Matching Dell

Matching Dell BA 4700 October 12th, 2010 Bing Bai Zexin Li Ian Ruehle Erin Strack Chun Zhang

Introduction

The Dell Computer Corporation was founded in 1984 by Michael Dell, who began the company by refurbishing IBM clones out of his dorm room for extra money. From the beginning and through the 1990’s, the company grew quickly and was very successful. Dell used a cost leadership strategy and focus on creating products that were already in the market place, but changed the timing of production and the method of distribution that was in place with the company’s competitors by assembling computers to order and selling directly to the customers. The company focused on creating value for customers and meeting their needs, but into the new millennium they lost touch with the needs of their customers, which caused a significant decrease in their share of the market. In order to understand what made Dell so successful from the period of 1984 through 1998 it is useful to evaluate several analysis tools including an examination of Dell’s market segmentation, a STEP analysis, Porter’s Five Forces Model, an evaluation of the company’s value chain, and a CRIG analysis.

Market Segmentation

The majority of Dell’s customers were large corporations and government entities who ordered large numbers of computers and also reordered in following years as repeat customers. The customer base was broken down by entity and location so that each segment could be better served with more efficient use of company assets. By 1998 the classifications included global enterprise accounts and other large businesses, federal, state and local governments, educational institutions, small companies, and consumers. These groups were further divided by region and country. Dell aimed to offer consumers high performance computers at relatively low prices. The company produced two main lines of desktop and notebook computers. One was more suited for businesses, being reliable, stable, and compatible with corporate networks, where as the second line offered customers the latest innovations in technology. They also produced lines of servers and workstations.

STEP Analysis

Social and Cultural There has been a drastic move in cultural perspective since the new millennium. The gogreen culture has become a dominating force. The metro movement moves in a parallel to this as well. The majority rule now appears to be a young, urban, environmentally conscious, culturally sensitive populace. Dell had a primary focus on keeping a fact based relationship with their clients. The case clarifies that this allowed them to treat their clients fairly. They even kept a very clean cut and dry model in the corporate setting. This is a very efficient and productive way to guide business. This model can, however, fall victim to the metaphor of the double-edged sword. Being so cut and dry tends to give you the appearance of a faceless corporation. In a revolution of go-green and corporate compassion, the face your corporation wears is its lifeblood. Dell had no focus on retail stores. They knew that the profits were coming from the larger customers. As mentioned in the case it is hard to increase the awareness of the product when it is not often seen in the retail world. How is the general public to view your corporate face if they are unable to see it? Dell was careful to diversify their product line; however they were not diversified in the distribution of the products. Culturally, Dell lost touch with the market. It is ironic that they based their company on the specific needs of their customers, but in reality the company lost the ability to be in touch with them. Dell struggles in their corporate image by comparison to Apple. Apple is very clear about portraying their culturally savvy image. Although they are not Dell’s direct competition, there is a lesson to be learned. Dell’s competitors were able to gain on Dell’s market share simply by implementing their operations model. The apparent Achilles heal is the lack of individuality with their image. Once the competitors were able to manage their operations in the lean and efficient way of Dell, the company lost their competitive advantage. Dell obviously made actions to try to reconnect through retailers to the end user. If they are able to culturally connect with their consumers, then they will have a shot in becoming the number one computer supplier once again.

Technological It is obvious that Dell is a technology company. The computer industry is strictly technology based. The growth of technology in the genre of computers is exponential. Dell had a significant strong arm in the ability to reduce costs, and was able to pass their efficiency to the customer. The supply chain does play a key role in keeping the costs low, however the basis is technology. When software and hardware drop in price due to new development in technology, it allows other companies to cut costs for their customers. In the case, we see that Dell’s competitors such as Hewlett Packard where able to do this. The implication is that if a competitor can simulate your lean management in the supply chain, then all it will take is a breakthrough in technology to cut costs across the board. In the case, Dell admits that it is not primarily a technology company but a logistics company. It is not hard for a company to see a logistics model and imitate it to cut costs for themselves. It is much harder to imitate a breakthrough in technology. This is a weakness of the Dell model. With companies like HP and ACER growing by the day and absorbing resources, Dell placed itself in a vulnerable position. Apple primarily keeps its technologies internal, which allows them to maintain a little more security than the competition.

