Notes on Dells strategy

Dell's business strategy is a successful cost leadership strategy. The company's formula for success has been based upon its unique customization, delivery, and cost proposition. In reaction to faltering performance and the need to pursue new growth opportunities, a dual-strategic approach is required to confront rapidly changing market conditions. First, Dell must integrate its cost leadership skills with differentiated product features and related services to create value for its customers and achieve the benefits of an integrated cost leadership/differentiation strategy. Additionally, becoming a diversified IT company opens up opportunities in related businesses, where similar products, buying processes, target customers, or other operationally-related activities can produce synergies. This business-level and corporate-level strategy combination offers Dell a method of dealing with the company's competitive realities. Both strategies are discussed below. Business-Level Strategy Customer expectations in the industry have created a growing demand for low-priced, differentiated products. As a result, Dell needs to be able to perform primary and support activities that simultaneously yield low costs and differentiated features, or an integrated cost leadership/differentiation strategy. The objective of using this strategy is to efficiently produce products with attributes that boost product quality or performance. Efficient production is the source of maintaining low costs, while differentiation is the source of unique value. Successful use of an integrated cost leadership/differentiation strategy has the added benefit of building skills that can help Dell adapt more quickly to new technologies and rapid changes in the external environment. Simultaneously concentrating on developing two sources of competitive advantage (cost and differentiation) increases the number of primary and support activities in which the company must become competent, which contributes to greater flexibility. Flexible manufacturing systems, information networks, and total quality management systems can also yield a more flexible organization. Each type of initiative should be considered by Dell as it tries to balance the objectives of continuous cost reductions and continuous product enhancements.

Dell already utilizes a customized assembly process based upon a FMS to fill customer orders. To increase flexibility, the company should look for ways to enhance the effectiveness of information networks (linking the supply chain through to the customer) to improve work flow and communication among employees to identify and resolve problems that emerge. [Improvements in information linkages would prove particularly beneficial as Dell seeks to improve services for its corporate customers.] Total quality management (TQM) is another managerial innovation that emphasizes an organizations total commitment to the customer and to continuous improvement of every process through the use of data-driven, problem-solving approaches based on empowerment of employee groups and teams. The development and use of TQM systems at Dell would align actions with the company's strategic needs and would concurrently serve to (1) increase customer satisfaction, (2) cut costs, and (3) reduce the

amount of time required to introduce innovative products to the marketplace. All of these objectives have been identified as critical factors that will influence Dell's future success. TQM systems result in the enhancement of innovative abilities, the ability to exceed customers quality expectations (differentiating the company from its competitors), and the elimination of process inefficiencies to cut costs (allowing Dell to offer better performing features at the relatively low prices expected by its customers). Thus, an effective TQM system will help Dell develop the flexibility needed to identify opportunities to implement its integrated cost leadership/differentiation strategy. Because TQM systems are available to all competitors, they may help the company maintain competitive parity, but rarely will they unilaterally lead to a competitive advantage. Corporate-Level Strategy A corporate-level strategy specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets. Corporate-level strategies help companies select new strategic positions to increase the firms value. They are also a means to grow revenues and profits. By 2006, Dell has already diversified from a purely desktop PC provider to operating in the following additional product categories: mobility, server, storage, printer, enhanced services, software, and consumer electronics. More than thirty percent of its revenue is generated outside of its dominant business. Because of this ratio and because there are existing links between its diversified businesses, a related constrained diversification strategy is being employed. With a related constrained diversification strategy, Dell will be able to expand the value of its resources and capabilities by sharing activities and exploiting economies of scope between its businesses. Available to companies operating in multiple product markets or industries, economies of scope are cost savings that the firm creates by successfully sharing some of its resources and capabilities (operational relatedness) or by transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses (corporate relatedness). To create economies of scope both tangible resources (such as plant and equipment or other physical assets) and intangible resources (such as knowledge or other bases of core competencies) can be shared. In at least two ways, the related linked diversification strategy can help Dell create value. First, because a core competence has already been developed (and paid for) in one of the companys businesses, transferring it to a second business eliminates the need for that second business to allocate resources to develop it. Resource intangibility is a second source of value creation through corporate relatedness. Intangible resources are difficult for competitors to understand and imitate. Because of this difficulty, the unit receiving a transferred corporate-level competence often gains an immediate competitive advantage over its rivals. One thing to keep in mind, however, is that it can be difficult for investors to actually observe the value created by a firm as it shares activities and transfers core competencies. For this reason, the value of Dell's assets being used to create economies of scope may be discounted by investors. Dell's business model became successful in the PC industry as personal computers gained acceptance in the market. The company's growth was achieved by taking away share from industry leaders and "commodifying" the product. Rather than being the market leader in other

consumer electronic products (HDTV, digital cameras, etc.) when new product prices are high and consumers are doing extensive research prior to the purchase (needing retail outlets to touch and feel the product), Dell's place might be to jump into the market as consumer electronic products begin to transition into commodities. The company can be prepared to capture the second wave or tier of consumers who have not adopted new technologies and products until prices lower and technology becomes accepted (capturing the market after the product/technology is proven, offering low prices, great quality, new features, and complementary services at this time). This second (or late) mover strategy is a competitive response to first movers' competitive actions and is typified by imitation. Taking the time to monitor customer reaction to product innovations and avoiding the mistakes and costs of new product introductions are compatible with Dell's successful business model. The approach also provides Dell with time to develop more efficient processes and technologies or create additional value for consumers. Overall, the outcomes of first mover competitive actions can provide an effective blueprint for Dell's late mover approach, especially as the consumers get comfortable with making investments in new technologies and begin to equate dependable quality and good value with the Dell brand. It is also going to be important for Dell to properly scale its aging businesses (such as PC's) to the size of the replacement market. [Of course, the company should always continue to look for advancements that might breathe life into mature products - such as it has done by turning home PC's into media centers).