In 1984, at the age of 19, Michael Dell founded Dell Computer with a simple vision and business concept–that personal computers could be built to order and sold directly to customers. Michael Dell believed his approach to PC manufacturing had two advantages: (1) bypassing distributors and retail dealers eliminated the markups of resellers, and (2) building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components, and finished goods.
Now, that concept picked up and arrived at Dell being the multi-billion dollar leading computer manufacturer in the world with 2001 revenues reaching $32 Billion and return on investment of 335%. However, things started to plummet by 2001 and Dell experienced, for the first time, a -10% decline in sales and unprecedented cutthroat competition from HP and IBM. Dell Corp. had to make difficult decisions on how to sustain its profitability in light of its broad product portfolio – PCs, workstations, servers and storage products for a broad cross-section of customers in the United States and worldwide. Fueled with ambition and determination, Michael Dell is set to maintain his company’s leading position coupled with the goal of reaching the $60 Billion mark by year 2007.
Dell, facing a predicament of whether they should maintain their strategic course or fundamentally change it in order to achieve the targeted growth rates, managed to acquire 2 important strategic options: 1) Focus only on the four major core products (Desktops, Laptops, Workstations, Servers), or 2) Focus on both the four major products (Desktops, Laptops, Workstations, Servers) and on International and Service Portfolio Investments. After extensive analysis and evaluation, it was apparent that alternative #2 is the most feasible one for it maintains Dell’s strategic structure and could, possibly, help Dell achieve its $6 billion/year for 5 years goal. This strategy resulted in the highest combination of growth and profit to insure and secure Dell’s leading position in the computer industry.
Founded in 1984, Dell was brought up, by Michael Dell, through upgrading IBM compatibles for local business in Texas, and on a simple concept: that by selling computer systems directly to customers, Dell could best understand their needs and efficiently provide the most effective computing solutions to meet those needs. This direct business model eliminates retailers that add unnecessary time and cost, or can diminish Dell’s understanding of customer expectations. The direct model allows the company to build every system to order and offer customers powerful, richly-configured systems at competitive prices. Dell also introduces the latest relevant technology much more quickly than companies with slow-moving, indirect distribution channels, turning over inventory every three days on average.
In 1985 the company started assembling its own PC brand. Ever since, Dell had achieved phenomenal growth and by 2000 had topped $25 billion in sales and over $2 billion in net income. In late 2000, however, the PC industry’s average 30-year growth rate crashed to a negative 10% due to slow economy. Dell Corp. had to make difficult decisions on how to sustain its profitability in light of its broad product portfolio–PCs, workstations, and servers on storage products for a broad cross-section of customers in the United States and worldwide.
Dell’s high return to shareholders has been the result of a focused effort over time to balance growth with profitability and liquidity. Dell has consistently led its largest competitors in each of those categories.
The future for Dell and the rest of the computer industry is shaping up to be a fairly difficult one mainly due to the weak economy. But, Dell’s economic problems are normal and shared by all companies in any industry. What’s not normal with Dell however, is its dilemma of how to maintain its leading position over its competition and achieving ambitious growth rates in an environment with which the economy is shaped up to be worst than anticipated, due to terrorist threats and economic uncertainty, which makes consumers skittish and spending down. Therefore, in light of the above situation, we believe that Dell could be facing a predicament of whether they should maintain their strategic course or fundamentally change it in order to achieve the targeted growth rates?
Dell’s fortunes do look better than its rivals, though. Dell Computer’s strategy was built around a number of core elements: build-to-order manufacturing, mass customization, partnerships with fewer suppliers, just-in-time components inventories, direct sales, market segmentation, customer service, market sensing, early integration of the Internet, low operating cost, and extensive data and information sharing with both supply partners and customers. Through this strategy, the company hoped to achieve what Michael Dell called “virtual integration”–a stitching together of Dell’s business with its supply partners and customers in real time such that all three appeared to be part of the same organizational team. To put the analysis in proper perspective, however, four major components that were essential to Dell’s success to date are explained below:
1. Supply Chain Efficiency: e-Business is just like any business in at least one respect: you have to maintain your edge. Whether responding to a flood of new customers and products, or reducing costs while maintaining customer loyalty during periods of economic decline, Dell believed that a more efficient supply chain would contribute significantly to its long-term success. By extending its build-to-order model all the way from materials and component suppliers to the customer, Dell could maximize both operational efficiency and customer satisfaction while responding immediately to changes in the marketplace.
