I. Background Michael Dell started running business in computers when he was in college. He bought random access memory chips and disk drives for IBM PCs at cost from IBM dealers, who had excess supplies on hand because they were required to order large monthly quotas from IBM. Dell’s sales grown up to $80,000 per month and because of his success he decided to drop out of college and form a company. His company was known as PCs Ltd where he sells both PC components and PCs under the brand name PCs Limited. During the next several years, PCs Limited was hampered by growing pains. Michael Dell sought to refine the business model and made different strategies while at the same time keeping costs low. The company was renamed Dell Computer in 1987, and the first international offices were opened at the same year. Sales to large customers quickly became the dominant part of Dell’s business. Michael Dell’s vision was for Dell computer to become one of the top three PC companies. In the years 1990-1993, the company began distributing its computer products through Soft Warehouse Superstores. But soon, the company realized that they made a mistake using that kind of distribution so they withdrew from it. During the year 1993, further problems emerged: Dell reportedly lost $38 million in risky foreign currency hedging, quality difficulties arose with certain PC lines made by the company’s contract manufacturers, profit margins declined, and buyers were turned off by the company’s laptop PC models. The company realized that there were higher costs and unacceptably low profit margins in selling to individuals and households that is why Dell did not pursue consumer market aggressively until sales took off in 1996 and 1997. PC savvy individuals are now looking for powerful computer with multiple features, did not need much technical support, liked the convenience of buying direct from Dell, ordering a PC configured to their liking, and having it delivered to their door. Dell formed and internal sales and marketing group to cater to the needs of these consumers during the year 1997. In late 1997, Dell became a low cost leader among PC vendors by wringing greater and greater efficiency. Since then, the company had continued driving hard to reduce its costs by closely partnering with key suppliers to drive costs out of its supply chain and by incorporating e-commerce technology and use of the Internet into its everyday business practices. From 2002-2007, Dell was widely regarded as the lowest cost producer among all the leading vendors of PCs and servers worldwide. Dell products received more than 400 awards relating to design, quality, and innovation.
II. Problem 1. Dell computer brand name is not popular to the college market. 2. The erosion of Dell’s brand value continues due to the perception of declining customer service. 3. Dell’s inability to serve all market needs due to the current strategy of limited vendors in its supply chain. Dell brings few products to market and leverages technology created by other companies effectively and efficiently. 4. The company has such a huge range of products and components from many suppliers from a plethora of countries, that there is the occasional product recall that can cause Dell some embarrassment. 5. Customers just can’t buy Dell as simply as other brands because each product is custom-built according to their specifications and this might take days to finish. III. Objectives 1. To aid or to make actions to the declining customer service and support efforts of the company. 2. To strengthen Dell’s customization position. 3. To strengthen Dell’s visibility and revitalize the company’s marketing to the other markets. 4. To strengthen Dell’s position as the low-cost personal computer producer and provider within the market
IV. Theoretical Framework Wharton Model of Competitive Advantage Cycle Understanding the key sources of advantage and how they are sustained or eroded become crucial in formulating competitive strategy. The Wharton Model below will help assess the nature and magnitude of present advantages and the reasons why they have been sustained. Key Success Factors - Brand Loyalty - Brand Equity -Product differentiation and specialization
Positional Advantage Dell is well known for its innovations in supply chain management and innovation in ecommerce. A variety of scopes and brands under its belt.
Source of Advantage Differentiation and product specialization. (Product Driven)
Performance Rewards for Dell’s Inc. Customers Quality service and products Satisfaction Dell kiosks for customer service
Competitive Dynamics Erode Advantages
Barriers to Imitation - Constant innovation
- Other brands prioritizing and strengthening customer service and relationship.
Investments in Renewal Dell Inc should invest in other sources of income and lowering costs and losses of product recall and customer compensation for faulty and misrepresented products.
