Term Paper, 2007
16 Pages, Grade: 72/100 credits
This paper aims to analyse strategy content, context, and organisational purpose of Dell Inc., one of the world's largest computer manufacturers. Dell's direct business model based on virtual integration, low inventory, and direct relationships is evidently a key source of competitive advantage on several levels.
Underpinning key findings from a critical evaluation of a variety of factors, in particular the computer industry and international dimensions of Dell's value system, strategic challenges for the company would include three key issues: first, Dell should address its weak performance in terms of customer service. Second, since Dell's current sales to corporations account for about 85 per cent, the author recommends a stronger focus on the more lucrative high-growth private consumer segment. Finally, Dell will have to successfully exploit opportunities on the fast-growing, but extremely competitive markets of Asia-Pacific.
De Wit and Meyer (2005) divide strategy into the dimensions process, content, and context. Using this distinction as starting point, this study follows de Wit's and Meyer's (2005) understanding of strategy content (i.e. what actually constitutes a strategy for an organisation on different levels) and strategy context (meaning environmental or organisational conditions surrounding strategic activities).
On the business level, a widely agreed upon notion is that strategy should create competitive advantage over rival organisations operating in the same business area, preferably in a sustainable manner (de Wit and Meyer, 2005, Brown et al., 2005). Besides other basic components like an organisation's resource base and its product offering, its activity system is a key factor (de Wit and Meyer, 2005). In this context, the value chain, a popular framework developed by Michael Porter (1985, cited in Brown et al., 2005), is an appropriate model to track the flow of movement from inputs to outputs. Illustrating a company's activity system throughout the value creation process, Porter (cited in de Wit and Meyer, 2005) distinguishes primary activities (inbound logistics, operations, outbound logistics, marketing and sales, and service) and support activities (procurement, technology development, human resource management, and firm infrastructure). The value chain is based on the idea that value, instead of cost, is added at every stage (Brown et al., 2005), while the goal of these activities is to offer a level of value to the customer that exceeds the cost of these activities, thereby resulting in a profit margin (NetMBA Business Knowledge Center, 2006). Competitive advantage, it is argued, can be the result of an extraordinary (re-)configuration of the entire activity system, as well as of its ability to manage the value system of which it is a part - i.e. a series of value chains, linking the firm to the value chains of its suppliers, channels and customers (de Wit and Meyer, 2005; NetMBA Business Knowledge Center, 2006).
The value chain is therefore also a useful approach to form a company's activities in which it can pursue a sustainable competitive advantage. At a very high level, Porter (1980, cited in Kippenberger, 1998), developed basic generic strategies: overall cost leadership, differentiation, and focus (i.e. serving limited target markets in terms of customer range, geography, or product range, more effectively, efficiently, or both). While Porter originally suggested an incompatibility between cost leadership and differentiation, he later revised this view by stating that “... any superior firm has achieved one type of advantage, the other, or both ” (Porter, 1991, cited in Prajogo, 2007).
According to Hedley (1977, cited in de Wit and Meyer, 2005), many companies are involved in different businesses, which can result in a large variety of individual, separate business strategies. Hence, on a corporate level, it is vital for organisations to strategically determine an optimal set of businesses, including decisions about which business they should be in at all (de Wit and Meyer, 2005). One challenge for organisations in this area is to resolve the paradox between synergy and responsiveness, with multi-business synergy striving to share and integrate activities, and responsiveness as granting business units a higher level of market-focused autonomy (ibid.).
But also corporations themselves can form partnerships and alliances within and across industries (ibid.). On such a network level, establishing relationships with certain actors can be an eminent part of inter-organisational strategy. Amongst others, relations to suppliers (upstream vertical) and to customers (downstream vertical) can form embedded collaborative networks (ibid.). Nonetheless, many other inter-organisational relationships are also highly competitive, even confronting, and driven by a pursuit of independence towards rivals and other external parties. Hamel et al. (1989, cited in de Wit and Meyer, 2005) even perceive collaboration as competition in a different form.
