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Mary Ho preparea this case unaer the supervision of Prof. Ali Farhoomana for class aiscussion.

This case is not intenaea to
show effective or ineffective hanaling of aecision or business processes.
· 2006 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproaucea or
transmittea in any form or by any meanselectronic, mechanical, photocopying, recoraing, or otherwise (incluaing the
internet)without the permission of The University of Hong Kong.
Ref. 06/285C


1






ALÌ FARHOOMAND

DELL: OVERCOMING ROADBLOCKS TO
GROWTH


You aont get a big result if you aont challenge people with big goals.
- Kevin Rollins, president and CEO, Dell
1


In spring 2005, Dell, Inc. ('Dell¨), the world`s largest personal computer (PC) maker,
announced a new goal: to reach US$80 billion in annual sales by 2009. The goal was Iairly
ambitious Ior Dell, which at the time had revenues oI about US$49 billion.
2
In an eIIort to
meet its goals, Dell had woven together a broad set oI PC products and services, pushed new
products aggressively, and strengthened its marketing eIIorts globally. Dell planned to use its
direct sales business model to continue growing its PC business in emerging markets, while
also expanding in new product markets Ior printers, Ilat TVs and other consumer electronics
products.

While analysts generally applauded Dell`s eIIorts to diversiIy and move away Irom being a
PC company, they also Ieared that Dell could miss its high-Ilying sales goal. This was
because Dell`s Iinancial perIormance was still heavily dependent on the PC business.
3
At the
heart oI the PC industry`s troubles was a steep drop in prices and sluggish revenue growth.

On August 11
th
2005, Dell saw a 7° slump in stock price aIter it announced its second quarter
revenue oI US$13.4 billion. The revenue Iigure Iell short oI the market estimate oI US$13.7
billion. It was not the kind oI surprise investors had come to expect. For years, Dell had been
recognised as one oI the most outstanding companies in the technology marketIamous Ior
high earnings and surging stock prices. It had consistently outpaced its major competitors,
Hewlett Packard Company (HP) and International Business Machines Corporation (IBM), on
revenue and earnings growth |see Exhibits 1A to 1C|.

1
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.
2
As per Dell`s income statement Ior the Iiscal year ended January 31
st
2005.
3
About 79° oI Dell`s sales in 2004 came Irom desktops and notebook computers.
HKU575
06/285C Dell: Overcoming Roadblocks to Growth


2



Market worries over Dell`s Iuture growth had held down its shares. From the end oI 2004 to
late December 2005, Dell shares were down by about 28°, while those oI HP had soared
more than 36° |see Exhibit 1D|. Dell`s management blamed the earnings shortIall in part on
its over-aggressive pricing strategy. Although Dell had managed to achieve higher unit
shipments, such volume growth did not translate into earnings growth. In spite oI the slump in
share price, president and CEO Kevin Rollins remained conIident oI Dell`s Iuture success. In
November 2005, he issued a warning about the company`s third-quarter Iinancial
perIormance in 2005, but also deIended the company`s unIulIilled ambitions:

[T{he sky is not falling. We failea to meet our own expectations, which were
high . We still have an outrageous track recora. Our moael still works very
well.
4


Given the dip in revenues, investors began to question whether Dell was still the high-Ilying
growth company it used to be. Could Dell bring its growth back on track to realise its bullish
vision by 2009? Could the company capture the opportunities available outside the US where
its presence was younger and its share smaller? As Dell expanded into new product markets,
could it replicate its past success with the direct model and Iind new drivers Ior growth?
The Founding of DeII
Dell was launched by Michael Dell Irom his dormitory room at the University oI Texas at
Austin in 1983. At that time, Michael Dell upgraded IBM-compatible computers and sold
them to local businesses. In 1984, he dropped out oI college and established PCs Limited.
Michael Dell gradually shiIted the company`s Iocus and to assembling its own brand oI PCs
on a built-to-order basis. He changed his company`s name to Dell Computer Corporation in
1987. In June 1988, on Michael Dell`s 23
rd
birthday, the company went public. With an
unprecedented idea in the computer industry, Dell Iound a way to bypass the middleman and
sell PCs directly to customers.
How DeII Made its Name: The Direct ModeI
It was generally recognised that Dell`s direct model had brought about dramatic changes in
the PC industry, thereby disrupting the traditional avenue through which PCs were distributed.
The TraditionaI Distribution ModeI
Computer manuIacturers had traditionally relied on indirect channels Ior distribution and had
a wide variety oI channel partners. The characteristics oI the indirect channels are described
below.

Retail stores: Retail stores included computer product superstores, consumer electronics
superstores and oIIice product superstores. Computer product superstores oIIered a broad
range oI PCs and PC-related products. In consumer electronics superstores, PCs and PC-
related products were only one oI many types oI consumer electronics oIIered.
Salespeople tended to encourage customers to buy more expensive products to earn more
commission. The sales mix oI the third type oI retail store, the oIIice product superstore,
included printers, copiers, Iax machines, telephones, oIIice Iurniture and related supplies.

The above retailers normally took delivery oI computers directly Irom manuIacturers. In
stores, retail displays and sales representatives played an important role in assisting

4
Serwer, A., 'Dell`s MidliIe Crisis¨, Fortune, November 28
th
2005.
06/285C Dell: Overcoming Roadblocks to Growth


3



customers to make selections among products.
5
Large retailers typically carried only a
Iew brands oI computers due to limited retail space.

Distributors: Some large distributors supplied a Iull range oI computer hardware and
soItware to resellers. The resellers were typically small owner-managed Iirms and they
worked with business customers to design, buy, conIigure, install and support computer
networks.
6


Integrated resellers: Some integrated resellers were big enough to purchase directly
Irom manuIacturers. They operated distribution centres, Iielded extensive sales and
service organisations, and in some cases, managed the computer networks oI customers.
7


It normally took Iour to Iive weeks to pass a PC Irom the manuIacturers through the indirect
channels to customers.
8
In general, there was little variation in advertised retail prices across
channels. This was because oI the manuIacturer`s advertised (MAP) clauses inserted by the
manuIacturers into the co-operative advertising contracts with the channel partners. This
clause stipulated that the manuIacturer would not reimburse the reseller Ior co-operative ads
that involved a price below a speciIied level.

Channel partners perIormed various value-added Iunctions Ior computer manuIacturers.
These included breaking bulk orders and shipping merchandise to retail stores; providing
sales assistance, advertising, and aIter-sales customer service and support; managing credit or
collections Irom consumers; and conducting returns processing. All these support services
added to manuIacturers` costs. Besides, manuIacturers had to contribute to co-operative
advertising Iunds. They also provided price protection Ior inventory that became obsolete on
the retail shelI and this resulted in a reimbursement to the retailers. Inventory buy-backs, price
protection and advertising support reduced the margins earned by manuIacturers.
The Direct ModeI
There were a variety oI direct distribution channels. These included:

Direct inbound: This involved a direct-sale transaction that was completed via telesales
or telemarketing methods.
9


Direct outbound: This involved a direct-sale transaction that was completed by the
manuIacturer`s sales Iorce, agents or representatives. Sales in which a manuIacturer
played a signiIicant role in developing the business, but did not directly deliver the
product, were not considered direct outbound.
10


Internet: This involved a sale transaction that was completed by using the internet
protocol standard through a publicly accessible website.
11
The distribution process could
involve some human intervention (internet assisted) or not at all (internet unassisted).


5
Rivkin, J. and Porter, E., 'Matching Dell¨, Harvara Business School Case, June 6
th
1999.
6
Rivkin, J. and Porter, E., 'Matching Dell¨, Harvara Business School Case, June 6
th
1999.
7
Rivkin, J. and Porter, E., 'Matching Dell¨, Harvara Business School Case, June 6
th
1999.
8
Fortuna, S. and Pappachan, P., 'Compaq Reengineers the Channel: Will it be Enough to Slow Dell`s Momentum?¨, Deutsche
Morgan Grenfell Technology Group, June 11
th
1997.
9
Rosenthai, R., 'Dell, HP and IBM`s Sales Channels Ior PCs and x86 Servers: Current Market Share by Sales Channel and
Future Market Growth¨, IDC Research, October 2003.
10
Rosenthai, R., 'Dell, HP and IBM`s Sales Channels Ior PCs and x86 Servers: Current Market Share by Sales Channel and
Future Market Growth¨, IDC Research, October 2003.
11
Rosenthai, R., 'Dell, HP and IBM`s Sales Channels Ior PCs and x86 Servers: Current Market Share by Sales Channel and
Future Market Growth¨, IDC Research, October 2003.
06/285C Dell: Overcoming Roadblocks to Growth


4



Extranet: This involved an electronic transaction that was completed through a
controlled-access (private) website designed to address the requirements oI a speciIic
customer or organisation.
12
To assess their website`s ease oI use, computer companies
could measure the ratio oI internet-assisted to internet-unassisted orders; the lower the
ratio, the easier the site was to use. There could be value in having customers call Ior help
with an order, as service representatives could take the opportunity to up-sell.
13


