The Dell Company - A Strategic Analysis

Content

1. Introduction

2. Industry
2.1 PEST-analysis
a) Political
b) Economic
c) Social
d) Technological
2.2 Market structure
2.3 Porter’s five forces
a) Potential new entrants
b) The bargaining power of buyers
c) The bargaining power of suppliers
d) Substitute products and services
e) Intra-industry rivalry
(i) Hewlett Packard
(ii) IBM
(iii) Fujitsu Siemens

3. Dell’s history

4. Dell’s business model
4.1 Dell Direct Model
4.2 Elimination of inventory
a) Account selection
b) Demand management
c) Supplier management
d) Forecasting
e) Liquidity management
f) Real time information for suppliers

5. Internal analysis
5.1 Products
5.2 Customers
5.3 Suppliers

6. SWOT-Analysis
a) Strengths
b) Weaknesses
c) Opportunities
d) Threats

7. Forecast

8. Conclusion

Bibliography

Annex

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 Texas², 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.

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.

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.

illustration not visible in this excerpt

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 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

illustration not visible in this excerpt

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.

b)The bargaining power of buyers

Buyers of computer systems range from individual private consumers, to businesses of all sizes, governments and institutions. As the computer industry is a growing industry, the bargaining power of the buyers is considerably weak, also because the market is only dominated by a few big companies which are able to define the rules.

c)The bargaining power of suppliers

The bargaining power of suppliers in the computer industry is assumed to be quite weak, as there are just few computer manufacturers but a lot of component suppliers. But a supplier can gain some bargaining power when he is able to offer products that are superior, e. g. in quality and/or technology compared to his own competitors. Referring to Dell’s situation, suppliers find themselves in a very weak position as they are forced to play by Dell’s rules. Otherwise, Dell will find suppliers which can meet its requirements.¹⁰

d)Substitute products and services

Until today, no products exist that can replace a computer system as a whole. However, single features and tasks can be fulfilled by some substitute products. Among these are e.g. mobile phones which today are used to surf the internet, to write emails and to download data.¹¹ Another example are game consoles replacing conventional computer games. Nevertheless, it has to be emphasised that these substitutes can only replace single features. Regarding a complete computer system, there are no substitute products.

e) Intra-industry rivalry

In order to analyse the intra-industry rivalry, it is essential to know the main competitors and their market behaviour. As already seen in 2.2, the four leading manufacturers Dell, Hewlett Packard, IBM and Fujitsu/Fujitsu Siemens together have a market share of 44 percent.¹² The computer industry is characterised by strong competition where the right strategy and the recognition of innovation and trends determines success or failure.¹³ How Dell’s competitors manage to compete in that global marketplace will be examined below.

(i)Hewlett Packard

Hewlett Packard was founded in 1939 and is today present in 170 countries worldwide. It is headquartered in Palo Alto, California and employs about 150,000 people. The company recorded revenues of $79 billion in 2004, the highest turnover in its history. Hewlett Packard merged with Compaq in 2002, today offering a wide product range, including desktops, notebooks, servers and peripheral products. Additionally, entertainment products like digital cameras and MP3-players enlarge the product range.¹⁴

(ii)IBM

Another successful competitor in the computer industry is IBM, which was established in 1911 and today is headquartered in Armonk, New York. 329,000 employees worldwide generated revenues of $96 billion in 2004, being the highest in that industry. Its product portfolio consists of personal computing solutions like notebooks and desktops, peripheral products, server solutions and software.¹⁵

(iii)Fujitsu Siemens

Fujitsu Siemens is a partnership of the German Siemens AG and the Japanese company Fujitsu. This 50/50 partnership that has its headquarter in Maarssen in the Netherlands was established in 1999 and has more than 7,000 employees today. Despite its youth in that industry, the company already ranks number four in worldwide market share and achieved a turnover of more than $6 billion in the fiscal year 2004/2005. Like its competitors, Fujitsu Siemens offers IT hardware and software solutions.¹⁶

This chapter revealed the conditions prevailing in the computer industry and the factors influencing the behaviour of the participating companies. The knowledge about the macro environment now allows an in-depth analysis of the Dell company.

3. Dell’s history

This short chapter serves as an introduction to understand the world of Dell. It explains the roots of the Dell company and how today’s success began.

In 1984, Michael Dell founded the Dell Computer Corporation when he was an undergraduate student at the University of Texas. Just one year later the company introduced the first computer of its own design - a system running at eight megahertz. It is the first computer system company that offered next-day and on-site product service, going internationally in 1987. Due to early success, Dell conducted its initial public offering in 1988 offering 3.5 million shares, each at $8.50. In order to be able to serve the European, Middle Eastern and African markets the company opened its first manufacturing centre in Ireland two years later. This internationalisation proved successful - in 1993, Dell was one of the top five computer systems makers worldwide. The same year, the company entered the Asian Pacific market. Until then Dell sold its computers exclusively through telephone contacts, which was also extended to internet selling at www.dell.com in 1996. During the following years, Dell constantly enlarged its product range and its manufacturing facilities all over the world. In 1999 the company introduced “E- Support Direct from Dell” an online technical support. One year later, Dell was able to encounter daily internet sales worth $50 million and ranked number one in global market share for the first time in 2001. The company changed its name to Dell Inc. in 2003, as it had evolved to a diverse supplier of technology products and services. Last year, Michael Dell withdrew from his position as CEO and was succeeded by Kevin Rollins. Michael Dell remains chairman of the board.¹⁷

After having given a short overview about the history, the following chapter deals with the question of how Dell managed to become the number one global player.

4. Dell’s business model

Today, Dell is one of the most successful companies in the computer industry.

[...]

¹ Dell (2005), p. 3

² Hill (2005), p. 555, 556

³ Dell (2005), p. 20, 21

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

⁵ ebd.

⁶ Byrnes (2003)

⁷ Telephone interview Michael Rufer (2005)

⁸ Telephone interview Michael Rufer (2005)

⁹ Sutton (2001), p. 2, 3

¹⁰ Breen (2004)

¹¹ eTForecasts, Worldwide PC market (2004), p. 6

¹² Telephone interview Michael Rufer (2005)

¹³ Byrnes (2003)

¹⁴ www.hp.com, company information

¹⁵ www.ibm.com, company information

¹⁶ www.fujitsu-siemens.com, company information

¹⁷ www.dell.com, company information (2005)