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Dell: Selling Directly, Globally.

Current Situation: Dell was established in 1985 and was into its fifteenth year of operation and increased from a US $6.2 billion based on U.S. market to a U.S. $21.7 billion global business in 1999. The success of Dell has contributed to its business-to-customer model, which is revolution to PC industry. Dell Computer Corporation is currently occupying the second position among the US PC vendors with a market share of 14.3% in terms of number of shipments and Dell is also second in worldwide PC shipments with a market share of 9.1%. This is extremely good considering the competitiveness in the market and the strength of the other leading competitors. (IBM, Compaq, Hewlett-Packard) Dell computers rise from humble beginnings in 1985 to its current strong position is mainly attributed to Dells direct business-to-customer model and emphasis on catering to customer specific requirements. In the first quarter of 1997, Dell reached U.S. $1million by on-line selling, US$30million in a month, US $11billion per annum. Dell tried to target its business by 50%on-line in 2000. Although Dell has been successfully growing in several markets, it still has some regions that Dell hasnt reached such as China. Dell was top 7 in China PC market in September 1999, Dell tried to get 10 percent of its growth by China market in 2002, which might give Dell a chance to get into top 2 in China market. Dells main strategic intent and the objective is to become Chinas second ranking PC seller as Chinese market is projected to be the second largest PC market in the world. Dell wants to achieve 10% of global sales through the Chinese market and 50% Asia pacific sales to account from China. Dell also has an objective of achieving 50% of sales through the Internet. The companys main policy is to deal directly with the customers by using the Dell direct model. Michael Dell-CEO is responsible for most of the strategic decisions. However, these China objectives are seriously challenged in many ways. Currently Dell computer is ranked only seventh in China. The Direct Model has not proved all that effective in china and there are serious issues to consider when using the direct model in China. Generally Chinese customers prefer to see the product before they make a decision to purchase. Even though the Internet usage is growing in China, the numbers of subscribers are not as large as the U.S. and the likelihood of purchasing over the Internet is also limited. Therefore, Dells main marketing tool and their core competence is seriously challenged in China. Other issues such as government regulations, lack of trained staff, inadequate telecommunication facilities and transportation infrastructure, unavailability of parts also adds to the problems Dell has to face in China.

The problem facing Dell is not internal, but external. The question here is whether or not the Chinese market is ready for on-line sales given the restrictions in the Chinese economy. And whether to change its direct model and its distribution system. External Environment: General Environment- China being the most populated country in the world and the key potential increase in the PC market as a result of the large population is a key Demographic issue Dell should consider. Chinese PC market is expected to be the second largest in the world by the year 2004. Increase in income levels as a result of economic development in the country also has the potential to positively affect Dells sales. Politically there are draw backs, such as government regulations, unfavorable taxes, trade policies and potential political instability in China are serious issues. In the technological segment, application of knowledge and R&D development in China wont be as effective as USA and other developed countries. Rapid growth and expansion is necessary if a company is to survive. Dell chose growth and expansion from three aspects: target of a different market segment, consider additional product attributes to existing customers and expand globally beyond the US and thus diversify. The growth entered on new customers, markets, products and services. Dells entry to china had the following shortcomings (challenges) Market conditions: (only large companies and government were the potential customers since retail buyers only accounted for 10% of sales.) Low personal savings: (the price of a PC was the equivalent of two years of a personal savings.) Human resources issues: (Chinese managers were becoming more and more tech-savvy on their own. Political/legal issues: (software piracy in China; Microsoft estimated that 95% of the software in Chinese corporations was stolen. China is nationalistic while US is democratic. China made its public intention to protect domestic industries. Internet users in China had to register with the police.) Lack or inadequate access to credit: (In China, credit was only available to large companies and people of high social standing.) In summary, there remained tensions between the immense economic opportunities in China and the constraints on business activities. Despite these constraints China is predicted to have the largest growth in the world in many aspects (economic, demographic, etc ;). Industry Environment-The rivalry among competing firms are very intense. Worlds leading PC companies along with leading Chinese makers are competing in China.