Analysis Dell’s primary source of advantage is product differentiation and specialization because they have the most differentiated and customized line of computers/laptops for the consumers in the market. They have different specialized features for each particular user such as heavy users for education, business, entertainment and gaming. Dell has different types of brands each catering to the said categories. Dell’s positional advantage is its variety of scopes and brands aiding to that of its source of advantage which is the product differentiation and specialization. Dell has tapped many specific market segments as shown here: Its Business/Corporate class represent brands where the company advertises emphasizes long life-cycles, reliability, and serviceability. Such brands include: OptiPlex (office desktop computer systems) Vostro (office/small business desktop and notebook systems) n Series (desktop and notebook computers shipped with Linux or FreeDOS installed) Latitude (business-focused notebooks) Precision (workstation systems and high-performance notebooks),[35] PowerEdge (business servers) PowerVault (direct-attach and network-attached storage) PowerConnect (network switches) Dell/EMC (storage area networks) EqualLogic (enterprise class iSCSI SANs)
Dell's Home Office/Consumer class emphasizes value, performance, and expandability. These brands include: Inspiron (budget desktop and notebook computers) Studio (mainstream desktop and laptop computers) XPS (high-end desktop and notebook computers) Studio XPS (high-end design-focus of XPS systems and extreme multimedia capability) Alienware (high-performance gaming systems) Adamo (high-end luxury laptop)
One of Dell’s performance rewards for its customers is the launching of Dell kiosks in malls for customer service and maintenance of the units. Some of Dell Inc's marketing strategies include lowering prices at all times of the year, offering free bonus products (such as Dell printers), and offering free shipping in order to encourage more sales and to stave off competitors.
It is common knowledge that there are criticisms sparking the quality of customer service Dell offers such as in May 2008, the New York Supreme Court ruled that Dell and Dell Financial Services "engaged in fraud, false advertising, deceptive business practices, and abusive debt collection practices". The relevant lawsuit aimed to highlight and seek restitution for a lack of technical support given to customers by Dell. The court plans to hold further proceedings to determine how much money Dell has to pay out to customers and how much profit Dell made unlawfully, in New York. In July 2009, Dell apologized after the firm offered its Latitude E4300 notebook at NT$18,558 (US$580), 70% lower than usual price of NT$60,900 (US$1900) in its Taiwan website. The firm withdrew orders and offered a voucher of up to NT$20,000 (US$625) a customer in compensation. The consumer rights authorities in Taiwan fined Dell NT$1 million (US$31250) for customer rights infringements. Many consumers sued the firm for the unfair compensation. A court in southern Taiwan ordered the firm to deliver 18 laptops and 76 flat-panel monitors to 31 consumers for NT$490,000 (US$15,120), less than a third of the normal price.[81] The court said the event could hardly be regarded as mistakes, as the prestigious firm said the company mispriced its products twice in Taiwanese website within 3 weeks. With these latest criticisms Dell must invest in other sources of income that will not jeopardize its stockholder’s money and should incur less cost and fees for compensation to its damaged customers. Also another eroding factor other than the accused engage in fraud, is the ability of customers to switch brands to a brand that is more customer friendly.
V. SWOT Analysis STRENGTHS WEAKNESSES • Lower cost due to direct selling • Difficulty in attracting the college students segment of the • Lower cost due to decreased market inventory • Customization and direct • Lower risk of retaining method problems with home inventory due to build-to-order users model • Occasional product recall • Stronger relationships with customers due to their direct model • Extensive range of ways as to how customers may comment • Inexpensive quality products and services • Customization • Innovative • Application of the internet to other parts of the business • Total command of the supply chain OPPORTUNITIES THREATS • Continuous increase in usage • Constant change in the industry of personal computers • Decrease in price difference • Customization’s attraction to among brands second-time computer buyers • Increase in demand for high • Increase in demand for laptops quality, low priced products • Convenience in online • Slow down of the growth rate of shopping the industry Diversification • Technological advancement is a double-edge sword • Fluctuation in global currencies
Constant change in the industry In a volatile market such as personal computers, threats abound. Computers change in a constant sometime daily basis. New software, new hardware and computer accessories are introduced at a lightning speed. It is essential for Dell therefore to be always on the lookout for new things or introduce new computer systems. Decrease in price difference among brands One of the biggest external threats to Dell is that price difference among brands is getting smaller. Dell’s Direct Model attracts customers because it saves cost. Since other companies are able to offer computers at low costs, this could threaten Dell’s price-conscious growing customer base. With almost identical prices, price difference is no longer an issue for a customer. They might choose other brands instead of waiting for Dell’s customized computers. Increase in demand for high quality, low priced products The threat to become outmoded is a pulsating reality in a computer business. Not only that, companies must produce products that are high in quality but low in price. This is one challenge that Dell contends with. Slow down of the growth rate of the industry The growth rate of the computer industry is also slowing down. Today, Dell has the biggest share of the market. If the demand slows down, the competition will become stiffer in the process. Dell has to work doubly hard to differentiate itself from its substitutes to be able to continue holding a significant market share. Technological advancement is a double-edge sword Technological advancement is a double-edge sword. It is an opportunity but at the same time a threat. Low-cost leadership strategy is no longer an issue to computer companies therefore it is important for computer companies to stand out from the rest. Technology dictates that the most up-to-date and fastest products are always the most popular. Dell has to always keep up with technological advancements to be able to compete. Fluctuation in global currencies Dell, being global in its marketing and operations, is exposed to fluctuations in the World currency markets. Although it is a very lean organization, orders do have to be placed some time ahead due to their size or value. Changes in exchange rates could leave the company exposed to potential loses in parts of its supply chain.
