Dell Case Key Issues

Matching Dell Industry Dynamics How to attain advantage How to protect advantage

Industry Dynamics 5 Forces Model – Gauges the degree of competitive rivalry in industry. Bargaining Power of Suppliers. Bargaining Power of Customer. Threat of new entry. Threat of substitutes. Intensity of Rivalry.

Bargaining Power of Suppliers Proprietary Standards from Microsoft and Intel - Extract profits Other inputs are commodities Thus Bargaining Power of Suppliers is Very High

Bargaining Power of Customers Standardized product means its easy to switch brands Resellers and retailers have grip on channels. Corp. users buy direct based on price since little differentiation Over BP of customers is high and rising.

Threat of new entry. Increasing with rise of internet and direct channel. Main barrier is capital needed for manuf. facility. Only real barrier are economies of scale. Threat is fairly high.

Threat of substitutes. Within product category, few direct substitutes.

Intensity of Rivalry. Rivalry is very high due to: Lack of differentiation. Reliability and Service are only diff’s. Price is similar for all competitors If prices are similar, this is a signal of rivalry. Do prices go down or up? Tend to fall.

Dell’s Advantages/Disadv. Direct to order Efficient (best cost position) Effective (for some customers - best) Focus! Not distracted by other channels Maybe not competent in other channels? Service By from Dell, deal w/ Dell.

IBM’s Advantages/Disadv. Direct Salesforce. Well regarded laptop. Costs are higher Few non-corporate customers

Compaq Adv/Disadv. Cost position is good Retail relationships Poor quality Poor reputation

HP Adv/Disadv. Quality reputation Higher cost Resellers

Gateway Adv/Disadv. Price – lower Service Image?

Example of Unit Price and Cost Analysis 1998 numbers Dell Compaq Notes Unit Price 1996 1932 Unit COGS 1555 1325 1-Gross Margin Channel Markup/Unit 135 Unit SGA 195 309 Inv. Carry Costs 44 124 Cost of unit 1794 1893 Profit 202 39 Rev 12327 31169 Gross Margin 2722 9786 Margin % Rev 22.1% 31.4% Channel Markup 0.0% 7.0% SGA 1202 4978 SGA % Rev 9.8% 16.0% Cost of inventory 273 2,005 Days of Inventory 10 34 Inv / (Rev-Gross Marg)*365 Cost of Inv % of Rev 2% 6%

For all firms 1998 numbers Dell Compaq IBM HP Gateway Unit Price 1996 1932 1959 2129 1762 Unit COGS 1555 1325 921 1451 1406 Channel Markup/Unit 135 149 Unit SGA 195 309 400 353 242 Inv. Carry Costs 44 124 125 284 39 Cost of unit 1794 1893 1445 2237 1687 Profit 202 514 -108 75 Rev 12327 31169 81667 47061 7648 Gross Margin 2722 9786 43282 14989 1546 Margin % Rev 22.1% 31.4% 53.0% 31.9% 20.2% Channel Markup 0.0% 7.0% SGA 1202 4978 16662 7793 1052 SGA % Rev 9.8% 16.0% 20.4% 16.6% 13.8% Cost of inventory 273 2,005 5,200 6,284 168 Days of Inventory 10 34 49 72 Cost of Inv % of Rev 2% 6% 13% Note: IBM numbers are likely inflated by Mainframe and service being included.