Dell Case

Key Issues

Matching Dell
Industry Dynamics
How to attain advantage
How to protect advantage

2-2

Industry Dynamics
5 Forces Model Gauges the degree
of competitive rivalry in industry.
Bargaining Power of Suppliers.
Bargaining Power of Customer.
Threat of new entry.
Threat of substitutes.
Intensity of Rivalry.

2-3

Bargaining Power of Suppliers

Proprietary Standards from Microsoft
and Intel - Extract profits
Other inputs are commodities
Thus Bargaining Power of Suppliers
is Very High

2-4

Bargaining Power of Customers

Standardized product means its easy
to switch brands
Resellers and retailers have grip on
channels.
Corp. users buy direct based on price
since little differentiation
Over BP of customers is high and
rising.
2-5

Threat of new entry.

Increasing with rise of internet and
direct channel.
Main barrier is capital needed for
manuf. facility.
Only real barrier are economies of
scale.
Threat is fairly high.

2-6

Threat of substitutes.
Within product category, few direct
substitutes.

2-7

Intensity of Rivalry.
Rivalry is very high due to:
Lack of differentiation.
Reliability and Service are only diffs.

Price is similar for all competitors

If prices are similar, this is a signal of
rivalry.

Do prices go down or up?

Tend to fall.
2-8

Dells Advantages/Disadv.
Direct to order
Efficient (best cost position)
Effective (for some customers - best)

Focus!
Not distracted by other channels
Maybe not competent in other channels?

Service
By from Dell, deal w/ Dell.
2-9

IBMs Advantages/Disadv.

Direct Salesforce.
Well regarded laptop.
Costs are higher
Few non-corporate customers

2-10

Compaq Adv/Disadv.
Cost position is good
Retail relationships
Poor quality
Poor reputation

2-11

HP Adv/Disadv.
Quality reputation
Higher cost
Resellers

2-12

Gateway Adv/Disadv.
Price lower
Service
Image?

2-13

Example of Unit Price

and Cost Analysis
1998 numbers

Dell

Compaq

Unit Price

1996

1932

Unit COGS

1555

1325

135

195

309

44

124

1794

1893

202

39

Channel Markup/Unit

Unit SGA

Inv. Carry Costs

Cost of unit

Profit

Notes

1-Gross Margin

2-14

For all firms

1998 numbers

Dell

Compaq

IBM

HP

Gateway

Unit Price

1996

1932

1959

2129

1762

Unit COGS

1555

1325

921

1451

1406

135

149

195

309

400

353

242

44

124

125

284

39

1794

1893

1445

2237

1687

202

39

514

-108

75

12327

31169

81667

47061

7648

Gross Margin

2722

9786

43282

14989

1546

Margin % Rev

22.1%

31.4%

53.0%

31.9%

20.2%

Channel Markup

0.0%

7.0%

0.0%

7.0%

0.0%

SGA

1202

4978

16662

7793

1052

16.6%

13.8%

Channel Markup/Unit
Unit SGA
Inv. Carry Costs
Cost of unit
Profit

Rev

SGA %
Rev numbers are likely inflated by
9.8%
16.0%service being
20.4%
Note:
IBM
Mainframe and
included.
Cost of inventory

273

2,005

5,200

6,284

2-15
168

2-16