Analysis of Dell’s Business Strategy


Research Paper (postgraduate), 2008
47 Pages, Grade: A

Excerpt

CONTENTS

Introduction

1. Strategy analysis
1.1. Industry analysis
1.2. Competitor analysis
1.3. Environmental analysis
1.4. SWOT Analysis

2. Arenas
2.1. Product markets
2.2. Distribution channels
2.3. Market segments
2.4. Geographic scope

3. Vehicles
3. 1. Internal development
3.2. Strategic alliances
3.3. Joint Ventures
3.4. Acquisitions

4. Differentiators
4.1. Image
4.2. Customization
4.3. Pricing
4.4. Speed to market
4.5. Special product features
4.6. Convenience
4.7. Styling / Design
4.8. Product reliability
4.9. Service
4.10. Value (combination of above at the best price)

5. Staging

6. Economic Logic

7. Assessment of Outcomes

Conclusion

References

Introduction

Dell was founded in 1984 by Michael Dell on a simple concept: by selling computer systems directly to customers. Its corporate headquarters are located in Round Rock, Texas, and it conduct operations worldwide through subsidiaries. The company’s core business strategy is built around its direct customer model and highly efficient manufacturing and logistics. Nowadays they are expanding that core strategy by adding new distribution channels to reach even more commercial customers and individual consumers not only in the USA but around the world. Recently, company also has begun to pursue a targeted acquisition strategy designed to augment select areas of its business with more products, services, and technology. Dell’s goal today is to provide the best possible customer experience by offering superior value; high-quality, relevant technology; customized systems and services; superior service and support; and differentiated products and services that are easy to buy and use [1].

But what pursued Dell to change its strategy and to reevaluate its direct model? If we will look at Dell’s market capitalization we will see that during 1995 and 1999 it was growing very fast (Figure 1) [2]. There was a big decline from 1999 and 2001 because of “Internet bubble” and Price wars on PC market but then there was a period of growth of Dell’s market capitalization from 2003 to 2005. And in 2005 the second period of Dell’s big decline started. In order to understand the market reaction we have to look at Dell’s growth rates and market growth rates during that period.

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In comparison to its main competitors – Apple and HP – Dell’s 10 year CAGR of its revenues is much higher but its 5 and 1 year CAGR is much lower (Figure 2) [9]. Its 10 year compound annual growth rate of revenues is still higher because of the previous high levels of revenues which are growing today slower than the market’s one.

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Dell lost much of its product momentum and market share in the laptop, desktop and server segments to HP. In 2007 and 2008 Dell was listed in a Scoreboard: WSJ Worst Three Year Performance with a -9.6% three year return. Because of its size and an absence of an innovative product like the iPhone, it is a challenge for Dell to drive revenue growth in a meaningful way. In order to be able to return its market share and high rates of growth Dell has to reshape its strategy and reevaluate its goals according to the new trends in IT market.

1. Strategy analysis

Today the computer industry is arguably the most important industry in the world. It is the basis for all information technologies and accounts for about 5% of the world’s gross domestic products [10]. As a tool the computer is a crucial element in many industries ranging from telecommunications and consumer electronics to medical research and automobiles. In the first quarter of 2008 Worldwide PC shipments grew by 14.6% to 69.5 million units, according to IDC's Worldwide Quarterly PC Tracker [11]. But today computer industry looks not like 20 years ago. Every highly technological and innovative industry has rapidly changing trends and structure and the computer industry one of those who requires from companies always to be in touch with the latest technologies and movements.

Dell Inc. is one of the few corporations which was able to remain at the top of the market but also nevertheless had a difficult time because of the inconsistency between its strategy and new changing environment. From the beginning Dell’s strategy was built around a number of core elements: build-to-order manufacturing, mass customization, partnerships with suppliers, just-in-time components inventories, direct sales, market segmentation, customer service, and extensive data and information sharing with both supply partners and customers. But nowadays Dell and other U.S. personal computers (PC) makers are struggling to eke out a profit in an environment of falling prices and intense international competition.

1.1. Industry analysis

One of the most important trends in the PC market is the increasing of the share of consumer markets in the total market from 28% in 1994 to 38% in 2005 (Figure 3) [5]. The main reasons are continued price downturn and performance gains in key components as a result expanding demand for PCs. It is very important for Dell to take into consideration the increasing significance of individual consumers since mostly it was oriented more on commercial customers and government.