B2Bi:
14
This channel involved the use oI internet protocol standards (eg, XML) to send or
receive data during the buying process. The transaction was completed by a program that
was integrated directly into a customer`s procurement and/or ERP
15
system.
16


EDI: This channel involved the use oI non-internet protocol standards to electronically
send or receive data during the buying process (eg, Ilat Iile, FTP).
17
The transaction was
completed by a program that was integrated directly into a customer`s procurement
system. Many large companies had been using EDI and were very comIortable with its
capabilities. Rather than replacing it with newer technologies, some large companies had
chosen to extend the capabilities oI their existing EDI networks by using internet
technologies to connect with the IT systems oI smaller suppliers.
18


While most computer makers supplied machines based on orders Irom retailers, distributors
and resellers, Dell sold products via direct distribution channels |see Exhibit 2|. Dell`s direct
model was based on a simple concept: by selling PCs directly to customers, the company
could best understand their needs and provide the most eIIective solutions to meet those
needs.
19
In his book, 'Direct Irom Dell¨, Michael Dell explained this philosophy: 'Dell sells
directly to our customers, deals directly with our suppliers, and communicates directly with
our people, all without the unnecessary and ineIIicient presence oI intermediaries.¨
20


BeIore the launch oI the internet distribution channel, orders came to Dell Irom two major
sources: (1) inbound calls Irom customers who had read Dell`s catalogue or print
advertisement, and (2) orders placed by Dell`s internal sales representatives on behalI oI large
accounts. In June 1994, Dell used the internet to enhance its direct sales model. In its early
stage oI development, Dell`s website (www.dell.com) presented customers with simple
product and price lists. In July 1996, the website began oIIering sophisticated tools that
enabled customers to conIigure and order a computer directly. Customers could obtain
product inIormation, conIigure a computer system, check pricing, place an order and track an
order`s progress online. Through the website, Dell`s services were tailored to the needs oI
diIIerent market segments, which included large commercial accounts, government,
educational institutions, small and medium businesses and home buyers. Dell was the Iirst
computer company to provide a comprehensive online purchasing tool.

12
Rosenthai, R., 'Dell, HP and IBMs Sales Channels Ior PCs and x86 Servers: Current Market Share by Sales Channel and
Future Market Growth¨, IDC Research, October 2003.
13
Rosenthai, R., 'Dell, HP and IBM`s Sales Channels Ior PCs and x86 Servers: Current Market Share by Sales Channel and
Future Market Growth¨, IDC Research, October 2003.
14
B2Bi stands Ior business to business integration.
15
ERP (enterprise resource planning) is an industry term Ior the broad set oI activities supported by multi-module application
soItware that helps a manuIacturer or other business manage the important parts oI its business, including product planning, parts
purchasing, inventory maintenance, interaction with suppliers, providing customer service, and order tracking. ERP can also
include application modules Ior the Iinance and human resources aspects oI a business.
16
Rosenthai, R., 'Dell, HP and IBM`s Sales Channels Ior PCs and x86 Servers: Current Market Share by Sales Channel and
Future Market Growth¨, IDC Research, October 2003.
17
Rosenthai, R., 'Dell, HP and IBM`s Sales Channels Ior PCs and x86 Servers: Current Market Share by Sales Channel and
Future Market Growth¨, IDC Research, October 2003.
18
Rosenthai, R., 'Dell, HP and IBM`s Sales Channels Ior PCs and x86 Servers: Current Market Share by Sales Channel and
Future Market Growth¨, IDC Research, October 2003.
19
Farhoomand, A. and Ng, P. (1999) 'Dell: Selling Directly, Globally¨, Centre Ior Asian Business Cases.
20
Dell, M. and Fredman, C. (1999) Direct from Dell. Strategies that Revolutioni:ea an Inaustry, HarperBusiness: New York.
06/285C Dell: Overcoming Roadblocks to Growth


5




In addition to the publicly accessible website, Dell created 'Premier Pages¨ (ie, customised
extranets) to sell to companies and institutions oI all sizes. These 'Premier Pages¨ were
accessible only by authorised employees oI a speciIic customer, and provided innovative
Iunctions such as paperless purchase orders, approved product conIigurations, pricing, real-
time order tracking, purchase history and account team inIormation. On the relationship side
oI the business, customers may not want daily contact with Dell`s sales representatives;
'Premier Pages¨ could nevertheless give Dell daily presence so that customers could get basic
service support anytime they wanted.

Dell also used B2Bi to increase corporate and institutional sales. 'Dell B2B Direct¨ was a
powerIul B2Bi solution that enabled Premier Page customers to integrate and automate the
exchange oI inIormation between the Premier Dell.com page and customers` back-end
systems. Through this solution, Dell`s customers could integrate their product orders with
their ERP and procurement systems.
DeII's Competencies
Managing Demand and SuppIy

People make proaucts, push them through channel partners ana hope
someone will buy them, theres no [market{ pull. We place customers at the
centre ana nothing starts until we have an oraer.

- Paul Naughton, director oI supply chain planning (EMEA), Dell
21


Dell`s direct distribution model Iacilitated demand and supply management. For Dell, the
supply chain was all about placing the customer at the centre, which allowed visibility oI
actual customer demand. By having direct contact with the market, Dell could respond more
quickly to market changes than its competitors, and could conduct more precise Iorecasts.
With the direct model, Dell could continuously rebalance demand with supply. For example,
it was oIten diIIicult Ior Dell to predict which product Ieatures would be popular in the
market and thereIore which component had to be used. Yet components had long lead times
and they had to be bought according to projections. II demand exceeded supply, Dell worked
with business partners to speed up supply oI components and resources Irom one or more
suppliers.
22
II the issue could not be resolved on the supply side, Dell considered alternatives
on the demand side. For instance, it could adjust prices on product options to boost demand
Ior components that had slow turnover. That was easy Ior Dell to do as it could adjust product
promotions on its website quickly. The approach, which Dell called 'Sell What You Have¨,
allowed Dell to increase sales by steering demand and minimising the costs oI supply
demand mismatches.
23

Dell leveraged its partners by connecting their planning and execution activities with Dell`s
systems.
24
It gathered real-time inIormation about the inventory levels oI suppliers at various
points in the supply chain. Suppliers could also share inIormation with Dell about cost and
capacity Iorecasts, as well as technology inIormation. The inIormation Irom suppliers
Iacilitated Dell`s management oI product price. In return, Dell provided inIormation about

21
Davies, C. (2004) 'The Dell Model¨, Supply Chain Europe, 13(4): 42.
22
Anonymous (2004) 'Dell`s Supply Chain DNA¨, Supply Chain Management Review, 8(7): 20.
23
Kopczak, L. and Johnson, E. (2003) 'The Supply-Chain Management EIIect¨, MIT Sloan Management Review, 44(3): 31.
24
Anonymous (2004) 'Dell`s Supply Chain DNA¨, Supply Chain Management Review, 8(7): 20.
06/285C Dell: Overcoming Roadblocks to Growth


6



market demand, market movements and procurement strategies to its suppliers. Dell`s
projections were prepared by its line oI business marketing department. Apart Irom product
speciIic trends, they presented inIormation about the seasonality in sales. Such projections
were then analysed, and inIormation about the level oI components that had to be purchased
could be generated.

The challenge for us is that we sometimes neea to give the suppliers 90 aays,
yet they neea to get the proauct to us in 3-5 aays. If we haa the bullwhip
effect
25
we woula have masses of inventory all over the place.
- Paul Naughton, director oI supply chain planning (EMEA), Dell
26


Dell evaluated its suppliers on Iour major points: continuity oI supply, e-business
collaboration, low-cost manuIacturing and technology leadership.
27
In exchange Ior building
partnerships and sharing inIormation, Dell set perIormance targets Ior its suppliers. Dell had
quarterly meetings with them to evaluate their perIormance. Dell gave each supplier a
scorecard, which compared it against industry peers on cost, quality, reliability and continuity
oI supply.
28
Dell requested its suppliers to move quickly and to reduce costs. Since Dell had
higher exposure to market volatility than its competitors, its suppliers had to be more Ilexible.
Suppliers who met Dell`s stringent guidelines could secure large volume business and receive
training and assistance in development. By leveraging its partners, Dell could shiIt non-value-
added processes upstream and Iocus on adding value through customisation.
29
Dell did not
add much value by assembling standard components.
30
Instead, this assembly was perIormed
by suppliers.
Managing Inventory and Turnover

Inventory is like fish. The longer you keep it the faster it aeterioratesyou
can literally see the stuff rot.

- Kevin Rollins, president and CEO, Dell
31



We have eliminatea warehouses in our factory. Insteaa we have trucks on one
siae ana customer oraers coming out the other siae.