The company’s goal was to integrate the supply and demand sides of the business in order to eliminate the guesswork that leads to inventory shortage and overages. At the same time, Dell needed to ensure that the right computer system components were always available – at the right time and place – to build each customer’s dream machine. And the savings from a more efficient supply chain could be passed on to customers, helping Dell hold onto its solid lead over the competition in good economic times, and in bad.
Therefore, by implementing a supper-efficient supply chain software, Dell can now procure inventory from suppliers over the web in real time and pull materials into the factories every few hours based on customers’ orders. That means Dell maintained a few hours worth of inventory at any given time, which gave it an extra step ahead of its rivals.
2. Segmentation/Customer Efficiency: One of the brilliant segmentation approaches is that of Dell’s, it not only perfected customer service efficiency, but also helped cater and custom-build products for each customer segments. It is implied from the case that customers, especially in the new millennium, are more educated and aware about the different PC products and technological advances within the industry, therefore, it is in no doubt that the PC industry is transformed from “what industry want” to “what the consumer want.” The later fact inspired Dell to create a company to serve that purpose and made Dell a major success in its industry thanks to its Build-to-order model.
3. Market Sensing: Michael Dell had a keen sense of pursuing untapped opportunities in the computer industry. Dell’s timing to enter the PC market, then to establish the internet with Dell.com, then to penetrate the storage and server market could not be more perfect for it helped Dell gain ground faster and establish its reputation as the number one PC manufacturer in the world. For Example, in 1996, several opportunities like rapid growth in server uses among corporate customers, large margins on server sales, and recognizing that purchase price was not as significant a factor in selecting which brand of server to buy because servers required far more in the way of service, support, and software encouraged Dell to enter the market for low-end or entry-lever PC servers. Thus, Dell enjoyed seeing its profit and market share increase by eating up shares from rivals HP and IBM, which made the later companies question them selves “Whose lunch would Dell eat next?!” metaphorically.
4. Dell’s Direct Model: Dell built its computers, workstations, and servers to order; none were produced for inventory. Dell customers could order custom-built servers and workstations based on the needs of their applications. Desktop and laptop customers ordered whatever configuration of microprocessor speed, random access memory (RAM), hard-disk capacity, CD-ROM drive, fax/modem, monitor size, speakers, and other accessories they preferred.
This sell-direct strategy meant, of course, that Dell had no in-house stock of finished goods inventories and that, unlike competitors using the traditional value chain model, it did not have to wait for resellers to clear out their own inventories before it could push new models into the marketplace. Equally important were the fact that customers who bought from Dell got the satisfaction of having their computers customized to their particular liking and pocketbook. Thus, that helped efficiently service consumers, cut back on production time, get instant consumer feed back, and establish a long-term relationship with its various customers. (Exhibit 1 shows a poster that is hanged on every Dell office, Dell.com). The following model is just to show were Dell, relative to its competition fall in the number of channels/Product range matrix.
1. Environmental Analysis
The broad environment in which the Dell Corporation operates includes trends/influences that could potentially have an impact upon the company. An assessment of this environment includes Sociocultural Forces, Economic Forces, Technological Forces and Company culture/Competition Forces. The most important trends/influences in each of these four areas are examined, along with the best strategies to deal with these trends/influences in our SWAT analysis.
A. Sociocultural Forces:
Dell’s impressive division of segments made it possible to cater its product to satisfy each and every of Dell’s 9 different segments. Relationship Business: large corporations, educational and government institutions, accounts for 60% of the sales, longer payment periods, major competitors are IBM, HP, and Compaq. Small and Medium Business: account for 30% of sales, untapped and growing, and Consumer Business: account for about 10% of the sales, price sensitive, generates more cash due to the nature of payment; main competitors are HP, Compaq and Gateway. Another sociocultural force is the need to reach the international market that Dell felt is necessary to sustain growth. 25% of the company’s revenues come from abroad, mix of direct and indirect selling strategy is used to target these segments;
Western Europe: direct selling, 9.3% market share, main competitors are Fujitsu Siemens and Compaq; APCC/Japan: direct business, very low market share, high market growth, stiffer competition. Latin America: direct model, smaller customer base; Rest of the World: indirect selling, government regulations and barriers, lack of infrastructure, insignificant growth. This segmentation positioned Dell to be the market leader with majority of the U.S market share (about 25%)goes to it. The size of their purchase, the frequency of their purchase, and the purpose of their purchase determine the differences between the U.S. 9 different segments.
