Dell Inc. Case Study By: Dan McLindon Kyle McDaniel Jeremy Smiley Tom Anderson Ray Moorman 1

Key Question for Dell Can Dell overtake HP as the world leader in personal computers with its current strategies of Build to Order and Direct to Consumer sales? 2

Secondary Questions What 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?

Dell Computer Company Overview Founded 1984 by Michael Dell Vision PC’s could be built to order & sold directly to customers 2 Major Advantages of Business Concept 1. Bypass distributors & retailers eliminated markups 2. B2O reduced risks & costs of having inventory Sell Direct & B2O Business Model Success 2003 – most efficient procurement, mfg, & dist in PC industry. Gave profit & costs advantage over rivals

PEST Analysis for Dell Category Issue Threats/Opportunities Ranking (1-5) Political 2008 Economic downturn Threat – economy also impacting govt. spending 3 Economic Threat – companies and individuals cut down IT spending Social Rising incomes and demand for IT in BRIC countries, especially SE Asia and Eastern Europe Opportunity - ½ of world’s population 4 Growth in popularity of social networking and mobile society Opportunity – increasing demand for servers and network gear Technological Explosion in data information and content Opportunity – Dell can provide hardware and services to drive Global expansion of Internet Opportunity – requires installation of millions of servers 5

What is going on in the PC industry?

Industry Overview (Supply) Porter’s five forces: Threat of substitute products High Bargaining power of suppliers Low Rivalry among existing competitors High Bargaining power of buyers High Threat of new entrants High

Porter’s Five Forces Factor Analysis Impact Threat of substitute products Growing popularity and sophistication of mobile and smart phones. Servers need to run the networks behind phones. Bargaining power of suppliers Several 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 discounts Relationship with suppliers may suffer as Dell shifts to outsourcing laptop manufacturing. Bargaining power of buyers Many 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 rivalry Lots of well established players in all markets that Dell competes in. Majority competing on cost in a race to the bottom Compression of profit margins . As price decreases sole focus is cutting costs. Threat of new entrants Growth 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

Dell’s PC business model has not translated into global leadership. 2007 PC Vendor Market Share Dell’s PC business model has not translated into global leadership.

What contributed to Dell’s success and rapid growth in the late 1990’s?

Build to Order Advantages Disadvantages Selling 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 purchase Mass 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?

Is Dell’s Build to Order model still a competitive advantage or has it become a liability?

Enabled success in late 1990’s Build to Order Enabled success in late 1990’s Dell 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 B2B Businesses 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 B2C Difficulty 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

What has Dell done to separate itself from the competition?

Dell Inc. Product Timeline Year Product Current Position In Market Success of Failure? 1984 PCs 2nd behind HP (15% market share) Success 1995 Website Revenues greater than Yahoo, Google, eBay and Amazon combined Late 1990’s X86 Servers 1st domestically, 2nd behind HP globally (11% global market share) 2001 Data-routing switches and Data storage devices Storage – 5% market share Routing – 2% market share TBD 2002 Large Enterprise IT services <1% market share Success, rapidly growing revenues White label PC N/A TBD, forecast to achieve $380 million in sales (2003) 2003 Printers 20% market share in US, 5% global Consumer Electronics Retail POS systems Conclusion – Expanding product set into several highly competitive markets with well established players. Strategy is be the low cost leader.

Internal Analysis – Core Competencies Build to order Direct to Customer Sales B2B value-adds Core Competency Description Build to order Build 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 Sales Cuts out retail markup. Allows Dell to maintain higher profit margins and charge lower price. B2B value added services Services like asset tagging and software downloading differentiate Dell from competitors. Enabled by in-house manufacturing. Red – Easy for competitors to develop Yellow – Possible for competitors to develop Green – Very difficult for competitors to develop

What does Dell do well and where does it struggle?

Dell's Geographic Performance (Operating Incomes) U.S. Business & EMEA markets showing strongest growth trends.

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.

Internal Analysis - Manufacturing Build to Order/D2C Sales Heavily invested in facilities and technology Enables value-adds for B2B No longer low cost leader due to outsourcing Already starting to outsource laptops Hampering growth in emerging BRIC markets Conclusion – 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?