OPPORTUNITIES Continuous increase in usage of computers Personal computers are becoming a necessity now more than ever. Customers are getting more and more educated about computers. Customization’s attraction to second-time computer buyers Second-time buyers would most likely avail of Dell’s custom-built computers because as their knowledge grows, so do their need to experiment or use some additional computer features. Increase in demand for laptops Demand for laptops is also growing. As a matter of fact, demand for laptop has overtaken the demand for desktops. This is another opportunity for Dell to grow in other segments. Convenience in online shopping The internet also provides Dell with greater opportunities since all they have to do now is to visit Dell’s website to place their order or to get information. Since Dell does not have retail stores, the online stores would surely make up for its absence. It is also more convenient for customers to shop online than to actually drive and do purchase at a physical store. Diversification Dell is pursuing a diversification strategy by introducing many new products to its range. This initially has meant good such as peripherals including printers and toners, but now also included LCD televisions and other non-computing goods. So Dell competes against iPod and other consumer electronics brands. WEAKNESSES Difficulty in attracting the college students segment of the market Dell’s biggest weakness is attracting the college student segment of the market. Dell’s sales revenue from educational institutions such as colleges only accounts for a measly 5% of the total. Dell’s focus on the corporate and government institutional customers somehow affected its ability to form relationships with educational institutions. Since many students purchase their PCs through their schools, Dell is obviously not popular among the college market yet. Customization and direct method problems with home users
For home users, Dell’s direct method and customization approach posed problems. For one, customers cannot go to retailers because Dell does not use distribution channels. Customers just can’t buy Dell as simply as other brands because each product is custom-built according to their specifications and this might take days to finish. Occasional product recall The company has such a huge range of products and components from many suppliers from a plethora of countries, that there is the occasional product recall that can cause Dell some embarrassment. In 2004 Dell had to recall 4.4 million laptop adapters because of a fear that they could overheat, causing electric shocks or fires. STRENGTHS Lower cost due to direct selling Dell is able to reduce cost because selling directly to customers allowed the company to reduce marketing and sales cost by eliminating mark-ups of distributors and retailers. Lower cost due to decreased inventory & Lower risk of retaining inventory due to build-to-order model Dell uses build-to-order inventory system which aims to operate on the principles of lean manufacturing. This means that the end consumer dictates when and what products will be produced. A production order only generated when a customer order is received and confirmed. This model reduces production waste, work in progress, inventory holding cost and improves customer lead times and cash flow for the company. Stronger relationships with customers due to their direct model Dell's Direct Model approach of enables the company to offer direct relationships with customers such as corporate and institutional customers. This is because the company can assist the customers personally fostering trust and loyalty. Extensive range of ways as to how customers may comment or suggest The company’s strategic method also provides other forms of products and services such as internet and telephone purchasing, customized computer systems; phone and online technical support and next-day, on-site product service. This extensive range of products and services is definitely one of Dell’s strengths. Inexpensive quality products and services
Dell boasts a very efficient procurement, manufacturing and distribution process allowing it to offer customers powerful systems at competitive prices. Customization Each Dell system is built to order to meet each customer’s specifications. Innovative Dell is able to introduce the latest relevant technology compared to companies using the indirect distribution channels. Dell turns over inventory for an average of every six days, keeping inventory costs low. Application of the internet to other parts of the business The company's application of the Internet to other parts of the business including procurement, customer support and relationship management is growing at a rate of 30 percent. The company's Web site received at least 25 million visits at more than 50 country-specific sites. Total command of the supply chain Dell cuts out the retailer and supplies directly to the customers. It uses information technology, and Customer Relationship Management (CRM) approaches to capture data on its loyal consumers. So a customer selects a generic PC model, and then adds items and upgrades until the PC is kitted out to the customer's own specification. Components are made by suppliers, never by Dell. PC's are assembled using relatively cheap labour. You can even keep track of your delivery by contacting customer services, based in India. The finished goods are then dropped off with the customer by courier. Dell has total command of the supply chain. 10
INDUSTRY CHARACTERISTICS AND MACRO FORCES A strategic map is an analytical tool to graphically display competition in an industry and see how industry changes or how trends might affect it. In the figure below, the strategic dimensions of Push and Pull and Purpose of Usage are used. Strategic Map of the Information Technology-Computer Hardware Industry
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Currently in the market, HP is number one and has a great pull for its brand of laptops and PC units because of its variety specific for its users ranging in gaming, entertainment, business and education. The second in the market is Dell however it is over run by the pull and the aggressiveness of users for Apple who caters to entertainment, business and education because of its constant innovation and buzz marketing for products. This leads Dell on a leverage bordering from pull to push& pull. Notice the apparent scope in gaming, because Dell is the leading brand for gaming because of its successful brand of Alienware. Sony is in the Push & Pull area scoping mid-range of gaming to entertainment until a bit of business specifics.