- Paul Naughton, director oI supply chain planning (EMEA), Dell
32

In 1993, Dell carried 20 to 25 days` worth oI inventory in a network oI warehouses.
33
By
2004, the company had already eliminated all warehouses. Although Dell assembled nearly
80,000 computers every day, it carried no more than 2 hours oI inventory in its Iactories and a
maximum oI about 4 days across its entire operation.
34
To Dell, cutting inventory was a

25
The bullwhip eIIect 'describes a phenomenon that occurs in many supply chains whereby the variability oI demand increases
at each stage oI the supply chain¨. It has been observed by managers in a vast array oI industries, and in every case it has
increased both physical distribution and market mediation costs. From Kopczak, L. and Johnson, E. (2003) 'The Supply-Chain
Management EIIect¨, MIT Sloan Management Review, 44(3): 31.
26
Davies, C. (2004) 'The Dell Model¨, Supply Chain Europe, 13(4): 42.
27
Davies, C. (2004) 'The Dell Model¨, Supply Chain Europe, 13(4): 42.
28
Anonymous (2004) 'Dell`s Supply Chain DNA¨, Supply Chain Management Review, 8(7): 20.
29
Anonymous (2004) 'Dell`s Supply Chain DNA¨, Supply Chain Management Review, 8(7): 20.
30
Anonymous (2004) 'Dell`s Supply Chain DNA¨, Supply Chain Management Review, 8(7): 20.
31
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.
32
Davies, C. (2004) 'The Dell Model¨, Supply Chain Europe, 13(4): 42.
33
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.
34
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.


7



Iinancial imperative as computer components had relatively short product liIecycles. Many
components lost 0.5 to 2° oI their value per week.
35
While some computer companies stuck
to their build-to-stock policy and kept inventory as a hedge against inaccurate Iorecast, Dell
did not need excess stocks to serve as a saIety net. It was determined to maintain its exposure
to Iluctuating demand while keeping minimal supply.

Its a real misconception that more inventory means less shortages . If you
aont have solia processes that monitor aemana ana supply on a real-time,
continuing basis, then I aont care how much inventory youve got.
Invariably, youll have a lot of the wrong stuff ana none of the right stuff. But
when you have basically :ero inventory, its like araining a swampall of the
stumps start to show.

- Dick Hunter, vice-president, America`s manuIacturing operations oI Dell
36


Dell was able to monitor demand and supply on a real-time basis as it had a Iully integrated
value chain that allowed a three-way exchange oI inIormation with its suppliers and
customers. Suppliers could access a Dell internet portal site that enabled them to monitor the
order Ilow and inventory oI their components. When orders were received through direct
channels, a manuIacturing Iacility within Dell would send details oI the components required
to its suppliers. All components were delivered to the manuIacturing sites and products were
shipped out within the shortest time Irame.

Dell also took a regional approach to its supply chain. The company built more oI its products
in the region that the orders came Irom to expedite delivery. In addition, it consolidated
supply such that 80° oI its procurement was Irom around 50 suppliers. A number oI Dell`s
suppliers set up their logistics Iacilities next door to Dell`s Iactories. Their deliveries ensured
that Dell had just enough on-site inventories to cope with the next Iew hours oI orders. By
building to order and arranging just-in-time delivery oI parts Irom suppliers, Dell reduced
inventory cost and eliminated obsolete components.
Managing Logistics
Historically, Dell allowed its suppliers to control logistics decisions (especially air Ireight
expedited shipments). Suppliers were responsible Ior the logistics (including costs and
processes) to get parts into Dell`s manuIacturing sites. They owned the inventory, and iI there
was an increase in demand Ior a certain component, the suppliers would expedite the parts by
air to Dell`s site. This created gaps oI continuity oI supply and increased cost in the supply
chain. The problem was particularly obvious in the Asian market where demand Ior air Ireight
capacity was Iar outpacing what the region`s airports and inIrastructure could handle. Air
transportation networks Ior Dell mostly originated in Asia at its sites in Shanghai, Taiwan,
Singapore and Hong Kong.

Starting in 2001, Dell began working with its suppliers and logistics partners in the region to
aggregate its air Ireight to secure blocks oI space on regularly scheduled Ilights out oI the
Asian market. The tightly scheduled air networks provided advantages in planning. Fred
Montoya, Dell`s IulIilment director, explained how the company optimised air Ireight Ior
supply chain improvement.
37


35
Kapuscinski, R., Zhang, R., Carbonneau, P., Moore, R. and Reeves, B. (2004) 'Inventory Decisions in Dell`s Supply Chain¨,
Interfaces, 23(3): 191-205.
36
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.
37
Anonymous (2005) 'Dell Flies in the Right Direction: Captains oI Supply Chain Optimize Air Capacity Ior Build-to-Order
Model¨, Purchasing, 134(19): 50.


8




We proviae weekly MRP
38
forecasts out to our supply base, which allows
suppliers to ship proaucts to our manufacturing sites . the challenge is
always how quickly we can change transportation to meet aemana . By
aggregating the aemana for air freight across the supply base we not only
gain cost savings, but we gain more information which we can use to better
meet aemanas of customi:ation.

Historically, iI Dell`s demand Iorecast showed 50° 17-inch Ilat panel displays and 50° 19-
inch displays, the supplier would Iill its air shipments with halI and halI.
39
But iI Dell then
saw that it needed more 19-inch displays, the supplier would arrange to expedite them,
creating supply-chain ineIIiciencies. So, instead oI doing that, Dell pre-established lanes and
secured space on planes, so it could better use that space to meet customisation demands.
Substituting space on the planes Ior 19-inch displays instead oI 17-inch displays was much
more eIIicient. In 2005, Dell averaged three 747-sized shipments oI cargo out oI Asia every
day and was rolling a similar strategy out to its ocean shipping to secure capacity that could
be conIigured to meet customer demand.
40


Dell`s capability in logistics management enabled the company to overcome a number oI
challenges. In 2002, a labour crisis created by US dockworkers resulted in the shut down oI
29 ports on the West Coast extending Irom Los Angeles to Seattle.
41
The crisis brought huge
disruptions to supply chains world-wide and blocked cargo ships Irom unloading supplies and
products. Analysts expected that Dell would be especially hard hit when imports oI parts Irom
Asian suppliers were gridlocked. However, the ethos oI speed and Ilexibility that seemed to
put Dell at the mercy oI the crisis also helped it to dodge the worst eIIects oI the labour crisis.

When a labour problem or an earthquake or a SARS epiaemic breaks out,
weve got to react quicker than anyone else. Theres no other choice . We
fust cant tolerate any kina of aelay.

- Dick Hunter, vice-president, America`s manuIacturing operations oI Dell
42


Dell`s relationship with its suppliers, along with its internal collaboration capability, allowed
it to prepare contingency plans and Iind alternative modes oI transport to bring components in
time. Six months beIore the crisis occurred, Dell`s suppliers and its US-based shipping
partners had alerted it to the possibility oI a crisis. Dell then dispatched a team oI logistics
staII to CaliIornia and other ports to work with its logistics networks to design a contingency
plan. The company chartered eighteen 747s Irom UPS, Northwest, China Airlines and other
carriers.
43
A 747 could hold enough parts to manuIacture 10,000 PCs. When the bidding oI the
chartered Ilights grew Iierce, Dell could still keep its costs low as it secured the Ilights early.
Moreover, Dell worked with its suppliers to ensure that its parts were always at the airports in
time to enable its returning charters just enough time to land, reIuel and take oII. The
company was consistently able to get its planes to the US and back to Asia within 33 hours.
44

Dell also had Ireight specialists in every major harbour to ensure that its parts were the last to

38
MRP stands Ior material/manuIacturing resource planning.
39
Anonymous (2005) 'Dell Flies in the Right Direction: Captains oI Supply Chain Optimize Air Capacity Ior Build-to-Order
Model¨, Purchasing, 134(19): 50.
40
Anonymous (2005) 'Dell Flies in the Right direction: Captains oI Supply chain Optimize Air Capacity Ior Build-to-Order
Model¨, Purchasing, 134(19): 50.
41
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.
42
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.
43
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.
44
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.


9



be loaded onto each cargo ship so that they could be unloaded Iirst when the ship arrived in
the US. In the end, Dell survived the crisis with roughly 72 hours oI inventory, and it never
delayed a customer order.
45

Servicing Corporate Customers
Dell always tried to ensure that it did a better job at attaching support to systems going out the
door than its competitors. The more products Dell sold, the more service was going with it.
To set an example Ior his staII, Michael Dell himselI still attended many customer meetings
to ensure the company delivered the right services. He paid great attention to what customers
said and directed his staII to adjust service strategy where necessary.

