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                  STRATEGY ANALYSES AND  RECOMMENDATIONS  FOR   DELL, INC.      March 6, 2006

AUTHORS  KHALID ALKELABI  (Organization Capabilities and Resources)    JENNIFER LUND  (Competitive Landscape)    KATHRYN LYNCH  (Industry Characteristics and Macro Forces)    GREG SHORR  (Present Positioning and Strategy)    MATTHEW SMITH  (Organization Characteristics)   

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TABLE OF CONTENTS 
AUTHORS ...................................................................................................................................................................1 TABLE OF CONTENTS ............................................................................................................................................2 I. EXECUTIVE SUMMARY......................................................................................................................................3 II. KEY STRATEGY ISSUES....................................................................................................................................4 III. ORGANIZATION CHARACTERISTICS.........................................................................................................5 IV. ORGANIZATION CAPABILITIES AND RESOURCES ................................................................................8 V. INDUSTRY CHARACTERISTICS AND MACRO FORCES.........................................................................10 VI. COMPETITIVE LANDSCAPE.........................................................................................................................13 VII. PRESENT POSITIONING AND STRATEGY ..............................................................................................16 VIII. ENVIRONMENT AND STRATEGY ASSESSMENT .................................................................................19 IX. OPTIONS AND RECOMMENDED STRATEGY ..........................................................................................22 IX.1. FOCUS ON INNOVATION ..................................................................................................................................22 IX.2. DIVESTING ......................................................................................................................................................22 IX.3. EXPANSION INTO SERVICES.............................................................................................................................23 IX.4. REINVIGORATE DIFFERENTIATION ADVANTAGE ............................................................................................23 IX.5. RECOMMENDED STRATEGY ............................................................................................................................24 APPENDICES A – C: ORGANIZATION CHARACTERISTICS ......................................................................28 A. ORGANIZATIONAL PURPOSE AND DIRECTION .....................................................................................................28 B. ORGANIZATIONAL CHARACTERISTICS.................................................................................................................29 C. VALUE CHAIN ANALYSIS ....................................................................................................................................31 APPENDICES D – F: ORGANIZATION CAPABILITIES AND RESOURCES..............................................36 D. KEY COMPETENCIES ASSESSMENT .....................................................................................................................36 E. TECHNOLOGY ASSESSMENT ...............................................................................................................................39 F. FINANCIAL RATIO ANALYSIS ..............................................................................................................................43 APPENDICES G – I: INDUSTRY CHARACTERISTICS ..................................................................................45 G. MACRO FORCES ANALYSIS .................................................................................................................................45 H. INDUSTRY ANALYSIS ..........................................................................................................................................50 I. INDUSTRY LIFE CYCLE .........................................................................................................................................53 APPENDICES J – L: COMPETITIVE LANDSCAPE.........................................................................................55 J. FIVE FORCES OF COMPETITION ............................................................................................................................55 K. MAJOR COMPETITORS .........................................................................................................................................57 L. COMPETITOR RESOURCES ...................................................................................................................................59 APPENDICES M – O: CURRENT POSITIONING AND STRATEGY.............................................................62 M. PRODUCT MARKET MATRIX ...............................................................................................................................62 N. PORTER'S GENERIC STRATEGIES .........................................................................................................................65 O. MARKET ATTRACTIVENESS AND STRENGTH .......................................................................................................66 APPENDIX P: BIBLIOGRAPHY ...........................................................................................................................69

 

I. EXECUTIVE SUMMARY  Dell has experienced tremendous growth over the past twenty years. Throughout this period, Dell has continued to raise its standards of excellence. The values, mission and vision of the company facilitate the achievement of these illustrious goals. The purpose of this document is to evaluate the internal and external environments and Dell’s position within this competitive landscape. Based upon this analysis, a recommended strategy will be outlined which will guide Dell back to its roots. The key competencies of Dell are customer focus, manufacturing processes, supply chain management, customer selection, acquisition and retention, customer service and human capital management. Dell’s strategy has been to match its core competencies with key industry success factors. The PC industry is facing increasingly strong worldwide competition – leading to reduced differentiation among competitors and increased price sensitivity among consumers. Although Dell has seen considerable growth, the company is beginning to lose its competitive edge in critical business segments. Specifically, Dell needs to improve in the following areas: customer service, customization options, increased marketing presence and retail solutions tailored to the global environment. Dell’s ability to adapt in these business segments will ultimately determine its ability to maintain its predominant position. The recommended strategy for Dell is to reinvigorate its differentiation advantage. Ultimately, the company must get back to basics. This requires the firm to realign its core competencies with the needs of a global marketplace.

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II. KEY STRATEGY ISSUES  Dell is facing multiple strategic issues which may impede on the company’s top position in the computer hardware market. This section addresses the four key strategic issues that Dell should address in order to maintain its prominent market position. First, Dell faces slow growth for its primary product: the personal computer (PC) in a saturated U.S. market. The majority of U.S. corporate and education PCs will be replacement units affected by a technological upgrade cycle within the next two years. Therefore, as Dell attempts to maintain its dominant position, the company should focus on product customization and superior relationships with suppliers. This strategy enabled Dell’s past success but had become diluted over the last five years. The company should continue to improve itself in these areas in order to remain the top computer hardware differentiator. Second, the erosion of Dell’s brand value continues due to the perception of declining customer service. Although the company prides itself on superior customer service, recent surveys suggest that Dell’s results recently declined in this business segment. Dell’s executives are aware that quality customer service is a key element of the company’s success and are reportedly working towards improvements. Third, Dell’s inability to serve all market needs due to the current strategy of limited vendors in its supply chain. Dell brings few products to market and leverages technology created by other companies effectively and efficiently. Dell also remains committed to chip supplier, Intel. Although this enables Dell to offer PCs at high value to consumers, it also limits the company’s ability to supply diverse customers. The company should consider enabling itself to offer more customized products by increasing relationships with more diverse suppliers.

 

Finally, Dell’s market footprint extends primarily to mature markets in the U.S., Europe and Japan. The global market for PCs continues to grow—creating additional opportunities for Dell. For Dell to compete in growing computer markets around the world including Latin America, China and other countries in Asia the company should enhance its expertise in customizing its products. This would enable it to expand its market niche of product

differentiator outside of the U.S. III. ORGANIZATION CHARACTERISTICS  
By Matthew Smith

Dell, Inc. has experienced tremendous growth since Michael Dell founded the company with only $1,000 in his University of Texas dorm-room. Today, Dell has global revenues of nearly $50 billion and employs more than 55,000 individuals. Despite this tremendous growth, the organization has remained committed to its core values. The “Soul of Dell” creates an ethical framework in which people are the common thread which links the organization’s current position and future aspirations. The organization’s mission is “…to be the most successful computer company in the world at delivering the best customer experience in the markets we serve” (Soul of Dell, 2006). The vision of the company is: “…to lead in all regions we serve. The foundation of our success is the same in the United Kingdom and France, China and Japan, Canada and other countries. Customers want technology products that are relevant to them, offer great value and can be easily purchased and used. That’s what our team around the globe consistently delivers” (Fiscal 2005 in Review, 2005). Considering variations in customer preferences throughout the world, this vision may not allow Dell the flexibility to meet varying customer needs throughout its global marketplace.  

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The organization, which is exceedingly results driven, has set one major goal through 2007. That goal, which was increased by $20 billion, is to reach $80 billion in revenue by the end of 2007. Despite a recent decline in PC sales, the revised goal was established to reflect increases in service and storage revenues. In addition, the organization believes it stands to benefit from increased sales in emerging markets. Dell is a flat organization which operates on open communication and demands results. Employees at every level are given the freedom to pursue and develop new and more efficient ways of completing tasks without prior approval from upper management. If successful, new strategies are shared and initiated across the organization. Likewise, open communication

creates a results driven organization. The organization believes that each employee should know exactly where he/she stands with regards to meeting organizational goals. To facilitate this, employees are rated every six months by their peers. These surveys are instrumental for

accountability. Those employees that earn excellent ratings on their surveys are rewarded with high appraisals. Conversely, those that receive poor ratings expect substandard appraisals. Dell’s culture is a meritocracy in which leadership rewards achievement. As noted, Dell leadership relies heavily upon surveys to evaluate, reward, retain and promote high performers. The organization feels that this method provides an honest, open assessment of employee accomplishment and potential. This assessment, which is based upon open communication and honesty, creates a culture that is competitive, hard working and loyal to the organization. Dell utilizes key strategic partnerships to maintain efficiencies in its operations. Dell currently partners with Intel for 100% of its chips. While this single source partnership has allowed Dell to contain its costs and maintain consistent supplies, it has also limited the customer choice. Many analysts believe an additional partnership with AMD would provide Dell

 

significant price and performance advantages. Dell also partners with Costco, Sam’s Club, QVC Inc. and Target in an effort to broaden its customer base. Additional production partnerships include Lexmark, Fuji Xerox, Kodak, Samsung and EMC. Rather than spend significant dollars on R&D, Dell relies heavily upon the technological developments of its partners and competitors to recreate successful technologies. Dell’s value chain is considered to be the gold-standard of the industry. The

organization’s model relies heavily on technology and its employees to achieve its success. With regards to inbound logistics, the organization maintains just-in-time inventories through shared EDI systems. The organization’s ability to maintain four day inventory levels are among the most cost effective of any company. The organization also looks to its employees to maintain efficiencies. As noted, Dell’s culture encourages its employees to develop more efficient ways of doing business. Within operations, employee developed initiatives have saved the

organization billions of dollars and quadrupled productivity over the last 4 years. Dell’s direct-selling business model revolutionized the computer industry. The

organization has maintained a massive marketing budget to push its customized PCs. Although most orders are placed via Dell’s website, customers may also place customized orders by phone, fax or through limited retail locations. Those orders, which now include printers and consumer electronics, are then shipped within one week for significantly less cost than its competitors. Over the last decade, few competitors have matched Dell’s legendary customer service. Although customer service is considered to be a differentiator in the computer industry, recent surveys have shown a decline by Dell. This decline has resulted in the similar decline in the brand’s inferred value. Increased outsourcing is a suspected reason for the firm’s decline in this business segment.

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IV. ORGANIZATION CAPABILITIES AND RESOURCES 
By Khalid Alkelabi

The heart of Dell’s business strategy and its direct selling model is customer focus. Dell developed a core competency in making its customers the center of its business and deployed its resources and capabilities to enhance the ability to serve them. The customer centricity in Dell’s strategy has empowered it to develop more competencies: manufacturing processes, supply chain management, human capital management, customer selection and customer service. In order to hit the market in a timely manner with new products that are based on new technologies, Dell had to constantly improve its supply chain. Furthermore, manufacturing processes had to be improved to compliment the efficiencies created by the supply chain. To manage this complicated infrastructure, Dell had to recruit, train and retain a capable workforce that can grow as the company grows; thus, a healthy environment that endorses honesty, accountability and learning was created over time. This efficient and logical approach helped enhance core competencies: Dell became more efficient in recognizing, acquiring and retaining customers by fulfilling their needs efficiently, delivering value and servicing them effectively. These core competencies enabled Dell to manage its profitability and performance efficiently in a mature industry (Appendix I). Dell was able to utilize its internal resources and capabilities and leverage its core competencies to match the industry’s key success factor (Appendix H.6). In addition, Dell’s infrastructure, human capital, global presence and

capabilities will greatly help its international growth and contribute further to its differentiation strategy. Dell’s technology infrastructure is efficient and capable of supporting expansion into new markets, growing sales and delivering value to customers. Global manufacturing facilities supported by innovative processes will also support such strategies.