SWOT Analysis for Dell Strengths Weaknesses Opportunities Threats JIT, lean mfg practices lowers inventory costs = less risk for innovations & price increases Desktop manufacturing Customer Support – focus on 90% customer satisfaction worldwide (Asia 92%, Europe 90%) Website sales = 50% of sales Long term relationships with suppliers – picked top 1 or 2 & stuck with them as long as they kept costs down and innovated product Weaknesses B2C in Asian Markets – need to touch & feel Customer support – US satisfaction = 80% Outsourcing manufacturing – has lead to quality issues before Limited distribution network Laptop manufacturing Opportunities 2nd billion people coming online Expansion into new products – focus on inefficiencies in supply chain Listening to consumers – cont. to utilize IdeaStorm to innovate products & support based on customer feedback Horizontal Integration – acquire software co’s White Box PC’s – go to market in China where private label/generic PC’s are strong Threats Entering 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 products Standardizations in technology have allowed competitors to outsource manufacturing, enabling lower prices

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?

Cost Efficient Build to Order Elements of Strategy Cost Efficient Build to Order Competition has tried to emulate with limited success ýAlthough 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 Strategy Cooling Warming Contribution towards a future competitive advantage…

Partner with Suppliers Elements of Strategy Partner with Suppliers ýIBM, 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 Strategy Cooling Warming Contribution towards a future competitive advantage…

Elements of Strategy Direct Sales þCompetitors have not been able to shorten their supply chain as effectively as Dell þCompetitors 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 Strategy Cooling Warming Contribution towards a future competitive advantage…

Expansion of products and services Elements of Strategy Industry 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 services Dell’s Strategy Cooling Warming Contribution towards a future competitive advantage…

Customer Service and Technical Support Elements of Strategy Dell’s growing pains with off shoring support services are behind them. Processes and best practices standardized world wide. Voice of the customer – regional forms, IdeaStorm Custom websites for large customers, product design services, value add services ýBelow customer satisfaction goal in Americas Customer Service and Technical Support Dell’s Strategy Cooling Warming Contribution towards a future competitive advantage…

R&D focused on customer needs Elements of Strategy R&D focused on customer needs Advocate for customers needs – useful, cost effective technologies Quality Control streamlines the assembly process and reduces costs Growing budget -- $600M in 2008 Facilitates entry into new products and services Dell’s Strategy Cooling Warming Contribution towards a future competitive advantage…

Use of Standardized Technologies Elements of Strategy Use of Standardized Technologies More cost effective than proprietary technology Standardized technologies are upgradeable ýStrategy is easily replicated Dell’s Strategy Cooling Warming Contribution towards a future competitive advantage…

Elements of Strategy Cooling Warming Dell’s Strategy Cost Efficient Build to Order Partner with Suppliers Direct Sales Expansion of products and services Customer Service and Technical Support R&D focused on customer needs Use of Standardized Technologies Cooling Warming Contribution towards a future competitive advantage…

How does dell’s current position compare to HP?

Dell V. HP HP Dell Operating philosophy Key products Build to Stock, outsource manufacturing, large distribution network of retailers and resellers around the world Build to Order, control manufacturing, direct to customer sales on own website Key products Global 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 Sales 18.8% Globally 23.9% in USA 14.9% Globally 28% in USA Financials $104.3 billion revenue, $7.3 billion profit (2007) $61.1 billion revenue, $3 billion profit (2008) Key Acquisitions 2002 – Compaq 2008 – EDS 2005-2008 - $7 billion on other software, tech, and service companies 2007-2008 spent $2 billion on software capabilities for value-added services

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)

Contributors to HP's Operating Income HP acquires EDS Dell 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.

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)

What does Dell need to do in order to take the lead again?

Recommendations Acquire a larger IT services company to supplement Dell's current IT services department - CSC is a possibility Gain immediate market share Focus 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 Systems Focus on speed of service, customization to meet needs of each organization, build loyalty with groups who have more frequent demand and servicing needs.

Recommendations Hire 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.

Recommendations Sell 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 efficiencies This 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.