Dell`s service goal was to meet and exceed its customers` expectations. From its Iour
Enterprise Command Centres in China, Japan, Ireland and the US, Dell could watch Ior
computer and server outages, conduct technical evaluations oI critical situations, and assign
staII to manage crises. That was crucial because Dell promised some corporate customers
their crashed hardware could be restored in as little as two hours. Regardless oI climate or
environment Iluctuations, Dell had to guarantee that the right parts were in right places. The
sense oI urgency and accountability served Dell well. With US$2.31 billion in sales oI
hardware support service Ior corporate customers in 2004, Dell Ior the Iirst time nosed out HP
Ior the top position in the US hardware support market, according to Gartner Inc. HP derived
US$2.2 billion Irom these hardware support services Ior corporate customers.

Dell`s secret oI success was its ability to remain Iocused. Unlike IBM and other competitors,
Dell had avoided the trap oI becoming a repairer or technical consultant Ior any customer that
used mixed-brand services and computers.
46
Instead, Dell`s Enterprise Command Centres
Iocused on servicing customers with Dell products. This meant it only had to stock parts Ior
its own brand, which helped the company minimise costs. Dell endeavoured to Iind ways to
standardise and drive down costs. From parts management to crisis control, Dell ensured that
its services were delivered in the most eIIicient manner.

In July 2005, Dell reported that its services operation grew 35° Irom the year beIoremore
than double Dell`s 16° overall growth and almost Iive times Iaster than the overall services
industry. Just as it did in the computer markets, the company successIully attacked the service
market that was ripe Ior commoditisation. Back in the 1990s, technical buyers typically inked
a slew oI deals with various services companies. In 2005, however, a majority oI buyers
demanded cheaper bundles oI basic services. Although Dell was not alone in going aIter this
market, its share oI the computer business and Iocused operation in services gave it an
unrivalled opportunity to achieve Iurther growth.
Managing Cash and FinanciaI Performance
Dell also excelled at managing cash and at Iundamental Iinancial perIormance. On average,
computer companies paid their suppliers 30 days beIore a PC was shipped to market, bought
and paid Ior by a customer. However, Dell`s build-to-order model oIten enabled it to receive
payment Irom its customers immediatelythrough credit cards, either online or over the
phone. Yet, Dell did not pay suppliers until 36 days aIter it received payment Irom the
customer. By collecting sales beIore making payment to suppliers, Dell could achieve a cash
conversion cycle oI negative 36 days.
47
This also meant that Dell could reduce its need oI
working capital to Iinance daily operations.


45
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.
46
Grow, B., 'Dell: The Action Hero oI Product Support¨, Business Week, August 1
st
2005.
47
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004.


10



Operating margin, not just proIits or growth rates, was the number that Dell cared about most
to ensure long-term proIitability. Dell maintained high operating margins by keeping a close
eye on the monthly balance sheet and proIit and loss statement. The company`s cash Ilow was
careIully tracked by evaluating weekly updates oI days oI inventory, receivables and payables
to achieve an optimal cash conversion cycle. Selling price and overheads were also closely
monitored. In addition, Dell`s top management team expected every Dell manager to know
current and detailed perIormance Iigures. Everyone, Irom the chairman to the Iactory
associates, knew the Iour key measures and actions to take each week. These Iour speciIic
metric categories were quality, productivity, saIety and delivery.
48


Dell spent less on research and development than its major competitors.
49
Its research and
development expenses normally accounted Ior less than 1° oI sales. With net margins higher
than its major competitors, Dell could reduce product prices to grab market share when
necessary. Similarly, it also had the Ilexibility to go Ior proIits instead. Dell could stop cutting
prices, yet remained competitive with competitors` oIIerings. Exhibits 3 and 4 present Dell`s
Iinancial perIormance. Exhibits 1A to 1D provide a comparison oI the key Iinancial statistics
and share price perIormance oI Dell vis-a-vis its competitors.
Strategic Opportunities
Dell had consistently led the pack oI the largest competitors in the computer industry. The
company could not have achieved such success had the trends toward standardisation on
technology not taken place. In the 1990s, Ialling prices in PC components and standardisation
on the Windows operating system and Intel processor technology Iacilitated mass production.
Users became more knowledgeable about PC installation, which Iacilitated the migration
toward direct distribution by the adoption oI standard soItware products like MicrosoIt
applications.
50
As a result oI the technological and market changes, many PC users no longer
required the technical know-how oI the indirect channel during the buying process.

Since the early 2000s, Dell had been moving away Irom being just a PC company. It moved
into the printer, Ilat TV, mobility product, and soItware peripheral markets. Dell was
conIident its direct business model would keep it moving Iorward proIitably, regardless oI
product line. On July 18
th
2003, shareholders oI Dell voted to re-brand the company as Dell
Inc. The decision to drop 'Computer¨ Irom its name reIlected the company`s evolution Irom a
strictly computer hardware company to a diverse supplier oI technology products and services.

The Iundamental shiIt oI Dell`s business model was mainly driven by the slowing growth oI
the computer market. Gartner Inc.
51
Iorecast that world-wide PC unit growth would average
5.7° annually Irom 2006 to 2008, which was approximately halI the average Ior the years
Irom 2003 to 2005.
52
It was projected that PC revenue growth would average 2° annually
Irom 2006 to 2008, which was less than halI the 4.7° average Ior the years Irom 2003 to
2005. Worldwide PC shipments were projected to total 204.6 million units in 2005, a 14.1°
increase Irom 2004, according to a Iorecast by IDC
53
|see Exhibit 5A|. However, the end oI
the replacement cycle was likely to strain viability Ior even the largest PC companies in 2006

48
Breen, B., 'Living in Dell Time¨, Fast Company, November 2004
49
Serwer, A., 'The Education oI Michael Dell¨, Fortune, March 7
th
2005.
50
Su, W., 'Can Anyone Disrupt Dell`s Direct Model?¨, IDC Research, February 2004.
51
Gartner Inc. is the world`s leading provider oI research and analysis about the global inIormation technology industry.
52
'Gartner Says Three oI Top 10 PC Vendors Will Exit the Market by 2007¨, Gartner Inc. Press Release, November 29
th
2004.
53
IDC is the premier global provider oI market intelligence, advisory services, and events Ior the inIormation technology and
telecommunications industries. IDC helps IT proIessionals, business executives, and the investment community make Iact-based
decisions on technology purchases and business strategy. IDC is a subsidiary oI IDG, the world`s leading technology media,
research and events company.


11



and beyond. In the huge but mature US market, sales grew only 3.6° per year between 2000
and 2004.
54
Between 1996 and 1999, PC sales in the US climbed on average 16° annually.
55


Meanwhile, mobile PCs
56
continued to attract more new users as mobile prices Iell and
wireless became more pervasive. A growing number oI users were replacing their old
desktops with more portable mobiles, and this helped to boost mobile PC growth. Gartner
Iorecast that world-wide mobile PC shipments would grow 26.5° in 2005, while desk-based
units would grow only 4.6°. In May 2005, mobile PCs made up just below 30° oI all PC
shipments.
57


As computer companies struggled to maintain growth in a highly competitive market, price
competition would most likely intensiIy. Analysts expected that computer companies would
be Iorced to continue maximising supply chain eIIiciencies and to diIIerentiate on price,
service levels, Ieatures and other characteristics. Computer companies might also attempt to
diversiIy into related markets, such as consumer electronics, to boost margins.
Diversification
Printers
The airect moael always finas its way . The biggest surprise is how fast ana
how quickly customers acceptea ana aaoptea the replenishment of
consumables.
- Tim Peters, general manager oI imaging and printing, Dell
58


In the printer business, manuIacturers typically sold their printers cheap and charged premium
prices Ior printer supplies. Hence, printer supplies, including toner cartridges, were an annuity
to manuIacturers once a printer was sold. They were very proIitable and were a source oI
stable revenue stream. Typically, retailers carried more low-yield cartridges because they
resulted in customers coming back more oIten. ManuIacturers also liked them because they
kept their prices down, thereby helping them to compete better against cheaper re-
manuIactured cartridges. It was observed that high-yield cartridges accounted Ior less than
40° oI cartridges sold in retail stores.

When Dell entered the printer market in March 2003, it aimed at building its installed base oI
printers quickly. Dell`s goal was to establish a well-developed customer base Ior its
consumables, which had high proIit margins. Unlike traditional printer makers, Dell Iocused
on selling high-yield cartridges that were larger and more durable than typical cartridges.
About 85° oI the cartridges Dell sold exclusively through its website were high yield.
59
By
selling cartridges that produced a lower cost per page than traditional cartridges, Dell lowered
the cost oI printing and changed the value propositions Ior consumables.