 

Dell’s differentiation stems from process innovation. The company is very successful in leveraging and harnessing the value of its suppliers’ and partners’ technology innovation. This allows Dell to minimize R&D spending and improve the cost structure, a strategy that is rarely matched by competitors. The company is also gaining knowledge in the retail industry by partnering with major retailers such as Costco. This is vital for the success of any strategic initiative aiming for a retail presence in global emerging markets such as China and India. Dell’s financials indicate a stellar operational performance evident by above the average inventory, assets and receivables turnovers. The company was able to achieve a high financial performance at the operational level by utilizing its state of the art IT infrastructure, supply chain and inventory management systems. Further, the company’s stock represents an attractive

investment due to the company’s utilization of assets and focus on capital return. This is evident when comparing Dell’s high return on investment, asses and invested capital (ROE, ROA and ROIC) to the industry and market (Appendix F). experiencing average profit margins. Profitability ratios indicate that Dell is

This is contributed to hyper competition in the PC

industry; competitors are running on thinner margins in order to gain market share. The capital structure that Dell adopts focuses on financing growth and operations from retained earnings, the company doesn’t pay dividends or acquire debt. The company’s financial policy in this regard emulates an IT start-up company, even though it’s a mature company in a mature industry. It’s highly unlikely that Dell will continue this policy in the near future as investors press for dividends and the stock price falls, as is happening already. Further,

acquiring debt might be necessary to finance growth and establishing retail presence into global emerging markets. This will not have a negative affect on Dell since it possesses the necessary financial leverage.

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V. INDUSTRY CHARACTERISTICS AND MACRO FORCES 
By Kathryn Lynch 

The current environment for the computer hardware industry is shaped by several macro forces. Primarily, Dell and its competitors are influenced by economic, demographic,

technological and national forces. Government, social, physical and national forces peripherally affect the computer hardware industry to varying degrees. The commoditization of the personal computer—a vital tool for business and consumer customers—is a key driver for the economics of this industry. Corporate spending accounts for 80% of all technology spending, and economic conditions decreasing business capital expenditures has a negative and direct impact on the computer hardware industry. While this industry is mature in the U.S., leading to decreased growth expectations, computer spending by other countries around the world will likely fill this void. Specifically, the computer hardware industry is predicted to grow exponentially in Latin America and non-Japanese Asia over the next several years. Demographic forces also influence the characteristics of the computer hardware industry. Geographic areas discussed above indicate where computers are well below their penetration levels—creating the prospect of new markets. Although 2003 U.S. census data on computer and internet usage at home correlates closely with income and educational level, the commoditization of computer hardware industry enables it to be accessible to lower income level consumers. Consumer race and age also influences computer usage, according to the 2003 U.S. Census Bureau. Computer hardware companies should target less educated consumers, Hispanics,

Blacks and people older than 65 years to achieve additional areas of market growth.

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Technological forces have the most significant influence on the computer hardware industry. The phenomenon called the “upgrade cycle” is one of the most influential macro forces on the computer industry. The upgrade cycle drives waves of new purchases among business and consumer customers as technological change transpires. Some industry analysts assess that 50% of computer hardware product profits are created during the first 3 – 6 months of sales. In 2006, Microsoft is set to release the “Vista” operating system which is likely to catalyze an upgrade cycle among business and consumer customers. Customers increasingly choose a single vendor to meet all of their computer needs and technology upgrades. For a computer hardware company to remain competitive, all customers’ needs must be efficiently satisfied. We recommend that Dell focus on “turn-key” technology solutions in order to maintain its superior differentiator status within the industry. National forces are increasingly important in a computer company’s ability to maintain its competitive edge, both in terms of the manufacturing process and improving sales. Computer companies are increasingly shifting their manufacturing operations outside of the U.S. to take advantage of a growing business and consumer market for their products as well as cheaper operating costs. Government, social and physical forces influence the computer hardware industry, however, these macro forces are significantly less important than those discussed in prior paragraphs. Governments throughout the world represent an opportunity for computer hardware companies, including Dell, as they aim to develop and deliver more services to their citizens. Social forces, including holiday, back-to-school sales and a summer business slowdown in Europe also drives sales in this industry. The physical environment has very little impact on the computer industry since all computer parts are artificially manufactured. However, adverse

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weather can negatively impact the competitive edge of a company such as Dell, which relies on “just in time” inventory methods as well as direct sales to its customers. The electronic computer manufacturing industry is mature in Japan, the U.S. and Europe. Growth opportunities remain among certain target populations within those areas and significant areas of market expansion are likely to occur in Latin America, Asia, and the Middle East. However, computer hardware companies are likely to continue the trend towards consolidation for the foreseeable future. Mergers and acquisitions have characterized this industry over the last few years including Lenovo Group’s purchase of IBM’s PC division in 2005 and HP’s 2002 acquisition of Compaq. Pricing in the computer manufacturing industry is extremely competitive. IT reflects the rapid pace of technological change and decreasing PC costs. Since 2000, the prices of chips and disk drives declined and the standardization of primary components of PCs led to a decline in PC prices. Direct sellers, including Dell, have traditionally been able to under-price indirect sellers in the industry including Compaq and HP. However, most PC vendors now offer a desktop model for less than $500 and a laptop for $700. Key success factors for companies in this industry continue to evolve as the industry matures. Specifically, they include: • • • • • Competitive prices Superior relationships with suppliers Product customization for business and consumer customers Quality customer service Excellent cost structure

Dell’s business model incorporates many of these key factors; the company is working to improve customer service and product customization.

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There are also significant opportunities for computer hardware manufacturers including expansion into peripheral markets and products such as printers. Dell entered this market in 2003. However, threats to the computer hardware industry are strong—primarily, stiff

competition among top industry players such as HP. The computer and peripherals industry is firmly entrenched in the maturity stage of the life cycle. Companies in this stage, including Dell, experience stable sales, slight growth, and decreasing production costs. In order to remain at the forefront of the competition, computer hardware companies should focus on process innovation—an arena where Dell has succeeded. Specifically, Dell adopted a customer-focused approach with a closely managed supply chain and cash-flow process. Dell’s low-cost, direct sales model shaped its position in the industry and other companies have struggled to copy this innovation. As Dell and other computer hardware companies continue to maneuver the challenges of the mature life cycle stage, they will need to remain focused on process innovation and creating business and consumer customer value to maintain its status as industry leader. VI. COMPETITIVE LANDSCAPE 
By Jennifer Lund

Understanding the external environment is key to successfully competing in the computer hardware industry. Porter’s Five Forces of Competition provide a framework for Dell to outline the bargaining power of suppliers and customers, the threat of new entrants, the threat of substitutes and the intensity of competition. In this industry, the bargaining power of suppliers is high due to the limited number of suppliers for key components. For instance, Intel sells 90% of the microprocessors used in PCs and Microsoft provides 85-90% of the operating systems. In addition, 80% of the world’s laptops are assembled in Taiwan. Likewise, the bargaining power 13  

of customers is also high due to the fact that PCs are now commodities. Nearly all PCs contain the same components or the same type of components. However, customers’ power remains limited because consumers may be willing to pay a premium to computer companies that are able to provide technological solutions. Alternatively, the threat of new entrants is low. The 1990s saw a significant level of growth, but the early 2000s have shown signs of contraction within the industry. The threat of substitutes is also low since the only available substitute for a Windows-based PC is an Apple Macintosh. Finally, the intensity of competition is high since there are relatively few competitors in the market. However, they all offer the same basic products and must compete on price. Next, Dell must analyze its competitors to determine the best way for it to successfully compete in the computer hardware industry. Dell’s main competitors include: HP, IBM and Sun Microsystems (Sun). In the PC market, Dell competes primarily against HP. It held the #2 spot (behind Dell) as of the 3rd quarter of 2005. HP is also doing well in Asia-Pacific, growing its market share by 250 basis points in the same quarter. However, HP appears to be focusing less on its PC division, enabling Dell to increase its own market share. IBM recently sold its PC division to Lenovo, but remains a strong competitor in the server market. In addition, its 2002 purchase of PwCs’ consulting division provided it with an established services organization. The combination of IBM’s server line and its consulting arm allow it to provide services that Dell cannot. Sun competes predominantly in the server market. It held the #3 spot in the Unix server market in the 2nd quarter of 2005. It recently added personnel to improve its services offerings and created alliances with Electronic Data Systems Corp and Computer Services Corp. Sun also

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added the Galaxy server line to regain market share but its continuing financial weaknesses may allow Dell to take server market share. Dell and its competitors were analyzed in terms of their sales, liquidity, asset management, profitability and operations. IBM and HP have far outpaced Dell and Sun in terms of sales. For instance, IBM earned $92 billion compared to Dell’s $49 billion in 2005. The current ratio reveals Sun as the most liquid competitor. Its current ratio of 1.51 surpassed that of HP (1.38), IBM (1.31) and Dell (1.20). Although this implies that Sun is more capable of repaying short-term assets than any of its main competitors, this analysis reflects information available prior to Sun’s 2005 acquisition of Storagetek. Asset turnover measures the firm’s ability to use its assets to create sales. With a ratio of 2.12, Dell outpaces its competition. For every dollar of total assets, it earned $2.12 in sales. Alternatively, HP has a ratio of 1.12, IBM’s totaled 0.90 and Sun’s equaled 0.78. Four profitability measures were evaluated: gross profit margin, net profit margin, return on equity and return on assets. IBM and Sun earned the highest gross profit margins in 2005 with 42.7% and 41.5%, respectively. This implies that IBM and Sun are better at controlling input costs than HP and Dell. IBM’s large consulting division generates greater sales with fewer inputs resulting in higher profitability. However, Dell’s gross profit margin trended upward over the past three years indicating that Dell has either increased its prices or improved its control of input costs. Net profit margin paints a different picture. Sun actually earned a negative net profit

margin despite its high gross profit margin. The other three competitors earned steady margins over the past three years. However, IBM still posted the highest marks (8.8% in 2005 and 2004 and 8.5% in 2003).

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Return on equity shifts the focus from IBM to Dell. In 2005, Dell’s ROE totaled 46.9%, IBM’s was 26.4%, HP equaled 6.5% and Sun earned -1.6%. Return on assets presents a similar view of the companies. Dell is once again in the lead with 13.1%, compared to IBM’s 7.9%, HP’s 3.1% and Sun’s -0.8% in 2005. Dell is obviously the best at turning its assets into net sales. The final category analyzed was operations – more specifically, inventory turnover. For manufacturing companies, this is a critical measure of success. Too much inventory can lead to companies holding obsolete inventory, while too little may mean that customers will turn to competitors. As expected, Dell outperformed its competitors. In 2005, it turned its inventory over 107 times! In contrast, IBM’s ratio was 28 times. Dell is not as large in terms of total sales or as liquid as some of its competitors, but it has proven to be the most effective in terms of cost and asset management. VII. PRESENT POSITIONING AND STRATEGY 
By Greg Shorr

Dell competes in several international and domestic markets and currently produces a wide variety of products. In each of these markets, Dell has succeeded due to its broad

differentiation approach. This approach, detailed in Appendix N, is based on the strength of its direct sales business model, manufacturing prowess, brand strength and customer service. The ability to differentiate has allowed Dell to stand out within mature markets and maintain a higher than average margins for its products. Although Dell's products cover a wide swath of the industry, there are several product lines and markets that the company does not currently serve. The company should consider three options:   16 

• • •

Adding a PC and server product line based on AMD microprocessors Developing a showroom style storefront in developing markets Expanding consulting services to include business services

Dell's addition of a product line based on AMD microprocessors would enable the company to service the entire market of PC users. Dell's exclusive use of Intel processors has limited the company's ability to match the high end products that its competitors are offering. This leaves Dell continuing to serve the low-end portion of the market and out of the very profitable high-end portion of the market. In addition, as AMD gains market share on Intel, Dell will encounter pressure on its own market share. Dell currently is the largest worldwide provider of PCs based on the strength of its U.S. business. In international markets, Dell is currently second or third, but has struggled to gain market share with its direct sales business model. Issues in developing countries include lack of credit cards and buying habits that involve touching and seeing before purchasing. Without

gaining market share in these large markets, Dell could surrender its top position to competitors such as Lenovo, who are already entrenched in these markets. Developing a showroom style storefront would enable Dell to compete effectively against its competitors in these countries. The showroom allows Dell to maintain its competitive

advantages while simultaneously meeting the societal needs of the developing markets. It will be a place for Dell to exhibit its product and conduct sales for later delivery. Dell will retain its ability to customize its products and maintain its build-to-order efficiencies. Dell's efficiency has made the firm a player in business infrastructure services. However, the company is viewed as a leader in providing value, not necessarily complete or creative solutions. By moving into business consulting, Dell may be able to develop more extensive relationships with companies. These relationships could help grow Dell's core business through 17  

better understanding of client's needs and stronger ties to Dell, rather than to their current consulting partner: HP, IBM, et al. This process will effectively open an additional sales channel to Dell, but it is a risky endeavor. Diversification into consulting may pull the company too far from its core Before branching into the development of business

competency of sales and production.

consulting, Dell should examine the impact on the other portions of its product portfolio. Due to its varied product portfolio, Dell cannot be cast into one particular quadrant of either the Boston Consulting Group Growth-Share matrix or the McKinsey 9-cell. Each

business group must be looked at separately in order to accurately portray its business prospects. Dell's sole cash cow is its PC business. This market continues to grow and as the market share leader, Dell is poised to reap the benefits of this growth. In order to ensure that this product remains a cash cow, Dell must continue to determine what products the industry wants, and consistently be a best-in-class deliverer of value to its consumers. One of Dell's stars is its server business. Dell’s market share has grown at a rate of over 25% and it recently surpassed Sun as the #3 provider of servers. To keep this product line a star, Dell needs to continue its growth in the low end server market, It also needs to simultaneously develop its higher end server product line to meet the needs of the entire server market. Dell's one visible question mark is its services business. Although this division is one of the fastest growing segments at Dell, its small market share leaves this segment vulnerable to competitors and other market forces. In order to turn this business into a star, Dell needs to increase market share. Dell must develop its creative infrastructure and than advertise its

creativity throughout the market. By changing its market perception, Dell will begin to draw clients that it previously would not have drawn, and thus increase market share.

