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Dell

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Five forces, Business model and recommendations

Five forces, Business model and recommendations

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  • 1. MGT -767 Organizational Policy and StrategyDominant Economic Characteristics • The information technology industry witnessed a growth rate of 7.7% in 2010. The industry growth rate declined during the period 2001-2007. • The industry usually offers the following products a) Hardware b) PC c) Servers d) Storage devices e) Printers f) Peripherals • The PC industry is currently in the matured stage of the product life cycle. Globalization has not affected the growth rate of the industry. • The industry has a large number of consumers and it is diverse. The attributes of the PC industry is useful to anyone. Thus anyone can derive value from the industry. • The innovation and technological advancements are booming in the industry with the advent of sophisticated features in their products. • The industry has both internal and external economies of scale. The industry has achieved internal economies like managerial, financial, marketing and financial economies and external economies with the retailers and distributors. • Most of the households in US and many developed countries have computers. Students start learning about computers at a very early age. There is high reliability in the industry. The only drawback is the support systems in the industry. 1 Dell Inc - Case
  • 2. MGT -767 Organizational Policy and Strategy• The industry is very competitive and profitable as well. As of now, the PC industry has the highest profit levels. E.g. Apple• The industry is also characterized by mass outsourcing, customization, personalization, electronic commerce etc.• There was sluggish economic growth in the industry in the international market during the year 2001-2003.• Linux and Windows are the major operating systems in the industry.• There is growing preference for low priced and standard components in the industry.• The industry is also characterized by standardization, flexibility, simplicity, economy of use and value.• There is cut throat competition in the industry. The major companies in the industry are Dell, Apple, Gateway, HP, Sony, Lenovo etc.• The market is highly concentrated. The top companies like Apple, Dell etc have the major share in the market.• Products in the industry usually follow market penetration as many companies target to sell their products at low price and get high market share. 2 Dell Inc - Case
  • 3. MGT -767 Organizational Policy and Strategy • The industry has high experience curve effects. Companies can achieve economies of scale only after a company achieves high learning effect. This is a threat to new companies. • Price and efficiency are the major factors determining the market share of a company • The return on asset ratio is low for companies with high market share in the industry. • The products in the PC industry have moved from being a luxury to a commodity product (Except Apple products) • The massive digitalization of content is also an important feature in the industry.Key Driving Forces • Explosion of digital and information content is a key driver as it improved data availability. The overall rate of global spending increased and the data availability also doubled. • The advent of search engine activity, social networking sites, e-mail, mobile phones, android applications etc. also acted as a key driver. This digital expansion improved the industry’s economic presence and overall demand in the industry. 3 Dell Inc - Case
  • 4. MGT -767 Organizational Policy and Strategy• The demand for information technology in emerging markets like India, Brazil, Russia, China and India increased. The population is high in these areas and thus the demand for IT products and services also increased. This was a key driver in the industry.• Certain drivers had negative implications on the industry. The digital volume content lacked authentication and there are many security issues in the industry. Also the consumers’ expectations are not stable. These keep changing. The overall ability of the consumers to deal with complexity and sophistication is low. The consumers want quick access to their demands. All these factors are the downside driving factors of the industry.• Replacement factor is a key driver in the industry. The existing PC’s are getting replaced with the advancement in features, design and compatibility of the PC.• The entry of smart phones into the industry is a key driver. The cross category competition became more intense with the developments in the smart phone industry. These devices also gave access to the internet. The smart phones are sleek and they offer compatible usage. The costs of these smart phones are also low compared to the PC and laptops. Thus consumers may switch to smart phones from PC.• The mobile phones are offering the features of the internet at a subsidized rate. These driving forces have negative implications on the industry.• Processor speed and RAM were the driving forces in the industry that generated profit. They are no longer the driving force as cloud computing is introduced. They are slowly replacing processors and RAM. 4 Dell Inc - Case