Hence, it becomes clear that strategy must not consider organisations in isolation, but in relation to the industry context in which they operate. For example, the developments of an industry can show tendencies towards convergence or divergence, towards concentration or fragmentation (de Wit and Meyer, 2005). In order to accurately recognise the development of an industry, to understand both its drivers and inhibitors of change is critical. The critical question is how organisations can proactively modify or shape an entire industry, as opposed to mere adaptation to given industry dynamics (ibid.).
As many of today's industries are global in nature, organisations have to consider strategy in an international context. In an international management approach, one organisational challenge is to establish cross-border synergies, by means of standardising, coordinating, and centralising activities across political and cultural boundaries (ibid.). In contrast, to exploit local market responsiveness, by acknowledging local adaptation, decentralisation and autonomy might be useful in many cases. This has eventually led to contrasting perspectives of global convergence versus international diversity, since every organisation must reconcile these opposing demands on an individual basis (ibid.).
However, also from a more internally focused perspective - the organisational context - an interesting point should be understood, i.e. who should determine an organisation's strategic directions in the first place, initiate changes, and exert power and control? But a rare choice is that between tight, top-down management control and self-regulatory organisational chaos. Rather, organisational leadership and organisational dynamics form the end poles of a continuum with regard to (re)shaping the organisational system (ibid.). Ireland and Hitt (2005) outline other key points of strategic leadership, e.g. developing and sustaining an effective organisational culture and establishing balanced organisational controls.
Finally, it is clear that every strategy acts as a “course of action for achieving an organization's purpose” (de Wit and Meyer, 2005, p. 249). Advocates of a shareholder value perspective would insist that companies should primarily serve the interests of its owners in a profitable manner. On the other hand, advocates of a stakeholder perspective also argue that the purpose is to serve the interests of all parties involved (ibid.). Dutta and Burgess (2003), identify key stakeholders as those with both high interest and high power (power-interest matrix). Besides, the notion organisational purpose involves issues of form and function of corporate governance, as well as elements of a corporate mission, which is often expressed in a mission statement (de Wit and Meyer, 2005).
The organisational example chosen here, Dell Inc., provides various interesting starting points for evaluating and illustrating strategy in the business world. Following a structured approach, relevant elements of strategy content and context are evaluated sequentially in this study. Nonetheless, it is most important to realise that to understand these elements in isolation does not make sense - rather, actual and potential interrelationships between them form the key points of a holistic strategic approach.
Founded in 1984 by Michael Dell as Dell Computer Corporation, Dell Inc. is today one of the largest manufacturers and sellers of personal computers and information technology systems worldwide. Dell splits its products into the categories desktop computer systems, mobility products, software and peripherals, servers and networking products, and storage products (Dell Inc., n. d. d). Moreover, the company provides product support and several other product-related services such as financing and asset management (Datamonitor, 2006). Dell is best known for what has become known as its “direct business model”, a system which basically aims at selling directly to customers and building products to order. Thus, Dell can both bypass the reseller channel and keep its stock of components and finished goods low (Magretta, 1998). According to its corporate website (Dell Inc., n. d. a), the company's inventory is turned over in only five days on average.
Based in Round Rock, Texas, the company serves both domestic and international markets, operating in the Americas; Europe, Middle East and Africa (EMEA); and Asia Pacific- Japan (APJ) as geographic markets (Dell Inc., n. d. c). Dell employs approximately 65,200 people and the company's overall revenues in 2006 amount to $55.9 billion (Datamonitor, 2006). Although operating globally, Dell has a particularly strong presence in the Americas, its largest geographic market - accordingly, the Americas generated 65.1 per cent of Dell's total revenues in 2006, followed by Europe, Middle East and Africa, with a proportion of 23.0 per cent in the same fiscal year (ibid.). The Americas segment is subdivided into business and consumer divisions, while sales to businesses comprise about 85 per cent of Dell's total revenues (Lee, 2007). Asia Pacific-Japan accounted for 11.9 per cent of the total revenues in 2006, though with a considerable growth rate of 20.9 per cent (Datamonitor, 2006).