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Dell's peripheral business spans the range of cash cows to question marks. Dell must continue to feed its question marks through advertising and developing solid product reputations. This should be done by following the outline laid out by the PC division, where Dell has used outstanding quality and value to become the market leader. VIII. ENVIRONMENT AND STRATEGY ASSESSMENT  The computer industry can be characterized as mature in the U.S., Japan, and Europe but there is continued room for growth in Latin America, the Middle East, and the rest of Asia. Further, business and consumer customers globally are subject to a technology “upgrade cycle,” whereby the short product lifecycle of computer products drives repeat purchases. Pricing is fiercely competitive in the computer hardware industry. Further, mergers characterize a significant trend and are likely to remain a defining factor in the near-term. These deals are enabling computer hardware providers to offer better services to their customers. Two of Dell’s largest competitors, HP and IBM, offer full-service products (i.e. hardware, software and consulting services). As discussed in Appendix J, computer hardware consumers increasingly prefer and are willing to pay a premium to vendors that are able to provide all of their IT needs: hardware, software, and the knowledge to package the items to meet the customers’ requirements. In addition, the technology in this industry is rapidly

changing and Dell does not conduct its own research and development. This is not necessarily a problem. However, Dell does risk being considerably outpaced by its competitors. The computer hardware industry offers extensive opportunities for growth. For instance, 80% of sales over the next four years will take place in developing countries. Dell has the opportunity and the ability to earn a high percentage of those sales if it develops a successful strategy for entering the market. 19  

Dell’s organizational structure is a vital part of the company’s success. Little hierarchy exists within the company. From the factory floor to the executive office, communication is emphasized and all employees are empowered to make decisions to improve job and business performance. Upper management approval is not required for the implementation of new ideas. Dell’s flat corporate structure is likely to enable the company to remain at the tope of its industry. Employee empowerment facilitates process innovation—one of the main competitive characteristics of maturing industries. Similarly, Dell’s fast, consistent, reliable and responsive business model enables it to execute its direct sales model more effectively than any other company in the industry. As Dell expands into growing markets, however, the company will have to adapt its organizational structure to growing global environments. Dell will need to maintain focus on its place in the industry as a product differentiator, bringing superior value to customers. Although strategic partnerships (such as with Intel) have been key to the company’s success, it needs to continue to be selective about these relationships and to continually evaluate whether they remain appropriate in the current environment. The key macro force for the computer industry is technological change. The extremely short product life cycle for computers, influenced by the upgrade cycle, has both positive and negative effects on companies within the industry. It challenges companies to maintain superior inventory management and supplier relationships: areas where Dell excels. Technological

change also drives waves of additional computer purchases within a mature market. Another trend impacting the computer industry is the rise of a single vendor as a provider for all IT needs. This simplifies technology choices for customers and makes one vendor accountable and Dell does not offer this capability currently.

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Dell’s vision is to “lead in all regions we serve.” Dell bases its foundation for success on the strategy, regardless of location. In other words, Dell assumes that what works in the U.S. will work in Africa, Asia or Europe. In Dell’s primary market, the U.S., the company uses a direct sales strategy, meaning that it sells its products directly to the customer either online or over the phone, thereby eliminating the cost of the ‘middle man.’ This strategy proved immensely profitable in Dell’s early years. In fact, it was so successful that it actually changed the way its competitors did business. However, Dell’s reliance on its direct sales model may not be as beneficial in emerging markets. This is primarily due to the fact that consumers in these markets may be distrustful of buying items online or do not have the proper means of payment (i.e. credit cards) to make online purchases. In the PC market, Dell pursues three market segments: consumers, governments and businesses. In the U.S. market, the government provides 51.8% of Dell’s revenues. It controls the corporate and government markets within the U.S. and is currently working to obtain that same power in the global PC market. Dell does not hold the same position in any of its other markets, but is working towards gaining dominance in other markets. It has recently begun shifting its focus from low-end servers to higher-end ‘cluster’ servers. In addition to PCs and servers, Dell has entered the peripherals market – printers, digital cameras, monitors, storage, etc. At present, this segment presents the biggest question mark in Dell’s product portfolio. In addition, Dell relies entirely on Intel chips. Originally, this strategy benefited Dell through the advantage of incentives and discounts that came from buying in mass quantities and from only needing to maintain one production line. However, Intel’s lead in processing power has slowly lost ground to AMD’s more powerful chips. Dell needs to reevaluate its current strategy of relying entirely on Intel if it wants to maintain its position in the PC market.

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IX. OPTIONS AND RECOMMENDED STRATEGY  IX.1. Focus on innovation  While many of its competitors are working feverishly to develop the next generation of technology, Dell has been waiting. To date, the firm's strategy has been to recreate technology. In many cases, companies that do their own R&D are able to stay ahead of the industry through the development of new products. Putting more emphasis on R&D has some potential benefits. Through increased R&D spending, Dell may be the first to introduce products to market and establish first mover advantage. Dell's recognizable brand-name would allow it to expand into new products and potentially create insurmountable barriers to entry for its competition. However, an increased emphasis on R&D would distance the company from its core competencies. Increasing R&D changes its focus from mass customization of mature products to smaller batches and product introduction and growth. Additionally, it would force the company from its direct sales model, as new products require multiple distribution channels to ensure they are available to customers as quickly as possible. Currently Dell's strength is the sales of mature products through mass production, bringing quality and price without the cost of R&D. IX.2. Divesting  As is the nature of many larger companies, Dell is competing in several different product markets. Divesting products or services that the company is not competing near the top of the market will increase internal focus. Divesting of these assets or divisions could occur through identifying a competitor and selling the business, or by spinning a division into its own company. The key benefit of this strategy is the improved focus on core business. Stripping away these segments would enable Dell to become more streamlined. Specifically, it would require all   22 

segments to work for similar customer bases. Establishing a singular customer focus to each employee allows Dell to leaps in product creativity and adds more than value to its brand. As a complete solutions provider, Dell is uniquely positioned to meet a full range of customer needs. Divesting portions of their business, especially in its growing infrastructure segment, could potentially limit growth. Removing components from Dell's network will mean that as business grows, Dell would utilize external resources to satisfy customer's requests, limiting the effectiveness of Dell's competitive advantage. A single Dell branded solution is more likely to position Dell as a differentiated service company. IX.3. Expansion into services  This strategy encourages Dell to move into business consulting. This is a new business segment for Dell and would open a potentially new revenue stream. Given the firm's internal success at manufacturing and value-chain efficiencies, Dell would have a respected reputation as a consultant. While application of these theories may be difficult at other firms, Dell's expertise and proven track record would provide differentiation in a crowded market. Movement into the services business places Dell against largely entrenched competitors. These competitors have levels of expertise that Dell cannot currently match, placing it at a competitive disadvantage. While Dell’s specific knowledge would help it enter the market, its ability to service the complete market would be limited. Likewise, a limited market would not allow a stable revenue stream, making this business segment questionable. Ultimately, a move towards business consulting would distance the company from its core competencies. This move would limit focus from core businesses and distract the company from its position of excellence. IX.4. Reinvigorate Differentiation Advantage  This strategy encourages Dell to return to its core competencies and calls for the company to ‘get back to basics.’ It pushes the company to improve upon those competencies 23  

which helped differentiate it from the beginning. Specifically, improvements will include the enhancement of customer service, the addition of suppliers, new marketing campaigns, the modification of retail sales and the expansion of turn-key solutions. This strategy seeks to widen Dell's competitive advantage through the further refinement of its existing core competencies. Advantages of this strategy are considerable. Dell has long established itself as a pioneer and expert in value-chain management. The improvements this strategy develops are located within the company’s existing value-chain. Furthermore, Dell’s culture and structure is

specifically aligned to focus on improvements in these areas. Most significantly, the suggested strategy does not force the firm reinvent itself. Because improvements are limited to existing business segments, Dell will not be required to produce or develop new product lines. The negative aspects of this strategy are worthy of mention. By solely improving upon existing competencies, the company runs the risk of becoming stagnant. The proposed strategy does not encourage the addition of new products or services, potentially keeping the company out of new and profitable markets. Stagnation in the technology industry represents a significant risk and may cause degradation in the firm’s signaling criteria. This may reduce the company’s premium price and ultimately decrease profitability. IX.5. Recommended Strategy  It is recommended that the final alternative, in which Dell reinvigorates its differentiation strategy, be implemented. With this strategy, existing organizational resources and wherewithal can be leveraged to develop a clear differentiation advantage. This strategy does not make unnecessary or drastic operational changes which have the potential to disrupt the successful corporate culture and structure. Rather, the recommended strategy identifies and improves several existing competencies which have made the company so successful.

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Dell considers customer service and support to be a key differentiator. The company, which prides itself on this segment of business, has consistently ranked #1 in the industry. Not surprisingly, this segment represents a significant and expanding revenue stream for the firm. However, Dell’s lead in customer service and support has declined in recent years. Declining training and the outsourcing of customer service and support has damaged its reputation. To rectify this problem, Dell must improve its customer service representatives’ selection process, ensuring they are easily understood and well trained. By improving this segment of business Dell can once again clearly differentiate itself from rivals HP and IBM. Dell’s hugely successful direct sales model has allowed its products to be customized by customers. However, Dell maintains a single source relationship with chip maker Intel which limits consumer choice. Those that prefer to have PCs powered with AMD chips are currently unable to do so. To strengthen Dell’s customization position, the firm must offer increased configuration choices through the establishment of additional supplier relationships. There is however, one significant caveat. Dell must pursue relationships with only those suppliers that are able to integrate seamlessly with Dell’s supply-chain. This strategy will allow Dell to offer additional choices for its customers while maintaining production efficiencies. This strategy also recommends that Dell revitalize its marketing efforts to target underserved markets within the U.S. while expanding its marketing abroad into emerging and growing international markets. As noted, the first tactic is domestic. Recent surveys show that a high percentage of U.S. homes have PCs. However, there is a stark discrepancy in computer use among ethnicities. Whites and Asians are much more likely to use and own computers than their Black or Hispanic counterparts. This high ownership among Whites and Asians makes it

difficult for Dell to grow in this demographic segment. However, the low ownership among

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Blacks and Hispanics represents an area of growth. To strengthen Dell’s visibility with Blacks and Hispanics, it is recommended that Dell modifies its marketing focus. Dell must develop marketing campaigns to position its PCs as commodities that are necessary for everyday life. The second marketing enhancement will be centered in emerging markets where Dell’s direct sales model has several inherent limitations. For obvious reasons, the model does not work well in markets which customers do not have access to the internet or credit-cards. In these markets it makes sense for Dell to expand its use of retail locations or showrooms. To achieve success within emerging markets Dell must combine its direct sales model with its learned experience from its retail partnerships. This tactic calls for Dell to develop showrooms in which displays are available for customers to test and use products before they place an order. Once a customer has decided to purchase an item, they may use an in-store phone or internet connection to place their order. As in the traditional Dell model, customers may customize their product during this process. This tactic allows Dell to bring its product to customers in emerging markets while still maintaining its direct sales business model. Turn-key IT solutions include the planning, implementation and maintenance of IT customer services. opportunities. Simply stated, it provides Dell’s customers with one-stop shopping

As noted in Appendix O, this business segment represents a tremendous

opportunity for revenue growth. While Dell does offer limited turn-key or managed lifecycle services, the firm is not considered to be a major player in the market currently representing less than 1% of the total market. The aim of this strategy is to increase market-share through further enhancement of turn-key IT solutions. To strengthen Dell’s position within the market, the company must improve its focus on specific customer needs. Dell must improve its existing services to provide reliable and predictable solutions around this segment of business.

