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Dell's Path to a Sustainable Competitive Advantage

Dell's Path to a Sustainable Competitive Advantage

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Published by Aaron Blackburn
Co-written with Rudolph Ardon Bogantes, Matt Kincaid, John Nguyen, and Jia Zhang, for Dr. Clinton Chadwick's MGMT 704 class, taken at the University of Kansas the Spring of 2012.
Co-written with Rudolph Ardon Bogantes, Matt Kincaid, John Nguyen, and Jia Zhang, for Dr. Clinton Chadwick's MGMT 704 class, taken at the University of Kansas the Spring of 2012.

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Published by: Aaron Blackburn on Mar 18, 2012
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MGMT 704

Dell s Path to a Sustainable Competitive Advantage
Rudolph Ardon Bogantes, Aaron Blackburn, Matt Kincaid, John Nguyen, & Jia Zhang


The beginnings of Dell Computer Company took place in 1984 in a dorm room at the University of Texas at Austin. It was in this room where then pre-med freshman Michael Dell began his business called PCs Unlimited, later to become the multi-billion dollar Dell Computer Company1. With its direct-to-consumer model and an emphasis on the large business consumer, Dell experienced steady growth within the first two years of its inception.2 After only six years, Dell became part of the Fortune 5003. Despite its sudden growth and success, Dell faced difficulties in 1994 when two of its major products were plagued with quality issues, leading to decreased sales and a major cash deficit. The sudden cash deficit forced executives to rethink the way they did business4. This setback sparked a change at Dell that would reinvent they way companies worldwide manage logistics. A new business model was developed with goals of reducing inventory by 50%, improving lead time by 50%, decreasing assembly costs by 30%, and reducing obsolete inventory by 75%5. The model revolved around a ³sell what you have´ mindset and emphasized control of inventory and consumer lead times. Dell was forcing itself from

Dell. Company Timeline. 8th March 2012. http://content.dell.com/us/en/copr/our-story-company-timeline.aspx. Thompson, Arthur and A.J. Strickland. Dell Computer Corporation: Company Background. 1999. http://www.mhhe.com/business/management/updates/thompson12e/case/dell3.html. 3 Dell. Company Timeline. 8th March 2012. http://content.dell.com/us/en/copr/our-story-company-timeline.aspx. 4 Byrnes, Jonathon. Dell Manages Profitability, Not Inventory. 3rd June 2003. http://hbswk.hbs.edu/archive/3497.html. 5 Ibid.



the typical reactionary firm, ordering inventory, then trying to sell it, to a proactive and innovative company. The process began with an information database to assist in the targeting of very specific accounts and customers. Dell excelled in targeting customers with predictable purchasing patterns and lower service costs. This specific account selection was tied closely to Dell¶s demand management and forecasting6. Demand management at Dell was run with the ³sell what you have´ mindset in the forefront. Sales commission plans were set to equal the production plan, insuring that very little to no inventory was to be left on hand. When forecasts were askew, the firm adjusted accordingly. When components inventories rose higher than forecast, the sales department was incentivized to push those products. When components were depleting faster than expected, customers were steered to other products, or secondary suppliers were contacted to match the current demand7. Dell¶s genesis of just-in-time manufacturing became a capability that garnered it much success. In just four years, Dell revenues went from $2 billion to $16 billion at a 50% annual growth rate. Over a span of eight years, Dell¶s stock price increased by 17,000%8. In a time of need, Dell was able to innovate and create a distinctive capability that revolutionized the way firms view logistics. Despite this distinctive capability, Dell has been unable to continue its growth and hold its footing as an industry leader.
Kraemer, Kenneth L., Jason Dedrick and Sandra Yamashiro. "Refining and Extending the Business Model with Information Technology: Dell Computer Corporation." 2000. http://www.indiana.edu/~tisj/readers/full-text/16-1%20kraemer.pdf. 7 Byrnes, Jonathon. Dell Manages Profitability, Not Inventory. 3rd June 2003. http://hbswk.hbs.edu/archive/3497.html. 8 Ibid.


