The document discusses Dell's operations and strategy in China. It provides background on Dell, including that it entered China in 1995 and started focusing on the country in 1998. It then summarizes Dell's external and internal analysis for China, including Porter's Five Forces analysis identifying intense competitive rivalry and threats from new entrants. The SWOT analysis identifies strengths like Dell's reputation and manufacturing plant, but weaknesses in lacking a low-cost advantage. It recommends Dell expand and defend its position in China's high-end corporate PC market while preparing for the growing consumer and low-end segments.

1. Dell in China
Sample Case Analysis Presentation
Professor Josh Philpot
April 10, 2008

2. Agenda
 Identification of Key Strategic Issues
 External Analysis
 Internal Analysis
 Summary SWOT
 Strategic Alternatives & Recommendations
 Questions & Answers

3. Key Strategic Issues

4. Key Strategic Issues
 Taking advantage of an international opportunity in
a high growth market
 Adjusting business-level strategy in light of a rivalry
 Leveraging core competencies in a foreign market

5. About Dell
 Founded in 1984
 World’s largest computer vendor
 Revenues of $41 billion in 2004
 Operates in 13 Asia Pacific markets with sales of $4.3B in
2004
 Entered China in 1995 via export
 Started focusing on China in 1998
 In 1998 established a local manufacturing and distribution
operation
 In 2004, Dell PCs captured 7% share in China

6. External Analysis

7. Industry Definition
 Dell competes in the PC industry, selling enterprise
systems, desktop computers and notebook
computers.

8. General Environment

9. External Analysis:
Key Environmental Factors
 Chinese population is 23% of world total
 Main opportunities will be in the larger cities
where incomes are higher
Source: China Country Commercial Guide (CCG)

10. External Analysis:
Key Environmental Factors
 Socio:
 Purchasing expectations (try before they buy)
 Chinese attitudes and culture becoming more similar in
purchasing patterns and work ethic to U.S.
 Economic:
 Chinese economy grew 9.8% in 2005
 Total retail sales increased 13%
 China’s PC market estimated to grow 19% in 2004-2005
 Low per capita incomes and unevenly distributed
 Average US $1,583
 Urban US $5,000
 Middle class (200 million people) US $8,000
Source: China Country Commercial Guide (CCG)

11. External Analysis:
Key Environmental Factors
 (new member of WTO but…)
 China’s political system controls unions and financial institutions
 Legal and regulatory systems can be inconsistent
 Business based on relationships (guanxi)
 Intellectual property at risk
 Tech
 Just 2.5% of urban Chinese own a computer
 Access and use of the internet is increasing
 Global
 Sales opportunity (Asia/Pacific currently just 10% of Dell)
 China’s attractive low-cost manufacturing capabilities
Source: China Country Commercial Guide (CCG)

12. The Five Forces of Competition Model
HIGH
INTENSE
LOW
MODERATE
NONE

13. External Analysis:
Porter’s Five Forces
 Threat of New Entrants – HIGH
 Foreign and local competitors
 IBM, Compaq and HP also entered in 1990s
 Less government policy barriers (China joined WTO in 2002)
 Potential barriers include:
 Access to distribution channels
 Scale economies (Local production plants)
 Substitutes – NONE
 Bargaining Power of Suppliers – LOW
 Dell and most competitors are vertically integrated

14. External Analysis:
Porter’s Five Forces
 Bargaining Power of Buyers – MODERATE
 Few buyers purchase a large portion of industry output
 State-owned companies, MNCs and educational institutions
 Sales account for a large portion of Dell’s sales revenue
 50% from government, education, telecoms, power and finance.
 Brand reputation and product differentiation can mitigate
 Competitive Rivalry – INTENSE
 High profit potential due to industry growth
 Main buyers are institutions with more resources than individuals
 Price pressure from local competitors
 High fixed costs of production capacity
 High strategic stakes (focus on market share)
 Aggressive competitive response
 Lenovo adopting Dell’s direct sales model in China
 Lenovo’s joint venture with IBM to increase it’s share
 Lenovo’s brand campaign to improve recognition