Economic There are many important dates which have hindered the economy in the last 20 years. We all know that 9-11 played a significant roll in the viability for every business in America. We can clearly see that Dell was not immune to the terrorist attack by the drop in the company’s stock price during that time. However, they have continued to stand in the shadow of their all time high in the late 90’s. Dell was able to withstand and continue to grow through the Internet bubble, so what caused them to slip into economic turmoil now? Since 2005, they have been consistently falling. The financial collapse that the economy has been dwelling in for the last few years is a strong factor in the prosperity of Dell. Dell chose to focus on businesses as their primary target, which allowed them a strong profit margin. Dell had many relationships with both large and small businesses and offered both computer sales and computer leasing to companies. Anyone familiar with basic economics knows that businesses primarily base their transactions on cash flow. Most purchases must be made with cash or some type of financing. During this credit crunch, businesses both small and large are in a position

where they are unable to get financing. Leasing and purchasing new technologies must be put on hold because businesses are unable to secure cash for these transactions. It is very difficulty for Dell to move their product to the end user because the primary focus of the end user is to just stay afloat. In the private consumer sector there will always be purchases made of new technologies. Even in economic downtimes there is still circulation of disposable income. Many people may even require a new computer to maintain their job in a company. In summation, no cash and no credit equal no moving of your product. When your primary focus is large business deals, it is difficult to remain viable when your customer does not have the choice to purchase or not.

Political During the last couple years, political aspects have had a direct connection to the economic viability of a company. As we just discussed, the economy is experiencing a credit crisis. Companies are unable to get financing to continue their life cycles. Multiple stimuli have been passed by the government in excess if $4 trillion. The sole intention of the latest stimulus was to free up credit and financing for business. Unfortunately, we have not recognized this impact yet. Many companies still struggle for credit lines and financing. With the Equal Housing Lending Act, banks were encouraged to give loans to people that may not have been the strongest prospects to pay back these funds. The promise of a safety net of subsidies was offered in return. This lending got out of control, and banks lost a lot of money. They were left holding toxic assets and had no access to cash flow, thus making it difficult for companies to function in their normal cycles. Banks are now far more cautious to lend. Dell also went through a legal investigation of their accounting procedures. Post ENRON, the Sarbanes Oxley act was created. The purpose of this act was to segregate accounting from the control of management, in order to prevent manipulation of earnings and losses which would drastically improve the appearance of a company’s financial well being. Due to the bad decisions of companies in the past, corporate images can be damaged by investigations for accounting issues, especially those that alter the earnings of the company. Dell did make it through the investigation and everything was cleared up, however, it is a permanent blotch on the financial record of Dell, which hurts consumers and investors alike.

Porter’s Five Forces Model

Threat of New Entrants The threat of new entrants in this industry was pretty high in 1998. Only about 45% of homes had personal computers and that number was expected to increase. Also, according to the case, a company could buy and install the equipment necessary to produce 250,000 computers per year for about $1 million. Although pretty much all computers were stuck using the Windows and Intel standard that IBM had created, there was a lot of room for product differentiation in terms of memory, processing speeds, portability, and peripherals which went along with the computer. The barriers to entry which deterred new entrants included economies of scale which existed with established producers, and the already low prices and thin profit margins in the industry.

Bargaining Power of Suppliers The suppliers did have some bargaining power, although it was moderate. They were forced to price their products competitively and offer relatively high quality since there were a large number of suppliers for Dell to choose from. It appears that Dell was more likely to work with suppliers who were located close to their assembly plants, and that they thinned down their number of suppliers, so those that Dell chose to work with would get significant income from the producer. The suppliers also had many computer companies to offer components to, which made them rely less on the sales to Dell.

Bargaining Power of Buyers The buyers of Dell computers had some bargaining power, but since Dell had such an efficient logistics model compared to that of its competitors, the low prices were already attractive. Dell did compete with the other firms such as IBM for sales contracts and market share, and was forced to simplify and streamline their processes in order to reduce costs. These savings were then passed on to their consumers. Dell reserved power of their own, however, by diversifying their customer base so that no single customer bought over 2% of the company’s output. Dell also was not tied to distributors or resellers except for about 5% of their sales, which they would sell to resellers in order to move old inventory.

Threat of Substitutes The threat of substitute products was relatively small in 1998, but was growing. In addition to PCs, people were beginning to use portable hand-held devices for tasks such as email. The cost of building workstations had also become relative to that of computers and this market segment was also growing.

Rivalry Among Competitors There were several strong competitors in the 1990s, which included IBM, Compaq, Hewlett-Packard, and Gateway. Dell out competed these alternative producers through several factors. First, the other companies had to charge higher prices because they were tied up in contracts with distributors, resellers, and retailers. If they tried to sell products directly to consumers at a lower price, they would be subject to channel resistance, and would lose sales recommendations. These companies also accepted returns and offered price protection through their distribution channel. Also, these companies experienced redundant shipping expenses as they would have all components sent to their assembly facilities and then to the customer, even those that were ready to be sent such as monitors. Finally, the competitors were tied up in extra inventory costs since they produced standard machines according to distributor forecasts.