Over-Reliance on its Operationally Efficient Supply Chain
Dell was a booming and very successful company throughout the 1980s and 1990s. It did so in large part based on its superior logistics system that reduced prices to a point no other company was able to match9. During Dell¶s most successful period during the late 1990s, it was only holding one week¶s worth of inventory whereas the competitors were holding between two- and three-months¶ worth10. "So the focus shifted from the 'outside in' [approach of] looking at its position in the market to thinking, 'How can we maximize earnings out of our existing resources and capabilities'´ at the expense of, rather than in addition to, thinking about what its customers need´11. This line of thinking has turned out to be damaging for Dell: ³Being eclipsed by Apple and the new iPad goes to the heart of Dell's struggle. Dell has never invented a notable product. What it has done is deliver a basic product that someone else has invented but get it to consumers much more efficiently´12. Dell¶s over-reliance on logistical superiority is cited by many. One source states: ³The core of Dell's problem is in the way they think about their business. Back when Michael was selling cheap PCs out of his dorm room, he came up with strategy to make computers as cheap as possible by squeezing all of the inefficiencies out of the supply chain. Dell's efficient supply chain and the way they squeezed those costs out is what

Wharton Business School. (2010). Dell's Diversification Strategy: 'A Day Late and a Dollar Short?'. Available: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2584. Last accessed 1 March 2012. 10 Ibid. 11 Ibid. 12 Ibid.


people began referring to as Dell's unique business model´13. The same source goes on to say why the once innovative supply chain is not a source of sustainable competitive advantage. ³That's [the efficient supply chain] not a model, any more than Henry Ford's creative application of the assembly line approach to the manufacture of the motor car was a model. The efficient supply chain was a competitive advantage that was non-proprietary, replicatable, and therefore was doomed to be copied´14. In effect, the supply chain is a product of operational efficiency. Dell fine-tuned it before others did. It was only a matter of time before its competitors caught up. According to the resource-based view, a firm¶s key resources or capabilities must meet four criteria: they must be valuable, rare, inimitable, and nonsubstitutable. There is a fifth factor that is often added, immobile. Dell¶s supply chain doesn¶t fare well against the ³VRINI´ requirements for a sustainable competitive advantage. It is valuable. This is a given considering how well Dell was able to perform with it in place. It was rare. At the time of its initiation, Dell was its pioneer in the computer industry; however, it is not rare anymore. Others have followed suit. Accordingly, it is not inimitable. It was nonproprietary and able to be replicated by any company that found it to be worthwhile. It also isn¶t nonsubstitutable. Other methods can be used to efficiently get computer technology to their end users. Lastly, it is not immobile. It is a system that can be understood and applied worldwide. Consequently, Dell¶s efficient supply chain gave it merely a temporary competitive advantage that has been largely eroded today.


Seeking Alpha. (2007). Dell: The Problems Began In China . Available: http://seekingalpha.com/article/25861-dell-the-problems-began-in-china. Last accessed 1 March 2012. 14 Ibid.


Robust Competition
Dell faces competition worldwide, but its target market and market share in the United States is being stripped away by Hewlett-Packard, Dell¶s biggest rival. ³The reason why is simple: HP is a U.S.-based firm with the goal of targeting the same companies as Dell. So far, HP has been far more successful´15. In addition to HP, Dell is facing an extremely difficult competitor in Apple Inc. which is unquestionably dominating the consumer electronics industry.

Over-diversification and the Need to Focus
Dell has entered several information technology markets. In many of these markets, however, Dell is struggling to compete. Dell needs to consider downscoping, or reducing its business to its core competencies ± what it does best. Eliminating the product categories and segments in which Dell is struggling to compete will allow it to focus its efforts on computers. ³After all, computers were how Dell became the company that it is today. And it's arguably the product that it understands best. By focusing its efforts there, Dell can go back to its roots, deliver a best-in-class product, and then worry about other markets´16. Michael Porter proposed that there are four different successful generic strategies that a company can utilize to achieve competitive advantage. They are broad differentiation, narrow differentiation, broad cost leadership, and narrow cost leadership. He believed that a firm needed to choose one of these four strategies and not pursue
Reisinger, Don. (2010). Dell`s Strategy Challenge: 10 Things We Don`t Get About Dell. Available: http://www.channelinsider.com/c/a/Dell/Dells-Strategy-Challenge-10-Things-We-Dont-Get-About-Dell17673/. Last accessed 1 March 2012. 16 Ibid.