Compaq, IBM, Hewlett-Packard and Legend are the main competitors. Possibilities of threat of new local entrants are also there as the Chinese government policies favor local manufacturers. New local manufacturers might consider taking advantage of the rapidly increasing market and the favorable local policies to enter the market. Bargaining power of the suppliers is also high as Dells direct model is based on the Just-in time system. Therefore, the supplier holds a major key in this process and in the value chain. Bargaining power of buyers is also high. Buyers have a lot of manufacturers to choose from and they are choosing a product in a rapidly evolving industry. The manufacturer will have to be up to date with the technology advances to successfully cater to demanding customers. Customer has the ability to demand new features with the advances in technology. There are no substitutes for computers. The large population in China and the increase in usage of computers and the Internet are key issues for Dell to consider. Chinese PC market is expected to be the second largest in the world by the year 2004. If this is properly exploited, the opportunities are tremendous. Therefore, the large population, increase in PC sales and the increase in Internet usage in China are the main opportunities for Dell. The main threats to consider are intense rivalry among competitors, non-accessibility of the Internet and the reluctance buy over the Internet and the phone by Chinese customers, government policies and the political situation. These issues, Dell will have to seriously consider being successful in China. Internal Environment: Marketing Dell currently markets to a customer base ranging from large corporations to home and small businesses both in the USA and overseas. The sales approach Dell has adopted is a direct selling to customer approach by the phone or the Internet (the direct model). This approach has eliminated the middle person in the sale (no distributors). Sales figures have shown an increasing trend both domestically and internationally. From 1998 to 1999 the sales figures have risen from 12,327 million to 18,243 million. These results prove that direct selling has given Dell a competitive advantage. Even periods before that the trend was an increasing trend. This proves that the marketing strategy has worked in the USA and in some parts of the world. However, the same cannot be said about be said about China. Direct selling approach hasnt worked as well as Dell would have wanted to in China even though the target market is almost similar (large corps, medium companies and homes and small businesses). Finance overall picture looks good as net income kept on increasing over the years for the whole company. Net Income increased from 944 to 1460 millions from 1998 to 1999. This is mainly due to the cost achieved by the Just in-time assembly system and the direct model.

Dell can boast of many Tangible and Intangible resources both in U.S. operations and in some overseas operations. As for tangible resources, Dell is very strong in financial resources (as result of good financial performance), organizational resources and technological resources (technology based marketing and customer serviceInternet, telephone). Intangible resources include human resourcesknowledgeable staff, innovation resources- one of the first to use full scale technology based marketing via telephone and internet, and reputation resources. The company with the above resources has the capability to use direct model effectively. The technological innovativeness coupled with the capable well trained human resources backed by good financial resources can be used very effectively to do direct marketing and customer services efficiently. This has proven to have given Dell a competitive advantage. Dells main strength is customer satisfaction by providing a faster efficient service. Looking at the value chain too we can see that both support activities and primary activities have created value for Dell. In the technological development side Dell has led the way, has added value to the product. In the primary activities, through the Just-in time system, inbound logistics and operations have added tremendous value. The Internet service and marketing and the telephone service and marketing have added value to Dell products. Therefore, we can clearly see that the direct model- using Internet and the telephone (marketing directly to customers) has been the core competence for Dell. However, this core competence (direct model) that had worked well in the USA and some countries hasnt worked well for Dell in China. The lack of preference for buying via the Internet and the telephone has put Dells competitive advantage in other countries to serious test in China. Dell China also lacks the human resources to carry out telephone and Internet direct selling and to do customer service. Therefore, this resource is limited in China compared to other places. Dell doesnt have a local partner as well. Just-in time model too might not work very effectively in China because of the lack of supplier reliability. Also, others (competitors) have started to copy Dell direct methods of marketing and servicing. Even though, financial resources are strength of Dell, the weaknesses mentioned above are serious issues.

Strategic Issues: Main strategic issues are; How to develop the Chinese market to meet company objectives? (Recall the objectives by 2002 were to achieve 50% of business in each region through on-line sales and for the Chinese market to generate 10% of global sales.)

