Dell Computers Case Study

“Dell Case Study” By Todd Beals 4/22/03

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

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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 lowend 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.

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INTRODUCTION

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 ? Should Dell continue forward with its highly successful ‘direct model’ strategy to try and

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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

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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

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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.

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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.

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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

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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

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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

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

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

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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

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“High Quality, More Powerful, Faster, Customized and Cheaper”. For every new product or service it introduces to the market, Dell consistently implements its startup mindset of “build-to-order computers” (referred to as the direct model approach) from the very beginning of the development and production process. Dell’s business was unique in that it was able to consistently make significant profits in low margin product areas. Its’ direct model approach evolves for every new product and service achieving delivery of high quality PC’s in a very cost efficient manner; one of continuous improvement. Dell is a continuous-growth model, constantly adapting, changing and finding ways to master its environment, as opposed to just responding to it. In addition, Dell has been able to take flexibility and speed, and build it into the company’s DNA.

Positioning- Michael Dell portrays his company as “the good guy”, the Robin Hood of the computer industry offering more for less. Their mantra is “better, faster, cheaper” using brand name components, build to order manufacturing, and customized customer service, which led to high quality and more powerful computing power. Dell had a reputation for “effectively entering product markets where core proprietary elements had become standardized and undercutting existing players based on price.” Dell’s strategy was to choose the best in class providers (like Intel and Microsoft) for each component and leveraging their scale investment in R&D. By 2001, Dell had become the US market leader in Wintel server sales. Target Market – Dell’s main focus is on large corporations with secondary efforts on small and medium sized businesses. In addition, they also target the global consumer directly, but with minimal effort. Dell mainly focuses on the segments that are already knowledgeable about computers.

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Products - Dell currently has 6 main products: PC’s, laptops, customer service, storage devices, workstations, and auxiliary services. Pricing - When Dell decides to enter a particular market, it consistently uses the Direct Model approach, pricing their product below that of their competitors. These low prices are the result of multi-level leveraging and from achieving economies of scale. Promotion - On-line model, direct mail order, catalogues, Premier Pages, special training and certifications, word-of-mouth, editorials, reviews, sales reps, and awards Place - Direct from Dell: On-line, telephone, mail-order. (Dell does not use any retailers or wholesalers to sell their products.)

In conclusion, Dell’s strategies do match the company’s 4 P’s, targeting, and positioning and can be summarized as a low-cost, fast and efficient business model, with superior customer value with virtual integration.

STRATEGIC OPTIONS Market Penetration – Maintain status Quo and continue to do more of the same. “If it ain’t broke don’t fix it”. Many people believe the recession will end soon, so Dell could just ride it out and hope to hang onto the marketshare it currently has. This option is not a proactive approach and could prove to be risky, resulting in declining market share, lower profits, and the possibility of the competition advancing while Dell stays stagnant. Product Development – •

Pursue Mid-Range Server Growth. By 2001, Dell was the market leader in entry level servers, but had no presence in the mid-range server market. Pursuing this growth option could result in increased market share and higher profits due to the

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higher selling prices and markups of these units, but could be risky if technology suddenly changes. Increased post sale costs are also a concern, as server sales don’t just stop upon delivery, they require continued service regarding reliability, serviceability, availability, and manageability. •

Increase product line: By introducing new products like a PDA, Dell can capture new markets and increase sales and awareness. However, Dell’s R&D budgets are well below that of its primary competitors. This option contains increased risk and high initial start-up costs.

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Pursue Associated Services Growth – within the US, 2000 service revenues accounted for over 37% of $2 billion in total revenues. This business unit was becoming an increasingly important part of Dell’s portfolio with longevity, able to stand the test of time and market uncertainty, no matter what turn technology took.

New International Market Development – Target new segments and enter new markets with existing products. The Potential benefits of international expansion are increased market share, revenues, profit, and buyer awareness. However, the successful Dell Model might not work everywhere. The product chosen for expansion should be a commodity where the demand is already in place and the country must also value on-time delivery. In addition, terrorism, cultural barriers, political systems, and longer ROI must be taken into consideration as well as limits on foreign ownership and tariff barriers. Diversification Merger and Acquisitions: By 2000, the external storage market was growing at 23% per year. By acquiring an innovative leading company like the EMC corporation, Dell can

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effectively enter the external storage and software market previously untapped, leveraging EMC’s expertise and experience. Due to the sagging economy, EMC’s stock price had fallen over 800% in 2001, meaning now might be the perfect time to buy the company at a significant discount. The Pros include increased market share and economies of scale, but cons are higher costs and the need to re-train employees to learn Dell’s culture and mission.