multiple, emphasizing that a firm would be ³stuck in the middle´ if it attempted to mix strategies such that it would not achieve competitive advantage. While this ³stuck in the middle´ theory of Porter¶s has been proven to not apply in all cases, it does appear to have some merit with Dell. One article notes: ³Dell needs to decide if it wants to compete on price or on value. In the tech industry, there are two types of companies: those who are capable of beating the competition with cheaper prices and those that deliver a superior product for a premium price. Dell is neither. Currently, its computers and accessories are not premium products offered at a premium price. And although it still makes fine products, it's not beating the competition on price. Dell is decidedly middle-of-the-road. That's not a good place to be for Dell´17.

Ineffective and Unethical Leadership
The Securities and Exchange Commission (SEC) settled with Michael Dell on July 22, 2010 on charges of repeatedly "failing to disclose material information to investors and using fraudulent accounting to make it appear falsely that the company was consistently meeting Wall Street earnings targets and reducing its operating expenses"18. Dell agreed to pay $104 million in total, $100 million of which would come from the company and $4 million from Michael Dell personally; however, six other Dell employees, including the former chief executive officer and chief financial officer, were either part of the settlement or have been sued by the SEC19.

17 18

Ibid. Hess, Edward. (2010). Stark Lessons From The Dell Fraud Case. Available: http://www.forbes.com/2010/10/13/michael-dell-fraud-leadership-governance-sec.html. Last accessed 1 March 2012. 19 Ibid.


The SEC made the following charges against Dell: for 20 straight quarters Dell would have missed consensus quarterly earnings estimates if it were not for payments from Intel, which Dell had specifically asked for; between the fiscal years of 2003 and 2007, Intel paid Dell over $4 billion in total; Dell¶s chairman was asking for and receiving the money from Intel so it could not only make its quarterly earnings estimates but also keep its stock price high; and ³Dell consistently misrepresented how it has generated consistent growth numbers resulting in illusory stock values that made possible Michael Dell's astronomical stock option gains´20. The above charges levied by the SEC were not inconsequential. They made an impact beyond just the $104 million dollars Dell needed to pay as a result being that they were indicative of a profound level of dishonesty and deceit. The board of directors didn¶t handle it well either. The board did not take back Michael Dell¶s stock option profits attributable to the fraudulent accounting, and the board did not elect an independent chairman for management oversight purposes21. A month after the date of the settlement, one quarter of Dell¶s shareholders refused to reelect Michael Dell as chairman of the board22. If a significant amount of shareholders don¶t want to reelect Michael Dell as chairman of the board, then it is pretty clear there is some sort of underlying problem. Shareholders are innately selfish ± they want what is best for them. What¶s best for them is what¶s best for the company: if the stock price goes up, they are happy; if the stock price goes up, it is good for Dell. Even if Michael Dell actually has the skills to be an effective leader, it is difficult for him succeed, and
Ibid. Ibid. 22 Wharton Business School. (2010). Dell's Diversification Strategy: 'A Day Late and a Dollar Short?'. Available: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2584. Last accessed 1 March 2012.
21 20


ultimately for his company to succeed, if the shareholders don¶t perceive his effectiveness.

Five Forces and the Personal Computer Industry
The truth of the matter is that, as it has been covered up to this point, Dell does not operate in a vacuum: having a clear understanding of the industry dynamics in which the firm develops its activities is crucial to the construction of an effective strategy for its future23. With this task in mind, this section attempts to determine how much bargaining power each of the so-called Five Forces have on the Dell Corporation. It is important to indicate that the relevant market for this introspection is that for which Dell¶s products provide a service solution; in other words, there is no intent at limiting the discussion to computers alone, but to expand it to goods that are perceived as relevant to the comprehension of the strategic dynamic present at the moment.