15. Competitors
 Future objectives:
 Build market share rapidly
 Current strategy:
 Cost leadership (Lenovo, Founder, Tongfang)
 Differentiation (HP, IBM & Compaq)
 Focused on consumer market
 Lenovo positioning itself to challenge in high-end

16. Competitors
 Key Strengths:
 Chinese competitors: market knowledge and low cost
advantage.
 American competitors: technology and brand recognition
 Key Weaknesses:
 Chinese competitors: brand recognition
 American competitors: higher costs

17. Customer
 High-end Customers
 State-owned companies
 MNCs
 Government
 Educational institutions
 Large Corporate Accounts (1,500+ employees in Telecoms, Power
and Finance
 Individual Consumers
 Behavior:
 Consumer market is price sensitive
 Prefer a trial use of PCs before purchase
 Internet purchases were uncommon but internet users increasing
 Best way to reach is through retailing (Kiosks)
 Value product quality, especially high-end customers
 Brand loyal

18. Internal Analysis

19. Key Financial Ratios
FY 2005 FY 2004 FY 2003 FY 2002 FY 2001
Profitability Ratios
Gross Profit Margin 18.32% 18.22% 17.93% 17.67% 20.21%
Net Profit Margin 6.75% 6.38% 5.99% 5.71% 7.06%
Return on Equity 51.24% 42.12% 43.55% 37.92% 40.02%
Liquidity Ratios
Current Ratio 1.20 0.98 1.00 1.05 1.43
Quick Ratio 1.16 0.95 0.96 1.01 1.38
Leverage Ratios
Debt to Total Assets 0.72 0.67 0.69 0.65 0.59
Debt to Equity 2.58 2.08 2.17 1.88 1.43
Long-term Debt to Equity 0.40 0.34 0.34 0.28 0.23
Activity (Efficiency) Ratios
Inventory Turnover 107.20 126.74 115.70 112.12 79.72
Accounts Receivable Turnover 11.15 11.40 13.69 13.74 13.16
Average Collection Period 32.29 31.58 26.30 26.21 27.37
Key Growth Rates
Sales 18.73% 17.06% 13.59% -2.26%
Net Income 25.63% 24.65% 19.21% -20.89%
Current Assets 58.91% 19.15% 13.29% -19.01%
Current Liabilities 29.74% 21.97% 18.81% 10.93%

20. Key Resources
 Key tangible resources:
 WW market leadership & financial resources ($8B in China)
 Direct sales system and customer service
 Local production plant in China
 Alliance with Oracle
 Manufacturing (“Build-to-order) and low inventory” strategy
 “Just-in-time” model (6 days vs. 40 days of supply)
 Portfolio of award-winning products
 Key intangible resources:
 Strong brand
 Reputation (“Dell experience” of high-quality products, support and
service)
 Innovative in its technology, business practices and customer service
http://www.dell.com/content/topics/global.aspx/corp/en/home?c=us&l=en&s=corp

21. Core Competencies
 Ability to simplify PCs and the supply chain since their
beginning
 Ability to understand customer needs and deliver innovative
technology and services
 Ability to use technology to simultaneously improve
customer experience and contain costs
 Ability to operate a direct business model
All are valuable, rare, costly to imitate and
Nonsubstitutable.

