Strategic management dell company case study

As one of the worlds leading direct computer systems companies and a premier supplier of technology for the Internet infrastructure, Dells competitive advantage is its direct customer focus. Constant interaction with its customers online and via the telephone gives Dell the ability to understand unique computing needs that drive individual and enterprise productivity. Even though growth rates for the computer industry are expected to be less than previous years, Dell can still successfully operate, enjoying healthy sustainable profits. A main problem is a sagging US economy which Dell has no control over and a saturated PC market with lower profit margins from industry price wars.

TABLE OF CONTENTS:

Executive Summary……….3

Introduction……… 4

Problem Identification……….4

Company Analysis……… 5

Critical Success Factors……… 7

Distribution Channel Analysis……….8

Sales Infrastructure Analysis……… 9

Industry Analysis……….9

Competitor Analysis………9

Customer Analysis……….10

SWOT Analysis……….11

Current Strategy (4P’s, Target Market, Positioning)……….11

Strategic Options………13

Recommendations & Implementation……… 15 Appendix……… 18-20

EXECUTIVE SUMMARY

As one of the world's leading direct computer systems companies and a premier supplier

of technology for the Internet infrastructure, Dell's competitive advantage is its direct customer focus Constant interaction with its customers online and via the telephone gives Dell the ability to understand unique computing needs that drive individual and enterprise productivity Even though growth rates for the computer industry are expected

to be less than previous years, Dell can still successfully operate, enjoying healthy

sustainable profits A main problem is a sagging US economy which Dell has no control over and a saturated PC market with lower profit margins from industry price wars Dell

should focus on being a “market taker”, instead of trying to be a market maker and capitalize on its ability to enter new markets and quickly dominate, as it did in the low-end server and workstation markets It should pursue a multi-continental expansion of its middle and high end server products Dell should also pursue the external data storage market through acquiring a leading company like the EMC Corporation Having already captured a large share of the US market, Dell should try and increase its server, storage, and service segment penetration overseas to gain more international market share,

particularly in China and Latin America Studies might also be done on African and Russian markets as Dell has no physical presence in these regions The only viable strategy in order to achieve Michael Dell’s goal to double Dell Computers’ current revenue to $60 billion by 2007 is to work on methods to improve sales in these 3 new areas A combination of service, storage and server product growth across newly

established international markets will help achieve this ambitious goal While the US economy is in a recession, there is still plenty of room to grow outside its borders

Dell was founded in 1983 by Michael Dell, an 18 year old college freshman from Texas who started out upgrading hard drives for IBM compatibles on nights and weekends Within a year, his service business had grown to an incredible $6 million from

performing computer upgrades for local area businesses and he dropped out of school to concentrate on the business When Dell changed his strategy and started offering custom built-to-order machines, the business exploded, with $70 million in sales by the end of

1985 Evolving into an assembler company, Dell was able to exploit certain events occurring in the industry and swiftly adapted to meet market conditions Five years later, total sales had grown to an unbelievable $500 million and Dell became nationally known

as a supplier of state-of-the art desktop and portable computers Dell continually

achieved phenomenal records in sales and profit growth, eventually making it the most successful company ever in the PC industry, surpassing $25 billion in 2000 As one of the world's premier providers of computer products and services, Dell was the US market leader in its core products, the desktop and laptop markets by 2001

PROBLEM IDENTIFICATION

Although Dell is seen to be a highly successful company, analysts worry that the recent slumping economy in the 4th quarter of 2000 and the market saturation in the technology arena could prevent Dell from achieving its prior growth rates and profits Can it

continue to maintain its stellar track record in light of the sudden decrease in demand, especially with lower and lower profit margins resulting from price wars in the industry ?

sustain its profitability in light of the industry’s -10% growth rate and 50% reduction in profit margins in late 2000, or should it change its expectations and react to the

commodity nature of the environment? Dell’s immediate challenge is to try and sustain its positive growth rate, spike its stock prices, and conquer new markets But how does Dell choose its next product or service to offer the world ? It must make the right choices

as to what is the next value proposition that really matters to its customers Another challenge for Dell is how to cope in a new world where technology devices and

components cost less and less (resulting in shrinking profit margins) that become obsolete practically overnight Perhaps, Dell’s biggest challenge will be to have the discipline to

know when and how to change strategies that have worked so well up to now If Dell

does not have the vision and adaptability, it will be just a matter of time before another company does a Dell on Dell

ANALYSIS –Dell’s Competitive Position

Dell’s success is directly attributable to its “direct model.” Customers have the ability to contact Dell directly and order technologically advanced systems at competitive prices

