The Dell Company - A Strategic Analysis

1.  Introduction  4

2.  Industry  4

2.1  PEST-analysis  4

  a) Political  5

  b) Economic  5

  c) Social  5

  d) Technological  6

2.2  Market structure  6

2.3  Porter s five forces  7

  a) Potential new entrants  7

  b) The bargaining power of buyers  8

  c) The bargaining power of suppliers  8

  d) Substitute products and services  8

  e) Intra-industry rivalry  8

  (i) Hewlett Packard  9

  (ii) IBM  9

  (iii) Fujitsu Siemens  9

3.  Dell s history  10

4.  Dell s business model  10

4.1  Dell Direct Model  11

4.2  Elimination of inventory  12

  a) Account selection  13

  b) Demand management  13

  c) Supplier management  13

  d) Forecasting  14

  e) Liquidity management  14

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  f) Real time information for suppliers  14

5.  Internal analysis  15

5.1  Products  16

5.2  Customers  17

5.3  Suppliers  17

6.  SWOT-Analysis  18

  a) Strengths  18

  b) Weaknesses  19

  c) Opportunities  19

  d) Threats  19

7.  Forecast  20

8.  Conclusion  21

  Bibliography  22

  Annex  25

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1. Introduction

“No other technology company listens

to customers, collaborates with partners, adds its own significant layer of innovation and delivers relevant technology more efficiently and effectively than Dell.” 1

These words from Michael Dell point out more than anything else how the Dell company managed to advance to the worldwide number one in the computer industry. From a little company founded by an undergraduate student at the University of Texas 2 , Dell Inc., headquartered in Round Rock, Texas, has developed into a huge corporation with more than 55,200 employees today and an annual turnover of nearly $50 billion. 3

This report aims to analyse how the Dell company performs in the competitive environment of the computer industry, which factors are essential for success and how Dell successfully takes advantage of its business structure. Furthermore, an internal analysis will be conducted and the resulting strengths and weaknesses will be presented. The future developments of the computer industry in general and of the Dell company in particular, will be examined at the end of this paper.

2. Industry

This chapter deals with the industry that the Dell company is working in. In order to understand this business environment, it is essential to examine and analyse the crucial factors that have an impact on Dell’s and its competitor’s business.

2.1 PEST-analysis

In the following, the analysis of the political, economic, social and technological factors leads to a description of the macro environment of the computer industry.

1 Dell (2005), p. 3

2 Hill (2005), p. 555, 556

3 Dell (2005), p. 20, 21

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a) Political Political factors include government regulations and legal issues determining the conditions under which companies have to operate. In this field, the computer industry has to face certain restraints. Problems can arise in countries where political stability is not guaranteed, no matter whether companies operate production facilities or if they do business with that country through exports. Many countries still have restrictive policies which are maintained to protect domestic manufacturers and production. Such policies often hinder foreign companies from entering into these markets. The only possibility to do business in those countries is to establish partnerships with local companies, where they are additionally forced to accept minority shares and to provide money and technological know-how. However, the computer industry sees great potential in those countries which loose their restrictions. 4 This is especially true for China which has opened for many industries since its accession to the WTO in 2001. In the course of globalisation trade barriers decline and new markets emerge, allowing free trade to expand.

b) Economic The computer industry expects a growth of approximately ten percent over the next years. 5 This growth is influenced by the economic situation in a specific country, having an impact on the purchasing power of potential customers. Additionally, changing inflation rates and currency fluctuation also determine the profitability of a company.

c) Social The national demand for computers is dependent on the educational level prevailing in a specific country. The higher the educational standard, the higher is the demand. Furthermore, computers get more and more involved in daily life. Today, children already get familiar with the use of computers at a very young age, representing a generation that will hardly live and work without a computer in the future. Additionally, the brand image of a computer and lifestyle trends get more and more decisive for the purchasing decision. The computer industry adapts to this trend, e. g. by offering a wider range of notebooks and by trying to create a strong brand name.

4 eTForecasts, Worldwide PC market (2004), p. 6

5 ebd.

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d) Technological There is hardly any industry that is characterised by a faster technological development than the computer industry. Increased Research & Development have caused permanent innovation processes which lead to short product life cycles resulting in a faster depreciation of the products. 6

2.2 Market structure

The computer industry is characterised by a quasi-oligopolistic structure. It is dominated by five major global players although there are a lot of small companies which often serve only regional markets. The following graph 1 illustrates the division of the computer market of each individual company.

Worldwide market share 2005

Graph 1: Worldwide market share 2005; Market researcher IDC (2005)

According to the market researcher IDC, Dell is the biggest computer manufacturer in the world and was able to extend – through a growth of 2.16 percent – its leading position to a current market share of 18.9 percent. Second is Hewlett Packard with a market share of 15.4 percent and IBM, which after a loss of 7.3 percent ranks third with 5.1 percent. Fujitsu Siemens has improved about 2.2 percent, now owning a market share of 4.6 percent. The biggest growth was achieved by the Acer company with 21.2 percent. Despite this enormous increase, Acer still is at fifth position with a market share of only 4.0 percent. Other computer manufacturers have a market share of 52.0 percent all together. 7 Although this number appears to be very high, it

6 Byrnes (2003)

7 Telephone interview Michael Rufer (2005)

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must be taken into consideration that every company only owns a very small part of the market. According to the fact that Acer ranks number five in the world with a market share of only 4.0 percent, it is a logical consequence that the “Others” are quite numerous, but that their individual market share is infinitesimal. 8

2.3 Porter’s five forces

In order to get a better overview of the computer industry, Porter’s five forces model is presented in the following, providing a structural analysis of the industry and helping to understand its relations and key factors. 9

Graph 2: Porter’s five forces model; Sutton (2001), p.2, own depiction

a) Potential new entrants

A first look, any new entrant in this market faces heavy restraints. Capital

requirements, technological know how are as high barriers to entry as skilled labour needs and sophisticated support industries. Additionally, the well-established big companies can actively take steps, for instance lowering prices to hinder potential new companies from entering into the market. Although being quite difficult, existing manufacturers whose current focus, which rather lies on regional markets, may be tempted to establish as a global player.

8 Telephone interview Michael Rufer (2005)

9 Sutton (2001), p. 2, 3

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