Entry When it comes to determining the threat that new participants represent to the market, two factors immediately come to the forefront. The first one is that in reality, setting up a small firm that deals with building computers in a customized way is not that hard; in fact, Dell was founded in a similar context, and that hasn¶t changed much. Any individual can go out there and build a PC given the adequate technical knowledge that
Hitt, Michael A. and R. Duane: Hoskisson, Robert E. Ireland. Strategic Management: Competitiveness and Globalization - Concepts & Cases. Mason, OH: South-Western Cengage Learning, 2008.


is so easy to come by at this time. However, this type of small operation is not where Dell is situated. Size and scale are the two keywords that present the second factor of relevance. For an entrant to become a threat to the incumbent firms (not only Dell), it would require a game plan that allows it to achieve a large size and production capability very quickly. Also, firsthand knowledge of how to set up a logistics channel that allows lowering manufacturing costs is not a trivial matter. It seems rather unlikely that a new entrant would be able to threaten the establishment in this market in any sizable way anytime soon. It would require a groundbreaking innovation to make it feasible. For these reasons, we believe that Dell has a big bargaining advantage in relation to potential entrants to the market; the barriers of entry to overcome are just too high.

Suppliers As a general rule, the bigger a company is, the better bargaining position it holds when it comes to the suppliers for its inputs24. Dell is not a special case: it is a large firm that, with the exception of a few components of its end products, has many viable suppliers attempting to score a big deal by partnering with it. Dell should enjoy a considerable bargaining power with its suppliers.

Hill, Charles & Jones Gareth. 2009. Strategic Management Theory: An Integrated Approach. South Western College



Customers The firms in this industry have to face the fact that customers have many choices to buy from when it comes to this type of good. Whether it be due to price or to a particular niche specification, customers hold the upper hand. Customers, therefore, possess a large bargaining power against Dell and its competitors, putting these firms in a weak position to dictate terms.

Rivalry As it has been hinted at thus far, this market already has a large penetration, making it vital for the different players to attempt to steal market share from their competitors in order to grow. Dell has not been able to competitively play this game for some time now, consistently losing market share. It is neither competing well on price nor is it competing well on quality. It seems appropriate to conclude that due to the extremely competitive focus of the industry and Dell¶s lack of progress at gaining ground in relation to its rivals, the firm¶s bargaining power when it comes to its competitors is low.

Substitutes This is where the clear definition of the target market pays off for the analysis. For many years, computers, whether this meant laptops or desktop computers, constituted the only realistic alternative for businesses and individuals to considerably increase their productivity. However, with the inception of the smartphone, some functions that were up to that point exclusive to the realm of computers were now accessible through these devices. Nonetheless the dramatic challenge to the status

quo takes place with the successful introduction of Apple¶s iPad in April of 2010. The rapid adoption of the device, especially in the business environment, has thrown the industry in which Dell finds itself into chaos. Computer sales have plunged considerably in deference to rapid tablet sales, which could be considered as a major schism and a coming of a critical shift in the industry of Schumpeterian creative destruction magnitude.25 The reality is that it is too soon to know for sure if tablets will rise to eventual supremacy, however there is certainty regarding the standing of the battle for the tablet crown. Apple managed to exercise its first mover advantage with astonishing results, essentially shell shocking its would-be competitors. Its mobile operating system, exclusive to their iPads, command the market share of that industry segment as it can be observed by the following figure:


Diamond, Arthur. Schumpeter¶s Creative Destruction: A Review of the Evidence. University of Nebraska Omaha. http://cba.unomaha.edu/faculty/adiamond/web/diamondpdfs/schumpevidence06.pdf. 26 IDC. http://www.idc.com/



Android based tablets have been ineffective so far in denting Apple¶s lead in any significant way; to make matters worse, there are a multitude of offerings within the Android environment, out of which Dell has three offerings, none of which have done very well. To summarize, when it comes to substitutes, it seems that Dell¶s industry at large is going through a major shift that represents a significant loss of bargaining power to potential substitutes, in which the firm¶s main line of business is located. This is a significant negative force for Dell¶s aspirations.

