Dell Case
Key Issues
Matching Dell
• Industry Dynamics
– How to attain advantage
– How to protect advantage
2-2
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.
2-3
Bargaining Power of Suppliers
• Proprietary Standards from Microsoft
and Intel - Extract profits
• Other inputs are commodities
• Thus Bargaining Power of Suppliers
is Very High
2-4
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.
2-5
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.
2-6
Threat of substitutes.
• Within product category, few direct
substitutes.
2-7
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.
2-8
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.
2-9
IBM’s Advantages/Disadv.
•
•
•
•
Direct Salesforce.
Well regarded laptop.
Costs are higher
Few non-corporate customers
2-10
Compaq Adv/Disadv.
• Cost position is good
• Retail relationships
• Poor quality
• Poor reputation
2-11
HP Adv/Disadv.
• Quality reputation
• Higher cost
• Resellers
2-12
Gateway Adv/Disadv.
• Price – lower
• Service
• Image?
2-13
Example of Unit Price
and Cost Analysis
1998 numbers
Dell
Compaq
Unit Price
1996
1932
Unit COGS
1555
1325
0
135
195
309
44
124
1794
1893
202
39
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
2%
6%
Channel Markup/Unit
Unit SGA
Inv. Carry Costs
Cost of unit
Profit
Rev
Cost of Inv % of Rev
Notes
1-Gross Margin
Inv / (Rev-Gross Marg)*365
2-14
For all firms
1998 numbers
Unit Price
Unit COGS
Channel Markup/Unit
Unit SGA
Inv. Carry Costs
Cost of unit
Profit
Rev
Gross Margin
Margin % Rev
Channel Markup
SGA
SGA % Rev
Cost of inventory
Days of Inventory
Cost of Inv % of Rev
Dell
1996
1555
0
195
44
1794
202
Compaq
1932
1325
135
309
124
1893
39
IBM
1959
921
0
400
125
1445
514
HP
2129
1451
149
353
284
2237
-108
Gateway
1762
1406
0
242
39
1687
75
12327
2722
22.1%
0.0%
1202
9.8%
273
31169
9786
31.4%
7.0%
4978
16.0%
2,005
81667
43282
53.0%
0.0%
16662
20.4%
5,200
47061
14989
31.9%
7.0%
7793
16.6%
6,284
7648
1546
20.2%
0.0%
1052
13.8%
168
10
2%
34
6%
49
6%
72
13%
10
2%
Note: IBM numbers are likely inflated by Mainframe and service being included.
2-15
2-16