Dell speciIically targeted it competitor HP with its aggressive pricing strategy. Although HP
remained an undisputed leader in the printing business, its worldwide market share had

54
Serwer, A., 'The Education oI Michael Dell¨, Fortune, March 7
th
2005.
55
Serwer, A., 'The Education oI Michael Dell¨, Fortune, March 7
th
2005.
56
Mobile PC products include: (1) Desktop replacement PCs: 7.5 pounds or greater; (2) Mainstream: weigh greater than 4
pounds but less than 7.5 pounds; (3) Ultraportable PCs: weigh 4 pounds or less; (4) Tablet PCs: equipped with a pen and on-
screen digitiser and are conIigurable into a tablet Iormat regardless oI the weight. Source: Gartner, Asia Pacific PC Market
Quarterly Upaate, May 2005.
57
Gartner Press Release, May 26
th
2005, |www document| http://www.gartner.com/press¸releases/asset¸127812¸11.html
(accessed July 23
rd
2005).
58
Seitz, P., 'PC Leader Dell ShiIts into Printer, TV Mode; Making A Quick Impact¨, Investors Business Daily, July 15
th
2005.
59
Seitz, P., 'PC Leader Dell ShiIts into Printer, TV Mode; Making A Quick Impact¨, Investors Business Daily, July 15
th
2005.


12



already taken a hit. HP`s US market share oI inkjet printers Iell Irom 57.4° in 2003 to 48° at
the end oI 2004, and its US laser printer market share declined Irom 45.7° to 38° in the
same period. HP also Iaced a new array oI challenges as its major competitors, including
Epson, Canon Inc. and Lexmark International Inc., rejuvenated their product lines and ramped
up their sales tactics. The threats posed by these traditional competitors and new rivals like
Dell were worrisome to HP because its printer business supplied roughly a third oI total
revenue and three-quarters oI its overall proIit.

Dell`s printer products had prompted other makers to add more Ieatures Ior the same price.
Dell added photo printing as a standard Ieature to traditional all-in-one printers, Iorcing rivals
to Iollow suit. It also added more Iunctions to its printers including scanning, Iax and copying.
Dell`s printers had a built-in soItware that could place orders Ior ink cartridges automatically
through the internet. Although Dell had outsourced the making oI printers to Lexmark, Fuji
and Kodak, its engineers put a lot oI eIIort into making the machines work seamlessly with
Dell`s products. From 2003 to 2005, Dell picked up market share quickly in the low end oI
the printer business by adopting a growth exaggeration strategy. It continued to leverage its
direct model with a Iocus on low cost printers and consumables. Dell claimed that its inkjet
printers cost 1015° less than HP`s.
60
It also reported that the total cost oI its laser printer,
toner and services was 3040° less expensive that that oI HP`s.
61
By mid-2005, Dell had sold
more than 9 million inkjet and laser printers. This Iigure was still a Iraction oI HP`s share,
which had secured an installed base oI 140 million printers. Nevertheless, a growing base oI
Dell printers meant that Dell could gradually eat into HP`s lucrative business oI selling printer
supplies to existing customers. This would make it more diIIicult Ior HP to utilise earnings
Irom printers to subsidise its barely proIitable computer business.

Meanwhile, Vyomesh Joshi, head oI the printers and PC business at HP, was conIident that
despite price competition, HP`s ability to innovate gave it a signiIicant edge over Dell in the
printer business. He also believed that Dell succeeded in the computer business because it was
commodiIying, while printers were not. As Dell relied on partners to supply intellectual
property, Joshi also believed that its partners would not let it get big.
62


As oI 2005, Dell`s printer business was only slightly proIitable and its customers were mainly
consumers and small companies. Dell ranked eighth in the printer market worldwide, behind
companies such as HP, Samsung, Epson, Oki Data and Xerox.
63
According to IDC, HP
controlled about 45° oI the printer market, well ahead oI Dells 15° share in 2005.
64

However, Dell saw that the printer business as a long-term play. In the short term, Dell aimed
at keeping the pressure on HP with pricing, thereby eroding HP`s operating margins. In the
long term, Dell had to learn how to sell printers independently oI computers and increase
sales in the corporate market, where HP dominated and innovation was important.
65

Flat TVs
The market Ior Ilat-panel TVs grew explosively Irom 2001 to 2005. According to estimates
by the Consumer Electronics Association in the US, more than 4.3 million Ilat-panel TVs
were expected to be sold in the US in 2005. This Iigure was more than 790 times that oI the
54,000 sets sold in 2001.
66
Back in early 2003, Dell had already spotted opportunities in the

60
Tam, P.W., 'HP`s Printer Business Takes a Hit as Rivals Muscle In¨, Wall Street Journal, March 10
th
2005.
61
Tam, P.W., 'HP`s Printer Business Takes a Hit as Rivals Muscle In¨, Wall Street Journal, March 10
th
2005.
62
Serwer, A., 'The Education oI Michael Dell¨, Fortune, March 7
th
2005.
63
Singer, M., 'Dell Targets Overseas Printer Market¨, ZDNet News, September 21
st
2005.
64
KeeIe, B., 'HEWLETT-PACKARD: Printer Giant Updates its lline; Changes Aimed at Upstart Dell¨, Atlanta Journal
Constitution, October 18
th
2005.
65
Morrison, S., 'Ink and Printer Sales give Dell a Boost¨, Financial Times, May 13
th
2005.
66
Ho, D., 'Dell Means to Get into TV Picture in a Big Way¨, Atlanta Journal Constitution, October 1
st
2005.


13



market and introduced its Iirst Ilat TV. It used its eIIicient supply chain to lower costs and
undercut competitors with lower pricing. When Dell came out with a 42-inch high deIinition
plasma TV Ior US$2,999 in mid-2005, its competitors were charging US$3,500 and up.
Dell`s 50-inch plasma model, the company`s biggest TV as oI October 2005, was priced at
US$3,799, which was about US$200 less than the cheapest comparable Panasonic model.

Dell`s aggressive pricing strategy had put a lot oI pressure on its competitors. In 2005, Dell
had successIully broken into the top ten in the North American Ilat TV market dominated by
traditional consumer electronics companies like Sony, Panasonic, Phillips and Sharp. In the
second quarter oI 2005, Dell was number ten in LCD TV shipments with about 26,000 units,
and number seven Ior plasma screen shipments with about 11,000 units. In comparison, LCD
leader Phillips shipped about 200,000 TVs, and plasma leader Panasonic shipped 113,000.

As television turned into more oI a technology product, consumers Iound ways oI objectively
comparing televisions without having to necessarily look at them. This meant they could shop
by speciIications alone, like Ior a PC. Such a trend Ior commoditisation played right into
Dell`s hands. Rapidly Ialling TV prices were also an advantage Ior Dell, which had
experience with the computer market`s extreme price drops. By selling directly to consumers,
Dell saved costs in Iighting Ior shelI space at retail stores. Dell was conIident that the
structural economic advantages it brought by eliminating the middleman created a unique and
hard-to-copy advantage Ior the company. Nevertheless, companies like Panasonic and Sony
also started to sell directly online, and more traditional TV makers were expected to Iollow.

To be successIul among the biggest TV makers, Dell put a lot oI eIIort into advertising so as
to get people to associate the Dell brand with quality Ilat-panel TV sets. In the US, Dell tried
to increase consumer awareness with TVs displayed at more than 150 kiosks around the
country at places like malls. It planned to open more at airports and commuter train stations.
Dell`s strategy was to stay out oI retail, but to expand the physical presence oI TVs Ior
customers who really wanted to touch and see them. For the Iuture, Dell was keeping a close
eye on trends including the incorporation oI digital video recorders, new developments in
media centre PCs, portable music players and portable photo printers.
The GIobaI and Emerging Markets
Market Position and Trends
The market Ior PCs across the globe had seen healthy growth rates in 2002 to 2005 |see
Exhibit 5B|. There was, however, a downturn in 2001, resulting Irom a decline in consumer
conIidence because oI the terrorist attacks. The global market had also suIIered Irom
intensiIied competition Irom consumer electronics such as MP3 players. In 2004, the global
PC computer market generated total revenues oI $128.6 billion, representing a compound
annual growth rate (CAGR) oI 2.2° Ior the Iive-year period spanning 20002004. The
developed markets continued to grow steadily, while the emerging and transition economies
had grown rapidly Irom a low base. The US remained the world`s largest market in terms oI
both volume and value, while China overtook Japan to become the largest market in Asia-
PaciIic and the world`s second largest by size.
67
Broadband and internet penetration rates had
driven consumer demand Ior high speciIication multimedia PCs.

By the end oI the second quarter oI 2005, the top Iive worldwide PC companies, by unit
shipment, were Dell, HP, Lenovo, Acer and Fujitsu/Fujitsu Siemens |see Exhibit 6A|. Dell
remained the top computer company world-wide, expanding its lead with world-wide growth

67
Datamonitor Industry Market Research, 'Global PCs¨, October 31
st
2005.


14



oI over 23° Irom the previous year. Similar to its rivals, Dell grew at a much Iaster pace in
its non-domestic markets than in the US |see Exhibits 6B to 6D|. In Asia-PaciIic (excluding
Japan), Dell had achieved an impressive year-on-year unit growth oI over 47° in the second
quarter oI 2005 |see Exhibit 6B|. It was Iorecasted that emerging markets would account Ior
more than 60° oI the computer market growth Irom 2006 to 2008.