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Specifically, it is critical that the company design and deliver services which offer superior quality and efficiency, while sustaining customization for individual customer needs. The subsequent exhibit shows the gap between buyer intended value and perceived value. The difficulty for Dell stems from the lack of real differentiation between intended value and perceived value of buyers. Competitors’ adoption of Dell's business model, combined with the recent decline in Dell's customer service has reduced Dell's competitive advantages, forcing customers to make decisions solely based on price.

Potential opportunities for Dell to reverse this trend can be found in advertising, service reputation and retail locations in emerging markets. Because Dell’s products are highly

customized and purchased infrequently, it is important for the company to optimize its signaling criteria. The preceding recommended strategy differentiates the organization through the

initiation of tactics which fortify the link between intended and perceived buyer value. 27  

APPENDICES A – C:  ORGANIZATION CHARACTERISTICS 
By Matthew Smith

A. Organizational Purpose and Direction  A.1. Organizational Values  Dell considers its organizational values to be the “Soul of Dell” (Soul of Dell, 2006). Specifically, this “Soul” is a statement of the corporation’s philosophy which defines its current position and future aspirations. It also serves as a guide for the firm’s actions around the world. Dell is committed to achieving financial success through ethical business practices which benefit its customers, shareholders, employees and the citizens of its global markets. A.2. Organizational Mission  The organization’s mission statement is as follows: “Dell's mission is to be the most successful computer company in the world at delivering the best customer experience in the markets we serve” (Frequently, 2006). A.3. Organizational Vision  While not specifically stated, it has been surmised that Dell’s vision is “… to lead in all regions we serve. The foundation of our success is the same in the United Kingdom and France, China and Japan, Canada and other countries. Customers want technology products that are relevant to them, offer great value and can be easily purchased and used. That’s what our team around the globe consistently delivers” (Fiscal 2005 in Review, 2005). Dell’s vision is quite focused and assumes customer needs to be somewhat homogenous throughout the world. A.4. Organizational Goals  The primary organizational goal of Dell is to achieve $80 billion in revenue by the end of fiscal 2007. Despite having missed Q3 expectations in 2005, the organization raised its original revenue goal from $60 to $80 billion. This goal was revised to reflect high levels of revenue,   28 

operating profits and cash from operations in recent years (Fiscal 2005 in Review, 2005). While this amended goal may seem to paint a promising picture for Dell’s future, it may be misleading. Desktop PC sales account for 37% of Dell’s revenue. Contrary to the PC market in general, Dell’s growth in the PC market has slowed over the last 18 months. Although Dell shipped a record 9.2 million units in that quarter, increased its service revenues by 36% and its storage revenue by 35%, its desktop sales declined by 2% (Dell Appears, 2005). Dell must regain its revenue in this business segment if it is to reach its $80 billion goal. Secondary goals for the firm include increasing its lagging PC sales while continuing to expand in emerging markets such as India and China. B. Organizational Characteristics  B.1. Organizational Structure  Dell is best described as a flat organization. From the factory floor to senior leadership very little hierarchy exists to slow down the decision process. Employees are encouraged to pursue the most efficient ways to complete their jobs and are permitted to implement these new efficiencies without prior approval by upper management. This open-communication has made junior employees realize their ideas are welcome and respected. Once proven to be successful, it is not uncommon for these ideas to be implemented across the organization. B.2. Organizational Culture  Dell Inc. was founded 21 years ago as a computer start-up company by Michael Dell. While the company has grown to more than 55,000 employees in 80 countries, Dell has done its best to maintain a small-company atmosphere. communication and honesty. Dell preserves its culture through open

“Tell Dell” surveys encourage rank-and-file employees to

anonymously evaluate managers and senior leadership. The firm believes this type of honesty helps bring about accountability and change. Past appraisals have brought about improvements 29  

in work/life balance, corporate objectives, and job satisfaction ratings. voluntarily with over 90% of the workforce taking part in the survey.

Participation is

Overall Dell’s culture is described as a meritocracy which rewards those employees who work hard to meet organizational goals (Culture, 2006) and is critical of those who do not. Employees have seen first hand the profitability achieved by the firm’s stock in the 1990s. While today’s employees may not realize the same wealth from surging stock options as those in the 1990s, by-and- large the culture works to retain and reward those employees who remain very competitive, hard working and loyal to the organization. B.3. Characteristics of Leadership  Michael Dell started his computer company, which would later become Dell, Inc., in his University of Texas dorm-room with just $1000. In 2004 Dell stepped down to become the organization’s Chairman of the Board and allowed Kevin Rollins to succeed as CEO. As noted, leadership has worked hard to maintain accountability within this relatively flat organization. Management is made acutely aware and held accountable when it fails to maximize organizational goals. “People know how they are doing, how the company is doing, what the problems are and know that the worst state for a leader to be in is denial” (There's Something About Dell, 2005). One way in which Dell evaluates its management is through the “360-degree appraisal process” (There’s Something About Dell, 2005). Every six months employees are given the chance to rate the performance of every manager. This appraisal includes every manager up to the CEO. Annual appraisals and promotions for management are based upon their improvement on their “Tell Dell” score. B.4. Key Strategic Partnerships  Dell has maintained a long-term single source partnership with the Intel Corporation to provide the chips necessary to produce its PCs. As Intel’s largest customer, Dell is virtually   30 

guaranteed its requests for Intel’s chips. This has helped Dell maintain production capacity even in times of chip shortages. Furthermore, the partnership with Intel has helped Dell contain the cost of its low-end, standard-based desktops and servers. This partnership may also have

produced negative results for Dell. By not partnering with chip producer AMD in at least one of its lines, Dell may be at risk of losing both a price and performance advantage. Chips from AMD are viewed by many analysts to be superior to those produced by Intel (Scannell, 2006). As Dell enters into new business segments, such as home electronics, it has increased its partnerships with retailers and suppliers. Dell has recently expanded its retail partners to include Costco Wholesale Corp., Sam’s Club, QVC Inc. and Target in an attempt to boost its lagging consumer sales in PC’s, consumer electronics and printers. In printers, Dell has partnered with Lexmark, Fuji Xerox, Kodak and Samsung. Dell has also initiated several partnerships with top players in consumer electronics to minimize initial costs within this new business segment. Lastly, Dell has developed a partnership with EMC for its data storage solutions. C. Value Chain Analysis 

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C.1. Inbound Logistics  Dell’s direct-to-consumer sales model has revolutionized the value chain within the computer industry. This model, which relies heavily upon web-based technologies such as Electronic Data Interchange (EDI) and just-in-time inventories, has clearly been one of the distinguishing factors in Dell’s success. Dell encourages its suppliers to use its website to track orders and inventories. This real-time information sharing allows Dell’s chip and component manufacturers to better see Dell’s sales. The goal of the information sharing is to create a virtual corporation where suppliers can watch their products purchased as parts on Dell’s computers. By using this technology, suppliers are able to more efficiently meet inventory requirements and maintain low costs. C.2. Operations  Dell has positioned itself as the #1 seller of personal computers by maintaining an efficient and streamlined operating strategy. Dell’s servers, storage systems, mobile and desktop computers are built-to-order in six manufacturing facilities around the world. Web-based

systems control customer orders and inventory levels. “Dell maintains inventory levels of only four days, even as it serves more customers with more products in more markets every day” (Fiscal 2005 in Review, 2005). As noted, Dell’s culture encourages its employees to find ways to cut costs. Within the last 4 years, Dell has increased its productivity by 400% and saved more than $1.9 billion by removing unnecessary costs within its operations (Fiscal 2005 in Review, 2005). This efficiency has allowed Dell to sell its made-to-order units for 10% to 20% less than its rivals. C.3. Outbound Logistics  Dell’s direct-to-consumer business model enables its customers to purchase its products via its website, by fax/phone or at limited retail locations. Internet customers are able to   32 

customize their purchases on their own “Dell Homepage.” Dell notes that customers which utilize its website spend more and make purchases faster than those using the fax/phone method of order. Once the order is placed, Dell prides itself on a 7-day shipping schedule. This delivery schedule is typically better than those offered by the company’s competitors. C.4. Marketing and Sales  Dell’s marketing efforts have a ubiquitous presence across the web, television and print. Few competitors can match the marketing budget of the $50 billion firm. Internet sales currently make up over 50% of the firm’s total sales. In hopes of increasing its consumer base the organization has offered its products at discount chains Wal-Mart, Target, QVC Inc. and Costco. Although Dell built its reputation as a low-priced computer seller, the firm has shown signs of distancing itself from its discount-price image by expanding its product mix to include high-end PCs, televisions, MP3 players and other electronics. C.5. Service  Over half of Dell’s sales are made on its website, limiting the level of direct sales interaction between its employees and customers. However, once the purchase is made

consumers often interact with customer service/support representatives. As cost differences become slimmer, exceptional service is one way in which computer companies differentiate and attract new and returning customers. Revenues from enhanced services/support are significant for the firm and have grown “nearly 40 percent for three consecutive years” (Fiscal 2005 in Review, 2005). Although the firm has long prided itself on offering the best customer service in the industry, recent surveys have shown declining results in this segment of the business. Consumer Reports ranked Dell behind Apple, IBM and Toshiba for its customer support with laptops (Computers, Desktops, & Laptops, 2006, p. 232). Despite the decline, Dell has still managed to rate higher than its competitors HP and Compaq. In recent years customer 33  

service/support has been moved to lower wage nations. Top executives have acknowledged the problem and are reportedly working toward improvements. C.6. Firm Infrastructure  Dell was founded in and maintains its worldwide corporate headquarters in Round Rock, Texas. To increase its global presence the firm has expanded its infrastructure to include corporate offices and manufacturing facilities in the UK, Japan, Singapore, Ireland, Brazil, China, Malaysia and other U.S. locations. The firm’s infrastructure also includes several

overseas call centers in India. Although the company partners with retailers, it does not have any official retail locations as part of its infrastructure. Most of the firm’s infrastructure is virtual or web-based. This allows the company to sidestep retail overhead costs while maintaining

customer visibility. C.7. Human Resources  Dell employs over 55,000 individuals. The organization is dedicated to creating a diverse workforce to meet the objectives of the organization and its customers. Dell-sponsored groups were formed to promote a sense of community among employee participants, support business goals, aid in their personal and professional development, support business goals and provide a resource for organically recruiting and retaining the best and brightest talent in the industry. The organization works diligently to create a corporate environment based on meritocracy, personal achievement and equal access to all available opportunities. C.8. Technology Development  Dell defines itself as a “global diversified technology provider” (Form 10-Q, 2005). Although it would seem that Dell spends a tremendous amount on its R&D this is not the case. Dell brings very few new products to market. Instead, Dell has a focused strategy which leverages the work of partners and other firms “to recreate the work others have done very well”   34 

(Fiscal 2005 in Review, 2005). Dell’s global teams meet regularly with customers to gain feedback on which new technologies will have the greatest impact. This feedback is then shared with partners such as Oracle, Intel, EMC and Red Hat to share in R&D costs. This strategy is in stark contrast to IBM which spends billions of dollars annually on R&D. The savings that Dell realizes from R&D allows it to deliver cookie-cutter servers and desktops at value. However, many analysts believe the firm’s inability to adopt more state-of-the-art technologies has prevented Dell from establishing a successful strategy for high-end products (Scannell, 2006). C.9. Procurement  As previously stated, Dell has remained extremely loyal to chip maker Intel. As the largest producer of personal computers, Dell is also the largest customer of Intel chips. Intel claims to be able to ship materials into Dell’s production facilities every two hours based on realtime customer orders. This real-time supplier allows Dell and its suppliers to forecast and manage the most efficient levels of inventory. “Dell's decision to remain solely committed to Intel chips have certainly helped contain the cost of low-end, standard-based desktops and servers. But competitors and analysts alike believe the company may be losing both a price and performance advantage by not incorporating rival AMD chips in at least one of its lines” (Scannell, 2006, p. 4). Despite these claims, Dell officials say that have no plans to use AMD chips in the near future. As noted, suppliers are directly linked to Dell’s website and are therefore able to see its inventory levels. Purchasing orders for production facilities are initiated when customers place orders thereby depleting inventory levels on the shared website. This form of purchasing allows both Dell and its suppliers to properly forecast, thereby maintaining low levels of inventory and capital investment.