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Another important trend is that PC demand has been steadily shifting toward smaller, more integrated and communications-oriented products. Portable devices (laptops and notebooks) are the fastest growing form factor, totaling 32 percent of unit demand in 2005 compared to just 10 percent in 1990, and are expected to exceed desktops (Figure 4) [9]. As it was written in IDC press release "Notebook purchases are driving consumers beyond one PC per household to one PC per person and manufacturers are reacting by focusing their attention on customization and personalization.” [11] More than half of PC shipments in 2009 will be portables, according to IDC forecasts [11].

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It is very important for Dell to remember that the growth of computer usage in the last 10 years has been caused by completely different factors than for example 20 years ago. In the first 25 years of the computer industry the unit sales were counted in thousands for mainframes and then in hundreds of thousands for minicomputers (Table 1) [10]. Today the Internet and the applications based on it have become the main driving force for the PC and the whole computer industry. In addition the core personal computing industry includes not only traditional desktop and laptop PCs and PC servers but also smart handheld devices such as personal digital assistants (PDAs) and smart phones which will augment PCs as Internet access devices in the next decade. But the growth of information/web appliances will also create opportunities for PCs because as mentioned by some experts many web appliances will be simplified PCs or application-specific computers [10].

Also there are such new trends in information technology industry as on-demand computing when firms purchase additional processing power from large computer service firms and have that power delivered when they need it over a network [7]. Server virtualization enables companies to run more than one operating system at the same time. Software platform trends include the growing use of Linux, open-source software and Java software not only for individual usage but also for enterprise integration and software outsourcing [7]. It can be a challenge for Dell to be the first in these new trends and also to be aware of global architectural standards set originally by IBM and now largely controlled by Microsoft and Intel. For example,

Dell started offering Linux notebook systems and soon it became the first major manufacturer which offers Linux across its full product line. However, by early 2001 Dell had disbanded its Linux business unit. There were clear signs that that Microsoft pressured Dell Inc. to did this.

Table 1. Computers-in-Use Driving Forces

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Source: “Computer-in-use forecast by country”, eTForecasts.com

Another PC opportunity is the need that will develop in homes that have multiple PCs and web appliances which will need a server that coordinates data transfers, data storage and other functions between the PCs and information appliances. [10] These home PC servers which will help create smart houses are already emerging for multi-PC households and will get a further boost.

Very important issue for Dell is a continuous price war in a highly competitive PC market. As reflected by IDC’s data, competitive PC industry pricing pressures were particularly intense in 2001 and 2002. The worldwide average unit price for a PC and monitor has declined markedly over the past 15 years (Figure 5), with desktops and notebooks selling at an average of under $1,100 and $1,400, respectively, in 2005, and many models available for well under $1,000 [5]. When adjusted for quality improvements this price decline is even much more dramatic. Also the price differences between the United States and other regions have declined. Gartner indicated that even the popularity of mini-notebooks today will not be enough to prevent the PC market from suffering in the current economic climate over the next 2009 year. This in turn will force a deeper price war and further consolidation in the marketplace.

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While previous efforts to develop very-low-cost PCs for developing countries have failed ($100 computer, Intel's Classmate PC and Asus's eeePC), PC makers and others continue to experiment with new designs and ideas like under $500 PC (Table 1) [10]. As a result there still always will be a main concern with cost reduction and business processes improvement in PC market. In 1990s Dell really has a strong competitive advantage with its built-to-order approach because of cost reduction as a result of low inventory but no more. In 2005 HP had hired Randy Mott, Dell's former chief information officer which helped it to improve its direct sales model to compete with Dell.

In addition, the U.S. computer market has matured and the vast majority of computer sales are replacement sales to upgrade and replace existing computers. This also made a negative impact of Dell’s sales because the main part of its sales belongs to USA. In 1980 the U.S. accounted for nearly 65% of all computers-in-use and retained over half of the computers-in-use until 1989. In 2000 the U.S. share dipped below 34% of all computers-in-use with a further decline below 22% projected for 2010 (Figure 6) [10]. Nowadays Asia-Pacific region has even more computers-in-use than Northern America [10]. This is a very important trend for all PC vendors because outside the USA, the PC market picture is quite different.