According to statistics Irom IDC, 40 million PCs were expected to be shipped in the Asia-
PaciIic region Ior 2005, representing an annual growth oI 14.8°. This would be Iollowed by
44.9 million PCs in 2006, or growth oI 12.2°. Although desktops would continue to
dominate over 75° oI the unit shipments in 2006 and 2007, notebooks were the hot spot oI
the computer industry, with a staggering 35.7° annual unit growth expected in 2005,
compared to 10.2° Ior desktops.
68


In the total computer market (including desktops), China and India were expected to be huge
engines Ior growth. China was expected to account Ior 45.7° oI the total PC unit shipments
in Asia-PaciIic (excluding Japan) in 2005. The Chinese PC market had grown rapidly to
become the largest in terms oI volume across the Asia-PaciIic region, and the second largest
in the world (aIter the US). India, the second largest market in the region, was expected to
have the strongest growth rates across all the countries in the region in both 2005 and 2006
at 30.1° and 25.6° respectivelyriding on the strength oI the Indian economy and as buyers
there reaped the beneIits oI a Iall in duties.
69
Analysts also saw signiIicant growth potential in
emerging markets such as Pakistan, Sri Lanka and Bangladesh. Although these markets were
small, analysts saw signiIicant opportunities in the business and public sectors. All oI these
emerging markets were highly Iragmented with a large assembler/white-box market. This
presented opportunities Ior Ioreign computer companies to achieve increased penetration.
Opportunities and Challenges
Dell Iaced diIIerent challenges in diIIerent geographical markets. In the US, Dell`s revenue
growth was hurt by the decline in consumer business. Operating margins in the consumer
business continued to Iall in 2005 as a result oI sluggish growth in the market aIter several
years oI robust growth. Dell decided to renew its Iocus on the mid-range and high-end oI the
US consumer market where unit growth rate was lower, but proIitability was higher. In
Europe, Dell`s Iinancial perIormance was hit by the Ilagging UK business, which contributed
as much as 2530° oI its total revenue in the region.
70
The company attributed the UK
weakness to a slowdown in IT spending by big companies and government, and to sales oI
lower-priced PCs to consumers. To boost its growth in the UK, Dell planned to Iocus on
medium-sized businesses and government bodies, where its market share was relatively low.
Dell also opened a business centre in Glasgow to provide more support services to such
customers. In Europe, Dell expected stronger growth Irom countries such as Germany and
Italy where Dell had a much smaller presence.

Dell was strengthening its expansion eIIorts in emerging markets. In India, Dell was
considering building a manuIacturing Iacility as it sought to capitalise on the subcontinent`s
growing market potential. It planned to increase the number oI staII in India Irom 10,000 in
2005 to 15,000 in 2006 as it opened a Iourth call centre. In 2005, Dell had just a 34° market
share in India, compared with an average oI about 10° elsewhere in Asia.
71
In China, Dell
planned to enlarge its production and research capacity in Xiamen in order to triple its

68
IDC, September 20
th
2005, |www document| http://www.idc.com/getdoc.jsp?containerId÷pr2005¸09¸20¸181543 (accessed
October 30
th
2005).
69
IDC, September 20
th
2005, |www document| http://www.idc.com/getdoc.jsp?containerId÷pr2005¸09¸20¸181543 (accessed
July 23
rd
2005).
70
Gardner, R., 'Dell Inc.¨, Citigroup Research, November 11
th
2005.
71
Alison, K., 'Dell Bullish on Market in India¨, Financial Times (Lonaon, Englana), January 31
st
2006.


15



mainland production capacity to compete with Lenovo, the market leader in the domestic
market. Dell opened sales oIIices in most major Chinese cities and made extensive use oI toll-
Iree telephone hotlines to accommodate the less sophisticated Chinese customers. It had also
developed a payment system through banks Ior customers who did not have a credit card or
Ielt uneasy about using their credit card over the internet. For instance, customers could go to
the corporate business window oI designated banks and make cash lockboxes to Dell`s
accounts, make payments through telegraphic transIers, or choose the 'call Ior payment
arrangement¨ whereby sales representatives would call to ask Ior payment details.
72
Although
Dell had successIully targeted the high-end Chinese market, its products were perceived as
expensive by consumers. While competitors including Lenovo, HP and Founder had all
introduced more price-competitive models with central processing units (CPUs) Irom
Advanced Micro Devices Inc. (AMD), Dell could only sell PCs equipped with more
expensive CPUs Irom Intel.
73
In August 2004, Dell decided to pull back Irom eIIorts to sell
low-cost consumer desktop computers and had withdrawn at least one low-price PC aimed at
the consumer market in China. Analysts believed that Dell`s retreat Irom low-cost computers
was driven not only by pricing pressures, but also by the limitations oI its direct-sale model.
Much oI the demand Ior low-end PCs in emerging markets came Irom smaller cities, where
the average household income was relatively low and consumers were not accustomed to
buying over the phone and the internet. Delivering products and setting up service centres
across large areas could cut sharply into the company`s proIit margins.
74
Dell had to handle
these Iunctions Irom major cities, which had resulted in complaints about slow delivery, and
poor service and support. It appeared that Dell could not sell as eIIectively as its competitors
in less developed cities without the channel presence.
Matching DeII
Between 1996 and 2005, Dell`s annual proIits increased Irom US$272 million to US$3.04
billion |see Exhibit 1A|.
75
During the same period, it grew Iaster than its major competitors.
Dell`s superior Iinancial perIormance had put pressure on other computer companies. HP,
IBM and Lenovo had all gone through substantial restructuring moves in order to counter the
Dell challenge.
HP
Founded in 1939, HP was a signiIicant player in the computer market and an undisputed
leader in the printer industry. In 2001, HP was the second largest computer company in the
world (behind IBM), but it was struggling under diIIicult economic conditions. The new era
oI standards-based computing, where computers were made with many oI the same basic
components, had robbed manuIacturers oI their pricing power. Apparently, HP was unable to
lower its overheads enough to compete eIIiciently in the computer market. In 2001, the
company`s net earnings declined 89° on an 8° decline in revenue. Earnings Irom printing
and imaging divisions, which supplied about three-quarters oI its operating proIits, had helped
oIIset the computer division`s US$450 million loss. Faced with the Iirst world-wide recession
since 1975 and a technology industry slump, HP decided to merge with Compaq Computer
Corporation ('Compaq¨), the third largest computer company in the world. Similar to HP,
Compaq was pressured by intense competition in the computer market and had been steadily
losing market share since early 1998. The merger was oIIicially completed in May 2002. HP
had hoped that the merger would help to achieve economies oI scale and lower the cost

72
Dell, Inc., |www document| http://www.dell.com.cn/ (accessed January 2
nd
2006).
73
Young, D., 'Chinese Low End PC Market Too Hot Ior Dell¨, Cyber Inaia Online, |www document|
http://www.ciol.com/content/news/1899/104081601.asp (accessed December 22
nd
2005).
74
Ye, S. and Chung, A., 'Dell ShiIts China Focus to ProIitable Segments¨, Gartner Research, August 20
th
2004.
75
As per Dell`s annual income statements Ior the Iiscal years ended January 31
st
1996 to 2005.


16



structure Ior its computer business. However, the new company`s proIits did not meet
investor expectations. Industry observers cited the management`s inability to keep pace with
changing market conditions as a key contributor to its disappointing perIormance.
SpeciIically, critics chastised HP`s management Ior Iailing to manage its computer business
eIIiciently and Ior Iollowing Dell`s lead in a low-cost direct selling model.

Under mounting pressure Ior change, HP Iired its CEO, Carleton Fiorina, in February 2005.
The new CEO, Mark Hurd, took the reins at HP in March 2005. Hurd inherited a huge group
oI assets and worked hard to close the gap with Dell. In June 2005, Hurd announced plans to
split PCs Irom the printer business in order to manage them as 'separate, highly Iocused
organisations¨. In July 2005, Hurd unveiled another program designed to simpliIy HP`s
structure, reduce costs and place greater Iocus on its customers. HP planned to reduce its
workIorce over the next six quarters by 14,500 employees, or about 10° oI its regular Iull-
time staII. In the second quarter oI 2005, Hurd`s reorganisation eIIorts had already begun to
pay oII. HP`s PC proIits surged to US$163 million, Irom US$23 million, as revenue rose to
US$6.4 billion, Irom US$5.9 billion. The real sign oI HP`s improvement lay in how its
growth compared to Dell`s. For PCs, Dell`s revenue dropped 1°, as unit shipments climbed
25°. HP posted an 8° rise in PC revenue, but on a 14° increase in shipments, a Iigure that
suggested HP was seeing better pricing on its PC models than Dell. The Iull-quarter results
also leIt analysts with reasons to continue giving Hurd the beneIit oI the doubt with his
turnaround. HP reported a net proIit oI US$73 million, or US$0.03 a share, on US$20.8
billion in revenue. The earnings were down Irom the $586 million HP reported in the
preceding year, but were impacted by a US$960 million tax provision and other one-time
items. Excluding those items, HP earned US$1.1 billion, or US$0.36 a share. HP`s strong
results led a group oI analysts to raise their ratings on HP.