This direct contact with consumers gives Dell the unique opportunity to know exactly

what its consumers want and offer products that would satisfy their specific needs Dell responded to market slowdown indicators by pursuing an aggressive pricing strategy designed to increase profits through volume Management felt that they could still thrive and dominate the highly competitive market even during the tough times, functioning as the lowest cost producer Continually trying to improve their position in the PC

marketplace, Dell pursued a multi-pronged growth strategy looking to gain domestic

marketshare in the storage/server and computer service markets, as well as implementing

a market penetration approach to attract new international business One of the most significant factors contributing to Dell’s success was the fact that its corporate customers

“not only valued the ability to customize their PC configurations to meet the unique needs of users but also liked being able to deal with the manufacturer directly and to receive Dell’s attractive pricing that was the result of its direct model.” This model was the engine of Dell’s success, which provided additional value to customers with the ability to custom-configure products, kept internal costs low, and provided lofty returns for shareholders Dell’s Direct Model was an efficient distribution system targeted at specific market segments It was also about direct and meaningful customer relationships and virtual integration Some of Dell’s success can also be attributed to the

differentiating fact, when compared to its competition, that it kept its product range rather narrow and limited the distribution to 1 main channel (refer to exhibit 6.) Another initial success factor was timing, as the company had been created as a result of the PC’s open architecture, unlike Apple’s, and was able to take advantage of building and selling clones Dell’s highly successful customer service internet/phone model was another major innovation in the PC industry, which resulted in satisfied customers, requiring less service dispatches, resulting in lower cower costs and more sales Well before the

internet explosion in 1995, Dell began integrating the internet and delivering online technical support and order status information which strengthened its efficiencies on both

the transaction and relationship sides of the business As a result, external sales reps

were able to devote more time to face-to-face contact and less time dealing with

administrative matters In fact, the internet model was so successful that by 2000, 50% of

Dell’s revenues were being generated through the internet resulting in increased

marketshare Dell also excelled in virtual integration, choosing the best providers for

each component and leveraging their scale investments in R&D (Financially speaking,

it is interesting to note that long term investments listed on the Balance Sheet as assets went up 511% from $532 Million in 1999 to $2,721 million in 2000, perhaps as a result

of significant R&D investments for future products Dell also experienced a significant increase of 3012% in long term debt of $17 million in 1998 to $512 million 1999, just one year prior to the asset increase (refer to figures 2 and 3.) Another interesting statistic was that by 2001, the total revenue per unit was the lowest ever at $2,050, resulting in lower profits at the current sales levels.)

Critical Success Factors

 Supply Chain - A key component of Dell's supply chain management was having

materials in close proximity to Dell factories; therefore suppliers are required to have inventory hubs near the manufacturing plants A huge benefit of this supply chain solution is communicating with these hubs in real time to deliver the

required materials Dell had reduced its inventory to an all-time low of a 5 day supply, which comparatively was 20 to 70 days for its major competitors, thereby creating a competitive advantage By operating on a just-in-time basis, (a result

of an 87% reduction in primary suppliers-see figure 4) Dell was able to provide better service with a faster turnaround time Also by reducing the total vendor pool and choosing suppliers physically close to Dell’s factories, supplier loyalty was increased, leading to further economies of scale

 Customer Efficiency – Dell constantly monitored the customer’s shifting

preferences, which helped in pricing, inventory management, and cost accounting Also, Dell’s factory assembly process was highly organized (i.e bar codes), efficient (i.e systems were “burned in”) and extremely fast (i.e 36 hour

turnaround) and its customer service was exemplary for the industry

Dell also had a superior ability to execute its plans and objectives, which were always proactive and forward thinking

 Market Sensing - Dell consistently sensed market changes before they happened

and was able to anticipate and identify product areas to maximize sustainable profits using its Direct Model As a result of this ability, Dell could pick and choose which market they entered, making sure it was a market leader quickly upon entering

Channels – Dell used its Direct Model approach when entering major markets, but for smaller markets it operated through its distributors Dell was labeled as a “mail order

company”, but less than 5% of sales actually came from individual consumers Most sales were to business customers through its direct sales force, with 50% of sales going to large corporate accounts and the other 50% of sales going to medium and small

businesses Computers were shipped directly to the customer, cutting out the middle man.