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APPENDICES D – F:  ORGANIZATION CAPABILITIES AND RESOURCES 
By Khalid Alkelabi

D. Key Competencies Assessment  D.1. Key Competencies  1. Customer focus Dell understands how to serve its customers and it knows them well. The build to order business model that Dell adopts across its product lines (servers, desktops, notebooks, PDA’s and consumer electronics) accommodates the changing needs of its customers. This model allows Dell to offer the latest technologies for an affordable price in a short period of time; and that is exactly what customers want from companies in this industry. As an example, Dell manages the changing needs of key customers by managing product life cycles and technology shifts (Gandossy, 2005). 2. Manufacturing processes Dell’s direct selling business model was the first to be applied on a mass scale in the personal computer industry. The model was further empowered by the boom of the Internet in 1994. Dell developed numerous efficiencies and proficiencies over the last decade and applied the model to multiple product lines where standardization of production and technology accessibility were possible (Hoffman, 2005). 3. Supply chain management The direct selling business model applied by Dell is powered by a state of the art supply chain management (SCM) system. Dell is one of few global companies that realized a

competitive advantage from its SCM system; it allowed Dell to move beyond a simple value chain mechanism into a more sophisticated value webs organism. This had a great impact on Dell’s just-in-time (JIT) manufacturing and JIT inventory management systems. (Gunasekara, 2005).   36 

4. Customer selection, acquisition and retention Supported by its sophisticated IT and customer relationship management (CRM) systems, Dell efficiently targets corporate clients with low service costs and predictable buying behavior that is tied to their budgets. To retain these clients the company creates customized corporate portals for each client, a model pioneered by Dell. This has resulted in significant contributions to Dell’s revenue streams; a great portion of Dell’s sales is generated by orders from business, corporate and government clients (Byrnes, 2003). 5. Customer service Dell offers a comprehensive set of tools to its business clients and end consumers. From customer care programs to technical support, Dell offers multilayered services supported by Internet enabled knowledge management solutions, corporate support portals and Intranets, and global call centers. Dell also offers extended service and support plans across its product lines for additional fees. Furthermore, Dell is beginning to offer complete service packages for corporate clients comprising of hardware/software solutions that are deployed, serviced and maintained by Dell’s IT professional personnel. 6. Human capital management The industry that Dell operates in suffers from the limited selection pool of talented managers, IT professionals and engineers. Unlike the majority of its competitors, Dell has constantly attracted and retained the talents it needed. HR policies that define fast learning, problem solving, team building and goal driven as the major characteristics of a successful executive hire are proving to be effective selection tools. Furthermore, the corporate culture at Dell has no tolerance for political conflicts, lies or inefficiencies; honesty and results are all that matters (Salter, 1999).

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D.2. Organizational Skills  Dell’s core competencies are largely based on business processes, IT infrastructures and people. It is fairly easy for a competitor to copy and learn Dell’s business model or even reproduce their core competencies. Yet no competitor succeeded in doing so for one very important reason: execution. Dell has become the example of fast, consistent, reliable and responsive execution. The successful marriage between Dell’s infrastructure (DNA) and its people created an organization that possesses a wealth of skills applied through extremely efficient execution (There’s something, 2005). D.3. Organizational Learning  Dell’s set of core competencies and the skills it gained from them are sustained, developed, and empowered by a corporate culture that encourages learning from mistakes and operating under ambiguity. The organization as a whole is an example of free knowledge traffic: high visibility at every level. Dell went through a long iterative approach to integrate knowledge management into its IT infrastructure. The end result is a huge flow of information that circles Dell’s value webs. Through this IT enabled knowledge system, Dell benefits from suppliers’ wealth of knowledge: their technologies, production systems and inventory management systems. It also gathers information about customers and learns a great deal about their Dell accomplishes this by allowing the

behavior, purchasing patterns, needs and trends.

suppliers to integrate their systems with its systems; thus suppliers access customers’ orders and provide information about availability, product details and technology (Kersten, 1999). Furthermore, HR policies at Dell encourage the hiring of skilled people that are willing to learn and share knowledge with their teams. Executives at every level share these values consistently; the corporate culture’s emphasis on accountability and results requires free sharing of knowledge and open communications. This was not easy to hardwire into Dell’s culture: from   38 

1993 to 1995, many executives left their positions because they did not think the environment was safe for them anymore; thus, change management was at its peak (Govindarajan, 2002). For the long run, Dell’s successful creation of a true learning organization has enabled it to grow at an exceptional rate. Unlike others in the industry, this approach did not help Dell cope with growth; it actually made it what it is today. E.  Technology Assessment  E.1. Manufacturing Technology  Dell, as all major PC suppliers, does not manufacture any of its products. It assembles the components of the products in manufacturing “assembly” facilities around the world. The automation of the assembly process is key to Dell’s success. Each assembly line in an assembly facility can produce up to 4 different product models. To accomplish this, Dell’s engineers standardize products in a way that allows minor modifications to produce different models (Hoffman, 2005). Original Equipment Manufacturers (OEM’s), suppliers and third party manufacturers provide Dell with all the hardware and software it needs to produce desktops, servers, notebooks, LCD’s, PDA’s and printers. Although the company’s supply chain consists of more than a hundred major suppliers, it prefers to lower the number for each component to 1, 2 or few supplier(s). Dell claims that this allows it to standardize its products, create valuable

relationships, integrate its IT systems with the supplier, receive favorable discounts and reduce the complexity of the supply chain. It also claims that it only commits large, innovative and stable suppliers. For example, Intel is the only provider of PC and PDA processors; Microsoft is the only supplier of operating systems; LG for LCD’s; Lexmark for printers; Western Digital and Samsung for hard drives. (See figure 1).

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Figure 1 Dell's information & physical flow (Kraemer, 2001)

To realize cost savings and operational efficiencies, Dell constantly tries to minimize the number of “touches” a single component goes through in the supply chain until it reaches the inbound logistics at an assembly facility. The less touches a single component goes through the faster it arrives and the less it costs. In most new assembly facilities, the inbound logistics are performed in the facility itself, not at a separate facility. This allows Dell to better utilize its assets and increase its inventory turnover. Inventories sit idle at an assembling facility for less than 4 hours on average. Dell is so successful in managing its supply chain and inventories that, unlike all competitors, it has major manufacturing facilities in the U.S. even though most suppliers are located overseas. In 1999 Dell started to assemble all product lines at the facilities it owns instead of subcontractors and contracted manufacturers in hopes of better quality and reduced costs (Hoffman, 2005). Suppliers, OEM’s, and logistics partners have direct access to Dell’s transactional systems to fulfill orders, move components to and from Dell and deliver products to customers.   40 

This helps Dell control costs and, as a first in the industry, it enables Dell to modify products’ prices in real-time through its online ordering systems. Dell relies on a formal business process improvement (BPI) program, similar to General Electric’s Six Sigma, to continuously improve operational and production processes. Managers, employees and engineers are heavily involved in this program and are cross-trained to enrich their knowledge about it. This program has been responsible, since the early 90’s, for many changes in inbound logistics, assembly lines improvements and standardizing product manufacturing (Fugate, 2004). E.2. Information Technology  Managing Dell’s sophisticated value webs, build-to-order supply chain, e-commerce and internal resources is a true story of simultaneous IT horror and success. Dell arrived to its current state of IT infrastructure “utopia” after multiple failures to implement an Enterprise Resource Planning (ERP) system. The problem that faced Dell in the past was to find a solution that integrates enterprise wide IT systems, but ERP systems in the mid to late 90’s failed to deliver such a comprehensive and flexible system that can accommodate Dell’s business model (Slater, 1999). The current IT infrastructure that Dell implemented is a unique hybrid of ERP, SCM, CRM and e-commerce systems provided by a subsidiary of Fujitsu Limited (Glovia, 2001), JD Edwards (recently acquired by Oracle), Oracle databases and Microsoft operating systems. To support its IT infrastructure, Dell deployed a network of data centers to enable a variety of systems that manages logistics, sales, manufacturing and other operations. Data centers are located in the regions that Dell operates in globally. Each data center has its own staff of IT professional to develop, manage and maintain them.

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These data centers are located in: o Austin, TX to support the Americas. o Bracknell, England and Limerick, Ireland to support Europe, Africa, and the Middle East (EMEA). o Singapore to support the Asia-Pacific region. Dell usually develops, tests, and deploys its operational, online transactional processing (OLAP), strategic and business intelligence systems at Austin’s data center. Other regional data centers are responsible of adapting these systems to their local markets and deploying them (Kraemer, 2001). E.3. Intellectual Property  Unlike the norm in the PC industry, Dell is not known as a company that focuses on product innovation. Most of Dell’s patent portfolio, 1,128 patents, covers manufacturing

processes (Form 10-K, 2005). Dell’s management does not believe that Dell should waste its resources on research and development (R&D). This is evident when comparing Dell’s annual reports to its major competitors. While HP, IBM and Sun Microsystems spent 5% to 10% of their revenues on R&D, Dell’s R&D spending went down from 1.4% in 2001 to less than 1% in 2005. Michael Dell (founder and chairman of the board) and Kevin Rollins (CEO) do not view R&D as a critical component of Dell’s strategy. They believe that R&D is not a core

competency, and that Dell excels in leveraging its partners’ and suppliers’ technologies and innovations (Breen, 2004). E.4. Facilities and Physical Elements  Dell operates globally by conducting business through 3 geographic segments: the Americas, Europe and Asia Pacific-Japan. The Americas region covers the U.S., Canada and Latin

America. The headquarters is located in Round Rock, Texas. Based in Bracknell, England, the

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European region covers Europe, the Middle East and Africa. Lastly, from Singapore, the Asia Pacific-Japan region covers the Pacific Rim, including Australia and New Zealand. Dell’s corporate headquarters are located in Round Rock, Texas (Company Info, 2006). As of January 2005, Dell owned and leased 11,700,000 square feet of manufacturing, office and warehouse space worldwide. 7,300,000 square feet is located in the U.S. and the rest is located internationally. Its manufacturing facilities are located in Austin, Texas; Eldorado do Sul, Brazil; Nashville and Lebanon, Tennessee; Limerick, Ireland; Penang, Malaysia; and Xiamen, China. Dell also has technical and customer support, operations, and distribution centers in India, Panama, Slovakia, Morocco, China, Brazil, Taiwan and Singapore. Dell has more than 55,000 regular employees; more than 24,000 of them are employed in the U.S. (Form 10-K, 2005).
Table 1 Capabilities relating to people and processes at Dell (Fugate, 2004) CAPABILITIES  Demand management Internal collaboration Leverage partners Business fundamentals PROCESS  Manufacture-to-order Information technology Integrate partner planning & execution Balance sheet and P&L PEOPLE  Maniacal about execution / Bias for action Learning & sharing Value of personal / business relationships Rewards for decreasing costs

