1. Dell Case Key Issues

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

3. 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.

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

5. 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.

6. 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.

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

8. 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.

9. 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.

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

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

12. HP Adv/Disadv.
Quality reputation
Higher cost
Resellers

13. Gateway Adv/Disadv.
Price – lower
Service
Image?

14. 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%

15. 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.