B. Economic Forces:
The main force here is weak economy and sluggish consumer spending. Despite impressive return on invested capital of 355% for 2001 and increased growth, Dell’s total revenue for the fiscal year 2001 went down substantially to $23,107M down from 1999 of 31,888 Mil. That’s mainly due to Dell’s aggressive price cuts that we view harmful to the company because it hurt both sales and brand image. Another economical force is the threat of competition. As we mentioned earlier competition is getting brutal in the PC industry, and based on that we interpret either a major merger between 2 rival companies that can easily eat up our market share or a hostile takeover by one of our competitors.
C. Technological Forces:
Advanced technology and demand in the server and storage departments led Dell to penetrate the low-end of these technologies and managed to led the servers market with 25.5% market share in such a short period. Moreover, it encouraged Dell to join venture with EMC, a leader in storage technology, which enabled Dell to introduce high quality products, catered to different needs, with the lowest price possible. Exhibit 4,5 and 6 in the case explains the different server and storage products available in the market, for storage, Dell have second highest capacity after Compaq, but Dell has cheaper RAM or memory and capacity upgrades than Compaq (Dell: $0.07/MB – Compaq: $0.21/MB)
D. Competition Forces:
There are 5 major competitors in the PC market, Dell being the leader with 24.6% of market share. (See Exhibit 2 for detail breakdown of competitors) However, Dell is very different than its competitor thanks to the entrepreneurship of Michael Dell that invented the Direct Model, which custom-build computers based on consumer preference. (Exhibit 3 shows the competitive advantages that Dell has over its competition) Dell positioned it self to be the market leader that supplies PC product to different segments that has different need and also positioned it self as a relationship company.
2. SWOT Analysis
The following SWOT analysis shows a compressed listing of the internal and external conditions that are relevant for the analysis of the situation.
An important strength for Dell is its dominant market share in the computer industry. Viewing tables C, D, and E in the case, it is apparent that Dell holds the leading position over its competitors in all major product categories.
Furthermore, Dell’s just-in-time inventory emphasis yielded major cost advantages and shortened the time it took for Dell to get new generations of its computer models into the marketplace. New advances were coming so fast in certain computer parts and components (particularly microprocessors, disk drives, and modems) that any given item in inventory was obsolete in a matter of months, sometimes quicker.
The engine of Dell’s success and strength is its Direct Model. It starts and ends with their customers. With the power of direct and Dell’s team of talented people, they are able to provide customers with superb value; high-quality, relevant technology; customized systems; superior service and support; and products and services that are easy to buy and use. That in turn made Dell more cost efficient and ever closer to its customers.
Finally, Dell’s Internet sales are the highest in the industry. With its excellent Dell.com site, Dell was able to enhance its business contacts, speed up manufacturing process, and can achieve the performance and flexibility necessary to deliver its award-winning products and services.
Even though Dell’s low inventory and fewer suppliers are its pride and jewel, it can also be a weakness for the company due to its high dependence on component suppliers. If one or more to go out of business, that will effect Dell’s fast inventory supplies and in turn its efficiency.
Dell’s R&D budget is the lowest in the industry, and that in turns would prevent Dell from introducing innovative products.
Sales and growth numbers in international market are very promising, which indicated that there is a strong potential market in Europe and Asia for Dell to further expand and gain momentum.
Also, low costs and advanced technology cane offer Dell the ability to offer superior products at a lower price than leading competitors.
Growth into the high-end server market is an excellent opportunity for Dell to grasp if it wishes to gain higher growth rate.
Acquiring Gateway, the poorest performing company in the industry could help Dell 1) gain higher market share 2) eliminate one of its competition 3) transfer technology from Gateway to Dell.
Finally, Consulting services is one of the attractive fields, these days, for corporation for it helps Dell capitalize on its self by providing its knowledge and expertise to startup or other companies. Through out the years, this approach has proven profitable for companies.