Business-Level Strategies Within the Personal Computer Industry

Dell became the market leader in the 1990¶s pursuing a ³low-cost strategy while simultaneously satisfying customer needs´27. This was a broad-based, integrated business level strategy. Other competitors had different approaches. Most, such as HP28 and Acer29, followed a broad, cost leadership strategy. Apple pursued a

Hitt, Michael A. and R. Duane: Hoskisson, Robert E. Ireland. Strategic Management: Competitiveness and Globalization - Concepts & Cases. Mason, OH: South-Western Cengage Learning, 2008. 28 Seth, Rorik. http://rorikseth.blogspot.com/2010/04/chapter-4-business-level-strategy.html. 6 April 2010.



differentiation strategy30. Throughout the 1980¶s and early 1990¶s, Apple appealed mostly to techies and artists, but starting in the late 1990¶s it started moving towards a broader market by advertising more to college students. Sony had a more broad cost leadership strategy, but has been ³now targeting business customers´31. This was perhaps a reaction to the presence of so many competitors in the broad, cost-leadership sphere and the need to find a niche that they could dominate. So while Apple moves from a focused to a broad strategy, Sony has taken an opposite approach. What has emerged over time is a business level strategy matrix where competitors have been moving relative to each other in an attempt to establish their markets. Dell¶s movements have been part of its decline in performance. Eventually Dell focused more on ³cost reduction through its supply chain´32. The objective was to increase operational effectiveness in an area they had already dominated. However, HP increased market share because it had ³learned how to manage its supply chain to lower costs«But it also provided a broader portfolio of goods and services that better satisfied customer needs´33. Because HP had already improved the operational effectiveness in its supply-chain, it was able to concentrate on increasing differentiation that appealed to customers. Dell¶s shift of focus prevented it from taking steps to protect the differentiation side of its strategy. Firms earn above
Hitt, Michael A., Duane R. Hoskisson and Robert E. Ireland. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 4: Business-Level Strategy. San Jose, CA: San Jose State University College of Business, 2011. PowerPoint presentation. 30 Iliev, Valentin, Andreas Lindinger and Guenther Poettler. Apple Computer Inc. Strategic Audit. Class Report. Dublin, Ireland: Dublin Institue of Technology, 2004. PDF. 31 Billups, Scott, et al. Computer Industry Analysis. Sacramento: California State University - Sacramento, 2006. PowerPoint presentation. 32 Hitt, Michael A. and R. Duane: Hoskisson, Robert E. Ireland. Strategic Management: Competitiveness and Globalization - Concepts & Cases. Mason, OH: South-Western Cengage Learning, 2008. 33 Ibid.


average returns when they create value for their customers. Dell¶s supply-chain cost reduction lead to lower prices, but this was less visible when HP already had exceeded in its low cost strategy. What was more visible to customers was HP¶s product diversification, which would explain why HP gained market-share over Dell. One method Dell has used to earn back differentiation is through acquisition. This is especially true with their purchase of Alienware. Alienware was founded in 1996 and specializes in customizable personal computers for gaming enthusiasts, a very focused differentiation strategy34. Dell, who had been trying to compete in the same market, made a horizontal acquisition of Alienware in 2006. This has allowed them to cater to this market without having to devote the resources and sacrifice the low-cost strategy. Another benefit is that Dell has obtained a unit with an entrepreneurial mindset, keeping the original management team. Alienware¶s autonomy allows it to respond to its customers¶ needs more quickly than Dell could alone. The success of the acquisition is due in part to both organizations¶ desire to customize products for the customer. It has allowed Dell to enter a focused market quickly. However, if Dell makes more acquisitions, then it might become a substitute for organic growth and distract management from solving issues in its core business.


Smith, M.S. Bright Hub. 11 May 2011. http://www.brighthub.com/computing/hardware/articles/68645.aspx.


Strengths, Weaknesses, Opportunities, and Threats for Dell
Strengths One of the greatest strengths of Dell is its operating methods. Dell operates on the customer focused direct business model35. It believes in maintaining direct contact with its customers and the model enables the company to offer a direct relationship with customers. Their strategic method provides for internet and telephone purchasing. Since the market is becoming more educated, and more than ever individuals are wanting a product that can target their specific needs, this model allows consumers to fully customize their laptops. Dell made it possible for each buyer to order directly from the factory36. So a customer selects a generic PC model and then adds items and upgrades until the PC is kitted out to the customer¶s own specification. In addition to this customization, this model has a remarkably low operating cost relative to revenue because it cuts out the retailer and supplies directly to the customers, and it also provides a fast delivery37. Customers place their orders either by telephone or through the website and the customized product reaches their doorstep within seven days. Components are made by suppliers and laptops are assembled using relatively cheap labor. The assembled products are directly shipped from the warehouses of the company to the customers. By contacting customer service, customers can even track their delivery.