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The direct sales model for PCs has only been successful in some markets. For example, Dell’s Numbers by the market share is 35% in the U.S., but only 18% worldwide [11]. Worldwide the indirect channel accounts for two-thirds of sales, and the dealer segment is larger than retail. And the retail exhibits many different local patterns as a result of local consumer preferences, government regulations and differences in historical evolution. This local complexity makes it difficult for branded PC makers to become global market makers. As a result of the increasing share in global market sales, Dell was forced to adjust their distribution models to fit local markets and to work with big retailers. In 2007 and 2008, the company partnered with Gome, China's largest consumer electronics retailer, DSG International, one of Europe's major consumer electronics retailers, and Tesco, an international retailer with operations in Europe and Asia which will allow Dell to sell its products to millions of in-store computer buyers [12]. In the same month, Dell opened its first exclusive retail store offering in Russia.

But this will also increase Dell’s distribution costs and may cause some organizational problems since Dell does not have experience with direct sales.

Since one of the main problems of the last years of PC makers was cost reduction there was a shift in the location of production from the Americas and EMEA to the Asia-Pacific region [5]. Initially, production was spread throughout East Asia in Japan, Malaysia, Singapore, Taiwan, and Korea but by 2005 China was the single largest producer of PCs and computer equipment in the world. [5] In the past, the location of final assembly was driven by the need for proximity to demand in the United States and Europe but now it is driven by growing demand in Asia and at the same time by lower costs for skilled labor, land, facilities and government incentives in China. In contrast to many of its competitors, Dell still owns several production facilities in the USA. Its factories in north Austin and Nashville are the only major computer-assembly plant still located in the United States. [18]

This confluence of product and process interdependencies with changing capabilities and costs in different locations has led to a new global division of labor (Figure 7) [5].

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It is projected by experts that a near-term division of labor for product development is likely to be as follows: component-level R&D, concept design, and product planning in the United States and Japan; applied R&D and development of new platforms in Taiwan; and product development for mature products, and nearly all production and sustaining engineering, in China [5.] But there has to be a gold rule that all cost reduction activities of the company can not be done at the expense of quality of product and customer service (this was the issue for Dell with its customers offshore support service).

There is a real challenge for Dell’s old strategy in today’s computer market because now the most of PC makers are efficient in minimizing inventory and getting new products into the market, and there is in general a fast product cycles in the market. This could be seen as an expensive race to the bottom that no PC vendor or component supplier really wins. Some PC vendors complain that component innovation is too fast, and they feel pressured to introduce too many products for too small markets. The main issue for the next years seems to be whether the cost of managing so many products might outweigh the benefits of being able to offer products that more closely match the needs of customers.

1.2. Competitor analysis

The main Dell’s competitors in global market are HP, Acer, Lenovo and Toshiba (Figure 8) [13]. Most of them have the similar strategy and products as Dell. The problem is that Dell's far removed from the days when its manufacturing and distribution system was the significant competitive advantage. Hewlett-Packard, now the world's largest PC maker, has a relatively lean cost structure while pushing his sales force to ring up bigger sales numbers.

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Note: PCs include Desktops, Notebooks, Ultra Portables, and x86 Servers and do not include handhelds.

Despite still the main competitor of Dell is HP but Lenovo's acquisition of IBM's PC business has put it directly in competition with HP and Dell around the world.

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The main Dell’s competitors in the USA market are HP, Acer, Apple and Toshiba (Figure 9).

The HP strategy focuses on cost savings in any phase of global operations, and this persistent review of operations has also fostered production efficiencies and better development of products to suit customer needs. HP sells about two-thirds of its PCs outside the United States at a time when overseas PC market growth is stronger, thus giving it an edge over Dell’s more US-centric sales pattern.

[...]

Excerpt out of 47 pages

Details

Title
Analysis of Dell’s Business Strategy
College
St. Mary's University San Antonio, Texas
Grade
A
Author
Year
2008
Pages
47
Catalog Number
V124459
ISBN (eBook)
9783640312054
ISBN (Book)
9783640316083
File size
1156 KB
Language
English
Tags
$20
Quote paper
Alina Ignatiuk (Author), 2008, Analysis of Dell’s Business Strategy , Munich, GRIN Verlag, https://www.grin.com/document/124459

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