financial resources are essential to revamping businesses and investing in new skills, such as design, which Dell pioneered in mid-2007 with its patterned laptops. Finally, the Dell brand, famous for reliability, durability and low-cost, protects from new entrants.
The specialized nature of Dell’s resources mandates a narrow scope of business, sharing (rather than transferring) of skills, a focus on operational strategy rather than financial results, and a broad corporate staff to support business units. Intent on restoring Dell’s growth, Mr. Dell began to implement these principles. Thus, Dell’s acquisitions focused on areas related to its original computer business: storage, memory, networking, and software. [xxxi] To leverage its brand, Dell contracted with one agency to execute uniform marketing campaigns worldwide, clarifying the company’s image. xxxii] Furthermore, Mr. Dell sought to transform the corporate culture from a short-term focus on achieving sales and profit targets to a long-term outlook. To facilitate this change, Dell asserted that legacy practices can change and instituted an “amnesty” period. [xxxiii] In this context, the mid-2007 purchase of EqualLogic, a company that pioneered a simple storage technology for small and medium-sized businesses, proved highly relevant to Dell’s strategy of offering straightforward, user-friendly computing services. xxxiv] The acquisition allowed Dell to establish a presence in a booming segment, strengthening the company’s competence in serving corporate customers and preferred position among smaller enterprises. By applying its purchasing power and operating expertise to EqualLogic’s production processes, Dell would be able to significantly lower EqualLogic’s costs. Access to Dell’s wide distribution network would promote volume production, reinforcing these cost advantages. xxxv] By 2009, the added value was clear: deemed as Dell’s most successful acquisition, EqualLogic boosted storage revenues. [xxxvi] Similarly, Dell’s acquisition of services provider Perot Systems in late 2009 is promising. Perot’s customers are concentrated in the domestic health-care field, where Dell has limited presence. Thus, the partnership could offer substantial cross-selling opportunities on both ends: Dell could promote Perot globally and win new customers in the medical field, which is expected to show explosive growth over the next several years. xxxvii] Furthermore, Dell’s access to low-cost computer components and financial leverage would help win larger contracts for Perot, which previously sidestepped such offers to minimize risk. Finally, Dell and Perot share a collaborative past and the companies’ CEOs are close, contributing to additional synergies. [xxxviii] As an indication, Dell is expecting a 7%, or $300 million, in savings merely from the integration effort. [xxxix] Recommendations The central challenge facing Dell relates to the imitability of its value proposition by competitors, most notably Compaq and Acer. xl] By losing former advantages grounded in the built-to-order and just-in-time delivery concepts, Dell is left with little more than its reservoir of brand equity filled during its market dominance. Though the company’s technical support strategy succeeded with corporate accounts, in other markets, such as individual consumers, Dell fails to offer apparent value superior to competitors. In fact, many consumers felt that the customer service provided by Dell post-purchase was sub-par at best. xli] With its legacy advantages no longer relevant, Dell is forced to compete principally on price, reinforcing trends towards commoditization. Alternatively, the firm may attempt to develop new core competencies; still, the latter requires substantial financial commitments, particularly difficult given the current economic climate and Dell’s stock performance, which lost approximately 2/3 from its peak market capitalization. A third option for Dell would be to reinvigorate its advantages and restore differentiation of its value proposition through acquisitions. Clearly, Mr. Dell has mbarked on this path, which appears most appropriate for the company. In the future, Dell should continue with acquisitions that strengthen the company’s offering to its primary clients: small and midsize businesses. To build its corporate advantage, Dell should focus on midsize companies, similar to EqualLogic, which would allow the company to avoid major mishaps while perfecting the integration process. Until Dell earns substantial experience in purchasing and applying its unique resources across all business units, the company should steer away from considering large companies that warrant such advanced resources.
Nevertheless, persisting with this corporate strategy is critical to Dell’s viability, particularly in light of the ability of HP, IBM and other competitors to win market share and profits from the company. Appendix A:: [pic] – http://www. informationweek. com/news/hardware/showArticle. jhtml? articleID=164008 Appendix B: [pic] – http://dataplusinsight. com/general/the-personal-computer-industry-value-chain/ Appendix C: [pic] – http://cloudbookumpc. com/the-many-versions-of-msi-wind Appendix D: [pic] |Global PC Market Share by Units, Percent. 2006-2010. |
Rank |2006  |2007  |2008  |2009  |2009Q4 | |1 |Dell |16 |HP |18 |HP |18 |HP |19 |HP |20 | |2 |HP |16 |Dell |14 |Dell |14 |Acer |13 |Acer |14 | |3 |Lenovo |7 |Acer |8. 9 |Acer |11 |Dell |12 |Dell |12 | |4 |Acer |5. 8 |Lenovo |7. 4 |Lenovo |7. 2 |Lenovo |8. 1 |Lenovo |8. 7 | |5 |Toshiba |3. 8 |Toshiba |4 |Toshiba |4. 5 |Toshiba |5. 1 |Toshiba |5. 3 | |Others | |52 | |47 | |45 | |42 | |41 | |-based on year end summary released by Gartner Technology Business Research Insight Appendix E: Key Success Factors in the Personal Computing Industry
There are five key success factors in the personal computing industry which are needed for a company to succeed in the unfavorable industry conditions. 1. Value chain management: As the industry faces continuing pressure to reduce prices it is imperative that companies continually optimize the value chain to reduce costs and maintain margins. This is particularly important in this industry where some of the largest growing products carry margins less than 1%. 2. Management: In this saturated market, competitive advantage is difficult to produce yet easy to imitate. Poor strategic decisions can quickly lead to loss in market share.