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Acer on the other hand is Push and Pull area nearing the Pull region scoping from the mid range of entertainment to business and education. IBM has been sold to the Chinese which owns Lenovo, because of this brand absorption, it is in the Push region because the firm wants to push the brand and its product in the market for consumers to react and create a need for them to purchase. The biggest Push is with Samsung given that the brand and its product’s attributes have a minimal scope in the consumer’s preferences and categories of specialization.
The current environment for the computer hardware industry is shaped by several macro forces. Primarily, Dell and its competitors are influenced by economic, demographic, technological and national forces. Government, social, physical and national forces peripherally affect the computer hardware industry to varying degrees. The commoditization of the personal computer—a vital tool for business and consumer customers—is a key driver for the economics of this industry. Corporate spending accounts for 80% of all technology spending, and economic conditions decreasing business capital expenditures has a negative and direct impact on the computer hardware industry. While this industry is mature in the U.S., leading to decreased growth expectations, computer spending by other countries around the world will likely fill this void. Specifically, the computer hardware industry is predicted to grow exponentially in Latin America and non-Japanese Asia over the next several years. Demographic forces also influence the characteristics of the computer hardware industry. Geographic areas discussed above indicate where computers are well below their penetration levels—creating the prospect of new markets. Although 2003 U.S. census data on computer and internet usage at home correlates closely with income and educational level, the commoditization of computer hardware industry enables it to be accessible to lower income level consumers. Consumer race and age also influences computer usage, according to the 2003 U.S. Census Bureau. Computer hardware companies should target less educated consumers, Hispanics, Blacks and people older than 65 years to achieve additional areas of market growth. Technological forces have the most significant influence on the computer hardware industry. The phenomenon called the “upgrade cycle” is one of the most influential macro forces on the computer industry. The upgrade cycle drives waves of new purchases among business and consumer customers as technological change transpires. Some industry analysts assess that 50% of computer hardware product profits are created during the first 3 – 6 months of sales. In 2006, Microsoft is set to release the “Vista” operating system which
is likely to catalyze an upgrade cycle among business and consumer customers. Customers increasingly choose a single vendor to meet all of their computer needs and technology upgrades. For a computer hardware company to remain competitive, all customers’ needs must be efficiently satisfied. We recommend that Dell focus on “turn-key” technology solutions in order to maintain its superior differentiator status within the industry. National forces are increasingly important in a computer company’s ability to maintain its competitive edge, both in terms of the manufacturing process and improving sales. Computer companies are increasingly shifting their manufacturing operations outside of the U.S. to take advantage of a growing business and consumer market for their products as well as cheaper operating costs. Government, social and physical forces influence the computer hardware industry, however, these macro forces are significantly less important than those discussed in prior paragraphs. Governments throughout the world represent an opportunity for computer hardware companies, including Dell, as they aim to develop and deliver more services to their citizens. Social forces, including holiday, back-to-school sales and a summer business slowdown in Europe also drives sales in this industry. The physical environment has very little impact on the computer industry since all computer parts are artificially manufactured. However, adverse weather can negatively impact the competitive edge of a company such as Dell, which relies on “just in time” inventory methods as well as direct sales to its customers. The electronic computer manufacturing industry is mature in Japan, the U.S. and Europe. Growth opportunities remain among certain target populations within those areas and significant areas of market expansion are likely to occur in Latin America, Asia, and the Middle East. However, computer hardware companies are likely to continue the trend towards consolidation for the foreseeable future. Mergers and acquisitions have characterized this industry over the last few years including Lenovo Group’s purchase of IBM’s PC division in 2005 and HP’s 2002 acquisition of Compaq. Pricing in the computer manufacturing industry is extremely competitive. IT reflects the rapid pace of technological change and decreasing PC costs. Since 2000, the prices of chips and disk drives declined and the standardization of primary components of PCs led to a decline in PC prices. Direct sellers, including Dell, have traditionally been able to under-price indirect sellers in the industry including Compaq and HP. However, most PC vendors now offer a desktop model for less than $500 and a laptop for $700. Key success factors for companies in this industry continue to evolve as the industry matures. Specifically, they include: • Competitive prices
