Introduction to Dell Corporate philosophy and initial success Operating margin Problem identification Pros vs. cons of expanding to new market Call center for corporate clients New market and challenges Possible outsourcing
Founded by Michael Dell Founded in 1983 $ 70 million sales by 1985 Annual report Dell, 2001
Dell Direct: Business clients comprised 90% of Dell’s customer. Low Inventory Control: Days inventory reduced from 31 in 1996 to 5 in 2001 Low-Cost Production and Low Prices: No intermediary to decide on mark up operating cost per unit from $330 to $240 in a span of 5 years. Customized Web Page: Advantage of Premier is discussed below.
Net revenues (in millions) (Ex 7) $31,888COGS $ 25,455SGA (Ex 7) $3,193R&D (Ex 7) $ 482Special charges (Ex 7) $105Average total revenue per unit ($) 2,050Units sold (millions) 15.55COGS/ unit ($) $1,636SGA/ unit ($) $205R&D/ unit ($) $30.99Special charges / unit ($) $ 6.75Margin per unit $ 171.2
25%Year on Year change in Ratio 20% 15% 10% 5% 0% -5% 1998 1999 2000 2001 -10% Years Gross Margin/ Net Revenues Operating Income/ Net Revenues Net Income / Net Revenues Note: if a ratio for example Net income/ net revenue is 5% in 2001 it means if in 1998 it was 115 then in 2001 it is 105.
Reasons for entering large server:1. The core competence of Dell, the sale model-Dell direct, can extend to other segment, large server2. The excellent customer relationship management will help Dell to break into the new segment.3. The high service quality in PC field makes customers believe in Dells new product.
Reasons for not entering large server:1. The Dell-direct may not succeed in large server due to different requirements. The customer of large server has different background.2. The position of Dell is to focus on low-cost production and low prices. This position cannot be accept by large server market.3. The Price wars are expected to take profits even lower.4. The existed competitors are doing well in field service. Dells strategy might not make difference to them.5. The way to large server is incremental. Dell has to follow customers needs. Such needs are different from PC market.6. The trading and cost for an in–house field service team are more critical for server.
Initiatives PayoffsShip to 1. Reduction of cost of transittarget 2. Improved customer serviceFirst-time 1. Improved number of issues solved in the first goResolvers 2. Thus improved customer perception of the product and hence reduced number of technical visits thus reducing after sales cost.Call centre 1. Reduction of technical visits to 75%representativ 2. Hence enabled company to place more stringent constraintses on service levels that can be delivered to customerFrequently 1. Reduced the technical visits required furtherasked 2. Help improve after sales service turnover timequestions 3. Also leveraged the technical knowhow of the technical team for its advantage 4. It helped in gaining customer satisfaction without employing extra resources for the sameFeedback for 1. Helped in improving Frequently asked questionsthe product 2. Helped as gold mine for product development team and support team to handle queries more effectively hence reduction of cost.
IBM costRevenueMiddle range server (million $) 4,996High end server (million $) 4,149Total (million $) 9,145Number of client (Pg 7) 12,000Margin of profit (Ref 3) 50%Expenses (million $) 4,573Number of after sales employee (Pg 7) 135,000% of employee cost (Assumption) 40%Employee expenses (million $) 1,829Employee expenses per client (million $) $ 0.38Employee expenses per employee ($) 33,870Employee per customer 11
Approximate cost if Dell entersi Cost cut due to CSRs (in PC) (Pg 6) 25%ii Cost cut due to CSRs ( technicality is double) (Assumption) 50%iii non First time resolves (PC case) (Pg 6) 10%iv non FTRs (for server is at least double) (Assumption) 20%v Multiplication factor due to repetition 1.2vi Service level provided (hrs) 24vii Service level in server (hrs) 4viii Multiplication factor due to service level (Assumption) 6 Total Multiplication factor (ii*v*viii) 3.6 case 1ix Employee expenses (Table 1) $ 205x Employee cost in expansion (ii*v*viii*ix) $ 738 if Efficiency of Dell employee in Server is less (Assumption) 50%xi Employee cost in expansion $ 1,476 case 2xii Number of employee per customer (PC) (per million) 2571.5 Number of employee per million customer in server (per million) (xii*viii/(ii*(1+iv)) 25715 Employee cost in expansion $ 2,053 case 3xiii Employee expenses (IBM cost) (Assumption) $ 33,870xiv Employee cost in expansion (ii*v*viii*xiii) $ 10,839
Points in favour Points againstDecision One1. High reach in the target market 1. Customer interface will vary hence2. Highly experienced in providing against Dell-direct service for server especially high end 2. Might or might not make up to the (Pg 7) SLA’s hence a risk at Dell’s end 3. Stringent Dell’s operation and service policies may be heavy for themIBM1. High reach in the target market 1. Direct competitor in the market2. Highly experienced in providing 2. Will it have any pressure to deliver service for server especially high end the SLA of Dell (Pg 7) 3. Might lead to breach of core3. High employee/ customer ratio competency i.e. operational hence will have workforce to meet efficiency to IBM. SLA4. Might help in boast in sales due to brand association with IBM.