Cutthroat competition over market share and price in both the US and overseas is in all time high in this saturated computer industry. As Dell expand into storage, servers, and other new products, it increases its exposure to more competition.
Currency fluctuation in countries outside the US could be fatal to the company for they could incur major cost of a currency of a country would devaluate.
Political instability and Tariff trade barriers in other nations could also be harmful to Dell. If, for example, Dell was so successful in Japan and it sales overshadowed that of a domestic Japanese computer manufacturer, Japan could place tariffs and extra taxes on Dell’s products to help Japanese companies.
3. Dell’s Competitive Position
Dell’s award-winning customer service, industry-leading growth and consistently strong financial performance differentiate the company from competitors for the following reasons: Price for Performance — With the industry’s most efficient procurement, manufacturing and distribution process, Dell offers its customers powerful, richly configured systems at competitive prices. Customization — Every Dell system is built to order. Customers get exactly what they want. Reliability, Service and Support — Dell uses knowledge gained from direct customer contact before and after the sale to provide award-winning reliability and tailored customer service.
Latest Technology — Dell introduces the latest relevant technology much more quickly than companies with slow-moving indirect distribution channels. Dell turns over inventory every six days on average, keeping related costs low. Superior Shareholder Value — During the last few years, the value of Dell common stock nearly doubled. From 2000 to 2001, Dell was the top-performing stock, having 243% and 355% respectively, on return on invested capital.
Therefore, Dell’s competitive advantage emerges as being its direct customer focus. Constant interaction with its customers gives Dell the ability to understand unique computing needs that drive individual and enterprise productivity.
In order to answer question #3 regarding the $60 Billion sales target, it is necessary to lay down several alternatives that would possibly help Dell achieve that goal. Then, we would evaluate each alternative independently and determine which alternative would accomplish the maximum profitability desired.
Alternative #1 – Focus only on the four major core products (Desktops, Laptops, Workstations, Servers): This option suggest that Dell would only focus on operations that deals with its four main products and minimize or possible spin-off International and service portfolios investments.
Alternative #2 – Focus on both the four major products (Desktops, Laptops, Workstations, Servers) and on International and Service Portfolio Investments: This approach suggest that Dell, pretty much, do whatever they have been doing in the past with minor improvement like expanding international business, expanding in services offered, and enhancing their operation in the four major products.
The Following decision criteria set was chosen to evaluate the 2 major marketing alternatives suggested above. First, we will lay down the economics and some of the numbers. Then, we would use these results to help come up with the final decision to the chosen recommendation. It is very important to keep in mind that, due to the lack of many major key figures and numbers, most of the decision and solutions made in this section are assumed or hypothetical.
Based on pages 11 through 15 in the Dell Case, the following number represent each of Dell’s core product and services:
· In 2000, worldwide PC sales were $217 Billion, of which $87B was in the US. Accounting for 75% of Dell’s revenue, Laptops and Desktops remained core product categories with growth rate for next year of 15% and 5% respectively.
· Dell’s 2001 revenue = $31.8B
· Assuming Laptops and Desktop sales contribution to Dell are 20% and 80% respectively.
· Dell had 30% of worldwide workstation market share
· In 2000, worldwide market sales was $9.2B
· In 2001, worldwide market sales of Workstations was assumed to be $10B ($10,000 X 1,000,000 Unites) [since 2001 figures are only from January to June – half a year – I assumed it would be safe to double the Avg. selling price and Unites figures in table D for 2001 worldwide sales by.]
· Dell operated only in the entry-level servers that had open architecture
(SIAS) and had 12% market share
· (SIAS) had a 2000 sales of $27B
· Dell’s 2001 revenue = $31.8B
· Assumed similar growth rate to last years 7%
· Dell had $1 Billion in sales in a $32B storage market
· The market is growing at 23% rate
· Derived from Dell’s case, it was estimated that next year service revenue would generate $3 to $5 Billion
· In 2000, Dell generated $2 Billion in service revenue
· In 2000, Dell generated $7.4B
· Other than that the case does not provide any other key figures, so it was assumed $1 Billion a year in growth for the next 5 years.