GlobalData. "Dell Inc. - Financial and Strategic Analysis Review." 2011. PDF. Ibid. 37 Ibid.


Moreover, the company can get direct feedback from customers by this operating model38. The feedback from customers helps the company in developing and refining Dell¶s products and marketing programs for specific customer groups. Dell also uses information technology to capture data on its loyal consumers. Dell also has a strong product portfolio and a wide range of IT hardware products, making it a leader in this market39. Dell is not only one of the world¶s biggest laptop producers, but also produces mini net books, desktops, keyboards, mouse(s), and monitors. It is a distributor of toners, GPS products, mouse(s), digital cameras, gaming consoles, mobile phones, PDAs, televisions, etc. It is also a third-party vendor of operating systems, besides selling software solutions including anti-virus suite and Internet security ware. In addition, Dell provides services to its customers including configuration, installation, and maintenance services. One of Dell¶s strengths in targeting the business executive category is that over half of all sales revenue comes from large businesses and government organizations40. Thus, Dell has good relationships with several large firms. In turn, these companies pass the relationship on through their employees by providing Dell products to them. Therefore, Dell gains an extensive base of users.

Weaknesses One of the Dell¶s biggest weaknesses is attracting the college student segment of the market41. Its marketing strategy focusing on the corporate and government

Ibid. Ibid. 40 Ibid. 41 Ibid.



customers made it less able to build relationships with educational institutions. Since many students purchase their computers through their schools, Dell cannot take advantage of this market. Another weakness is that Dell is a computer maker, not a manufacturer. It just simply buys components from different manufactures42. Though Dell can focus on marketing and logistics by this business operation, the company is reliant upon a few large suppliers and is unable to switch suppliers. Although the direct model provides Dell many advantages, Dell¶s greatest weakness is that buyers cannot physically touch or see the product they want to purchase43. Dell lacks solid retailer relationship due to their operating model. Customers cannot go to retailers because Dell does not use distribution channels. They cannot personally examine before purchasing. Additionally, buyers may not be willing to wait the few days it takes for their computers to be delivered.

Opportunities Dell focuses on acquisitions that complement its existing business44. In April 2011, Dell signed an agreement to acquire Dell Financial Services Canada Ltd., a CIT Vendor Finance and Dell partnership45. Under the agreement the company acquires CIT Vendor Finance which finances these related assets, sales and servicing functions in Europe; these assets will ultimately enable global expansion of Dell¶s direct finance model. Last year, Dell also acquired Compellent Technologies, Inc. and SecureWorks

Ibid. Ibid. 44 Ibid. 45 Ibid.



Inc. The acquisition will allow Dell to easily enter a new market and give the company industry±leading capabilities. The company focuses on minimizing its cost and is working on selling low±cost, low±price computers to PC retailers in the United States46. The computers are unbranded and should not be recognized as being Dell when the consumer makes a purchase. Rebranding for retailers, although a departure for Dell, gives the company new market segments to attack with the associated marketing costs. Computers are becoming a necessity now. They are being purchased and used more than ever before. The market for laptops is growing much faster than that of desktop computers47. This is a good opportunity for Dell¶s laptop business to grow. Customers are getting more and more educated. The number of second time buyers is growing. Consumers who have purchased computers in the past know what they want. Dell¶s model can provide consumers with fully personalized computers compared to other computer makers.

Threats Competition is intense in a shrinking IT hardware market. Dell competes with companies such as IBM, HP and Apple, which enjoy significant market position and financial strengths. With so many market players, companies compete in terms of pricing48. This could have an impact on its margin. What is worse, the price difference between brands is getting smaller all the time. Other companies are finding ways to

Ibid. Ibid. 48 Ibid.



combat the low costs of Dell, and they pass savings to their customers. As a result, Dell may lose its low cost strength. Another serious threat is that the growth rate of computer industry is slowing49. The global economic slowdown could impact the business operations of the company. Though the global economy began to recover in 2010, fears of a sovereign debt crisis have surfaced in some European countries which could lead to increasing deficit and debt. Even now, Greece and Italy have serious financial problems. If the market slows, competition for market share would intensify. If Dell cannot differentiate its brand from competitors, it will be very hard for it maintain any kind of significant market share.