A look at Dell's history (Dell Inc., n. d. b) reveals persistent international expansion; the company opened manufacturing plants in Ireland (1990), Malaysia (1996), China (1998), and Brazil (1999). In recent years, Dell introduced new products, for instance handhelds, printers, and consumer electronics. In 2006, Dell acquired Alienware Corporation, a manufacturer of branded high performance personal computers, specially focusing on gaming and digital multimedia content (Dell Inc., 2006).
Business Level Strategy
The direct business model introduced by Dell is fundamentally different compared to traditional computer manufacturers. While IBM, Compaq and HP utilised a built-to-stock value chain based on market forecasts and later dispatched to retailers, Dell built every system to order and sold directly to end customers (Govindarajan and Lang, 2002). Throughout its value chain, and especially in its primary activities, Dell explicitly focuses on adding value in the form of lower cost, simultaneously eliminating elements which do not add value, such as unnecessary high inventory and reseller mark-ups. For instance, Dell's inbound logistics are highly integrated with its suppliers through an efficient just-in-time delivery system (Brown et al., 2005). Moreover, the company's operations embrace high-quality mass customisation, optimised outbound logistics based on sophisticated data exchange systems with shippers, and direct selling through low-cost channels such as via phone and the internet (McGraw-Hill Student Resources, n. d.). As an article in MacWorld (cited in Holzner, 2005, p. 202) stated: “Basically, Dell is a sales and logistics engine that operates with minimal overhead.”
Through the information gained by selling directly to customers, Dell also developed the capacity to constantly further segment its customer base into distinct customer groups over time. As a result, it could better address individual needs (Magretta, 1998). However, at the end of these value-adding activities, the observation has been made with increasing frequency that Dell also loses value by delivering poor customer service and support (Brown et al., 2005; Holzner, 2005; Datamonitor, 2006; Holahan, 2006; Clark, 2006; Brignall and Levene, 2006) - a somewhat surprising fact, since Dell's direct business model allows the company to stay quite close to its buyers and the company itself claims to provide a superior customer experience (Magretta, 1998; Dell Inc., n. d. f).
When Dell initiated business with a comparatively small resource base (Stewart and O'Brien, 2005), its original generic strategy clearly was cost leadership, or “being the lowest cost producer of standard technology and staying there” (anon., 2005). As observed by Magretta (1998), Nelson (2004), and Serwer et al. (2005), the design of the company's value chain delivered substantial cost advantages over its competitors. But gradually, also differentiation aspects emerged as part of Dell's strategy, as the company's value chain was able to deliver highly customised products, simultaneously introducing the latest relevant technology much more quickly than competitors with higher stock and slow, indirect distribution channels (Govindarajan and Lang, 2002) - a promising differentiator in industries with massive technological obsolescence.
Corporate Level Strategy
In managing an optimal set of businesses, Dell's strength is rooted in a wide range of products and services, along with their associated cross-selling opportunities (Datamonitor, 2006). Dell's distribution and logistics business model provides the basis for multi-business synergies within its product portfolio: originally developed for Personal Computers, the company gradually expanded and adapted its innovative business model to sell servers, printers, peripherals, and storage equipment (Mockler, 2003). Similarly, Frigo (2003) states that Dell's strategic competencies are highly synchronised, thereby aligning strategic activities with financial value. Kraemer and Dedrick (n. d.) illustrate Dell's balanced approach of centralising certain strategic decisions and functions such as global sourcing and product development, while input from the regions provides the basis for local market responsiveness. In terms of its value chain, Dell utilises a strategy which decentralises primary activities, but centralises support activities.
Dell rarely acquires other corporations, and if so, it is certainly not for the sake of sheer growth. In these cases, the company rather aims to strategically streamline and enhance its portfolio of products, services, and customer segments: for instance, Dell's acquisition of Ali- enware targets the segment of gaming and media content consumers, and through buying ACS in November 2006, Dell engages in sophisticated services such as design and installation of big computer systems (Dell Inc., 2006; anon., 2006).
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