• Superior relationships with suppliers • Product customization for business and consumer customers • Quality customer service • Excellent cost structure Dell’s business model incorporates many of these key factors; the company is working to improve customer service and product customization There are also significant opportunities for computer hardware manufacturers including expansion into peripheral markets and products such as printers. Dell entered this market in 2003. However, threats to the computer hardware industry are strong—primarily, stiff competition among top industry players such as HP. The computer and peripherals industry is firmly entrenched in the maturity stage of the life cycle. Companies in this stage, including Dell, experience stable sales, slight growth, and decreasing production costs. In order to remain at the forefront of the competition, computer hardware companies should focus on process innovation—an arena where Dell has succeeded. Specifically, Dell adopted a customer-focused approach with a closely managed supply chain and cash-flow process. Dell’s low-cost, direct sales model shaped its position in the industry and other companies have struggled to copy this innovation. As Dell and other computer hardware companies continue to maneuver the challenges of the mature life cycle stage, they will need to remain focused on process innovation and creating business and consumer customer value to maintain its status as industry leader. COMPETITIVE LANDSCAPE (PORTER’S FORCES) Understanding the external environment is key to successfully competing in the computer hardware industry. Porter’s Five Forces of Competition provide a framework for Dell to outline the bargaining power of suppliers and customers, the threat of new entrants, the threat of substitutes and the intensity of competition. Bargaining Power of Suppliers (HIGH) In this industry, the bargaining power of suppliers is high due to the limited number of suppliers for key components. For instance, Intel sells 90% of the microprocessors used in PCs and Microsoft provides 85-90% of the operating systems. In addition, 80% of the world’s laptops are assembled in Taiwan. Bargaining Power of Customers (HIGH) Likewise, the bargaining power of customers is also high due to the fact that PCs are now commodities. Nearly all PCs contain the same components or the same type of components. However, customers’ power remains limited
because consumers may be willing to pay a premium to computer companies that are able to provide technological solutions. Threat of Substitutes (MODERATE) There are numerous PC sellers that are offering the same specifics and functions that Dell offers. Increase in low-priced sellers is also rampant. However, since the company offers customization, the customers chooses which parts they want which is a unique combination that other companies do not offer. Threat of New Entrants (LOW) Alternatively, the threat of new entrants is low. The 1990s saw a significant level of growth, but the early 2000s have shown signs of contraction within the industry. The threat of substitutes is also low since the only available substitute for a Windows-based PC is an Apple Macintosh. Intensity of Competition (HIGH) Finally, the intensity of competition is high since there are relatively few competitors in the market. However, they all offer the same basic products and must compete on price.
Value Chain Analysis
Inbound Logistics Dell’s direct-to-consumer sales model has revolutionized the value chain within the computer industry. This model, which relies heavily upon webbased technologies such as Electronic Data Interchange (EDI) and just-intime inventories, has clearly been one of the distinguishing factors in Dell’s success. Dell encourages its suppliers to use its website to track orders and inventories. This real-time information sharing allows Dell’s chip and component manufacturers to better see Dell’s sales.The goal of the information sharing is to create a virtual corporation where suppliers can watch their products purchased as parts on Dell’s computers. By using this technology, suppliers are able to more efficiently meet inventory requirements and maintain low costs. Operations Dell has positioned itself as the number one seller of personal computers by maintaining an efficient and streamlined operating strategy. Dell’s servers, storage systems, mobile and desktop computers are built-to-order in six manufacturing facilities around the world. Web-based systems control customer orders and inventory levels.“Dell maintains inventory levels of only four days, even as it serves more customers with more products in more markets every day” (Fiscal 2005 in Review, 2005). As noted, Dell’s culture encourages its employees to find ways to cut costs. Within the last 4 years, Dell has increased its productivity by 400% and saved more than $1.9 billion by removing unnecessary costs within its operations (Fiscal 2005 in Review, 2005).This efficiency has allowed Dell to sell its made-to-order units for 10% to 20% less than its rivals.