Whether to continue promoting the on-line selling approach with the current target segments or expand these? Whether to change its direct model and its distribution system? Whether or not Dell should build Multiple-Channel Systems: How to develop the on-line business in China given the restrictions in the environment? (Ex: poor financial system of personal credit, government regulation of on-line users. Little purchasing power of individual Chinese consumers Some other issues to consider in the external environment are large population in China and the rapidly increasing PC and Internet usage in China. Dell should exploit this opportunity while dealing with the threat of intense competitiveness among competitors and the bargaining power of buyers. Internally, Dell will have to deal with the lack of trained staff to carry out Internet and telephone marketing while dealing with Chinese PC buying preferences. The China strategy should be to exploit the opportunities and strengths (large market and financial resources), while countering weaknesses and threats. The biggest difference between Chinese customers and US is the purchasing behavior. In China, when people purchase valuable products, they prefer to view the real thing before purchase. If Dell can educate customer to get used to on-line purchasing, Direct-model could be an important advantage in developing market share. For success in China market, in a short run Dell has to focus on the middle class and corporate customers. Alternatives: Dell is currently following a cost leadership strategy, multiple point (country) strategy. Dell provides build-to order manufacturing and mass customization. Dells three golden rules (disclaim inventory, listen to customers needs and never sell directly) were pursued in order to cut operational and functional costs. Just- in time inventory has minimized the inventory maintenance costs and direct selling has cut middleman i.e.; distributor costs, if this strategy is fine tuned to the emerging needs of the new era, then it would have more promising results. ALT: I continues current strategy of targeting corporate accounts. Pros: this strategy has been giving good results. The companys market share increased from 0.7% to 2.3% in one year (1998-99). Cons: by targeting only businesses, Dell might be loosing out in future potential individual customers. Even though they might not have means to purchase its products, capturing this segment now could signify in the long run the difference between being the leader in China or not. ALT: II Continue current strategy of targeting corporate accounts, but develops simultaneously the personal computer segment.

Pros: this strategy will allow Dell to cover the market more exclusively, even though it means that initially it will not see immediate results by selling to individuals. The idea here is that as China develops financial tools ( credit cards for the masses), and as purchasing power increases over time due to the development of the economy, consumers will have more discretionary income in the future. Dell can provide individual consumers with payment options handled by the company. Regarding the limited number of on-line users and purchases made through internet, the initial step for Dell would be to emphasize the direct method with the population and eventually develop the internet sales approach as more and more users gain access. Cons: to develop the individual segment in China will generate additional costs to Dell. Whether or not Dell should build Multiple-Channel Systems: Yes: Cons: All PC vendors competing in China sold through distributors who carried many brands. For example, Compaq had engaged 21 distributors at one point during 1996.Retail buyers only accounted for 10 percent of sales. So, there is a need for traditional channel. It can stop retailers sell Dells computers, which retailers were purchasing direct from Dell and selling systems on to consumers at marked-up prices. Pros: The Internet usage was proliferating. No: Cons: The price of a PC was the equivalent of two years of a persons savings. So, if Dell establishing a traditional channel would increase the cost and price. Immature legal and institutional frameworks that traditional sale would provide Dell with lower risk business. Golden Card project would give a convenience of payment processing. There are many foreign companies in China preferring direct sales. Dell covered over 80 percent of the potential user population that Dell displays its products in major cities. Pros: It was difficult to find experienced direct sales people, because a direct sale was a new profession in China. Asia consumers dont like to buy computers through telephone. They like to see computers before they buy it. Insignificant volume of on-line sales in China and the simplicity of the direct model, it was only a matter of time before the competition would try to beat them in their own game. Recommendations: Alt II is recommended because it will allow Dell to position itself in a wider population segment in the long term, therefore gaining more market share. In order for Dell to gain greater market share, Dell will have to make certain adjustments in the Chinese strategy. Chinese customer preference to buy what they see as opposed ordering, will need to be changed gradually. Since Dell is not willing to market through a third party, Dell should consider marketing through a Dell owned and

