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1 Dell Inc. Case Study By: Dan McLindon Kyle McDaniel Jeremy Smiley
Tom AndersonRay Moorman1
2 Key Question for DellCan Dell overtake HP as the world leader in personal computers with its current strategies of Build to Order and Direct to Consumer sales?2
3 Secondary QuestionsWhat 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?
4 Dell Computer Company Overview
Founded1984 by Michael DellVisionPC’s could be built to order & sold directly to customers2 Major Advantages of Business Concept1. Bypass distributors & retailers eliminated markups2. B2O reduced risks & costs of having inventorySell Direct & B2O Business Model Success2003 – most efficient procurement, mfg, & dist in PC industry. Gave profit & costs advantage over rivals
5 PEST Analysis for Dell Category Issue Threats/Opportunities Ranking
(1-5)Political2008 Economic downturnThreat – economy also impacting govt. spending3EconomicThreat – companies and individuals cut down IT spendingSocialRising incomes and demand for IT in BRIC countries, especially SE Asia and Eastern EuropeOpportunity - ½ of world’s population4Growth in popularity of social networking and mobile societyOpportunity – increasing demand for servers and network gearTechnologicalExplosion in data information and contentOpportunity – Dell can provide hardware and services to driveGlobal expansion of InternetOpportunity – requires installation of millions of servers5
6 What is going on in the PC industry?
7 Industry Overview (Supply)
Porter’s five forces:Threat ofsubstitute productsHighBargaining powerof suppliersLowRivalry amongexisting competitorsHighBargaining powerof buyersHighThreat ofnew entrantsHigh
8 Porter’s Five Forces Factor Analysis Impact
Threat of substitute productsGrowing 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 discountsRelationship with suppliers may suffer as Dell shifts to outsourcing laptop manufacturing.Bargaining power of buyersMany 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 rivalryLots of well established players in all markets that Dell competes in. Majority competing on cost in a race to the bottomCompression of profit margins . As price decreases sole focus is cutting costs.Threat of new entrantsGrowth 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
9 Dell’s PC business model has not translated into global leadership.
2007 PC Vendor Market ShareDell’s PC business model has not translated into global leadership.
10 What contributed to Dell’s success and rapid growth in the late 1990’s?
11 Build to OrderAdvantagesDisadvantagesSelling 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 purchaseMass 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?
12 Is Dell’s Build to Order model still a competitive advantage or has it become a liability?
13 Enabled success in late 1990’s
Build to OrderEnabled success in late 1990’sDell 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 B2BBusinesses 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 B2CDifficulty 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
14 What has Dell done to separate itself from the competition?
15 Dell Inc. Product Timeline
YearProductCurrent Position In MarketSuccess of Failure?1984PCs2nd behind HP (15% market share)Success1995WebsiteRevenues greater than Yahoo, Google, eBay and Amazon combinedLate 1990’sX86 Servers1st domestically, 2nd behind HP globally (11% global market share)2001Data-routing switches and Data storage devicesStorage – 5% market shareRouting – 2% market shareTBD2002Large Enterprise IT services<1% market shareSuccess, rapidly growing revenuesWhite label PCN/ATBD, forecast to achieve $380 million in sales (2003)2003Printers20% market share in US, 5% globalConsumer ElectronicsRetail POS systemsConclusion – Expanding product set into several highly competitive markets with well established players. Strategy is be the low cost leader.
16 Internal Analysis – Core Competencies
Build to orderDirect to Customer SalesB2B value-addsCore CompetencyDescriptionBuild to orderBuild 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 SalesCuts out retail markup. Allows Dell to maintain higher profit margins and charge lower price.B2B value added servicesServices like asset tagging and software downloading differentiate Dell from competitors. Enabled by in-house manufacturing.Red – Easy for competitors to developYellow – Possible for competitors to developGreen – Very difficult for competitors to develop
17 What does Dell do well and where does it struggle?
18 Dell's Geographic Performance (Operating Incomes)
U.S. Business & EMEA markets showing strongest growth trends.
19 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.
20 Internal Analysis - Manufacturing
Build to Order/D2C SalesHeavily invested in facilities and technologyEnables value-adds for B2BNo longer low cost leader due to outsourcingAlready starting to outsource laptopsHampering growth in emerging BRIC marketsConclusion – 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?