22. Value Chain Analysis
 Primary activities of value:
 Operations: Manufacturing processes contain costs well
 Outbound logistics: Direct sales model
 Service: High responsiveness to customer needs
 Support activities of value:
 Technological development: Innovative web site and IT
infrastructure
 Firm infrastructure: Visionary founder and management
team

23. Summary SWOT

24. SWOT Analysis
Organizational Environmental
analysis analysis
Strengths Opportunities
Weaknesses Threats

25. Strengths & Weaknesses
 Strengths:
 Reputation
 Manufacturing plant (build-to-order capability, JIT)
 Direct sales model (on line and phone order capability)
 Strong sales revenue in 2003 ($8 Billion)
 Strategic alliance with Oracle
 Product performance (Best Overseas PC Corporation
Award)
 Weaknesses
 No low cost advantage that will allow them to compete in
the consumer segment
 Possible cost advantages not realized from their China
plant

26. Opportunities
 Large population in China and economic growth potential
(Dell’s fourth largest market)
 PC market expected to grow by 19%
 Only 2.5% of urban Chinese own PCs
 Sales potential in larger cities
 Reduction in tariffs on IT products makes it less costly to
export to China
 Expansion into Japan, Korea and Taiwan

27. Risks
 Low GDP per capita in China
 Weak government protection of IP
 Moderately high threat of entry of new competitors
 Intense rivalry among competitors
 Lenovo-IBM joint venture
 Lenovo’s copying of Dell’s direct sales model
 Lenovo’s attempts to boost brand recognition

28. Strategic Alternatives
and Recommendations

29. General Problem Statement
 Dell faces a rivalry from Chinese PC firms, in particular
Lenovo’s (Legend) attempts to copy Dell’s direct sales
approach and build brand recognition. (At risk is Dell’s
dominance of the high end market)
 Will require a cost advantage to re-enter the low-cost
segment. (At risk is the Dell customer experience of product
quality and service levels or accepting declining profits)

30. Strategic Alternatives
 Lower costs to be viable and establish a presence in the
low-end (consumer market) before competitors
 Abandon the low-end and put all resources on defending
the high-end (corporate market) where Dell currently has
an advantage
 Challenge Lenovo in other Asian markets that are
important to it while increasing product quality and services
in China

31. Strategic Recommendation:
Expand and defend the high-end of the market
Implementation
 Continue Dell’s business level strategy of differentiation
 Based on product quality, build-to-own capability and direct sales method
 Continue to innovate and outpace the Lenovo-IBM partnership
 Build brand recognition in China as Lenovo’s doing worldwide
 Grow direct ordering via the internet (increasing Chinese web usage)
 Leverage penetration in LCAs (>1,500 emp.) for increased “share of wallet”
 Challenge Lenovo in other important Asian markets while increasing product quality and
services in China
 Prepare for wireless/mobility trend and strengthen notebook offering
 Eventually broaden reach to penetrate low-end and rural areas
 Develop the infrastructure to service, support and sell (different than urban areas)
 Requires a low-cost, differentiated product line (e.g. AMD, no Windows OS)
 Learn the Chinese market to overcome “foreignness” and local rivals
 Explore alternative sales channels (besides direct) to reach small cities

32. Questions & Answers

33. Dell to build second factory in China
New facility will double Dell's current production capacity in China
By Sumner Lemon, IDG News Service
March 25, 2005
Dell announced on Thursday plans to build a second manufacturing plant in southeastern China.
The new plant will be constructed in Xiamen, Fujian province, where Dell already has one factory, according to the
company. The new manufacturing plant will produce PCs for Dell customers in northern Asia, including China and Japan,
the company said, adding that the new facility will double the company's current production capacity in China. The
company did not disclose what that capacity is.
China is the world's second-largest PC market, after the U.S., and continues to grow at a healthy clip. According
to Gartner, 14.9 million PCs were sold in China last year and shipments grew by 14.9 percent. Dell has the largest
market share of any foreign PC maker in China, but rivals IBM and Hewlett-Packard closed the gap last year by growing
faster than their rival from Round Rock, Texas, according to market analysts Gartner and IDC.
Despite the best efforts of foreign PC makers, the Chinese PC market continues to be dominated by local players, with
Lenovo Group holding the largest share of the market.
http://www.infoworld.com/archives/emailPrint.jsp?R=printThis&A=/article/05/03/25/HNdellchina_1.html

34. From April 3 ’08 Analyst Meeting
2008 27% revenue groth in BRIC