managed dealerships to start with (with a Chinese partner perhaps). This will enable to Dell to gain more penetration in to the market while keeping with the policy to sell direct. However, in order to gain from, Just-in time and made to order capability, these dealerships should specialize in delivering orders rather being a bulk seller. Since Dell has massive financial resources, Dell can start on this. The drawback here could be the additional costs associated with forming and operating a dealership. Have a sales force making house calls as well. Also, promote Internet buying among second time buyers. This can be done by encouraging existing customers to get their customer service done on the web and over the phone. This will familiarize Dell customers to Internet and they will feel comfortable to get there services on the net. Therefore, Dells core competence can be utilized even in China if a gradual approach to the Internet and the phone is used. Also, should have rigorous promotions in China about benefits of buying over the Internet and over the phone. This will help to get rid of the fear among Chinese people having good training programs to train Chinese workers would improve human resource problem quite considerably. LUFTHANSA-2000 MAINTAINING CHANGE MANAGEMENT I. RECENT PERFORMANCE Lufthansa is one of the legendary airlines in the world. It was a German state owned aviation company which was borne in 1926. In 1945 it was closed down and re-borne in 1953. The Lufthansa has its network of more than four hundreds subsidiaries with diversified businesses around the world. Its aviation business includes basically six areas: Passenger Business, Logistics, Maintenance, Repair and Overhaul, Catering, Leisure Travel and IT Services. De-regulation in the late 1980 triggered price competition, the slow decision making process, management policies of maintaining a huge fleet of 240 planes have caused huge loses for the company, the gulf war one also hit the Lufthansas profits. Despite the disappointing macroeconomic trend (from 1991 to 1997), Lufthansa has earned an excellent result in 1998-99. This result was made possible by the rigorous capacity and cost management strategy. Indeed, the Star Alliance (consist of 16 members) has become the leading alliance in the airline business in 1997. And due to synergic effects of the alliance Lufthansa achieve higher revenues and reduce costs. In 1991 profit revenue ratio was 3.5 %, it increased up to 11.o % in 1998. The total return on investment was negative 0.7 in 1991 and it increased up to 13 % in 1998. The organization culture, values and beliefs were very

rigid, formal, rule-driven and in flexible. The company had gone though corporate re-structuring; this was through de-centralization of power, and more operational independence to the employees. However, currently Lufthansa is in strategic planning process and its implementation priorities were established systematic, differentiated strategy, and dynamic planning process to achieve the goal. More specifically, it is following differentiation strategy as business level strategy and related diversification strategy as corporate level strategy. Problems & Strategic Issues 1. Intense competition in Airline Industry from the world wide competitors 2. Impact of the September 11 terrorist attacks in the USA emerges Air Traffic Crisis and interrupted the success 3. Efficient infrastructure, the scheduling, planning, and professional use of airport and air space capacity are acquiring growing significance for Lufthansa . 4. Higher operating expenses due to increased sales commission, fluctuation in currency market 5. Airlines flight scheduling, stuffing and fleet maintenance are very difficult and thus, difficult to have economics of scale. II. GENERAL FORCES AND INDUSTRY ENVIRONMENT AND COMPETITIVE

(a) General Environment: The airline industries are highly volatile and related to national and international political and economic conditions. This is true to this Lufthansa, it was affected by World War II and September 11 terrorist attack causes tremendous downturn in this industry. However, the strategic alliance is significant for its future success. (b) Industry environment includes Five forces analysis: Bargaining power of buyers: is relatively high as there are many airline companies and service providers in the market. Bargaining power of suppliers is quite low as the Lufthansa has many suppliers worldwide to choose from

Threat of new entrants: is moderately low as there are many big companies in the airline business and it will be expansive and highly risky for the new entrant in the market. Thus, Lufthansa has better prospects for future market. Rivalry among competing firms: is quite high and intense as there are many airlines companies. Threat of Substitute products: there is new innovation (such as etrain) in the transportation industry, but still threat of substitute products is low. External Environment: The most important external environment factors to consider are (1) what strategy to follow to counter decrease in sales as highly volatile nature of airline market and market demand; (2) Developing new market in the developing countries, especially, those countries are not included in the Lufthansa business network; (3) Identifying new and suitable strategy (such as alliance) for mutual benefit to increase market share and revenue. III, THE INTERNAL ACTIVITIES, CAPABILITIES AND CORE COMPETENCE There are (1) Tangible resources: Lufthansas financial resources and assets (i.e. manufacturing & research facilities and distributorships) and (2) Intangible resources: include the companys ability to innovate, alliances and services and its brand image or reputation. Marketing Approach (Groups Strategy): Lufthansas membership in Star Alliance's strengthened through the accession of total 16 big airlines companies and now it became the world's leading airline grouping. The new dedicated Star Alliance organization with a 100strong full-time staff of its own is accelerating this integration process. Moreover, the companys partnership future policy is reinforced to the further coordination of its joint products and services. Lufthansa Cargo's evolution towards becoming an indispensable element of a global logistics network also made further progress. However, its partners laid the foundation for further vertical integration of their value creation chain. Management: Lufthansa the biggest individual company in the Group and the parent company. The Group Executive Board, with the central functions Chairman, Finance, Human Resources and Passenger Business, directs the activities of the entire Group. Inter-company agreements regulate cooperation within the Group. A Group-wide management body consisting of the Executive Board, the Airline Board of Lufthansa German Airlines and the boards of the major subsidiaries