(Dell briefly altered this direct approach by selling computers in CompUSA and Sam’s Club in 1992, but unfortunately, entry into retail channels was not successful in

broadening its penetration of the consumer market because customers no longer had the

option to custom configure their machines - a previous leverage for Dell) Dell also sold servers through its direct sales force to larger relationship clients and through telephone and online channels to smaller business clients using a three-tiered architectural system

Sales infrastructure – Orders for the factories came in from 2 different sources

Consumers and small business customers responded to print ads calling toll free numbers, while Dell’s inside sales representatives placed orders for their large corporate customers

Industry- Dell entered the server market in 1996, and within 3 years, servers accounted

for 12% of its sales It entered the workstation market in 1997 and by 2000 was the worldwide market leader Dell had 2 US plants to service the North American market in Texas and Tennessee It also had plants in Ireland, Malaysia, Brazil and China to support its global business By 2000, Dell generated $7.4 billion, with 25% ($1.85 billion dollars) coming from outside of the US, but surprisingly, international market share was half of what it was in the states With the US computer industry pretty well saturated with 53%

of homes already owning PC’s coupled with consumer fears of a recession, there was a significant decrease in demand The industry had recently just gone through a hyper expansionary phase with 30% growth rates in 1999-2000, but gross profit margins overall have dropped from 50% to 25% in the last decade Therefore, the economic downturn of

2000 resulted in predictions of desktop and laptop revenues decreasing by 10% from the previous year

Competitors – The computer industry is fragmented New products are coming out all

the time, the competition is brutal, and customers are changeable Dell’s main

competitors were Apple, IBM, Compaq, Gateway, and HP, but the “Others’ segment had

the most percentage of vendors marketshare at 34% Many of these companies could not continue making profits operating in Dell’s “low-margin sweet spot” as the gross margins

of the industry consistently kept dropping (i.e total unit sales dropped from 46.9 billion

in 1999 to 30.4 billion by the 3rd quarter of 2001, which was comparatively a 14%

decrease See Figure 1 in the appendix.) Compaq had been the market leader in desktops

and portables in 1997, but by 2001, Dell had overtaken them Customer Analysis -

Customers valued Dell’s uniqueness of: offering the ability to easily customize their PC’s, dealing directly with the manufacturer, and the attractive pricing resulting from the

‘direct model’ Dell understood the different needs of its large corporate, small business, and governmental customers and attempted to optimize its 7,500 worldwide sales and support reps for each particular segment In order to do this, Dell segmented its customer base into 9 US geographical regions Dell also had created 3 regions outside of the US: Americas International, EMEA, and APCC (refer to exhibit 7) Dell’s four main types of customers were differentiated through the buying process as primarily relationship (consumers with ongoing purchases) or transactional customers, (consumers making 1 purchase at a time) broken down into the following segments (refer to figure 5)

Global: Primarily relationship and transactional, then broken down into 3 core areas:

Relationship Business, Small/Medium Businesses, and Consumer Business

 US Market (Relationship = 60%): Business-global, enterprise, large corporate

accounts, federal government, education, state & local government

 Small/Medium Businesses (Relationship = 30%): Preferred account division,

Business systems division

 Consumer Business (Transactional = 10%): knowledgeable buyers.

Dell has combined and implemented a multi-segment target marketing strategy with 90%

of its business being relationship based

SWOT

Strength – By offering superior telephone customer services such as Premier Access,

and outsourcing their shipping, Dell had the lowest operating cost in the industry at

11.5% It had a unique ability to predict which new high margin technology product

could be driven to scale w/lower priced products driven by its direct model, which was continuously improving, making it hard to copy Dell set the industry standard for customer service/relations resulting in satisfied customers and less downtime (Dell resolved 72% of problems remotely, which was twice the industry average.)

Weakness – Dell was late getting into the Latin American market (5th place in overall market share), resulting in lost sales It also had weak international market share in 2002 (Western Europe =3rd, Asia/Pacific = 7th, Japan = 8th, and 5th place in the rest of the world In addition, jumping into the laptop market too soon, entering the workstation market late and signing unsuccessful retail agreements all brought losses to the company Dell doesn’t have robust products to support mission critical environments and is shut-out

of big enterprise storage accounts

Opportunity – Dell can further capitalize on the remaining build-out of the Internet

infrastructure and increase market share in the external storage market (i.e SAN/DAS were expected to take 2/3rds of the market by 2005) and participate more in the midrange and high-end server markets (2000 saw a 7% worldwide increase from 1999.) It can develop itself into the premier Internet partner for customers around the world by heavily targeting sales to first-time PC buyers and introducing new product categories and

services With only a 5% global market share, Dell can easily increase business revenues from international growth

Threat – Computer industry consumers have traditionally been notoriously fickle in their

buying habits and trends, affected by the rapid pace of technology and the bursting Dot.com Economy While the growth of the Internet should produce more demand for servers and storage, those markets will test Dell in areas that haven't been its strong points: sophisticated product engineering and labor-intensive services

Current Strategy