Outbound Logistics Dell’s direct-to-consumer business model enables its customers to purchase its products via its website, by fax/phone or at limited retail locations. Internet customers are able to customize their purchases on their own “Dell Homepage.”Dell notes that customers which utilize its website spend more and make purchases faster than those using the fax/phone method of order. Once the order is placed, Dell prides itself on a 7-day shipping schedule. This delivery schedule is typically better than those offered by the company’s competitors. Marketing and Sales Dell’s marketing efforts have a ubiquitous presence across the web, television and print. Few competitors can match the marketing budget of the $50 billion firm. Internet sales currently make up over 50% of the firm’s total sales. In hopes of increasing its consumer base the organization has offered its products at discount chains Wal-Mart, Target, QVC Inc. and Costco. Although Dell built its reputation as a low-priced
computer seller, the firm has shown signs of distancing itself from its discountprice image by expanding its product mix to include high-end PCs, televisions, MP3 players and other electronics. Service Over half of Dell’s sales are made on its website, limiting the level of direct sales interaction between its employees and customers. However, once the purchase is made consumers often interact with customer service/support representatives. As cost differences become slimmer, exceptional service is one way in which computer companies differentiate and attract new and returning customers. Revenues from enhanced services/support are significant for the firm and have grown “nearly 40 percent for three consecutive years” (Fiscal 2005 in Review, 2005).Although the firm has long prided itself on offering the best customer service in the industry, recent surveys have shown declining results in this segment of the business. Consumer Reports ranked Dell behind Apple, IBM and Toshiba for its customer support with laptops (Computers, Desktops, & Laptops, 2006, p. 232).Despite the decline, Dell has still managed to rate higher than its competitors HP and Compaq. I n recent years customer service/support has been moved to lower wage nations. Top executives have acknowledged the problem and are reportedly working toward improvements. Firm Infrastructure Dell was founded in and maintains its worldwide corporate headquarters in Round Rock, Texas. To increase its global presence the firm has expanded its infrastructure to include corporate offices and manufacturing facilities in the UK, Japan, Singapore, Ireland, Brazil, China, Malaysia and other U.S. locations. The firm’s infrastructure also includes several overseas call centers in India. Although the company partners with retailers, it does not have any official retail locations as part of its infrastructure. Most of the firm’s infrastructure is virtual or web-based. This allows the company to sidestep retail overhead costs while maintaining customer visibility. Human Resources Dell employs over 55,000 individuals. The organization is dedicated to creating a diverse workforce to meet the objectives of the organization and its customers. Dell-sponsored groups were formed to promote a sense of community among employee participants, support business goals, aid in their personal and professional development, support business goals and provide a resource for organically recruiting and retaining the best and brightest talent in the industry. The organization works diligently to create a corporate environment based on meritocracy, personal achievement and equal access to all available opportunities.
Technology Development Dell defines itself as a “global diversified technology provider”. Although it would seem that Dell spends a tremendous amount on its R&D this is not the case. Dell brings very few new products to market. Instead, Dell has a focused strategy which leverages the work of partners and other firms “to recreate the work others have done very well” Fiscal 2005 in Review, 2005).Dell’s global teams meet regularly with customers to gain feedback on which new technologies will have the greatest impact. This feedback is then shared with partners such as Oracle, Intel, EMC and Red Hat to share in R&D costs. This strategy is in stark contrast to IBM which spends billions of dollars annually on R&D. The savings that Dell realizes from R&D allows it to deliver cookie-cutter servers and desktops at value. However, many analysts believe the firm’s inability to adopt more state-of-the-art technologies has prevented Dell from establishing a successful strategy for high-end products. Procurement As previously stated, Dell has remained extremely loyal to chip maker Intel. As the largest producer of personal computers, Dell is also the largest customer of Intel chips. Intel claims to be able to ship materials into Dell’s production facilities every two hours based on real- time customer orders. This real-time supplier allows Dell and its suppliers to forecast and manage the most efficient levels of inventory. “Dell's decision to remain solely committed to Intel chips have certainly helped contain the cost of low-end, standard-based desktops and servers. Purchasing orders for production facilities are initiated when customers place orders thereby depleting inventory levels on the shared website. This form of purchasing allows both Dell and its suppliers to properly forecast, thereby maintaining low levels of inventory and capital investment.