coordinates business activities and ensures that all decisions take into account the Group's overall interests. In that way, the Group retains its unity and cohesion despite its market-driven, decentralized structure. Finance: With foundation of STAR Alliance, the Lufthansa and the Group's other companies raised their revenue. The significant shares of the Group's individual business segments in external revenue are as follows: Logistics 16.9 per cent, IT Services 1.9 per cent, Passenger Business 67.9 per cent, Maintenance, Repair and Overhaul 7.3 per cent, Ground Services 1.8 per cent and Catering 4.2 per cent.

Capabilities/ core competence and important internal factors: Lufthansa was concentrating on quality development of its HR, to achieve this it started training centers which aimed at developing collective management style, inter-departmental and intradepartmental co-operation. The discussion sessions were very open and fair; the management would give the current situation as is to the employees involved in decision making. However, it has excellent management, reputation; good financial resources and worldwide presence have provided a competitive advantage. IV. THE MOST IMPORTANT INTERNAL & EXTERNAL FACTORS Strength: Lufthansas image, high capacity to innovate Alliances and its experienced Human Resources. Financial resources and worldwide presence has provided Lufthansa a competitive advantage. Weakness: high operating expenses and problems to reach economies of scale. Opportunities: Growth through partnerships and Success through alliances and developing the new market in the developing countries. Threats: threat of substitutes like mass transportations (e-trains, bus and economic issues such as economic down turn and terrorism. Besides, high competition among the airlines companies also another business threats for the Lufthansa. (V) STRATEGIC ISSUES FOR THE COMPANY The company managed to differentiate itself from its competitors by providing excellent services in cabin and has successfully capitalized its brand name. The differentiation strategy is followed by the company in business level strategy and related diversification strategy followed by the company in the corporate level strategy. It is very difficult to have economics of scale in flight scheduling, stuffing and

fleet maintenance. Generally, 65% Seat Load Factor (SLF) attainment is critical for benefiting from economics of scale as well as to obtain 75% of capacity utilization in cargo load. The changeover to the year 2000 entailed no problems for world air transport, and the prospects for our industry brightened further at the beginning of the year. Major competitors began to reduce their excess capacities. Together with the announcement of an overall expansion of capacity in line with market growth, this paved the way for a healthy trend in average yields. The quality of the infrastructure is another key issue, both on the ground and in the air, is increasingly becoming a decisive competitive factor. For Lufthansa, too, the planning, provision and efficient use of airport and air space capacity are therefore acquiring growing significance. Finally, the main Strategic issue in the external environment for Lufthansa is to exploit is to gain market share and Improving Alliance relationship. Alternatives and Recommendation: 1. Lufthansa could have its own operation and subsidiaries in the world wide business. Pros: It will have better control and guarantee of quality and services. Cons: It will be highly expensive for the company and risky. Besides, foreign exchange exposure will be another burden. Creating a separate identity as an individual aviation giant and as a member of alliance group will be tough, the operational part like ticketing, hub sharing, personnel sharing should be differentiated from its flight services, competition between the members should be only limited to the quality of service they provide, and that depends on teach individual members fleet maintenance, and personnel quality. 2. The companys corporate strategy should be intensified further to the continued valuecreating expansion of the alliance. Valueoriented management should guide all its activities. The Lufthansa could have Joint ventures and alliance to achieve its goal. Pros: it will give better infrastructure, economies of scale and collective and individual innovative spirit

among the group members. Thus will help to boost its revenue, increased market share, profit Margin and will help to have a loyal customer base. The cultural factor will play an important role in determining the success of the alliance, there should be openness and more interactions between the personnel of the member groups to allow the employees to know more about the cultural values of each other. Cons: It might have authority problem among the group members. Therefore, management could suffer from weak leadership, low quality and integration problem. Sharing the same customer base is difficult, but Lufthansa has to look-in if it would be more beneficial if it were with Alliance than on its won, one solution is to share revenues basing on the strong hold routs of the individual members I would strongly recommend the no. 2 alternative. Alternative no.1 is difficult, expensive and risky. It indeed, all the way through alliances and joint venture would help them in endeavor overseas and would reduce services and operations cost and gain fastest market access in different countries of the world.