Path to a Sustainable Competitive Advantage
For Dell to be able to have a sustainable competitive advantage, they will have to address the problems that have lead to their market decline. Personal computers are a fast-cycle market. As such, sustainable competitive advantages are quickly eroded, if they can be found at all. Dell¶s well-tuned supply chain was copied by competitors such as Acer50 and HP51. This has hurt the cost leadership portion of their business level strategy. Industry-wide mass customization52 has duplicated Dell¶s pioneering efforts. Therefore the firm¶s differentiation has suffered. As such, the company¶s integrated

49 50


Hitt, Michael A., Duane R. Hoskisson and Robert E. Ireland. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 4: Business-Level Strategy. San Jose, CA: San Jose State University College of Business, 2011. PowerPoint presentation. 51 The College of St. Scholastica. manalac.com/dell_rethink.pdf. n.d. PDF. 52 Billups, Scott, et al. Computer Industry Analysis. Sacramento: California State University - Sacramento, 2006. PowerPoint presentation.


business-level strategy has left them without a strong association with either strategy in the customers¶ minds. The firm will have to decide which business-level strategy works best for them. The best choice for a business-level strategy is one that leverages the firm¶s strengths into a competitive advantage. Since Dell already has a large variety of products53, it would make sense that they would lean more on a differentiation strategy. Further proof of differentiation¶s power over cost leadership within the computer industry is Alienware¶s performance. It has remained successful even after the acquisition by continuing to focus on personal computers designed for the gamer niche market54. The switch in business-level strategy would also address the problem of focusing too much on supply chain efficiency. Although efficiencies lower costs, customers may not acknowledge a resulting price reduction. Consumers looking for the most economic option have a crowded field of competitors to choose from. However, those customers who are willing to pay a premium for a specialized computer notice differentiation more. The issue then is to find the differentiation that will earn the firm above average returns. Having the right kind of differentiation is just as important as finding the right business-level strategy. This is especially true in Dell¶s case, where one of their problems has been over-diversification, and yet one of their strengths is a well-rounded product portfolio. The solution then is to downscope the firm¶s activities to those that are most profitable. Dell has already seen how this might work. Its subsidiary, Alienware, is successful because it designs computers for gamers, by gamers. There are other niches that could be exploited as well, such as music producers, graphic

GlobalData. "Dell Inc. - Financial and Strategic Analysis Review." 2011. PDF. Smith, M.S. Bright Hub. 11 May 2011. http://www.brighthub.com/computing/hardware/articles/68645.aspx.


artists, and researchers. Dell could use it extensive industry relationships to bring together the right hardware and software components market segments want. These business units would need to be led by experts in those fields, not only because they better know the needs and desires for those niches, but also to address Dell¶s leadership issues. This could be further entrenched by giving leadership within the subsidiaries ample managerial discretion to make decisions in the best interest of those units. Another benefit of diversification through separate units is that if one of the subsidiaries fails, then it could be closed without draining resources from the more profitable sub-organizations. Only by finding those market segments that will provide above average returns will Dell be able to be an industry leader once again. The subsidiaries will need protection though, or they will only be copied in the fast-cycle personal computer industry. They will be able to build some customer loyalty, but even that is erodible. Customers will need more of a reason to choose one of Dell¶s specialized holdings over an competitor. Therefore Dell should offer upgrade insurance that is specific to Dell products to ensure further consumption. This allows for additional revenue for protection of the customer¶s investment and incentive for them to continue to return in the future. The operation would include the customer returning their machine. Dell could then refurbish the computers to sell as ³pre-owned´ to economically strapped market segments. That way they could possibly receive multiple streams of revenue for the same machine.


The personal computer industry has seen explosive growth followed by decline thanks to newer generations of technology. As technology continues to improve, computing will become more specialized. While there will always be a demand for hardware and software to manifest technology, their forms and functions will continually change. Although being a personal computer company was very modern at the end of the twentieth century, at the beginning of the twenty-first it is increasingly becoming antiquated. The only hope for Dell in the long-run is to transition from a personal computer maker to a technological solutions provider.


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