VI. Alternative Courses of Action 1. Focus on innovation While many of its competitors are working feverishly to develop the next generation of technology, Dell has been waiting. To date, the firm's strategy has been to recreate technology. In many cases, companies that do their own R&D are able to stay ahead of the industry through the development of new products. Putting more emphasis on R&D has some potential benefits. Through increased R&D spending, Dell may be the first to introduce products to market and establish first mover advantage. Dell's recognizable brandname would allow it to expand into new products and potentially create insurmountable barriers to entry for its competition.
However, an increased emphasis on R&D would distance the company from its core competencies. Increasing R&D changes its focus from mass customization of mature products to smaller batches and product introduction and growth. Additionally, it would force the company from its direct sales model, as new products require multiple distribution channels to ensure they are available to customers as quickly as possible. Currently Dell's strength is the sales of mature products through mass production, bringing quality and price without the cost of R&D. 2. Divesting As is the nature of many larger companies, Dell is competing in several different product markets. Divesting products or services that the company is not competing near the top of the market will increase internal focus. Divesting of these assets or divisions could occur through identifying a competitor and selling the business, or by spinning a division into its own company. The key benefit of this strategy is the improved focus on core business. Stripping away these segments would enable Dell to become more streamlined. Specifically, it would require all segments to work for similar customer bases. Establishing a singular customer focus to each employee allows Dell to leaps in product creativity and adds more than value to its brand. As a complete solutions provider, Dell is uniquely positioned to meet a full range of customer needs. Divesting portions of their business, especially in its growing infrastructure segment, could potentially limit growth. Removing components from Dell's network will mean that as business grows, Dell would utilize external resources to satisfy customer's requests, limiting the effectiveness of Dell's competitive advantage. A single Dell branded solution is more likely to position Dell as a differentiated service company. 3. Reinvigorate Differentiation Advantage This strategy encourages Dell to return to its core competencies and calls for the company to ‘get back to basics.’ It pushes the company to improve upon those competencies which helped differentiate it from the beginning. Specifically, improvements will include the enhancement of customer service, the addition of suppliers, new marketing campaigns, the modification of retail sales and the expansion of turn-key solutions. This strategy seeks to widen Dell's competitive advantage through the further refinement of its existing core competencies. Advantages of this strategy are considerable. Dell has long established itself as a pioneer and expert in value-chain management. The
improvements this strategy develops are located within the company’s existing value-chain. Furthermore, Dell’s culture and structure is specifically aligned to focus on improvements in these areas. Most significantly, the suggested strategy does not force the firm reinvent itself. Because improvements are limited to existing business segments, Dell will not be required to produce or develop new product lines. The negative aspects of this strategy are worthy of mention. By solely improving upon existing competencies, the company runs the risk of becoming stagnant. The proposed strategy does not encourage the addition of new products or services, potentially keeping the company out of new and profitable markets. Stagnation in the technology industry represents a significant risk and may cause degradation in the firm’s signaling criteria. This may reduce the company’s premium price and ultimately decrease profitability.
OBJECTIVES
To aid or to make actions to the declining customer service and support efforts of the company
To strengthen Dell’s visibility and revitalize the company’s marketing to the other markets
To strengthen Dell’s position as the low-cost personal computer producer and provider within the market
Focus on innovation
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Divesting
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ACA
Reinvigorate Differentiation Advantage
To Total strengthen Dell’s customiza tion position
VII.
