Dell in China

Sample Case Analysis Presentation Professor Mike Davis January 14, 2008

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

Key Strategic Issues

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

About Dell

Founded in 1984 Worlds 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 Operates in in 1998 established a local manufacturing and distribution operation In 2004, Dell PCs captured 7% share in China

External Analysis

Industry Definition

Dell competes in the PC industry, selling enterprise systems, desktop computers and notebook computers.

External Analysis: Key Environmental Factors

Demographic 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)

External Analysis: Key Environmental Factors

Sociocultural:
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% Chinas 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)

External Analysis: Key Environmental Factors

Political/Legal (new member of WTO but)

Chinas political system controls unions and financial institutions Legal and regulatory systems can be inconsistent Business based on relationships (guanxi) Intellectual property at risk

Technology
Just 2.5% of urban Chinese own a computer Access and use of the internet is increasing

Global
Sales opportunity (Asia/Pacific just 10% of Dell) Chinas attractive low-cost manufacturing capabilities

Source: China Country Commercial Guide (CCG)

External Analysis: Porters 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)

Bargaining Power of Suppliers Low

Most competitors are vertically integrated

External Analysis: Porters Five Forces

Bargaining Power of Customers MODERATE

Few buyers purchase a large portion of industry output
State-owned companies, MNCs and educational institutions

Sales account for a large portion of Dells sales revenue

50% from government, education, telecoms, power and finance.

Brand reputation and product differentiation can mitigate

Substitutes None 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 Dells direct sales model in China Lenovos joint venture with IBM to increase its share Lenovos brand campaign to improve recognition

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

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

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

Internal Analysis

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

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.

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

Summary SWOT

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

Opportunities

Large population in China and economic growth potential (Dells 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

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 Lenovos copying of Dells direct sales model Lenovos attempts to boost brand recognition

Strategic Alternatives and Recommendations

General Problem Statement

Dell faces a rivalry from Chinese PC firms, in particular Lenovo (Legend) Need to overcome Lenovos attempts to copy Dells direct sales approach and build brand recognition. (At risk is Dells 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)

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

Strategic Recommendation:
Expand and defend the high-end of the market Implementation

Continue Dells 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 Lenovos 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

Questions & Answers