Value Chain Analysis

The primary activities of a company are those that directly create revenue for the firm, including inbound and outbound logistics, operations, marketing and sales, and service. The support activities are included within these primary activities as they reinforce them, and include procurement, technological development, human resource management, and firm infrastructure. During the period of 1984 through 1998, when Dell was at its strongest position in the industry, the company had a very solid strategy of dealing with the primary activities, especially those that involved logistics.

Inbound and Outbound Logistics Dell was very strict with inbound logistics since they did not hold a finished goods inventory of standardized machines and were focused on reducing the number of days’ inventory,

which they cut down to seven days in 1998. They reduced the number of suppliers that they procured components from to simplify the process and make it more efficient. Dell attempted to implement just-in-time delivery, updating some orders hourly. They also encouraged suppliers to co-locate with Dell facilities to cut down on transportation distances and costs, and kept close electronic links with suppliers. Finally, they had some products shipped directly to customers instead of wasting time and expenses shipping the product to the facility, then to the end user. Dell shipped the finished products to their customers using a third party such as UPS or Airborne express. Customers ordered their products directly from Dell, and the units were shipped directly to the customer instead of through a distributor, and often the shipper would also pick up the monitor or other peripherals from another location and deliver the products together.

Operations Until 1993, the infrastructure of Dell had been that of an entrepreneurial start up with few formal control systems in place. To remedy this, Dell hired seasoned managers from other well established companies, and these managers aimed to improve performance metrics such as return on investment. The company was not in the business of developing new technologies, although they were in a very technologically advanced field, instead their competitive advantage stemmed from their logistics system. The operations of Dell were a very concise system. The company had several assembly plants located globally in strategic locations to minimize costs. The older facilities were set up with the industry standard assembly line, but the newer facilities had an innovative process of five person assembly cells. These cells led to fewer defects and higher efficiency. The company processed individual orders on a consistent basis, but was also capable of quickly producing large orders when needed. The computers were not assembled until after the order was received, and the computers were built according to customer specification. After assembly, each unit was loaded with software, and then went through extensive testing. The entire process from receipt of the order to shipping took about thirty-six hours. These steps, along with the customer support, are an example of Dell’s initial commitment to meeting customer needs.

Marketing and Sales

Dell created their own marketing and sales plan, where customers where split into relationship customers and transaction customers. The relationship customers were those who made large and repeat orders. To reach these customers, Dell had a highly trained force of outside sales representatives who would work closely with potential customers to win them over and secure large orders. The transaction customers were reached through advertisements, and could order directly through a hotline. The large business and government sales comprised 77% of sales, where as personal and home office customers comprised 18%, so a lot more resources went into the relationship customers.

Service The inside and outside reps would work closely between the company and the customers with access to all of the customer information to ensure that they were satisfied. The company also offered after sale support services including on-line support and a 24-hour hotline. The website included 50,000 pages of customer support information. Support reps were able to solve 90% of customer problems over the phone using the diagnostic software which was installed in the computers. If an on-site visit was necessary, Dell would contract a third party to resolve the issue. In July of 1996, Dell created a website where customers were able to order on-line. The website also offered the Premier Pages for relationship customers where they could find specific information such as company requirements and software.

CRIG Analysis

The CRIG framework evaluates the competitiveness of companies based on their cost, revenue, innovation, and growth levers. For Dell, the cost levers included hardware, software, operational expenses, and customer support. The revenue levers consisted of the two lines of desktop and notebook computers, servers, workstations, and software installation. Dell’s innovation came from their efficient “Direct Model” sales and distribution system, and also their just-in-time component procurement. Finally, Dell’s growth stemmed from their low-cost advantage, the hiring of seasoned managers, the building of their brand, and the creation of their website, which allowed users to customize their own computer. Conclusion

Dell grew quickly and was very successful in acquiring a significant amount of the market share throughout the 1990’s by creating an innovative system of direct sales where they cut out the use of distributors, resellers, and retailers. By freeing themselves from these extra costs, they were able to reduce the price of their products, and offer consumers a quality product at a relatively low price. Dell focused on a low cost strategy and on meeting the customer needs. However, by the beginning to the new millennium Dell had over emphasized the cost reduction through its supply chain and had lost focus of its customers. They didn’t ensure that their core competencies were inimitable, and as a result, they lost a large portion of their market share to competitors as the other companies in the industry focused on innovative technologies and caught up with Dell’s logistics model.