Recommendation
Dell considers customer service and support to be a key differentiator. The company, which prides itself on this segment of business, has consistently ranked number one in the industry. Not surprisingly, this segment represents a significant and expanding revenue stream for the firm. However, Dell’s lead in customer service and support has declined in recent years. Declining training and the outsourcing of customer service and support has damaged its reputation. To rectify this problem, Dell must improve its customer service representatives’ selection process, ensuring they are easily understood and well trained. By improving this segment of business Dell can once again clearly differentiate itself from rivals HP and IBM. Dell’s hugely successful direct sales model has allowed its products to be customized by customers. However, Dell maintains a single source relationship with chip maker Intel which limits consumer choice. Those that prefer to have PCs powered with chips are currently unable to do so. To strengthen Dell’s customization position, the firm must offer increased configuration choices through the establishment of additional supplier relationships. There is however, one significant warning. Dell must pursue relationships with only those suppliers that are able to integrate seamlessly with Dell’s supply-chain. This strategy will allow Dell to offer additional choices for its customers while maintaining production efficiencies. This strategy also recommends that Dell revitalize its marketing efforts to target underserved markets within the U.S. while expanding its marketing abroad into emerging and growing international markets. To strengthen Dell’s visibility, it is recommended that Dell modifies its marketing focus. Dell must develop marketing campaigns to position its PCs as commodities that are necessary for everyday life. The second marketing enhancement will be centered in emerging markets where Dell’s direct sales model has several inherent limitations. For obvious reasons, the model does not work well in markets which customers do not have access to the internet or credit-cards. In these markets it makes sense for Dell to expand its use of retail locations or showrooms. To achieve success within emerging markets Dell must combine its direct sales model with its learned experience from its retail partnerships. This tactic calls for Dell to develop showrooms in which displays are available for customers to test and use products before they place an order. Once a customer has decided to purchase an item, they may use an in-store phone or internet connection to place their order. As in the traditional Dell model, customers may customize their product during this process. This tactic allows Dell to bring its product to customers in emerging markets while still maintaining its direct sales business model.
To strengthen Dell’s position within the market, the company must improve its focus on specific customer needs. Dell must improve its existing services to provide reliable and predictable solutions around this segment of business. Specifically, it is critical that the company design and deliver services which offer superior quality and efficiency, while sustaining customization for individual customer needs.
Financial Ratio Analysis The table below compares Dell’s financial ratios to the personal computer industry and to publicly held companies operating in the same markets for the previous fiscal year. Bold values indicate better performance. It is worth noting that Dell’s top management, since the mid 90’s, focused on the return-on-invested capital (ROIC) as a key performance indicator (KPI). This focus, managing profitability, made the company's stock a very attractive investment; Dell’s ROIC and ROE are way above the industry’s and competitors’ average. All other profitability ratios indicate good performance and profitable operations. There is no major indicator of risk or weak performance in Dell’s financials.
Comparative Financial Ratios Data Dell Profitability
Valuation
Operations Efficiency
Gross Profit Margin Pre-Tax Profit Margin Net Profit Margin Return on Equity Return on Assets Return on Invested Capital Price/Sales Ratio Price/Earnings Ratio Price/Book Ratio Price/Cash Flow Ratio and Days of Sales Outstanding Inventory Turnover Total Asset Turnover
18.3% 8.32% 6.2% 46.9% 13.1% 60.60 % 1.37 24.43 15.38 20.6 32.29 107.2 2.12
Industr y 20.95% 8.50% 5.71% 26.80% 10.40% 25.40%
Market
2.06 37.34 9.72 31.12 30.46
1.46 20.65 2.77 12.06 50.53
67 1.9
7.5 0.3
48.23% 10.64% 6.96% 13.20% 2.20% 6.50%
Net Turnover
11.9
7.2
1.2
1.53
1.41
Quick Ratio Leverage Ratio (asset/equity) Leverage Ratio (debt/equity) Data Revenue Per Share
0.9 4.74
1.3 2.57
1 6.1
0.1
0.06
1.35
23.02
18.09
21.66
Diluted EPS from Operations Book Value Per Share Growth 12-Month Revenue Growth Source http://www.scribd.com
1.29
1
1.53
2.05 14.60 %
3.84 9.20%
11.39 1.80%
Financial Liquidity
Per Share (dollars)
Receivables 12
and Current Ratio
Unlike many competitors, Dell does not rely on debt to finance its capital structure. This is contributed to cost cuts in operations and efficiencies in manufacturing and inventory management. Dell also outperformed the industry in terms of annual growth. It is wise though to lower future expectations in light of recent reports of lower than expected growth rates and net profits in the 3rd and 4th quarters of the previous year. Lastly, Dell does not pay dividends to stockholders. Instead, Dell uses net income to fuel its growth.