F.  Financial Ratio Analysis  The table below compares Dell’s financial ratios to the personal computer industry and to publicly held companies operating in the same markets for the 2005 fiscal year. Bold values indicate better performance. It is worth noting that Dell’s top management, since the mid 90’s, focused on the return on invested capital (ROIC) as a key performance indicator (KPI). This focus, managing profitability, made the company's stock a very attractive investment; Dell’s ROIC and ROE are way above the industry’s and competitors’ average. All other profitability 43  

ratios indicate good performance and profitable operations. There is no major indicator of risk or weak performance in Dell’s financials.
Table 2 Comparative financial ratios data (Comparison Data, 2006) Profitability            Valuation        Operations & Efficiency        Financial & Liquidity        Per Share Data ($)      Growth  Gross Profit Margin Pre-Tax Profit Margin Net Profit Margin Return on Equity Return on Assets Return on Invested Capital Price/Sales Ratio Price/Earnings Ratio Price/Book Ratio Price/Cash Flow Ratio Days of Sales Outstanding Inventory Turnover Total Asset Turnover Net Receivables Turnover Current Ratio Quick Ratio Leverage Ratio (asset/equity) Leverage Ratio (debt/equity) Revenue Per Share Diluted EPS from Operations Book Value Per Share 12-Month Revenue Growth Dell  18.3% 8.32% 6.2% 46.9% 13.1% 60.60% 1.37 24.43 15.38 20.6 32.29 107.2 2.12 12 1.2 0.9 4.74 0.1 23.02 1.29 2.05 14.60% Industry  20.95% 8.50% 5.71% 26.80% 10.40% 25.40% 2.06 37.34 9.72 31.12 30.46 67 1.9 11.9 1.53 1.3 2.57 0.06 18.09 1 3.84 9.20% Market  48.23% 10.64% 6.96% 13.20% 2.20% 6.50% 1.46 20.65 2.77 12.06 50.53 7.5 0.3 7.2 1.41 1 6.1 1.35 21.66 1.53 11.39 1.80%

Unlike many competitors, Dell does not rely on debt to finance its capital structure. This is contributed to cost cuts in operations and efficiencies in manufacturing and inventory management. Dell also outperformed the industry in terms of annual growth. It is wise though to lower future expectations in light of recent reports of lower than expected growth rates and net profits in the 3rd and 4th quarters of 2005 (Louise, 2005). Lastly, Dell does not pay dividends to stockholders. Instead, Dell uses net income to fuel its growth.

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APPENDICES G – I:  INDUSTRY CHARACTERISTICS 
By Kathryn Lynch

G. Macro Forces Analysis  G.1. Economic Forces  Spending on computer hardware represents nearly 40% of global information technology (IT) spending. It is expected to grow to $1.5 trillion in 2006 (Graham-Hackett, 2005). Although the consumer is increasingly important in the computer hardware market, corporate spending represents approximately 80% of all technology spending. Therefore, economic conditions depressing business capital spending decreases computer hardware sales (Graham-Hackett, 2005). Since demand from new users and applications is likely to increase, infrastructure development and internet-related spending is likely to continue to rise, according to IDT. The commoditization of the PC in the U.S. is a major force driving the economics of

this industry. Computers are now a necessity for all U.S. businesses and increasingly, for householders. Real Gross Domestic Product (GDP) growth, rising consumer confidence, and currency exchange rates all provide insight into the health of the computer hardware industry. Internationally, mixed PC sales and geographic areas where computers are well below their penetration levels create the prospect of additional markets. A weakened economy in Europe through 2001 plunged PC sales and resulted in unrealized growth potential throughout the continent. However, in 2005 a strong Euro and improving economies in Europe revived consumer demand for PCs resulting in double-digit revenue growth for computer makers. In Asia, outside of Japan, weakened currencies, high interest rates and slowdowns in economic growth plagued the PC industry through 2001. However, in 2007 the Chinese market is expected to grow 86% and South Korea by 40%. India has remarkably low technology penetration, which leaves much room for industry growth (The Gale Group, 2006). Latin America was the fastest 45  

growing region in the global computer market in 2005. A recovering Argentine economy is expected to contribute to substantial growth in this region as is 53% growth in Venezuela and 49% in Chile. G.2. Demographic Forces   Demographic forces are critically important to computer hardware companies. Business and personal computer usage remains on the rise. Businesses can obtain a competitive advantage through better servicing, and supporting their customers through their Web sites or linking with suppliers via the internet. Individual customers increasingly use the Web for communication, commerce, and educational purposes (Graham-Hackett, 2005). These trends suggest that the computer hardware industry is likely to continue to experience growth, despite a projected slowdown in the U.S. market for PCs. An estimated 75%-80% of total U.S. corporate and education PC units will be replacement units by 2008 (Datamonitor, 2005). As competing PC vendors struggle to emulate Dell’s efficient business model, this company continues to be the market leader in raising the penetration of PCs into nearly 60% of all US households (Graham-Hackett, 2005). However, in the U.S., decreasing PC prices (a typical trend in a maturing industry) also expand market opportunities for manufacturers. Most manufacturers now offer a sub-$1,000 model thereby increasing the number of households with incomes below $50,000 who can afford computers. Personal computer use in the U.S. has also increased exponentially since 1997. The U.S. Census Bureau has collected data in the Current Population Survey to assess computer usage since 1984 and internet usage since 1997. Data reported in 2003 indicates several areas of opportunity for computer hardware providers. First, the Southern U.S. had the lowest rate of computer ownership in the country at 59%. Householders throughout the country who do not

  46 

have internet access (but may own a computer) cite high costs as the main reason. As the cost of internet access decreases, this capability will become available to more of the population. 2003 U.S. census data on computer and internet usage at home correlates closely with income and educational level (U.S. Department of Commerce, 2005). This data suggests that as the prices of computers and internet access decreases areas of market growth remain for computer hardware companies, particularly among lower income consumers.
Computer At Home  75.7% 47.2% 74.3% 88.1% 93.6% 97.1% 72.6% Computer At Home  75.7% 47.2% 74.3% 88.1% 93.6% Internet at home  66.2% 33.0% 62.1% 82.2% 90.4% 94.8% 60.0% Internet at home  66.2% 33.0% 62.1% 82.2% 90.4%

Family Income (annual)             

Total families Less than $25,000 $25,000-$49,999 $50,000-$74,999 $75,000-$99,999 $100,000 or more Not reported

Educational Attainment   of Householder       

Less than high school High school graduate Some college Bachelor's degree Advanced degree

Additionally, computer hardware companies should target less educated consumers on the benefits of computer and internet use including comparative shopping opportunities, ease of household finance management, etc.
Computer At Home  80.3% 75.3% 47.3% 49.5%

Computer Use by Race  and Hispanic Origin     

White alone, non-Hispanic Asian alone Black alone Hispanic (any race)

Race and age is also a factor in computer usage, according to the U.S. Census Bureau report. Blacks and Hispanics have the lowest rates of computers at home of any U.S. racial group—providing a market opportunity for computer hardware companies which target these groups. Further, people 65 and older had the lowest rates of computer (28%) and internet (25%) 47  

use of all age groups. As the baby boomers age, this demographic is likely to increase its use of both technologies, partially due to exposure at younger ages. However, the current 65 and older population is also a market opportunity for computer hardware companies. G.3. Technological Forces  Technological change is critically important to the computer hardware business, contributing specifically to the perilously short product life cycle for computers. A phenomenon known as the “upgrade cycle” continues to be one of the most influential macro forces in the computer industry. For example, the replacement of the floppy disk by the compact disk and color monitors drove new waves of purchases as did additional technological change that made computer hardware faster and more efficient. In 2006, Microsoft is expected to release its new “Vista” operating system—spurring an upgrade cycle. Some industry analysts argue that 50% of a computer hardware product profit is created during the first 3 – 6 months of sales. An additional technological trend impacting the computer industry is that customers prefer to use a single vendor for all of their computing platforms (Graham-Hackett, 2005). From the customer’s perspective, this simplifies technology upgrades and one company is accountable for all of its needs. For a computer hardware company to remain competitive, it must be able to satisfy all of its customers’ needs in a timely manner. G.4. Government Forces   Governments around the world also represent an opportunity for the computer hardware industry. They are likely to continue to invest in internet infrastructure in order to improve the standards of living of their respective populations as well as to become more globally competitive (Graham-Hackett, 2005). In 2002, the U.S. federal government relaxed restrictions on computer exports of computers which have 190,000 Mtops to China, Russia, India, Pakistan, and other areas—providing a needed boost to the computer industry (The Gale Group, 2006).   48 

G.5. Social Forces  Seasonal factors influence the sales of computer hardware manufacturers. Specifically, these factors include the retail cycle for home PCs, the year-end sales push for corporate hardware, and differences in customs and business practices in other parts of the world (GrahamHackett, 2005). Holiday and back-to-school seasonal sales are also a key influence on the social forces of this industry which drives sales. Similarly, a summer business slowdown in Europe regularly results in decreased computer sales to this region during this period. In the computer hardware industry, the fourth quarter is the most important revenue and earnings period. This is due to two important factors (Graham-Hackett, 2005). First, most businesses close their books in December and managers try to deplete their capital spending budgets in order to avoid funding cutbacks in the next year. Second, the industry’s sales representatives are often offered substantial financial incentives to meet year-end sales goals. G.6. Physical Environment  Physical resources, environmental issues, and weather has little impact on the computer industry given that all computer parts are artificially manufactured. However, weather issues may affect the ability of a computer company’s supply chain to operate efficiently. Adverse weather can negatively impact the competitive edge of a company such as Dell which relies on “just in time” inventory methods as well as direct sales to its customers. G.7. National Factors  National factors are increasingly important in a computer company’s ability to maintain its competitive edge, both in terms of the manufacturing process as well as improving sales. According to the Wall Street Journal: “Scores of Western companies have been cutting costs by shifting software development, engineering design and routine office functions to countries such as 49  

India, where English-speaking workers are plentiful and wages are low” (Associated Press, 2006) Computer companies are increasingly shifting their manufacturing operations outside of the U.S. to take advantage of a growing business and consumer market for their products as well as cheaper operating costs. They also need to pay attention to the value of the dollar versus the currencies in which the companies trade. H. Industry Analysis  H.1. NAICS Industry Codes  Dell operates within the NAICS Industry Code 334111 – Electronic Computer Manufacturing. According to the U.S. Census, companies in this industry are: “…engaged in manufacturing and/or assembling electronic computers, such as mainframes, personal computers, workstations, laptops, and computer servers” (U.S. Census Bureau, 2006). Companies in this industry sell devices which are able to complete diverse tasks which can be freely programmed in accordance with user specifications. H.2. Industry History  The introduction of the PC in the early 1980s marks the advent of the modern computer industry. The Altair 8800, which was the first commercially successful PC, inspired the bulk of the modern computing environment and introduced two key concepts that remain critical to computer hardware manufacturing today. These include: mass production resulting in the

obtainment of Intel’s chips at an attractive price and are based on open-systems architecture. The first PC brought to a wide customer base was created by IBM in 1981. The open architecture of it enabled other companies create compatible PCs and ancillary devices including printers, video and sound devices. It also facilitated the commoditization of the PC. Servers and workstations coincided with the birth of the PC. Dell entered the industry in the late 1980s.   50 

H.3. Industry Trends and Forces  The computer industry is mature in Japan, the U.S., and Europe (The Gale Group, 2006). Growth opportunities continue to exist, however, in Asia, Latin America, and the Middle East. To meet growing demand from new users and new applications, Internet-related spending should continue to increase—propelling the electronic computer manufacturing industry. The trend of consolidation between companies in this industry is expected to continue (Graham-Hackett, 2005). Mergers receiving the most attention recently include: HP’s 2002 acquisition of Compaq and Lenovo Group’s purchase of IBM’s PC division in 2005. Further, many of these acquisitions are also occurring to enable computer hardware vendors to offer better services to customers. Finally, pricing is likely to continue to be increasingly competitive. H.4. Industry Marketing and Pricing Practices  The electronic computer manufacturing industry practices pricing reflective of the rapid pace of technological change and decreasing PC costs. Since 2000, the prices of chips and disk drives declined resulting in more competitive PC prices overall. The PC also became

commoditized due to the standardization of their primary components, including Microsoft Corporation’s Windows operating system and Intel’s processors (Graham-Hackett, 2005). Price competition is intense in this industry. Direct sellers, such as Dell, have

traditionally been able to under-price indirect sellers including Compaq and HP due to the company’s. Since 2005, most PC vendors offer a desktop model for less than $500 and a laptop for around $700 (Graham-Hackett, 2005). The phenomenon of declining prices is expected to continue in this industry and affect pricing for servers, workstations and large-scale systems. H.5. Industry Capital Requirements  Since the computer industry is maturing, competition based on price is intense. Successful companies in this industry, have found ways to streamline costs and transfer value to 51  

consumers.