Management must constantly be focused on eliminating the competitive advantage of its competitors, while protecting the competitive advantage it possesses. 3. Technological innovation: With the industry quick to imitate any success, companies must constantly offer technological advances. New technology generally carry the highest value premium, therefore those who introduce the technology are in the best position to profit from it. 4. Reliability and support: With the commoditization of hardware, and the narrowing ability to differentiate on price, companies must differentiate on reliability, product quality, and customer service.
Satisfaction in these areas is the biggest driver of sales after price. 5. Comprehensive Product Offerings: With the margins on personal computers being reduced to dangerously low levels, companies must supplement this revenue with higher margin complements such as peripherals, software, and services. Inability to offer these type of products, gives a competitive advantage to those who can. [pic] [pic] [pic] Endnotes ———————– [i] “Worldwide PC Market. ” Computer Industry Almanac. Jan 2010. 243. Print [ii] Greenemeir, Larry. “Analyzing The PC Vendors. ” InformationWeek Dec. , 2003. Print. [iii] “Microchips and Monopolies. ” Rev. of Intel’s Antitrust Actions. New York Times 28, October 2009, sec. A: 32+. Print. [iv] Flynn, Laurie J.. “Samsung to Pay Large Fine In Price-Fixing Conspiracy. ” New York Times 14, Oct. 2005. Web. 20 Apr. 2010 [v] Levere, Jane. “Standing in the Niche, Trying to Hold Your Own. ” New York Times 15 Apr. 2004. Sec C. Pg. 9. Print. [vi] Atticus, T. “MSI Wind Clones Galore. ” JCloudbook UMPC. N. p. , 2 Sept. 2008 Web. 20 Mar. 2010. [vii] Vance, Ashlee. “H. P. , Tech Powerhouse, Stumbles in Smartphones. ” New York Times 24 Apr. 010. Sec B. Pg. 1. Print. [viii] Gartner [ix] Fried, Ian. “HP to quit supplying printers to Dell. ” CNET News. N. p. , 23 July, 2002 Web. 20 Apr. 2010. [x] Magretta, J. 1998. The power of virtual integration: An interview with Dell Computer’s Michael Dell. Harvard Business Review (March-April): 72-85. [xi] Dell: Where’s The Competitive Advantage? http://seekingalpha. com/article/93343-dell-where-s-the-competitive-advantage [xii] Kraemer and Dedrick: “Dell Computer: Organization of a Global Production Network”, Center for Research on Information Technology and Organizations, 2002. xiii] Strategic Management, Thompson & Strickland, 11th ed. (case study) http://www. mhhe. com/business/management/thompson/11e/case/dell5. html [xiv] Ibid [xv] Inside Dell’s lean machine http://www. allbusiness. com/management/960195-1. html [xvi] Rooney, Paula. “Dell Acquires Plural”, CRN, May 31, 2002. http://www. crn. com/it-channel/18828446 [xvii] Williams, Tish. “Downturn Saw PC Makers Get Weaker”, The Street, May 26, 2002 http://www. thestreet. com/story/10014677/1/downturn-saw-weak-pc-makers-get-weaker. html [xviii] Tischler, Linda. “Can Kevin Rollins Find the Soul of Dell? , Fast Company, October 31, 2002. http://www. fastcompany. com/magazine/64/rollins. html [xix] “Dell Beats Wal-Mart as ‘Most Admired’”, CNN Money, February 22, 2005. http://money. cnn. com/2005/02/21/news/fortune500/most_admired/ [xx] Lee, Louise. “It’s Bad to Worse at Dell”, Business Week, November 1, 2005. http://www. businessweek. com/technology/content/nov2005/tc20051101_088420. htm [xxi] Krazit, Tom. “Dell profit surges, but investigations cast pall”, CNET News, November 21, 2006. http://news. cnet. com/Dell-profit-surges%2C-but-investigations-cast-pall/2100-1014_3-6137736. html? ag=mncol;txt [xxii] Shah, Agam. “Dell restates earnings after internal probe”, Computerworld, October 31, 2007. http://www. computerworld. com/s/article/9044858/Dell_restates_earnings_after_internal_probe [xxiii]http://www. nytimes. com/2008/12/16/technology/companies/16dell. html? pagewanted=1&%2359;%20dell&%2334&sq&st=cse&%2359;back%20against%20the%20wall&scp=1 [xxiv] http://www. nytimes. com/2007/09/09/technology/09dell. html? pagewanted=3&_r=2 [xxv] http://www. businessweek. com/technology/content/mar2009/tc20090324_741292_page_2. htm [xxvi] http://74. 125. 47. 132/search? q=cache:A8p9TUYTleAJ:knowledge. harton. upenn. edu/article. cfm? articleid%3D1799+dell+strategic+management&cd=9&hl=en&ct=clnk&gl=us [xxvii] http://www. nytimes. com/2008/12/16/technology/companies/16dell. html? pagewanted=2&%2359;%20dell&%2334&%2359&sq&st=cse&%2359;back%20against%20the%20wall&scp=1 [xxviii] http://www. nytimes. com/2007/09/09/technology/09dell. html? pagewanted=4&_r=2 [xxix] http://www. dell. com [xxx] Dell Looks To Ramp Up Acquisitions For Growth [xxxi] http://en. wikipedia. org/wiki/List_of_Dell_ownership_activities [xxxii] http://www. nytimes. com/2007/09/09/technology/09dell. html? pagewanted=3&_r=