As more IT sellers began to return to the indirect channel, some analysts believed that HP was
well equipped to capture the opportunities by having a hybrid distribution strategy. According
to IDC, resurgence oI the indirect channel could be driven by the Iollowing:

Further innovation in the technology market was outpacing the knowledge oI average
users. Technology convergence in computing, consumer electronics, printers and
multiIunction peripherals was driving changes in business models.
76


Rising needs Ior support services had resulted in a shiIt in consumer buying
behaviour. IDC`s research showed that the indirect channel was oIten the customer`s
trusted source oI advice and had a great inIluence on product and brand selection
processes.
77


Multiple marketing routes enabled customers to choose the one that was most suitable
Ior them. Some products were more suitable Ior selling through direct channels, while
others required indirect routes.
78
Consumers` perception oI the complexity oI a
product could also aIIect the preIerred route Ior distribution.

HP leveraged Compaq`s progress in developing a direct sales channel aIter the merger and
gradually increased the amount oI business it did directly with customers. In February 2005,
analysts estimated that about 1520° oI HP`s sales volume Ilowed through the Dell-like
direct model.
79
The new HP managed to increase sales through the direct model without

76
Su, W., 'Can Anyone Disrupt Dell`s Direct Model?¨, IDC Research, February 2004.
77
Su, W., 'Can Anyone Disrupt Dell`s Direct Model?¨, IDC Research, February 2004.
78
Su, W., 'Can Anyone Disrupt Dell`s Direct Model?¨, IDC Research, February 2004.
79
McCullough, A., 'HPQ: Going to the Full Court Printing Press?¨, Creait Suisse First Boston Equity Research Americas,
February 17
th
2005.


17



alienating its partners in the indirect sales channel. This was because it oIten redirected sales
leads to the indirect channels iI that were the more proIitable way to IulIil an order.
80
It had
mechanisms in place to determine the most proIitable route, depending on the complexity and
conIiguration oI the order. The customer might be unaware oI who IulIilled the order, or the
customer might be directed to a channel partner Ior technical advice.
81
HP`s online
distribution and delivery system oIIered multiple ways Ior customers to access its products.
Reseller agents could use the system on behalI oI their small and medium-sized customers;
large customers used the system Ior direct and indirect IulIilment through resellers; and HP`s
call centre staII used the solutions as they interacted with customers.

As oI 2004, HP had about 40,000 active HP.com business-to-business sites worldwide. HP
also had call centre staII who could cross-sell and up-sell existing customers. IDC estimated
that the typical percentage oI a customer`s business that went through an extranet was 55°.
Depending more on customer proIile than size, buyers might be steered towards tele-sales,
with the goal oI up-selling using HP`s knowledge or ability to track trends. HP`s call centre
had staII that routed and handled incoming orders that did not have a sales quota, and they
also had inside sales staII Ior some channel partners and end users, who did have a quota. The
inside sales staII could take advantage oI HP`s relationships with reseller partners and other
service providers to sell supplementary services that HP did not oIIer. II a customer wanted to
set up a storage area network, Ior example, then HP could sell the necessary hardware and
bring in a channel partner to provide the soItware and services. HP also oIIered additional
online tools to make it easier to buy Irom their channel partners. These included locator
services to Iind the right reseller. Customers could also identiIy local retailers based on their
zip code and check the price and availability oI speciIic products.
IBM
IBM was the world`s top provider oI computer products and services. Among the leaders in
almost every market in which it competed, the company made mainIrames and servers,
storage systems, and peripherals. IBM`s service arm was the largest in the world, and it was
also one oI the largest providers oI both soItware (ranking second, behind MicrosoIt) and
semiconductors. Although IBM helped make PCs a global phenomenon, it made little proIit
Irom its PC operations in the 2000s. To bring long-term value Ior clients, IBM recognised the
need to continually reinvent itselI. The company thereIore decided to streamline its hardware
operations with divestitures, and used acquisitions to augment its soItware and service
businesses. It edged itselI out oI the commodity hardware business by selling its PC
manuIacturing Iacilities to Sanmina-SCI Corp., and its hard drive unit to Hitachi, Ltd. in 2002.

In 2005, IBM completed the sale oI its PC operations to Lenovo Ior approximately US$1.75
billion. Despite customers` concerns, industry analysts thought it was a wise move Ior IBM to
get out oI making PCs. The timing could also be Iavourable. Although 2005 was expected to
be a relatively good year Ior the PC industry, those good returns were expected to give way to
several years oI slower sales. The deal was expected to strengthen IBM`s ability to capture the
highest-value opportunities in a rapidly changing inIormation technology industry. It also
Iacilitated the company`s shiIt Irom selling commodity products to selling services, soItware
and high-end computers. Under the deal, IBM would take a minority stake oI 18.9° in
Lenovo, which had a strong client base and sales inIrastructure in the Chinese market.
Although IBM would have less revenue aIter the sale, it was expected to have an improved
Iinancial proIile. By working with Lenovo, IBM could gain an edge in selling servers and

80
Waxman, J. and Rosenthal, R., 'HP and IBM`s Evolving Strategies Ior Direct and Indirect Channels¨, IDC Research, June
2004.
81
Su, W. and Rosenthal, R., 'The Evolution oI HP.com and ibm.com: More than Just Bricks to Clicks¨, IDC Research, June
2004.


18



services in the Iast-growing market in China. IBM Global Services would be Lenovo`s
preIerred provider Ior warranty and maintenance services.
Lenovo
Lenovo, Iormerly known as Legend Group Limited, was the largest computer maker in China.
The company was Iounded in 1984 as a distributor oI IT products. Over the years it started its
own computer business, growing into the number one spot in China. Legend Group Holdings,
which was controlled by the Chinese government, owned a majority stake in Lenovo.

In 2002, Lenovo ramped up plans to sell computers globally. It opened an oIIice in Silicon
Valley and started selling computers in Spain and other European markets. However, the
unexpected success oI Ioreign rivals in China had put heavy pressure on Lenovo. Dell, Ior
instance, won a huge contract with the municipal government in Beijing to supply computers
to schools. Lenovo responded to competition among international and second-tier computer
makers with aggressive price cuts. It also retreated temporarily Irom the international market
to protect market share at home.

In May 2005, Lenovo acquired IBM`s PC operations Ior approximately US$1.75 billion and
became the third largest computer company world-wide. BeIore the acquisition, Lenovo was
the ninth largest computer maker. The deal marked a breakthrough in Lenovo`s journey
towards becoming an international company. Based on both companies` 2003 sales Iigures,
the joint venture was expected to have an annual sales volume oI 11.9 million units and
revenue oI US$12 billion, increasing Lenovo`s computers business IourIold. Lenovo would
be the preIerred supplier oI PCs to IBM and would be allowed to use the IBM brand Ior Iive
years under an agreement that included the 'Think¨ brand. IBM had promised to support
Lenovo with marketing. During the Iirst phase oI the integration process, the PC operations oI
Lenovo and IBM would carry on as usual, independent oI each other. AIter 18 months,
Lenovo and IBM would use a common brand. Lenovo could also leverage IBM`s research
and development centre in Japan.

IBM`s comprehensive global network could help Lenovo to expand beyond China. However,
the deal also brought about challenges to combine the PC operations oI two radically diIIerent
companies. Lenovo perIormed very little independent research and development (R&D) and
mostly manuIactured low-end systems. More than halI oI its sales went to consumers and
very Iew systems were sold outside China. On the contrary, IBM sold mainly to corporations
and oIten to customers that had invested heavily in IBM services and soItware. Its Ilagship
ThinkPad notebooks came with novel design Ieatures like Iingerprint readers Ior additional
data security and hard drives that could survive a 6-Ioot drop. Maintaining good relations with
IBM`s customers was a great concern Ior Lenovo, which was less well known than Dell and
had less experience internationally. Lenovo had to take care that IBM`s high-end customers
would not be lured away by more Iamous brands like Dell and IBM. The integration work
needed to bring the operations together could also give Dell and other brands an opportunity
to strengthen their own presence in the Chinese market.