  • 5. MGT -767 Organizational Policy and Strategy • The differentiation is not much in the PC industry as most of the players are keeping up with technological advancement. • The concept of convergence has been acting as a key driver in the industry through the history. Earlier, transistors were used in computer hardware and they got replaced with micro processors. Now these processors are slowly getting replaced with cloud computing. Similarly smart phones and mobile computing offer the same services as offered by the PCs and laptops. • Apart from these the factors affecting the experience curve and scale effects, profitability ratios like ROA etc. are also driving forces for the industry. The learning curve affects the new entrants and determines the attractiveness of the industry and economies of scale determine the cost of production. If these are easier to achieve, the industry becomes more attractive. In the PC industry, the learning effect is high and thus it is not easy for the new entrants to achieve economies of scale.Key Success Factors • Dominant brand name: many companies in the industry have strong brand name. Their dominant presence in the market is because of the image they created for their products through their strategic moves. This enabled them to earn more market share in the industry. E.G. Apple, Dell, Sony. These companies have strong brand identity in the market. 5 Dell Inc - Case
  • 6. MGT -767 Organizational Policy and Strategy• Keeping up with the demand: The industry is up-to-date with the technological innovations taking place around the market. Also, it sells products that are preferred by the consumers. Constant replacement of products is taking place in the industry. New versions of laptops, PC etc have increased the compatibility, storage, look and usage of the product.• Economies of scale: even though the industry experience high learning curve effects, once the learning is achieved, the companies are benefited from economies of scale. Although this is a disadvantage to the new entrants, in the long run this makes justification to their investment.• Pricing policy: the pricing policy in the industry is very clear and appropriate. the pricing in the industry is related to the economies of scale. As the production cost has come down because of the economies of scale, the industry is capable to maintain their current pricing levels. The pricing is also acceptable by the consumers.• The supplier relations, distribution systems and strategic approaches like backward or forward integration have also acted as success factors in the industry. In particular, Dell had its own in house manufacturing of its components which helped them to build expertise in their technology they use.• The R&D capabilities in the industry improved and enabled them to keep their products on the cutting edge because of the efficiency achieved in vertical integration. 6 Dell Inc - Case
  • 7. MGT -767 Organizational Policy and Strategy • Outsourcing the manufacturing of certain components and having a concentrated assembly line also proved to be effective in the industry. • The reduction in the supply chain by integrating and collaborating with outside vendors and suppliers have acted as a success factor in reducing product and production cost.Porter’s Industry AnalysisRivalryFollow the leader strategy is the current trend in the industry as the products can be easilyimitated. Although there is lot of differentiation in the industry, as the products can be easilyreplicated, it is following follow the leader strategy. The competition in the industry is cut throat.There are few major players like Dell, Laptop, HP, Apple, Sony etc with similar market share.Other small competitors include Toshiba, Lenovo, and Acer etc. The competition is intense dueto slow growth rate and market saturation. The switching costs are low in the industry whichagain increases rivalry.Threat of new entrantsThe economies of scale is high in the industry. It enhances with increase in learning. This is athreat to new entrants as many companies would have already achieved economies of scale. Alsobrand loyalty is poor in the industry. This means that anyone can enter the market and if theyshow some differentiation it will sell. This is a threat from the new entrants to the industry. Alsothe capital requirements are high in the industry. It requires high capital investment to enter the 7 Dell Inc - Case
  • 8. MGT -767 Organizational Policy and Strategymarket. Also the return on asset ratio is shrinking slowly at the rate of 0.7% percent which isagain a threat to new entrants. The existing players like Dell have already established strongrelationships with their suppliers and they have achieved supremacy in their in-house productionof key components. The existing players can easily block the entry of new entrants because ofthis which makes the industry unattractive.SubstitutesThere are substitutes in the industry like mobile applications and android phones which canprovide similar functionality of a PC or a laptop. These devices also use servers to accessinternet.Supplier Bargaining PowerDell squeezed the number of suppliers from 204-47. The bargaining power thus has improvedbut still not good enough as the 47 existing suppliers are core suppliers and Dell already has astrong supply chain. But the bargaining power of suppliers in the chip segment alone is high asthere are only two major suppliers and they are AMD and Intel.Buyer bargaining powerThere are low or no switching costs in the industry and thus the buyers can easily switch theirbrands. In this industry, price will be the major factor for switching the brand.Dell Resources, Capabilities, Core competence and Distinctive competence 8 Dell Inc - Case