RECOMMENDATIONS & IMPLEMENTATION Server/Storage/Service Growth The booming PC market seems to have bottomed out, with little signs of improvement due to market saturation. Positive signs have come mainly in the form of limited PC replacement programs at some large companies and sales of notebook PCs. Any future PC market recovery will most likely be tied to an improvement in the economy. Therefore, Dell should ramp its efforts in three non-core areas as key for future growth: servers, external storage and services. Meanwhile, it can carry on with its aggressive price-cutting strategy for all of its products. Hopefully, these moves will allow them to gain traction in some markets, and even overtake some competitors in others. Once Dell has used its lowest price strategy to increase its installed base of clients in hardware sales, particularly in the enterprise market, the company can leverage its expertise in customer support to keep those clients. Even though Dell has already made some impressive progress in server and storage developments, it still lags behind other server vendors in total shipments and sales. The company needs to create a greater presence among enterprise and service-provider customers.

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Dell can quickly grow its storage business by providing simplified and standardized storage solutions to customers ranging from small businesses to large, global corporations with enterprise-class requirements. It can leverage its ties to Microsoft, Intel and other prestige component vendors to focus on providing Windowsbased storage and server products. This move will make its high-end storage products work with IBM, Hewlett-Packard and Compaq Computer Windows servers, as well as Dell servers. This allows Dell to widen its customer base by appealing to customers that don't have Dell servers, or have a mixture of servers from different vendors. With comprehensive support for multiple platforms, Dell can also offer customers a storage solution that leverages their existing Windows server investments, while scaling to accommodate their growing data requirements. An expansion of the services group should also be pursued based on customer needs, which will vary from country to country. While Dell continues to partner with third-party services firms in some areas, it should also bulk up on its own services capabilities so it can provide customers with more complete services offerings. Dell should realize that it would need to expand its services capability significantly in order to be taken seriously by some global enterprise and service-provider customers. Dell can also implement a fixed-price approach to services that will boost its presence in that market. New services, such as migrating from Unix-based servers to new ones based on Linux can be offered and combined with Dell's hardware. A total of $2 billion to $3 billion in service revenue can be achieved if this strategy is correctly implemented. Dell's three-pronged growth strategy by no means guarantees a sure-fire path to future

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profitability, but Dell's deliberate and measured steps to expand beyond its PC roots could result in additional good news in the future.

International Expansion As Dell looks at expanding into international markets, it needs to consider entering the markets that are key to the region. For example, Germany in Europe, China in Asia, and Brazil in South America. Dell needs to carefully study these types of key markets and implement its Direct Model only after it understands how these regions economically and politically function. However, this expansionary growth will place extensive demands on Dell’s information infrastructure needed to support such global operations. To be successful in these new markets, Dell must update its websites in the particular languages and modify the accounting systems to handle the specific currencies. Keeping these new employees in touch with one another and with customers, suppliers, and partners will be a gigantic task requiring the latest technology, increasing the demand for instant information. The global market is huge and virtually untapped and Dell is in a great position to take advantage of this market, especially with the use of the Internet and its advanced online capabilities. Dell’s most important strategic advantage is the ability to sell direct from Dell, eliminating all the middlemen in the normal distribution line. Anyone who wants a Dell must order it through the mail, online, or over the phone, which is a perfect method for doing international business. Dell just takes the order and ships the computers via one of its many shippers. Dell should focus on dominating the Asian market where they only have a 3.7% hold on a market with over 19.9 billion units. Asia is a virtually untapped market and is expected to grow rapidly in the next few years.

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Dell currently has two manufacturing plants and four technical support offices in the Asia area. Dell should look for ways to optimize these facilities and budget some advertising towards attracting enterprise and big businesses in that region. If Dell can capture a few large clients in China, it may be able to dominate the Asian market, drastically increasing its revenues.

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Appendix

Figure 1

Units in billions

Total Unit Sales 50 45 40 35 30 25 20 15 10 5 0

46.9

30.4 18.5 8

1985

1994

1999

2001

Figure 2 Long Term Debt Growth Debt in millions

512

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Series1

1998

1999

17

512 Year

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Figure 3

Investments in millions

Investment Growth 3000

2721 2418

2500 2000 1500 1000

532

500 0 1999

2000

2001

Figure 4 Primary Supplier Cuts 250 # of suppliers

200 200 150 100 50

25

0 1992

2000

There was an 87% decrease in the number of primary suppliers from 1992-2000

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Figure 5 Dell's Market Segmentation

Consumer Business, 10%

Small Business, 30%

Relationship Business, 60%

Figure 6 THE DELL MODEL

IBM Multiple HP

# of Channels

Single

Dell Gateway

Narrow

Broad

Product Range

Figure 7 Americas International Canada Mexico South America Central America

EMEA Europe Middle East Africa

APCC/Japan Asia Pacific China Australia India Japan

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