Dell Inc. Case Study
By: Dan McLindon
Kyle McDaniel
Jeremy Smiley
Tom Anderson
Ray Moorman
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?
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
2008 Economic downturn
Threat – companies and individuals
cut down IT spending
3
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
4
Explosion in data
information and content
Opportunity – Dell can provide
hardware and services to drive
4
Global expansion of
Internet
Opportunity – requires
installation of millions of
servers
5
Technological
What is going on in the PC
industry?
Industry Overview (Supply)
Porter’s five forces:
Threat of
substitute products
High
Bargaining power
of suppliers
Rivalry among
existing competitors
Bargaining power
of buyers
Low
High
High
Threat of
new entrants
High
Porter’s Five Forces
Factor
Analysis
Impact
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
Threat of substitute products
2007 PC Vendor Market Share
U.S. Market
Worldwide
Dell
28%
32%
HP
Apple
Acer
5%
5%
6%
24%
HP
19%
Dell
Acer
47%
15%
Toshiba
8%
All Others
7%
Lenovo/IBM
Toshiba
All Others
4%
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?
Build to Order
• Dell low cost leader.
• Improved reputation for quality. Allowed Dell to control quality and be first to market
with new products.
Enabled success
in late 1990’s • Competitors tried to copy, but with limited success. Long learning curve.
• 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
Still works well
adds to enterprise customers.
in B2B
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
Success
Late 1990’s
X86 Servers
1st domestically, 2nd behind
HP globally (11% global
market share)
Success
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
2002
White label PC
N/A
TBD, forecast to achieve
$380 million in sales (2003)
2003
Printers
20% market share in US, 5%
global
TBD
2003
Consumer Electronics
N/A
TBD
2003
Retail POS systems
N/A
TBD
Conclusion – Expanding product set into several highly competitive
markets with well established players. Strategy is be the low cost leader.
Internal Analysis – Core Competencies
Core
Competency
Build to order
Description
•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 inhouse manufacturing.
Build to
order
B2B valueadds
Direct to
Customer
Sales
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)
$3,500.00
$3,000.00
$2,500.00
$2,000.00
$ (in millions)
U.S. Business
U.S. Consumer
$1,500.00
EMEA
Asia-Pacific/Japan
$1,000.00
$500.00
$$(500.00)
2000 2002 2004 2005 2006 2007 2008
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
Heavily
invested in
facilities and
technology
Hampering
growth in
emerging
BRIC markets
Already
starting to
outsource
laptops
Enables valueadds for B2B
Build to
Order/D2C
Sales
No longer
low cost
leader due to
outsourcing
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
•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
Threats
•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
•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
Dell V. HPS
HP
Dell
Operating philosophy
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
40
% of Market Share
35
30
25
Dell
HP
20
15
10
5
0
1998
2000
2002
2004
2005
2006
2007
World Market Share – Dell vs. HP
20
18
% of Market Share
16
14
12
Dell
HP
10
8
6
4
2
0
1998
2000
2002
2004
2005
2006
2007
• 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
$5,000.00
$4,000.00
HP acquires EDS
$3,000.00
Printing and Imaging
$2,000.00
Personal Computing
Systems
Enterprise Systems
and Software
HP Services
$ (in millions)
$1,000.00
$-
2001 2002 2003 2004 2005 2006 2007
$(1,000.00)
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)
IBM
7%
EDS Accenture
3%
3% Fujitsu
3%
HP
2% Computer
Sciences
Corp. (CSC)
2%
Dell
1%
All Others
79%
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
 Develop a focus. Examine where the company is creating the
most value for customers and invest in that business line
 Focus on growth in B2B channel and the continued
development of value-added IT services
 Stay true to the Build to Order business model. Use it as a
tool to create value for customers, not as just a cost control
tool.
 Pull out of retail stores immediately. This goes against
every strategy and value that makes Dell what it is.
 Fix problems in laptop manufacturing to keep competitive
advantage in-house.