  • 9. MGT -767 Organizational Policy and Strategy• Dell’s unique business model is both a resource and a capability. Dell’s products like laptops, PC’s, printers and printer cartridges, LCD plasma TV, cash registers, CD, DVD drives, hand held devices, MP3 etc are important tangible resources.• Dell has a strong supply chain and strong vertical integration. Dell squeezed the number of suppliers in the industry from 204-47. This is the main capability and core competence for Dell.• Capabilities also include Dell’s just in time inventory, technical capabilities, customer knowledge, relationships, ability to manufacture low cost customer related and preferred products etc.• Dell also has a strong capability as it has a website and intranet server that is strongly tailored to the customer’s situation.• The efficiency achieved in the supply chain is a powerful capability for Dell. The direct to customer channel in the supply chain has been very effective and successful.• The configuration and other features offered by Dell’s products have instant customization and personalization to its customers which is again a key capability.• The feedback system adopted by Dell gives quick and up-to-date information about customers’ needs and preferences which is again a strong capability.• Dell’s supply chain management is the firm’s distinctive competence. It’s direct to sales strategy is also one of its distinctive competence. 9 Dell Inc - Case
  • 10. MGT -767 Organizational Policy and StrategyBusiness ModelCustomer Value Proposition: • Dell sells its products at low prices because of its just-in-time ordering system which minimizes stock and the need to calculate demand in advance • They provide an opportunity for the customers to choose what specification they want through Dell’s customization program and the prices are quoted accordingly. • The sales and marketing efforts of Dell are focused around customer groups whereas many of the technology companies focus around product lines. • The ability to quickly respond to the design flaws and component defects reported by the customers gives a significant advantage for Dell over the other PC makers. • The direct sales approach by Dell gives an edge over the other manufacturers which acts as a totally customer driven system. This customer driven system provides flexibility to transition quickly to new generations of components and PC models. • Dell website provides almost all the details what the prospective customer wants like configuration, price customization, track order etc. As the sales through website is higher than the sales inquiries received via phone. This helps to identify the level of customers “E-Loyalty” regarding the purchase mode. • Dell has an efficient way of delivering free On-Site service for most of its PC’s by having a tie up with local contract service providers to support the customers’ requests for 10 Dell Inc - Case
  • 11. MGT -767 Organizational Policy and Strategy repairs. Customer notify dell regarding the repair which in turn dell provide support through the contract service providers.• Dell provides a password protected and customized website called Premier page for all premiere customers like Corporate, Government and Institutions which gives access to information to all Dell products and configurations and place order online which routes electronically to high level managers for approval and the assembly then delivery.• The management of inventory records of the purchases for its large customers makes it easier for the Dell support and sales personnel to provide recommendations and suggestions about the PC purchases, configurations of customer’s PC network and to provide value-added services.• The customers of dell products are encouraged to provide reviews which is inspected by dell later and posted in the website which in turn help the prospective customers to choose among the best.• The concept of feedback from the customers is encouraged in dell. This is achieved by a website called “Idea Storm” where the customers of dell products post suggestions and opinions to improve the quality of the products.• Dell’s R&D focus on new developments which would prove most useful and cost effective for customers. The philosophy of dell is to think on behalf of its customers to seek out for new technologies arriving at the marketplace and to adapt to the design, feature’s, options and solutions that are most relevant to the customers. 11 Dell Inc - Case
  • 12. MGT -767 Organizational Policy and StrategyProfit FormulaRevenue generation: • Sale of Desktops PC’s, Laptops, software and peripherals like printers, monitors, Projectors, Ink and toner cartridges, Server and Networking Hardware, Consulting and enhanced services and storage products. • Sale of Warranty on most of the Dell products.Cost Structure: • The costs involved in making these products are the raw materials which are manufactured by dell itself. Also includes production and manufacturing costs, establishing the website, Investment cost involved in expansion of business in lucrative markets. • Promotional & Advertising costs and Support & maintenance cost are also one of the major cost involved.Profit Margin: • The profitability of Dell dependent on attracting large number of customers to cover its costs. They sell its product at low profit margin by keeping in mind of the high sales volume through their effective selling strategy.Key Resources and Processes 12 Dell Inc - Case
