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  • 1. DELL INC COMPANY INSIGHT AND COMPETITIVE ANALYSIS By Salman Abdulaziz
  • 2. EXTERNAL ANALYSISKEY ECONOMIC AND INDUSTRY VARIABLESMarket Size  PC units manufactured in US increased by 2.13%, from 64.2 million to 65.6 million from 2007 – 2008  Global PC units produced increased by 9%, from 261.4 million to 287.6 million, 2007 to 2008 Market Growth  PC units sold worldwide increased from 231.8B to 244B, a 5% increase from 2007 to 2008  PC units sold in the US decreased from 52.6M to 50.9M, a 3.34% decrease in 2007 to 2008  Demand for PCs declined in 2008 from 2000 levels due to global economic recessionNumber of Rivals Rivals Dell Apple Lenovo Acer HP US Market Share 2008 29.4% 7.9% 4.1% 9.3% 24.7%Global Market Share 2008 14.7% 3.5% 7.6% 10.9% 18.9%PORTER’S 5 FORCES ANALYSISCompetition: Intense  The industry is highly fragmented with several large key players  HP spent $1 billion in sales and marketing in 2008.  Acer is the fastest growing company in computer industry.  Apple spent $500million in sales and marketing, and increased market share from 2004-2008 as well globally.  Lenovo entered US market through the purchase of IBM’s PC division for $1.25B in 2004Threat of Entry: Low - Med It takes high level of investment and technological expertise to enter the industry. It takes $750 to manufacture a desktop PC. Entry takes place by foreign companies acquiring companies losing market share. Chinese PC manufacturer Lenovo entered the US market by acquiring IBM’s PC division. Taiwanese company Acer entered the US market by acquiring Gateway.Substitutes: Medium  The switching costs are low.  Smartphones and laptops will gradually replace PCs in the future.Supplier Power: Medium Suppliers can be categorized into hardware and software. Hardware can be purchased in highly global competitive market served by many companies except for microprocessors. In 2009, Intel had 80% market share in microprocessors and charged a fixed price for all buyers. Microsoft had a strong market share in operating systems. All PCs companies except for Apple are strongly dependent on Microsoft softwareBuyer Power: Medium  Buyer can be categorized into large business & government, small & midsize business, consumers (home) and education.  Transactional consumers have low buyer power. 2
  • 3.  Relationship buyers have high buyer power. They can negotiate prices as they purchase in large volumes ie. Government, education or large business COMPETITIVE POSITION IN RETAIL SECTOR PC Provider Dell HP Lenovo Acer Apple % of unit sales via retail 2008 11% 38% 25% 52% 47% Retail channel is becoming important to sell PCs. Retailers have the sales force to educate and influence the consumer’s decision to purchase a product. Since the end consumer segment is growing globally, relationship between PC providers and retailers is critical for success. POSITIONING MAP OF THE INDUSTRY Conclusion A balanced combination of price and strength in retail distribution is necessary to have a strong market share. Since 93% customers accept retailer recommendations, retail presence is critical to maintain a strong market share.KEY DRIVERS IN THE INDUSTRYGlobalizationLenovo from Taiwan and Acer from China entered the global PC market through acquisition of IBM PCdivision and Gateway respectively with competitive advantage in low-cost manufacturing. In 1990s, PCmakers began to outsource their manufacturing to China and Taiwan where the labor costs were 80% to90% lower. Dell opened a plant in India and closed some plants in US including the plant in Texas.Marketing InnovationHP launched a campaign, which differentiated the way PCs were perceived by consumers. Making PCs afashionable brand allows companies to charge a premium price like Apple.Product InnovationCustomers demand latest up-to-date gadgets. PC makers need to stay ahead of the competition. HPdeveloped different types of PCs catered to different audiences. Dell customized PCs to buyerspecifications and commenced assembly only after receiving an order. Dell offered 4 lines of desktops andlaptops that catered from large organizations to individual users as well as intensive graphic designers. 3
  • 4. Long-term steady growth in industryPC sales increased globally by 9% between 2007 to 2008. PC market size in the U.S. increased from $4.5billion to $50.9 billion from 1982 to 2008, an average annual increase of 11%. PC market share worldwideincreased from $60.9 billion to $244 billion from 1990 to 2008, an average annual increase of 7.5%.Growing Buyer PreferencesLarge businesses and organizations prefer customized PCs which can meet technical requirements.Individual consumers satisfied with standardized PCs. WEIGHTED KEY SUCCESS FACTORS IN THE INDUSTRY Weighted Dell Apple Acer Lenovo HP Factor Quality 0.16 8 9 6.5 5.5 8.5 Distribution 0.3 7.5 8.5 6 5.5 7 Channels Product Line 0.16 8 7 6.8 7 9 After-sales service 0.13 8.5 9 7 6.5 7.5 Product 0.1 7.5 8.5 6.0 7.3 7.3 innovation Advertising 0.15 7 8 6.0 5.5 8.5 Total 1 7.715 8.33 6.338 6.05 7.88 VALUE CHAIN ANALYSIS Distributors supplied PCs Microsoft, AMD and The manufactures to resellers. Resellers End conumers, large component suppliers assembles the products worked with business corporations, small provide operating and ships them to customers to design, businesses, government systems, microprocessors retailers, distributors, configure, install and and educational and PC parts to Dells businesses and end support computer institutions buy PCs. manufacturers. consumers. networks.  Personal computers flowed from manufacturers to customers via four channels - brick and mortar retail stores, distributors, integrated resellers and direct distribution. Some PC makers like Apple opened their own retail stores.  A handful of large distributors such as Ingram Micro and Tech supplied a full range of computer hardware and software to more than 100,000 resellers. Some resellers were large enough to buy directly from manufacturers.  Retailers and distributors typically mark up the product 3 - 4%. Distributors earn a thin margin of 1%.  In direct distribution PC makers took order by phone or Internet and shipped the PCs through third party shippers such as UPS directly from manufacturers to the customer. 4