21 SWOT Analysis for Dell Strengths Weaknesses Opportunities Threats
JIT, lean mfg practices lowers inventory costs = less risk for innovations & price increasesDesktop manufacturingCustomer Support – focus on 90% customer satisfaction worldwide (Asia 92%, Europe 90%)Website sales = 50% of salesLong term relationships with suppliers – picked top 1 or 2 & stuck with them as long as they kept costs down and innovated productWeaknessesB2C in Asian Markets – need to touch & feelCustomer support – US satisfaction = 80%Outsourcing manufacturing – has lead to quality issues beforeLimited distribution networkLaptop manufacturingOpportunities2nd billion people coming onlineExpansion into new products – focus on inefficiencies in supply chainListening to consumers – cont. to utilize IdeaStorm to innovate products & support based on customer feedbackHorizontal Integration – acquire software co’sWhite Box PC’s – go to market in China where private label/generic PC’s are strongThreatsEntering 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 productsStandardizations in technology have allowed competitors to outsource manufacturing, enabling lower prices
22 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?
23 Cost Efficient Build to Order
Elements of StrategyCost Efficient Build to OrderCompetition has tried to emulate with limited successýAlthough 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 StrategyCoolingWarmingContribution towards a future competitive advantage…
24 Partner with Suppliers
Elements of StrategyPartner with SuppliersýIBM, 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 StrategyCoolingWarmingContribution towards a future competitive advantage…
25 Elements of StrategyDirect SalesþCompetitors have not been able to shorten their supply chain as effectively as DellþCompetitors 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 StrategyCoolingWarmingContribution towards a future competitive advantage…
26 Expansion of products and services
Elements of StrategyIndustry 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.Expansion of products and servicesDell’s StrategyCoolingWarmingContribution towards a future competitive advantage…
27 Customer Service and Technical Support
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, IdeaStormCustom websites for large customers, product design services, value add servicesýBelow customer satisfaction goal in AmericasCustomer Service and Technical SupportDell’s StrategyCoolingWarmingContribution towards a future competitive advantage…
28 R&D focused on customer needs
Elements of StrategyR&D focused on customer needsAdvocate for customers needs – useful, cost effective technologiesQuality Control streamlines the assembly process and reduces costsGrowing budget -- $600M in 2008Facilitates entry into new products and servicesDell’s StrategyCoolingWarmingContribution towards a future competitive advantage…
29 Use of Standardized Technologies
Elements of StrategyUse of Standardized TechnologiesMore cost effective than proprietary technologyStandardized technologies are upgradeableýStrategy is easily replicatedDell’s StrategyCoolingWarmingContribution towards a future competitive advantage…
30 Elements of Strategy Cooling Warming
Dell’s StrategyCost Efficient Build to OrderPartner with SuppliersDirect SalesExpansion of products and servicesCustomer Service and Technical SupportR&D focused on customer needsUse of Standardized TechnologiesCoolingWarmingContribution towards a future competitive advantage…
31 How does dell’s current position compare to HP?
32 Dell V. HP HP Dell Operating philosophy Key products
Build to Stock, outsource manufacturing, large distribution network of retailers and resellers around the worldBuild to Order, control manufacturing, direct to customer sales on own websiteKey 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 Sales18.8% Globally23.9% in USA14.9% Globally28% in USAFinancials$104.3 billion revenue,$7.3 billion profit (2007)$61.1 billion revenue,$3 billion profit (2008)Key Acquisitions2002 – Compaq2008 – EDS$7 billion on other software, tech, and service companiesspent $2 billion on software capabilities for value-added services
33 US Market Share – Dell vs. HP
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)
34 Contributors to HP's Operating Income
HP acquires EDSDell 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.
35 Leading Providers of Information Technology (2007)
Acquisition of CSC would give Dell increased IT services market share of 3.3% vs. HP’s 5.3% combined market share (with EDS)
36 What does Dell need to do in order to take the lead again?
37 RecommendationsAcquire a larger IT services company to supplement Dell's current IT services department - CSC is a possibilityGain immediate market shareFocus 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 SystemsFocus on speed of service, customization to meet needs of each organization, build loyalty with groups who have more frequent demand and servicing needs.
38 RecommendationsHire product development specialists from product/branding focused companies.Helps Dell to get a fresh perspective on their product and new ideas for development.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.
39 RecommendationsSell 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 efficienciesThis 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.Acquire Chinese PC/laptop maker to enter Chinese market – Increase revenues from Asia-Pacific/Japanese market.