Common methods of reducing costs include shifting software development,

engineering design, manufacturing, and routine office functions to countries such as India that have low wages and many English speakers (Associated Press, 2006). Some of the most capitalintense aspects of this industry include managing inventory and supplier relationships. Many computer hardware manufacturers also sell indirectly to customers—forcing them to maintain expensive retail costs. Streamlining processes is a critical aspect of remaining competitive in this industry as it continues to mature and the price of component technology declines. H.6. Key Success Factors  Key success factors for companies competing in the computer industry continue to evolve as the industry matures. Certain factors are critically important towards enabling the success of companies in the industry. They include: Competitive prices, superior relationships with

suppliers, product customization, quality customer service and excellent cost structure. H.7. Consolidation and Strategic Partnerships  Consolidation and strategic partnerships are common and will continue to increase in the computer industry. This phenomenon enables companies to offer more computing products and services in order to broaden their customer base. Some examples of recent mergers include Hewlett-Packard Co.’s May 2002 acquisition of Compaq Computer Corp for $19 billion and China-based Lenovo Group’s acquisition of IBM’s PC division in May 2005 for $1.75 billion. Hardware vendors are also positing the importance of service. Therefore, as computer networks increase in complexity and size, business and consumer customers will increasingly choose a single vendor for all of their computing needs. Most computer hardware companies maintain strategic partnerships with software and chip providers such as Intel and Microsoft. However, increasing numbers of PC makers are teaming up with Microsoft’s software rivals, according to the Wall Street Journal (Guth, Robert   52 

A. 2006). Specifically, Dell is in serious negotiations with Google in order to get its software installed on millions of Dell PCs before they are shipped to users, according to the report. This change challenges the strategic development partnership formed between Dell and Microsoft in November 2004 enabling customers to reduce IT cost and complexity through using a single tool for managing hardware and software (Datamonitor, 2005). H.8. Industry Opportunities and Threats  Opportunities for computer hardware manufacturers include expansion into peripheral markets and ancillary products such as printers. Dell entered this market in 2003 and high growth is expected in this market and will likely generate higher revenues. Other areas with expansion potential include consumer electronics. In October 2004, Dell launched plasma TVs, compact photo printers, and updated Dell Digital Jukebox music players. As U.S. job growth continues, energy prices decrease, and stock and housing prices rise, consumers are likely to be in a spending mood—potentially boosting sales to companies such as Dell. There are also significant threats to the computer hardware industry that should be considered. These include threats from competitors. Stiff competition exists among the top major players in the PC business: Dell and HP. With forecasted slowing growth in the U.S. PC market, competition is likely to intensify. Component price fluctuations are also a threat to the price of the products of computer hardware companies—particularly Dell. Since Dell’s direct business model enables it to operate with reduced levels of component and finished good inventories, price fluctuations can severely impact the company’s margins when component prices rise. I. Industry Life Cycle  Companies comprising the computer and peripherals industry—including Dell Inc.—are firmly entrenched in the maturity stage of the industry life cycle (Grant, Robert M., 2005). 53  

Companies in this stage experience stable sales, slight growth, and decreasing production costs. All of these characteristics have been discussed in detail with regard to the computer and peripherals industry in Appendices G and H. Companies find it difficult to innovate at the maturity stage since most of their products are a commodity. Instead, they compete on cost and focus on process innovation. The key success factors for companies in the maturity stage include cost efficiency through capital intensity, scale efficiency, and low input costs while delivering high quality (Grant, Robert M., 2005). Successful mature companies should target their strategies to address these issues. Dell Inc. is the market leader in the computers and peripherals industry due to its ability to transform the rules of engagement to a standards-based approach. Specifically, Dell rejected protected franchises and a tiered distribution system and adopted a customer-focused approach with a carefully managed supply chain and cash-flow process (Emerald Group Publishing Ltd., 2005). Further, other companies throughout the industry copy Dell’s low-cost, direct sales

model. As Dell continues to negotiate the challenges of the mature life cycle stage, the company will need to continue to focus on process innovation and creating business and consumer customer value in order to maintain its status as industry leader.

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APPENDICES J – L:  COMPETITIVE LANDSCAPE 
By Jennifer Lund

J. Five Forces of Competition  J.1. Bargaining Power of Suppliers  Suppliers hold considerable power in the computer hardware industry. Although Intel’s grip on the market has decreased slightly with the emergence of AMD, the company still supplies about 90% of the microprocessors used in PCs. Similarly, the Microsoft operating system is used in an estimated 85% to 90% of PCs worldwide (Graham-Hackett, 2005).
Threat of substitutes – Low Bargaining Power of Suppliers – High Industry Rivalry – High Bargaining Power of Buyers – High Threat of New Entrants – Low

Also, almost all PC manufacturing is outsourced. Taiwanese companies now produce approximately 80% of the world’s laptops. In fact, one Taiwanese company (Quanta) produces nearly 25% of the world’s portable computers, which are then sold by companies such as Dell and HP (Dean, 2005). Outsourcing the manufacture of PCs and laptops is a valuable cost-cutting measure taken by OEMs (original equipment manufacturers). Further, the OEMs have begun playing their contract manufacturers against each other to keep any one supplier from gaining too much power in the market. J.2. Bargaining Power of Customers  Consumers also have a significant amount of power within the PC market. As a result, PCs have become commodities – requiring vendors to maintain competitive prices in order to retain customers. In addition, almost all providers allow customers to customize the PC to match 55  

their needs. Plus, nearly all PCs contain roughly the same components and may have been manufactured by the same Chinese/Taiwanese firms. As discussed in Appendix G, the addition of new technology to a market (such as the introduction of a new operating system) will lead consumers to upgrade their systems, thereby limiting some of the consumers’ power. In the server market, the demand for midrange and high-end UNIX servers appears to be swinging back from the volume servers. Also, as discussed in Appendix H, as computer

networks become larger and more complex, customers increasingly prefer and are willing to pay a premium to use a single vendor for all of their computing platforms (Graham-Hackett, 2005). J.3. Threat of New Entrants  The explosive growth in servers in the late 1990s attracted new entrants to the market. In addition, PC server participants, drawn by projected growth rates of 25%, further stimulated the market with dramatic price cuts (Graham Hackett, Industry Profile, 2005). However, the

computer hardware industry has been in a consolidation phase for a number of years (for example, Compaq purchased Tandem then HP purchased Compaq). J.4. Threat of Substitutes  The threat of substitutes is low in the computer hardware industry. Consumers only have two choices for PCs – Apple’s Macintosh or Windows-based PCs. However, the cost of

switching between the two systems is significant, thereby making it unlikely that customers will substitute one for the other. Servers, on the other hand, have no available substitutes. J.5. Intensity of Competition  The number of competitors in the PC and server markets is relatively low; nevertheless, the level of competition is exceptionally high. In the PC market, the largest (“Tier 1”) vendors are IBM (although its PC business is now owned by Lenovo), Sun Microsystems, HP, and Dell. Smaller (“Tier 2”) vendors include Gateway and Toshiba. However, below the second tier lies   56 

another group of manufacturers - companies selling unbranded “white box” computers that they have either assembled themselves or purchased from a local assembler. Since white boxes increasingly use the same components as branded computers, their functionality differs little from those sold by the Tier 1 and 2 vendors (Graham-Hackett, 2005). The recent trend towards consolidation and the decreases in component prices has led to the intense competitive pricing now facing the industry. Given the long-term downtrend in PC pricing, vendors will need to continue to cut costs from their operations. The growing ‘white box’ market will require the Tier 1 and Tier 2 vendors to maintain competitive prices. Companies with more favorable cost structures increase their chance of profitability. K. Major Competitors  For the purposes of this analysis, Hewlett-Packard, IBM and Sun Microsystems have been identified as Dell’s main competitors. Each company will be evaluated on its strengths, weaknesses, generic strategy, threats and opportunities. Hewlett-Packard held the #2 spot in PCs behind Dell as of the 3rd quarter of 2005. Its position in the server market is even more impressive. It held the #2 slot in the Unix server category in the 2nd quarter of 2005 and the #1 place in the Linux server group at 24.3%. At this point in time, HP is operating under a broad/cost strategy. It is offering a significant number of products at a wide range of prices. Strength & weaknesses: HP’s recent acquisitions have provided it with considerable market expertise. For instance, Compaq’s acquisition of Tandem provided it with a

knowledgeable sales force and skills in “clustering” computers. Its purchase of DEC provided it with a high-end Unix system and a worldwide services organization. Finally, HP’s 2002

purchase of Compaq was designed to create a company with $12 billion in services’ revenue (Graham-Hackett, Industry Profile, 2005). HP is still struggling to reorganize itself after the exit 57  

of Carly Fiorina. Adding to its difficulties is its place in the market: it is trapped between the efficient Dell and the innovative IBM. In addition, its product portfolio is rather cumbersome – ranging from ink cartridges to multimillion dollar computers (Burrows, 2005). Threats and Opportunities: HP is doing exceptionally well in the Asia-Pacific. It grew by 52.4% in the region, for a market share increase of 250 basis points (Graham-Hackett, Current Environment, 2005). It offers products but also the ability to leverage the channel’s massive infrastructure to meet customers’ specific needs at the most granular level (Pereira, 2005). However, HP appears to be focusing on its servers, data-storage equipment, mobile computing devices and computer security and imaging (Tam, 2005). The company’s lack of focus on the PC market opens the door for Dell to gain a portion of HP’s share of the market. IBM holds the largest overall market share in servers. It led the Unix server category in the 2nd quarter of 2005, with a 31% share. In addition, IBM has made much about promoting its Linux lineup and maintained a 20.3% market share (Graham-Hackett, Current Environment, 2005). IBM is using a broad differentiating strategy: it is appealing to a number of different consumer groups while differentiating itself based on its services organization. Strength & weaknesses: IBM led the high-end server market in 2004 with a total share of 55.2% (Graham-Hackett, Industry Profile, 2005). In 2002, it acquired the consulting unit of PricewaterhouseCoopers. IBM faces strong price competition and technological disruptions. With product transitions, it faces the risk that customers will not adopt new products as quickly as hoped (Fortuna, International Business Machines, 2006). Threats and Opportunities: IBM’s consulting arm can provide services to customers that Dell cannot. However, IBM spends billions annually on research and development. Dell has the ability to reverse engineer IBM’s successful products for its own use.