  • 5. CONCLUSION ABOUT ATTRACTIVENESS OF THE INDUSTRYDue to the growing demand for PCs globally, the industry is attractive for large companies who have thefinancial resources and technological expertise to enter the market.INTERNAL ANALYSISCOMPANY’S RESOURCE AND COMPETITVE POSITIONCompany strategy  Corporate Strategy – Dell’s strategy was to increase its market growth by targeting large corporate customers directly. They also targeted end customers online and kept supply chain costs to a minimum. Now Dell is moving towards small businesses and home users through retailers and resellers.Functional Strategies Supply Chain – Dell was the industry leader in efficient supply chain management. Using Just-in- Time distribution allowed them to reduce inventory storage costs and expedite order delivery. Manufacturing – Dell tried to reduce its cost by closing its Texas, Tennessee plant into India, and relied more contractor to produce its PCs Human Resources – After returning, Michael Dell hired Ronald Garriques from Motorola as the head of Dell’s consumer division and Michael Cannon from Solectron as Chief Global Operations. Brian Gladdin from GE and Ed Boyd were hired as CFO and Chief Consumer Designer. Marketing and Sales – They enhanced their product line by launching a series of laptops in bright colors and selling through major retailers globally. They also launched the Partner Direct program to build relationship with qualified resellers.COMPANY VISION, MISSION AND COMPETITVE ADVANTAGEDell vision statement  Make information technology solutions affordable for millions of people around the world.Mission Statement  To be the most successful computer company in the world by providing the best product with competitive pricing through the utilization of the most efficient supply chain and manufacturing strategy.Competitive advantage  Dell has strong direct sales compared to competitors giving it a large presence in the B2B market. 66% of Dell’s revenue comes from large customers.  Dell provided exceptional customer service to corporate clients. They could repair or replace high- end servers of corporate customers within hours. They had personnel in five control centers around the world to respond to IT emergencies.SWOT ANALYSISStrengths  Efficient and streamlined supply chain - Dell worked closely with suppliers to arrange JIT delivery to reduce inventory levels. Symphony – a custom-built software application that used EDI links with suppliers to monitor inventory, as a result Dell only carried four days of inventory while competitors had 20 – 30 days.  Good relationship with large corporate buyers. Dell has excellent customer support system for corporate clients. 5
  • 6.  Dell specializes in providing customized PCs based on customer specifications. Excellent leadership and strategic direction under Michael Dell. He brought in senior and experiences talent from different industries to add the expertise in DellWeaknesses Poor relationship with retailers due to conflicting strategies. Dell’s marketing was focused more on technical specifications rather than brand value. Dell’s strategy did not realize the importance of small businesses and end consumers. Dell’s customer service towards end consumer declined. PC rating less than Apple’s Mac in 2009Opportunities Ability to reach new segments globally through big retailers Wal-Mart, best buy, Gome, Staples, Carrefour, Big Camera The acquisition of Perot Systems provided opportunities in selling IT services. PartnerDirect program allowed Dell to provide technical, financial and marketing assistance to certified resellers. China and Taiwan offer low cost production opportunities than US and Europe PC related products have expanded to include laptops, workstations, servers, notebooks, and tablet PCs. Potential to reach new customer segments by using multiple distribution channels. Demand for PCs among end users in US increased at an average of 4% between 2002–2008. The PC market grew from $176.4B in 2004 to 244B in 2008, an average growth of 10%.Threats  Inventory Buyback - PC makers had to buy back inventory which did not sell. Price protection was also provided in case the price of a computer fell while it was in the distribution. Inventory buy backs and price protection cost PC makers 2.5% of their revenue.  In 2009, Acer surpassed Dell as world second largest PC provider in unit terms  Stagnant market in United States  HP exceeded Dell in PC market share globally  Faced a diverse set of competitive dynamics: Compaq merger with HP, Acer enter the market as fastest growing firm in the industry, Lenovo acquired IBM`s PC department  Apple’s rating as the most preferred brand by consumers in 2009KEY FINANCIAL RATIOSProfitability ratios 2002 2004 2005 2006 2007 2008Gross profit 18.3% 18.4% 17.7% 16.6% 19.1% 17.9%Operating Profit Margin 7.8% 8.6% 7.9% 5.3% 5.6% 5.2%Net Profit Margin 5.8% 6.1% 6.5% 4.5% 4.8% 4.1%Return on total assets 2.3 2.1 2.4 2.2 2.2 2.3Return on stockholders equity 41.9% 47.1% 89.0% 59.70% 78.9% 58.0% 6
