Dell in China
Sample Case Analysis Presentation
Professor Josh Philpot
April 10, 2008
Agenda
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Identification of Key Strategic Issues
External Analysis
Internal Analysis
Summary SWOT
Strategic Alternatives & Recommendations
Questions & Answers
Key Strategic Issues
Key Strategic Issues
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Taking advantage of an international opportunity in
a high growth market
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Adjusting business-level strategy in light of a rivalry
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Leveraging core competencies in a foreign market
About Dell
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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
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In 1998 established a local manufacturing and distribution
operation
In 2004, Dell PCs captured 7% share in China
External Analysis
Industry Definition
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Dell competes in the PC industry, selling enterprise
systems, desktop computers and notebook
computers.
General Environment
External Analysis:
Key Environmental 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)
External Analysis:
Key Environmental Factors
Socio:
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Purchasing expectations (try before they buy)
Chinese attitudes and culture becoming more similar in
purchasing patterns and work ethic to U.S.
Economic:
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Chinese economy grew 9.8% in 2005
Total retail sales increased 13%
China’s PC market estimated to grow 19% in 2004-2005
Low per capita incomes and unevenly distributed
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Average US $1,583
Urban US $5,000
Middle class (200 million people) US $8,000
Source: China Country Commercial Guide (CCG)
External Analysis:
Key Environmental Factors
(new member of WTO but…)
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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
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Tech
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Just 2.5% of urban Chinese own a computer
Access and use of the internet is increasing
Global
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Sales opportunity (Asia/Pacific currently just 10% of Dell)
China’s attractive low-cost manufacturing capabilities
Source: China Country Commercial Guide (CCG)
The Five Forces of Competition Model
HIGH
INTENSE
LOW
MODERATE
NONE
External Analysis:
Porter’s Five Forces
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Threat of New Entrants – HIGH
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Foreign and local competitors
IBM, Compaq and HP also entered in 1990s
Less government policy barriers (China joined WTO in 2002)
Potential barriers include:
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Access to distribution channels
Scale economies (Local production plants)
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Substitutes – NONE
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Bargaining Power of Suppliers – LOW
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Dell and most competitors are vertically integrated
External Analysis:
Porter’s Five Forces
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Bargaining Power of Buyers – MODERATE
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Few buyers purchase a large portion of industry output
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Sales account for a large portion of Dell’s sales revenue
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State-owned companies, MNCs and educational institutions
50% from government, education, telecoms, power and finance.
Brand reputation and product differentiation can mitigate
Competitive Rivalry – INTENSE
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High profit potential due to industry growth
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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
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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
Competitors
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Future objectives:
 Build
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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
Competitors
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Key Strengths:
 Chinese
competitors: market knowledge and low cost
advantage.
 American competitors: technology and brand recognition
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Key Weaknesses:
 Chinese
competitors: brand recognition
 American competitors: higher costs
Customer
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High-end Customers
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State-owned companies
MNCs
Government
Educational institutions
Large Corporate Accounts (1,500+ employees in Telecoms, Power
and Finance
Individual Consumers
Behavior:
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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
Internal Analysis
Key Financial Ratios
FY 2005 FY 2004 FY 2003 FY 2002 FY 2001
Profitability Ratios
Gross Profit Margin
Net Profit Margin
Return on Equity
Liquidity Ratios
Current Ratio
Quick Ratio
Leverage Ratios
Debt to Total Assets
Debt to Equity
Long-term Debt to Equity
18.32%
6.75%
51.24%
18.22%
6.38%
42.12%
17.93%
5.99%
43.55%
17.67%
5.71%
37.92%
20.21%
7.06%
40.02%
1.20
1.16
0.98
0.95
1.00
0.96
1.05
1.01
1.43
1.38
0.72
2.58
0.40
Activity (Efficiency) Ratios
Inventory Turnover
107.20
Accounts Receivable Turnover 11.15
Average Collection Period
32.29
Key Growth Rates
Sales
Net Income
Current Assets
Current Liabilities
18.73%
25.63%
58.91%
29.74%
0.67
2.08
0.34
0.69
2.17
0.34
0.65
1.88
0.28
0.59
1.43
0.23
126.74
11.40
31.58
115.70
13.69
26.30
112.12
13.74
26.21
79.72
13.16
27.37
17.06%
24.65%
19.15%
21.97%
13.59%
19.21%
13.29%
18.81%
-2.26%
-20.89%
-19.01%
10.93%
Key Resources
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Key tangible resources:
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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:
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Strong brand
Reputation (“Dell experience” of high-quality products, support and
service)
Innovative in its technology, business practices and customer service
http://www.dell.com/content/topics/global.aspx/corp/en/home?c=us&l=en&s=corp
Core Competencies
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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.
Value Chain Analysis
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Primary activities of value:
 Operations:
Manufacturing processes contain costs well
 Outbound logistics: Direct sales model
 Service: High responsiveness to customer needs
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Support activities of value:
 Technological
development: Innovative web site and IT
infrastructure
 Firm infrastructure: Visionary founder and management
team
Summary SWOT
SWOT Analysis
Organizational
analysis
Environmental
analysis
Strengths
Opportunities
Weaknesses
Threats
Strengths & Weaknesses
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Strengths:
 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)
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Weaknesses
 No
low cost advantage that will allow them to compete in
the consumer segment
 Possible cost advantages not realized from their China
plant
Opportunities
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Large population in China and economic growth potential
(Dell’s fourth largest market)
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PC market expected to grow by 19%
Only 2.5% of urban Chinese own PCs
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Sales potential in larger cities
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Reduction in tariffs on IT products makes it less costly to
export to China
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Expansion into Japan, Korea and Taiwan
Risks
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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
Strategic Alternatives
and Recommendations
General Problem Statement
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Dell faces a rivalry from Chinese PC firms, in particular
Lenovo’s (Legend) attempts to copy Dell’s direct sales
approach and build brand recognition. (At risk is Dell’s
dominance of the high end market)
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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)
Strategic Alternatives
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Lower costs to be viable and establish a presence in the
low-end (consumer market) before competitors
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Abandon the low-end and put all resources on defending
the high-end (corporate market) where Dell currently has
an advantage
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Challenge Lenovo in other Asian markets that are important
to it while increasing product quality and services in China
Strategic Recommendation:
Expand and defend the high-end of the market
Implementation
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Continue Dell’s business level strategy of differentiation
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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
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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
Questions & Answers
Dell to build second factory in China
New facility will double Dell's current production capacity in China
By Sumner Lemon, IDG News Service
March 25, 2005
Dell announced on Thursday plans to build a second manufacturing plant in southeastern China.
The new plant will be constructed in Xiamen, Fujian province, where Dell already has one factory, according to the
company. The new manufacturing plant will produce PCs for Dell customers in northern Asia, including China and Japan,
the company said, adding that the new facility will double the company's current production capacity in China. The
company did not disclose what that capacity is.
China is the world's second-largest PC market, after the U.S., and continues to grow at a healthy clip. According
to Gartner, 14.9 million PCs were sold in China last year and shipments grew by 14.9 percent. Dell has the largest
market share of any foreign PC maker in China, but rivals IBM and Hewlett-Packard closed the gap last year by growing
faster than their rival from Round Rock, Texas, according to market analysts Gartner and IDC.
Despite the best efforts of foreign PC makers, the Chinese PC market continues to be dominated by local players, with
Lenovo Group holding the largest share of the market.
http://www.infoworld.com/archives/emailPrint.jsp?R=printThis&A=/article/05/03/25/HNdellchina_1.html
From April 3 ’08 Analyst Meeting
2008 27% revenue groth in BRIC