1 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Dominant Economic Traits in PC Industry Scope of the Rivalry Global, U.S – 40% of Market, Europe –11%, Asia- Pacific especially China growth markets Market Size M PCs sold, 2001 – 120M 1 Number of Competitors Global (at least 7) and National competitors Growth Rate (Units)PCs – 23%, 2000 –16% 2, 2001 – (-8%) 3 Servers – 2000 – 16%, (-16%) 4 CustomersSeveral Buying Groups (Corporations, Government, Academia, Healthcare and Individuals) with different pricing and technology requirements Prevalence of Backward Integration Minimal backward integration DistributionRetail Outlets and Direct Sales

2 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Dominant Economic Traits in PC Industry Entry BarriersExperience Curve, Sizable economies of scale, some brand loyalty, capital requirements Product DifferentiationPCs – Based upon software compatibility (Internet based applications) not hardware 5 Pace of TechnologyObsolescence is an issue because of the speed of components. Lower inventory is preferred Rapid Product Innovation Many innovations Profitability 6 Operating Margin Net Profit Margin 2001 – 7.3% 4.6% 2000 – 10% 7.9% 1999 – 10.7% 7.9%

3 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Drivers of Change in PC Industry DriverIndustry Effect Slow Industry Growth1999 PCs (lower priced units), Servers, and Workstations driving growth Increasing GlobalizationGrowth Markets –Asia Pacific and Latin America Technological ChangePC hardware must have compatibility with multiple types of software (Internet Applications) Suppliers Larger RoleFast-paces changes in component technology driven by suppliers Customer PreferencesCustomization, low costs, compatibility

4 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Key Success Factors in PC Industry Technology-relatedSoftware Compatibility, Internet Technical Support (drives down costs) Manufacturing-relatedQuality, customization, efficiency Distribution-relatedLow distribution costs, short delivery times Marketing-relatedBreadth of Products and Services

5 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Dell’s Value Chain – Primary Activities  Purchased Supplies and Inbound Logistics  Suppliers Long-term partnerships Brand name components Suppliers part of Dell’s Design team valuechain.dell.com  Logistics Just-in-Time delivery Low inventory ratio – 6 days vs. Gateway at 14 days, Compaq with 23 days

6 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Dell’s Value Chain – Primary Activities  Operations  Customized Assembly  Cell Manufacturing with Groups vs. Traditional Individuals at a single station (75% reduction in assembly time and 100% increase in productivity)  Quality Control Programs  Distribution and Outbound Logistics  Direct Sales Simultaneous shipping of PC and monitors

7 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Dell’s Value Chain – Primary Activities  Sales and Marketing  Direct sales provided immediate feedback about customer preferences  8 Market Segments  Sales representatives for large corporate and institutional accounts  Internet, phone, and fax sales

8 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Dell’s Value Chain – Primary Activities  Service  Repairs through local contractors  Customer and technical support via a toll free number, fax, or  Customer Software added at the factory  Premier Pages for corporate accounts  On-site Service  On-site Support  Customer Forums  Online order Inquiries

9 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Dell’s Value Chain – Support Activities  General Administration  Strategic partnerships with Microsoft and Intel  Human Resource Management  Training for Sales-account managers  Profit-sharing for Compensation  360-degree performance appraisal  Research and Development  Product Development - $250 M (1% of sales) annually to improve customers’ experience with product  Efforts to improve users’ experience

10 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Dell’s Value Chain – Support Activities  Research and Development  Direct sales provided immediate feedback about customer preferences  8 Market Segments  Sales representatives for large corporate and institutional accounts  Internet, phone, and fax sales