$31.8B X .75 = $23.85B
PC: $23.85 X .80 = $19.08B @ 5% growth = $20.03B
LT: $23.85 X .20 = $04.77B @ 15% growth = $05.49B
Therefore, $25.52 – $23.85 = $1.67B
Dell’s 2000 sales = $9.2B X .30 = $2.76B
Dell’s 2001 sales = $10B X .30 = $3.00B
$31.8B X .12 = $3.82B
$3.82B @ 7% Growth = $4.09B
$1 Billion X 23% Growth = $1.23B
Thus, Overall total for Alternative #1 = $3.41 Billion
Same numbers from alternative #1 apply, Plus:
Dell forecasted that it will generate $3 to $5 Billion in service revenues
Therefore, for the sake of the argument, we will assume $3 Billion
· International Markets:
Since there was no figures available, we assumed $1 Billion
Thus, overall total for Alternative #2 = $7.4 Billion
Recommendation & Implementation
As shown above in the decision criteria and analysis of each alternative, the marketing strategy #2 “Focus on both the four major products (Desktops, Laptops, Workstations, Servers) and on International and Service Portfolio Investments” is the overall most closest, if not exceeding, the $6 Billion sales target compared to Alternative #1, which fell short from achieving that figure. This strategy resulted in the highest combination of growth and profit to insure and secure Dell’s leading position in the computer industry.
A major advantage of this strategy is that it fully grasp onto the various opportunities presented to Dell whether it is expanding Internationally or going after services and enhancing on the existing 4 products. One minor disadvantage present, and that of cost. It is highly costly to implement this approach for it requires more funding to expand overseas (Facilities and labor) and enhance and adopt the 4 core and services.
However, for Alternative #1, it is less costly than alternative #2 and help Dell direct its full attention and focus on its core products more efficiently rather that distract it with other segments like International markets. One drawback is that it does not meet Dell’s projected goal of $6 Billion a year.
To implement the chosen strategic option #2, we need first to look at an important model called Ansoff’s Product-Market Expansion Grid, which will
help us understand why are we sticking with out approach.
Since Alternative #2 requires constant penetration and the whole concept behind the alternative is to do more of the same thing Dell been doing all along, It is safe to say that Dell falls under “Market Penetration” box on the left-upper corner. This strategy would not effect Dell’s position dramatically for it is a re-implementation of an existing plan. Only, this plan is taking it further to include in its umbrella segments such as International Market expansion and service unites.
For example, looking at the broad environment analysis above under sociocultural forces, we notice that Dell is implementing the same amazing direct system in most foreign countries, therefore, not risking its current segmentation, positioning, and strategy towards higher growth rates. If anything, it increases the growth rate of the company beyond its competitors’ belief because Dell has a combination of competitive advantages mentioned above like, low cost and just-in-time-inventory, that keeps it profitable and ahead of competition.
We highly believe that Dell should emphasize further expansion into international markets due to the following reasons: 1) Foreign economies, unlike the US, are showing sings of higher growth rates and possibly increased penetration rate since they are not fully mature. 2) Asian and Eastern European Market are opening up and free trade is adopted by many nations, that it self signals a huge opportunity to gain market share in both governmental and private sectors. And once we form a solid ground in these areas, we are guaranteed sales increase after that. 3) Dell’s Direct Model would be an excellent fit to the Eastern European and Asian market due to their price sensitivity and it would be an attractive offer since it allows consumers to build their own PC, server, storage, or/and service as low or as high as they want. In Asian market, we recommend the company joint venture with a domestic company like Toshiba. This would help Dell cut down on costs and gain the expertise needed in the Asian market.
Moreover, in the US market, Dell should penetrate aggressively the High-end servers market, Joint venture with EMC to enhance their storage capabilities, and assertively enter the consulting and other service areas. Based on previous data regarding growth rate and revenues for those markets by other competitors, we believe that it is highly profitable to engage in the 3 S’s (Servers, Storages, Services)
Therefore, engaging in both international market penetration and the 3 S’s should be the strategy that would help Dell reach higher sales target. We sense that the opportunities within the international markets and the US 3 S’s market make it possible to achieve a higher target than what currently met in 2000 ($25Billion), especially with the help of extensive advertising, precise segmentation of those markets, and the factors mentioned above like joint venture.
Courtney from Study Moose
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