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Sun Microsystems garnered the #3 spot in the Unix server category with a 29.5% market share in the second quarter of 2005. Sun’s strategy is to be a narrow differentiator. It focuses primarily on consumers in the server market. Strength & weaknesses: Sun added personnel to improve its service offerings and has made alliances with companies such as Electronic Data Systems Corp. and Computer Services Corp. Sun will have trouble reaching levels of sustained profitability without better gross margins, further cost cuts or significant top line growth (Fortuna, Sun Microsystems, 2006). Threats and Opportunities: Sun recently added the Galaxy server line in an attempt to win back customers. However, its financial weaknesses may allow Dell to move more firmly into the server market. L. Competitor Resources 
Annual Sales (in millions)        Dell HP IBM Sun Microsystems 2005  $49,205 $86,696 $92,000 $11,070 2004  $41,444 $79,905 $96,293 $11,185 2003  $35,404 $73,601 $89,131 $11,434

In terms of sales, HP and IBM are much larger than Dell or Sun Microsystems. However, this alone does not prove that HP and IBM are more competitive or successful than their competitors – it only proves that they are bigger and offer more sales and services.
2005  1.20 1.38 1.31 1.51 2004  0.98 1.50 1.18 1.47 2003  1.00 1.61 1.19 1.64

Current Ratio       

Dell HP IBM Sun Microsystems

The current ratio is primarily used to estimate a company’s ability to repay its short-term obligations with its short-term assets. A ratio above 1 implies that a company will be able to repay all of its current debt should it come due. It can also be used to measure a company’s operating efficiency – i.e. companies with low current ratios often have difficulty collecting their 59  

receivables or have high turnover ratios. In this instance, Dell has the lowest current ratio implying that the other three companies are more financially sound – at least in the short-term. However, Dell also posted substantially higher asset turnover and inventory turnover ratios than its competitors, as will be shown below.
2005  2.12 1.12 0.90 0.78 2004  2.15 1.05 0.88 0.76 2003  2.29 0.99 0.85 0.89

Total Asset Turnover       

Dell HP IBM Sun Microsystems

Asset turnover measures a firm’s ability to use its assets to create sales. Dell is the obvious leader in this category. For the past three years, its turnover ratio has been double that of its nearest competitors – meaning that Dell is the most efficient company in terms of asset use.
2005  18.3% 23.6% 42.7% 41.5% 2004  18.2% 24.5% 37.4% 40.4% 2003  17.9% 26.8% 37.0% 43.2%

Gross Profit Margin       

Dell HP IBM Sun Microsystems

The gross profit margin looks at the percent of revenue remaining after the cost of goods sold has been accounted for. Dell has been slowly trending upward, as has IBM, possibly because both have become better at controlling costs. HP, on the other hand, has seen its gross profit margin slowly eroding – a sign that it may be having difficulty controlling its supply costs.
2005  46.9% 6.5% 26.4% -1.6% 2004  42.1% 9.3% 28.3% -6.0% 2003  43.5% 6.7% 27.2% -52.1%

Return on Equity       

Dell HP IBM Sun Microsystems

Net profit margin measures how much revenue is actually retained as earnings. In sharp contrast to the gross profit margins, Sun Microsystems has actually been losing money in the last three years. Dell and IBM have maintained relatively steady margins. IBM has posted higher net profit margins than its competitors for the last three years.   60 

Return on Assets       

Dell HP IBM Sun Microsystems

2005  13.1% 3.1% 7.9% -0.8%

2004  13.7% 4.6% 7.7% -2.6%

2003  13.7% 3.4% 7.3% -26.2%

ROE measures the amount of profit a company generates with its shareholders investments. Dell is, once again, out in the lead – nearly doubling the ROE earned by IBM. Sun continues to show signs of a recovery although the company is still producing negative results.
2005  6.2% 2.8% 8.8% -1.0% 2004  6.4% 4.4% 8.8% -3.5% 2003  6.0% 3.4% 8.5% -29.6%

Net Profit Margin       

Dell HP IBM Sun Microsystems

Return on assets indicates how well a company is able to use its assets to generate profits. Higher percentages are typically regarded as better because the company is earning more money on less investment in assets. In this instance, Dell is clearly the best at turning its assets into net income. IBM also appears to be doing well. However, Sun Microsystems is clearly having some difficulties, although it has made improvements since 2003.
2005  107.20 12.61 27.96 25.68 2004  126.74 11.30 29.04 24.11 2003  115.70 12.14 30.30 27.49

Inventory Turnover       

Dell HP IBM Sun Microsystems

For manufacturing companies, inventory must be monitored extremely closely – holding too much or too little can lead to serious problems. In the computer hardware industry, where technology frequently changes, extended inventory holding periods may mean that companies are holding obsolete products in their inventories. As expected, Dell’s inventory turnover rate far exceeds those of its competitors (according to these calculations, Dell turned its inventory over 107.2 times in 2005, compared to 27.96 for IBM, 12.61 for HP and 25.68 for Sun Microsystems). 61  

APPENDICES M – O:  CURRENT POSITIONING AND STRATEGY 
By Greg Shorr

M. Product Market Matrix  Dell currently serves a global market through the sales of its products and services. Its core business is computer related and is based in the U.S., where the company has the largest percentage share of the computer market.

M.1. Present Products and services  Dell's present product line can be segmented into 5 major categories: Desktop and Mobility Computing, Software and Peripherals (Printers, Monitors, Plasma TV's, Cameras, etc.), Servers and Networking, Infrastructure Services and Storage. These 5 categories span the

computing industry and allow Dell to be engaged in all aspects of the individual and corporate computing experience. Within each of these categories, Dell offers products that appeal to many market segments. While often known as a low-end provider (Lee, 2005), Dell is expanding its personal   62 

computing offering to include high end products with the reintroduction of its XPS brand. This product offering will allow Dell to market its products to the entire spectrum of computer users, rather than approach the market from a broad perspective. M.2. Present Market  Dell, through the creation of subsidiaries, has expanded its business model worldwide. While its core business resides in the U.S., operations in Europe, Asia and Japan continue to grow, making up 34.5% of Dell's year-to-date (YTD) revenue (Form 10Q, 2005). In each market, Dell utilizes a direct sales methodology to eliminate the costs of the middle man. In each geographic market, Dell pursues three independent market segments: consumers, government and businesses. Of these three, Dell is the most reliant on the U.S. business segment, which is responsible for 51.8% of Dells YTD revenue (Form 10Q, 2005). M.3. Related products and markets  Dell's CEO, Kevin Rollins, set an aggressive goal of becoming an $80B company by the end of 2007. To reach this goal, Dell must continue to gain market share in each of the markets described above and expand their businesses. The company should begin by adopting a broader market offering of internal workings of PC's, expanding its service business to include creativity and business solutions and developing a retail option to better match societal realities in developing countries such as India and China. As the sole remaining PC producer that relies entirely on Intel chips, Dell benefits from the advantage of incentives and discounts that arise from volume and the ease of only having to maintain one production line for attachment of microprocessors (Yager, 2005). Over the last

several years, AMD has developed fresh new microprocessors that surpass Intel's offerings in capability and speed. Until Dell begins to offer these components, it has the potential to lose

market share. While offering their customers a full range of chip options and improve product 63  

line offering, adding AMD would challenge Dell’s manufacturing process since chip attachment methods vary by company. However, Dell's newest plant, WS1, is built in a lean manufacturing mentality, where diverse product models can be built by the same manufacturing line executing Single Minute Exchange of Die (SMED) methods (Null, 2005). This should reduce the impact of changing between chip vendors, as the plant already has flexibility built into its operating procedure. As the market for PC's expands globally, companies such as Dell have begun to grow in developing countries. This market is expected to be where 80% of sales will be over the next four years (Kharif, 2005). Dell has already penetrated the market in China, where they are currently the #3 PC makers. However, Dell’s direct sales model is not providing the returns

expected in China due to differences in buying patterns and the relatively low use of credit cards. Dell should invest in partnerships or storefronts similar to the 'Apple store' concept where the entire Dell product line can be seen and touched, a method that will probably work better with Chinese buying habits. This would put the company in direct competition with the #1 computer maker in China, Lenovo, who operates over 4,800 retail shops (Lee, Burrows, 2005). M.4. Unrelated Products and markets  Currently Dell's service provisions are limited to infrastructure services. Dell works with a customer to determine the necessary technology, deliver it and set it up, and then terminate its involvement with the customer (Marengi, Cotshott, 2006). This market is based on single event purchases, rather than a continual relationship and has limited interaction with customers. By expanding into consulting services, Dell will establish more ongoing relationships with customers and become a company offering a solutions focus, an area currently dominated by rivals IBM and HP. In addition, this strategy will help ensure a continuing market for the Dell PC, server and integration service businesses. It will also change Dell's Business-to-Business   64 

brand from a solely value provider to a creativity and complete solutions provider (Slavens, 2005). N. Porterʹs Generic Strategies 

While Dell participates in many different markets and industries, its corporate differentiations strategy is best exemplified by its core businesses, PC sales and services. The company has dedicated itself to making the customer the most important voice in the value chain. Its direct sales model changed the way the industry did business, eliminating the middle man and putting consumers and businesses directly in touch with production. Dell has been able to eliminate unnecessary costs and reinvest in areas that create value for the end user, such as mass customization and world class service and support. By utilizing just-in-time inventory through supply chain management and SMED methodologies, Dell is able to manufacture computers with a world class cycle time. This enables the firm to maintain a cost structure that other PC makers cannot currently match. This also helps Dell to eliminate stocks of finished products, reducing component stocks and replacement costs (Tournois, 2004). Not only does this allow Dell to quickly respond to

competitor price shifts, but also allows the consumer to get the high quality product it wants very quickly and for a reasonable price. By introducing mass customization to the market, Dell

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created a brand name, which was ranked as the 19th most recognizable consumer brand by CoreBrand (Slavens, 2005). Another key aspect of Dell's brand is its high quality customer service reputation. Among low end customers, Dell's ranking has slipped due to changes in the way services are marketed as the company focuses on higher margin products (Lee, Thornton, 2005). Within this segment, Dell continues to provide high quality services and is recognized as the industry leader. In either case, the company continues to focus on providing high initial quality, instituting rigorous checkouts for each PC before the product is shipped. As the market has changed, Dell's business model continues to differentiate itself by focusing on customers. However, Dell is now building service into its business model. It will begin charging for services on its lower end products while promoting some higher end products that will continue to receive free service (Lee, Thornton, 2005). In either respect, Dell focus is on increasing customer value, but is keeping the value consistent with the product purchased. O. Market Attractiveness and Strength   Using the Boston Consulting Group’s growth share matrix, and the McKinsey 9 cell matrix, Dell's many businesses can be

independently analyzed. Dell's PC division, comprising both desktop and mobility segments can be categorized as a Cash Cow, due to the company's front running position and ownership of over 18% of the world market (Williams, Cowley, 2006). This market is expanding, especially in developing countries (Kharif, 2005), with an expected increase in shipments of 10.5% worldwide in 2006   66 

(Kanellos, 2006). Dell's strength in this segment comes is evidenced by their control of the corporate and personal markets in the U.S. where they are the top vendor. Outside the U.S., Dell is currently either the #2 or #3 PC maker, where they are seeing greater than 20% Year over Year (YOY) growth , depending on the market (Young, 2006) (Evans, 2005). The server business is one where Dell continues to make show consistent growth in market share, making it a star in Dell's portfolio. Dell's market share has increased substantially over the last several years to almost 11%, overtaking Sun to rank as the #3 producer of servers (Shankland, 2005). To grow market share, the company focused on lower end, higher volume servers, posting between 2225% YOY growth over the last several years. As the company matures in this market, Dell is expanding its business by growing into higher end Windows markets such as clustered servers (Yager, 2005). These new product offerings put Dell in a strong position to capitalize on the expected 6-8% growth of the market in 2006 (Graham-Hackett, 2005). Unlike their PC and server businesses, Dell does not have the current strength of market to categorize their service business as more than a question mark. This segment is the fastest

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growing business segment at Dell, with over 30% of growth for each of the last several years. However, Dell estimates that it currently services less than 1% of this over $670B industry. The company sees this segment as an opportunity to grow its business through continued refinement of its depth of expertise and capability of its consultant base (Marengi, Cotshott, 2006). The company has developed a focused strategy to continue to expand this business through the development of suite services and packaging services through product sales. In order to move this segment of business to a Star or Cash Cow, Dell must develop this business into a more consistent and recognizable portion of its product portfolio. The final market Dell competes in is the peripherals market, which includes printers, digital cameras, monitors, storage, HDTV's and many other products. These products together make up 16% percent of Dell's overall revenue and have shown more than 20% YOY revenue growth (Form 10Q, 2005). Within this segment, however, Dell's product offerings cannot be categorized together, as the products range from cash cows to question marks. The largest revenue producer and cash cow is the digital display business due to the product linkages between monitors and computer purchases. Outside of digital displays, where Dell does not have the same product ties to its PC line, Dell faces competition from many entrenched market leaders. Despite this, Dell is experiencing significant sales growth for its peripheral products. For example, its printer unit, while a distant #2 behind HP, has grown to over a 13% market share in just over 2 years (Singer, 2005). Its storage division, based on a partnership with EMC, is ranked a distant #4, holding just over 8% of the market for external and disk storage (Nisbet, 2006). However, due to its ranking in PC sales, Dell is the #1 reseller of storage, more than 16% ahead of its nearest rival (Zerekes, 2004). Within each of these markets, Dell has experienced over 20% YOY growth (Form 10Q, 2005).

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APPENDIX P: BIBLIOGRAPHY 

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