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

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

3. Key Strategic Issues

4. 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

5. 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

6. External Analysis

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

8. 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)

9. 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
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)

10. 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)

11. 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

12. 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

13. 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

14. 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

15. 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

16. Internal Analysis

17. 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

18. 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.

19. 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

20. Summary SWOT

21. 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

22. 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

23. 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

24. Strategic Alternatives
and Recommendations

25. 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)

26. 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

27. 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

28. Questions & Answers