  • 13. MGT -767 Organizational Policy and Strategy • Dell operates globally by conducting business through 3 geographic segments like the America, Europe and Asia Pacific-Japan. Each one severs the neighboring countries. Dell’s capabilities like Demand management, internal collaboration, Leverage partners and Business fundamentals. It’s Process like Manufacture to order, Information technology and Integrate partner planning and execution respectively.Action Plan • Increase standardAs the competitors have better standards in the same product line which makes it a weakness inthe competitive market. By inspecting the quality of the parts before entering into productionwill reduce the defects and compete or come in par with the competitor’s standard. • Idea Storm:The senior management takes the decision of the design and the features depending on thefeasibility of the production. The feedback site called Idea Storm by Dell has various suggestionand opinion which should be considered majorly and using the innovation expected by thepeople should be identified for the feasibility for production. By fulfilling maximum expectationof the customers with the integration of the company’s low cost goal, market share can beincreased drastically. • Trade OffThere are not many Dell products available in the retailers as they sell its products through directselling (website) and customized which are the company’s core values. This customization needstime and bought through dell site, thus makes the home users disappointed who are interested in 13 Dell Inc - Case
  • 14. MGT -767 Organizational Policy and Strategybuying directly at shop by examining the product and buy some other brand instead. So keepingin mind of the home buyer and electronic buyers, dell products should be sold at retail stores andin the website. • Student focusOnly 5% of the Dell’s total sales come from education institutions like schools and colleges asthe company did not focus in that market unlike other competitors. This is one of shortcomingsof dell. Through effective marketing by providing discounts to students, sales can be increased. • To focus on innovation:Providing more emphasis on Research & Development will help the company to stay ahead ofthe industry through the development of new products. Increase of spending in R & D from 10%when compared to its competitors. R&D should be done without changing its focus from masscustomization. • To expand their support and services:This strategy encourages Dell into the business consulting. Dell’s expertise in the field ofSupport and services would definitely provide differentiation in the market. • Customer service is one of the key success factors for the company which should be enhanced. • To strengthen the customization of Dell’s product, the firm must increase its suppliers those who can integrate well with the Dell’s supply chain. • To modify its retail sales in markets by launching retail showrooms where customers doesn’t have access to internet or credit cards. 14 Dell Inc - Case
  • 15. MGT -767 Organizational Policy and StrategyCompetitive Business StrategyStrategic alliance:Dell forms strategic alliance with ika Systems where the both has Healthcare business processoutsourcing and Technology service respectively. Due to this alliance, Dell reducesadministrative costs and streamlines the process. Dell and Perot systems formed alliance toprovide fully integrated virtualized health care technology solutions to reduce cost and improvepatient care.Virtual Integration:Dell basically stitches together a business with partners or suppliers like AMD, Seagatetechnology etc that are treated as if they are inside the company. When launching a new product,the supplier engineers are right in the dell’s plant and the problem is fixed in real time.Offensive Strategy:When rival computer companies provide relatively higher cost, dell decreases its price by timelydiscounts which acquires the market share overall.DELL’s CORPORATE LEVEL STRATEGYIn order to gain, competitive advantage a corporate level strategy that involves selecting andmanaging a group of different businesses competing in different product markets was necessaryfor Dell.Dell diversified from a being a pure desktop PC provider to an industry leader in various othercategories as well. It realized the growth opportunities for other supporting products like storage 15 Dell Inc - Case
  • 16. MGT -767 Organizational Policy and Strategydevices, internet switches, servers, printers and other consumer electronics like MP3 players andLCD TVs. And this has led to more than 30% of share for Dell in the industry.Because of this ratio and the existing links between its diversified businesses, a relatedconstrained diversification strategy is being employed. This strategy has enable Dell to expandvalue of its resources and capabilities by sharing activities and exploiting economies of scopebetween its businesses.To diversified by having strategic alliances with EMC, a leader in data storage to manufacturestorage devices. It contracted out its printer manufacturing to Lexmark. Its other businesses weremade possible by the core competencies that Dell already developed for in one of its existingbusinesses. Hence transferring it to a new business eliminates the need for additional cost.Moreover, the intangible resources are difficult for competitors to reproduce and Dell has madeuse of that. For example, Dell started to make servers from the confidence it created amongpeople. Their PC desktops and laptops have acquired the brand value for Dell. So this intangibleresource that they have acquired over years has helped to launch servers under the brand name.Thus, the resources and capabilities are utilized to achieve diversification of Dell’s offerings.Moreover, the complementing products like printers and servers are going to benefit Dell’soverall sales in the long run. 16 Dell Inc - Case

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