  • 7. STRATEGYIssuesProduct Differentiation – Dell is not able to differentiate itself as a unique value provider. Acer providesthe most affordable PCs while HP and Apple are leaders in brand value. Competitive Advantage is vital tosurvive in the competitive PC market.Competition – Entry of new firms, mergers within competitors and return of Apple’s Macintoshincreased the rivalry in the industry. Dell’s inability to respond to the evolving competitive landscaperesulted in loss of market share.Distribution Issues – Dell experienced significant losses in retail sales and was forced to temporarilywithdraw from retail channels. Retailers were not comfortable with Dell’s direct and online distributionstrategy.ANALYSISProduct Differentiation The prices of PCs have reduced significantly. Dell’s price for Desktop PC decreased from $1,052in 2002 to $601 in 2008 due to outsourced manufacturing in China and Taiwan where the labor costs are80 – 90% lower. Customers are now satisfied with standard PCs and do not require a high level ofcustomization. As a result R&D budgets have been reduced to less than 4% as a percentage of sales in2008. Creating brand value is necessary to charge premium prices and increase margins. Dell does notdifferentiate itself as a low cost provider or the most premium product. Acer has the lowest operatingcost in the industry while Apple and HP are leaders in brand value. Even though Dell spent 800M inadvertising and sales in 2008, it was not able to position itself as a unique product or an iconic brand.Increasing Competition Dell lost significant market share to its competitors. Lenovo entered the market with acquisitionof IBM’s PC division for $1.25B giving them the rights to IBM brand for five years and access tointernational markets. Similarly, Taiwanese company Acer purchased Gateway and Packard Bell, makingit the fastest growing PC provider. Acer’s product line focused on inexpensive computers with goodinternet connectivity and economies of scale allowed it to achieve lowest overhead costs in the industry.In 2009, Acer surpassed Dell to become the second largest PC provider in terms of units sold.Furthermore, HP’s move to acquire Compaq for $25B created a company which ultimately became Dell’sbiggest rival. In 2007, HP’s consumer PC revenue grew by 39% and notebook PC revenue grew by 47%.HP spent $1B in innovative marketing campaigns to position itself as a unique PC provider. They also 7
  • 8. worked with retailers and resellers to capture the growing consumer market. In addition, Apple’sMacintosh resurfaced in the market. It’s PCs which were known for sleek design and high prices wereimproved with a shift to Intel microprocessors and the release of new operating systems. Along with itsown independent retail stores, Apple also sold through resellers, storefront retailers and direct sales. Asa result Apple’s revenue from laptops and PCs experienced annual growth rates of 35% and 6%respectively. Dell’s re-entry in the retail market with limited product lines was an ineffective strategy intargeting end consumers.Distribution Channel Dell’s current competitive advantage in direct model is becoming less and less advantageous in aglobal market. Direct sales to end consumers in US have decreased through by -7.6% between 2004–08as end consumers are less receptive to the direct model. Only 27% of the global market share can beattributed to the direct distribution channels, but 73.25% of the global market belongs to retailers andresellers. In 2008, sales for large businesses reached $20.2B as compared to $45.9B for the endconsumers. This is critical as of 2009, 74% of Dell’s sales took place directly. Also, 38% of Dell’s sales takeplace in the stagnant US market which decreased 3.2% between 2007-2008 in dollar sales whereas theinternational markets increased by 5%. End consumers prefer to buy the personal computer in the store because it allows them totouch and feel the product. But Dell’s presence in retail is weak with only 11% units sold through retail.Since, 93% consumers accept retailer recommendations, Dell misses a vital opportunity. Retailers andresellers are hesitant to work with Dell because Dell’s direct strategy eliminates them. Since endconsumer segment is increasing globally, retail channels are vital to reach the market. The sales byindirect distribution channel in US increased from 39.7% in 2004 to 55.9% in 2008, compared to directdistribution 56.6% in 2004 to 42.2% in 2008. Michael Dell downplayed potential conflicts by stating thatdirect and indirect businesses were separate. However, retailers and resellers were hesitant to workwith Dell and preferred HP over any other PC.Recommendations Significant restructuring in the way Dell operates is necessary to improve the competitiveposition of the company. Dell should partner with retailers to target the 73.25% PCs sold globallythrough retail channels. We recommend that Dell merge direct sales to end-consumers with its retailchannel. Customers who order directly may pick up their orders from closest retail stores who cancharge a small fee for their service. If retailer relationships cannot be developed, opening independentstores will enable Dell to avoid retailer conflict and retain the margins. Furthermore, creating a 8
  • 9. competitive advantage for its products such as built-in applications or hardware capabilities is necessaryto create a unique value proposition for the customer. A marketing campaign focused on creating brandvalue should be implemented which will allow Dell to charge premium prices and maintain brandloyalty. 9