Dell in China Sample Case Analysis Presentation Professor Mike Davis January 14, 2008

Agenda Identification of Key Strategic Issues External Analysis Internal Analysis Summary SWOT Strategic Alternatives & Recommendations Questions & Answers

Key Strategic Issues

Key Strategic Issues Taking advantage of an international opportunity in a high growth market Adjusting business-level strategy in light of a rivalry Leveraging core competencies in a foreign market

About Dell Founded in 1984 World’s largest computer vendor Revenues of $41 billion in 2004 Operates in 13 Asia Pacific markets with sales of $4.3B in 2004 Entered China in 1995 via export Started focusing on China in 1998 Operates in in 1998 established a local manufacturing and distribution operation In 2004, Dell PCs captured 7% share in China

External Analysis

Industry Definition Dell competes in the PC industry, selling enterprise systems, desktop computers and notebook computers.

External Analysis: Key Environmental Factors Demographic factors: Chinese population is 23% of world total Main opportunities will be in the larger cities where incomes are higher Source: China Country Commercial Guide (CCG)

External Analysis: Key Environmental Factors Sociocultural: Purchasing expectations (try before they buy) Chinese attitudes and culture becoming more similar in purchasing patterns and work ethic to U.S. Economic: Chinese economy grew 9.8% in 2005 Total retail sales increased 13% China’s PC market estimated to grow 19% in 2004-2005 Low per capita incomes and unevenly distributed Average US $1,583 Urban US $5,000 Middle class (200 million people) US $8,000 Source: China Country Commercial Guide (CCG)

External Analysis: Key Environmental Factors Political/Legal (new member of WTO but…) China’s political system controls unions and financial institutions Legal and regulatory systems can be inconsistent Business based on relationships (guanxi) Intellectual property at risk Technology Just 2.5% of urban Chinese own a computer Access and use of the internet is increasing Global Sales opportunity (Asia/Pacific just 10% of Dell) China’s attractive low-cost manufacturing capabilities Source: China Country Commercial Guide (CCG)

External Analysis: Porter’s Five Forces Threat of New Entrants – High Foreign and local competitors IBM, Compaq and HP also entered in 1990s Less government policy barriers (China joined WTO in 2002) Potential barriers include: Access to distribution channels Scale economies (Local production plants) Bargaining Power of Suppliers – Low Most competitors are vertically integrated

External Analysis: Porter’s Five Forces Bargaining Power of Customers – MODERATE Few buyers purchase a large portion of industry output State-owned companies, MNCs and educational institutions Sales account for a large portion of Dell’s sales revenue 50% from government, education, telecoms, power and finance. Brand reputation and product differentiation can mitigate Substitutes – None Competitive Rivalry – Intense High profit potential due to industry growth Main buyers are institutions with more resources than individuals Price pressure from local competitors High fixed costs of production capacity High strategic stakes (focus on market share) Aggressive competitive response Lenovo adopting Dell’s direct sales model in China Lenovo’s joint venture with IBM to increase it’s share Lenovo’s brand campaign to improve recognition

Competitors Future objectives: Current strategy: Build market share rapidly Current strategy: Cost leadership (Lenovo, Founder, Tongfang) Differentiation (HP, IBM & Compaq) Focused on consumer market Lenovo positioning itself to challenge in high-end

Competitors Key Strengths: Key Weaknesses: Chinese competitors: market knowledge and low cost advantage. American competitors: technology and brand recognition Key Weaknesses: Chinese competitors: brand recognition American competitors: higher costs

Customer High-end Customers Individual Consumers Behavior: State-owned companies MNCs Government Educational institutions Large Corporate Accounts (1,500+ employees in Telecoms, Power and Finance Individual Consumers Behavior: Consumer market is price sensitive Prefer a trial use of PCs before purchase Internet purchases were uncommon but internet users increasing Best way to reach is through retailing (Kiosks) Value product quality, especially high-end customers Brand loyal

Internal Analysis

Key Resources Key tangible resources: Key intangible resources: WW market leadership & financial resources ($8B in China) Direct sales system and customer service Local production plant in China Alliance with Oracle Manufacturing (“Build-to-order) and low inventory” strategy “Just-in-time” model (6 days vs. 40 days of supply) Portfolio of award-winning products Key intangible resources: Strong brand Reputation (“Dell experience” of high-quality products, support and service) Innovative in its technology, business practices and customer service http://www.dell.com/content/topics/global.aspx/corp/en/home?c=us&l=en&s=corp

All are valuable, rare, costly to imitate and nonsubstitutable. Core Competencies Ability to simplify PCs and the supply chain since their beginning Ability to understand customer needs and deliver innovative technology and services Ability to use technology to simultaneously improve customer experience and contain costs Ability to operate a direct business model All are valuable, rare, costly to imitate and nonsubstitutable.

Value Chain Analysis Primary activities of value: Operations: Manufacturing processes contain costs well Outbound logistics: Direct sales model Service: High responsiveness to customer needs Support activities of value: Technological development: Innovative web site and IT infrastructure Firm infrastructure: Visionary founder and management team

Summary SWOT

Strengths & Weaknesses Reputation Manufacturing plant (build-to-order capability, JIT) Direct sales model (on line and phone order capability) Strong sales revenue in 2003 ($8 Billion) Strategic alliance with Oracle Product performance (Best Overseas PC Corporation Award) Weaknesses No low cost advantage that will allow them to compete in the consumer segment Possible cost advantages not realized from their China plant

Opportunities Large population in China and economic growth potential (Dell’s fourth largest market) PC market expected to grow by 19% Only 2.5% of urban Chinese own PCs Sales potential in larger cities Reduction in tariffs on IT products makes it less costly to export to China Expansion into Japan, Korea and Taiwan

Risks Low GDP per capita in China Weak government protection of IP Moderately high threat of entry of new competitors Intense rivalry among competitors Lenovo-IBM joint venture Lenovo’s copying of Dell’s direct sales model Lenovo’s attempts to boost brand recognition

Strategic Alternatives and Recommendations

General Problem Statement Dell faces a rivalry from Chinese PC firms, in particular Lenovo (Legend) Need to overcome Lenovo’s attempts to copy Dell’s direct sales approach and build brand recognition. (At risk is Dell’s dominance of the high end market) Will require a cost advantage to re-enter the low-cost segment. (At risk is the Dell customer experience of product quality and service levels or accepting declining profits)

Strategic Alternatives Lower costs to be viable and establish a presence in the low-end (consumer market) before competitors Abandon the low-end and put all resources on defending the high-end (corporate market) where Dell currently has an advantage Challenge Lenovo in other Asian markets that are important to it while increasing product quality and services in China

Strategic Recommendation: Expand and defend the high-end of the market Implementation Continue Dell’s business level strategy of differentiation Based on product quality, build-to-own capability and direct sales method Continue to innovate and outpace the Lenovo-IBM partnership Build brand recognition in China as Lenovo’s doing worldwide Grow direct ordering via the internet (increasing Chinese web usage) Leverage penetration in LCAs (>1,500 emp.) for increased “share of wallet” Challenge Lenovo in other important Asian markets while increasing product quality and services in China Prepare for wireless/mobility trend and strengthen notebook offering Eventually broaden reach to penetrate low-end and rural areas Develop the infrastructure to service, support and sell (different than urban areas) Requires a low-cost, differentiated product line (e.g. AMD, no Windows OS) Learn the Chinese market to overcome “foreignness” and local rivals Explore alternative sales channels (besides direct) to reach small cities

Questions & Answers