By leveraging IBM`s know-how and award-winning manuIacturing teams, Lenovo could
push more actively into the corporate sector oI the Chinese PC market. Although Lenovo held
a larger share oI the corporate sector than Dell, corporate sales accounted Ior a much smaller
percentage oI Lenovo`s total shipments. Lenovo and Dell also had diIIerent Iocuses in the
corporate customer segment. While Dell had built its strength in the corporate sector on large
enterprise customers, Lenovo had an advantage in selling PCs to small and medium-sized
enterprises as its channel distribution network extended across China. However, neither
Lenovo nor Dell was willing to remain in the segment it was strong in. Both companies had
adjusted their strategies to enter markets where the other currently appeared stronger. By


19



dividing its distribution channels, Lenovo was marketing more products to larger enterprises.
At the 2005 Lenovo Partner world conIerence, Lenovo announced that its Iuture development
oI its PC business in China would emphasise large corporate customers, the country`s rural
markets, and laptops. The plan Ior marketing to large corporate clients was launched in April
2005, when Lenovo restructured its corporate PC product line. In addition, Lenovo also
launched direct sales operations in 2004. Product details were published on Lenovo`s website,
which also allowed consumers to customise their PCs. Customers could purchase PCs online
or through call centres. In July 2005, Lenovo`s direct sales volume amounted to just a Iew
thousand units out oI the about 750,000 it shipped each quarter. As Lenovo was looking to
attract larger corporate clients, Dell also began to adapt its direct sales model, which had
proved successIul Ior targeting larger enterprises, to China`s small and medium-sized
enterprises. Competition between Lenovo and Dell was on the rise. Whenever a customer had
to make a choice between Lenovo and Dell, Lenovo would do its utmost to provide what that
customer needed, and it would also reduce its price to a very low level.
The Future
In 2005, Dell was recognised by 'Fortune¨ magazine as America`s most admired company,
and number three globally. It had been repositioned as a broader provider oI technology with
a comprehensive portIolio oI products and services. Compared to other international
computer makers such as HP, Sony and IBM, Dell had a relatively stable management team
and did not rely too much on acquisitions or mergers Ior expansion. In Iact, Dell disputed the
notion that acquisitions or mergers would necessarily create a lower-cost structure. As
chairman Michael Dell considered the restructuring moves oI Dell`s major competitors, he
remarked
82
:

The IBM-Lenovo business has so far only helpea us. When the HP-Compaq
combination came out, I saia it lookea a gooa thing for us, ana now youa be
hara-pressea to fina anyboay to aisagree . People say Lenovo will be
cheaper because its in China but none of that is true. We have a lower cost
structure in China, we are more profitable in China.

In spring 2005, Dell announced that it planned to bring its global sales to US$80 billion by
2009. To reach this goal, analysts believed that Dell had to achieve an average annual sales
growth oI 1518°. Underlying its bullish vision, Dell estimated that up to 55° oI the target
sales would be generated outside the US. Dell said its strategy would not lean too much on
selling low-price computer products. Instead, it would strike a balance between price and
perIormance. Selling to the enterprise would remain its priority, Iollowed by the consumer
market. In the consumer market, Dell would Iocus on selling to higher-end consumers, who
were not Iirst-time buyers. Dell was also looking at non-PC related sectors as the next major
growth drivers Ior the company. Non-PC operations like printers, services and Ilat TVs were
expected to become a major contributor to Dell`s Iuture revenue.

For the Iirst time since January 2001, Dell signiIicantly missed revenue expectations and
lowered its Iorward outlook in the second quarter oI 2005. The company reported revenue oI
US$13.4 billion Ior the second quarter oI 2005, which Iell short oI the US$13.7 billion that
the market had expected. Although the poor results were partly attributable to weaker-than-
expected government business and a soItness in the US consumer market, president and CEO
Kevin Rollins admitted that Dell had made an execution error in pricing, which boosted unit
volume but undermined revenue growth. The average selling price oI Dell`s computers Ior

82
Veitch, M., 'Client Week - Personal Computing Interview - Dell Sees No End Ior Desktop PCs,¨ IT Week (UK), June 13
th

2005.


20



consumers dropped a substantial 13° during the second quarter oI 2005. Dell had apparently
underpriced its machines to a level where volume increases did not oIIset the revenue impact
oI the lower prices.

It was expected that Dell`s pricing mis-step would spill over into the Iuture period. In Iact,
Dell issued a warning about the company`s third quarter Iinancial perIormance in November
2005. It expected revenue to be about US$13.9 billion versus its previous Iorecast oI US$14.1
billion to US$14.5 billion, a diIIerence oI more than 4°. This leIt analysts wondering iI Dell
could re-establish investor conIidence and generate suIIicient growth to reach its sales target
by 2009. Apparently, winning the price war would not be enough Ior Dell to sustain long-
term growth. Dell`s Iuture would probably hinge on how Iar it moved beyond computers and
the US market.


21



EXHIBIT 1A: COMPARATIVE ANNUAL FINANCIAL DATA-DELL, HP AND IBM


Dell
Year end Sales Total net income EPS
83

Jan 05 49,205 3,043 1.08
Jan 04 41,444 2,645 1.01
Jan 03 35,404 2,122 0.80
Jan 02 31,168 1,246 0.46
Jan 01 31,888 2,236 0.84
Jan 00 25,265 1,666 0.61
Jan 99 18,243 1,460 0.53
Jan 98 12,327 944 0.32
Jan 97 7,759 531 0.18
Jan 96 5,296 272 0.09


HP
Year ended Sales Total net income EPS
Oct 05 86,696 2,398 0.82
Oct 04 79,905 3,497 1.15
Oct 03 73,061 2,539 0.83
Oct 02 56,558 (923) (0.37)
Oct 01 45,226 624 0.32
Oct 00 48,782 3,561 1.73
Oct 99 42,370 3,104 1.49
Oct 98 47,061 2,945 1.39
Oct 97 42,895 3,119 1.48
Oct 96 38,420 2,586 1.23


IBM
Year ended Sales Total net income EPS
Dec 05 91,134 7,994 4.91
Dec 04 96,293 8,448 4.94
Dec 03 89,131 7,613 4.34
Dec 02 81,186 5,334 3.07
Dec 01 85,866 7,723 4.35
Dec 00 88,396 8,093 4.44
Dec 99 87,548 7,712 4.12
Dec 98 81,667 6,328 3.29
Dec 97 78,508 6,093 3.01
Dec 96 75,947 5,429 2.51


Note: Figures in USD million except EPS.
Source: MSN Money.



83
EPS ÷ earnings pear share


22



EXHIBIT 1B: COMPARATIVE ANNUAL FINANCIAL DATA-DELL, HP AND IBM

Dell
Year
ended
Avg
P/E
84

Price/
sales
Price/
book
Net profit
margin
Debt/
equity
Return on
equity
Return on
assets
Jan 05 31.20 2.11 16.00 6.20 0.08 46.90 13.10
Jan 04 29.60 2.06 13.59 6.40 0.08 42.10 13.70
Jan 03 33.20 1.74 12.62 6.00 0.10 43.50 13.70
Jan 02 51.40 2.29 15.27 4.00 0.11 26.50 9.20
Jan 01 45.20 2.13 12.09 7.00 0.09 39.80 16.60
Jan 00 70.80 3.92 18.66 6.60 0.10 31.40 14.50
Jan 99 59.20 6.97 54.95 8.00 0.22 62.90 21.20
Jan 98 26.10 2.58 24.86 7.70 0.01 73.00 22.10
Jan 97 14.90 1.48 14.25 6.80 0.02 65.90 17.10
Jan 96 12.00 0.48 2.67 5.10 0.12 28.10 12.70

HP
Year
ended
Avg
P/E
Price/
sales
Price/
book
Net profit
margin
Debt/
equity
Return on
equity
Return on
assets
Oct 05 29.30 0.92 2.14 2.80 0.09 6.50 3.10
Oct 04 18.40 0.68 1.45 4.40 0.12 9.30 4.60
Oct 03 22.90 0.93 1.80 3.50 0.17 6.70 3.40
Oct 02 NA 0.85 1.33 (1.60) 0.17 NA (1.30)
Oct 01 94.50 0.72 2.34 1.40 0.27 4.50 1.90
Oct 00 32.80 1.86 6.39 7.30 0.24 26.00 10.90
Oct 99 29.60 1.76 4.07 7.30 0.10 19.10 9.90
Oct 98 23.30 1.30 3.62 6.30 0.12 17.40 8.70
Oct 97 19.50 1.50 3.97 7.30 0.20 19.30 9.80
Oct 96 19.20 1.16 3.33 6.70 0.19 19.20 9.30

IBM
Year
ended
Avg
P/E
Price/
sales
Price/
book
Net profit
margin
Debt/
equity
Return on
equity
Return on
assets
Dec 05 17.40 1.42 NA 8.8 NA NA NA
Dec 04 18.50 1.68 5.45 8.8 0.50 28.30 7.7
Dec 03 19.30 1.76 5.64 8.5 0.61 27.20 7.3
Dec 02 29.40 1.64 5.86 6.6 0.88 15.70 3.7
Dec 01 24.00 2.43 8.83 9.0 0.68 32.70 8.7
Dec 00 24.20 1.68 7.27 9.2 0.90 39.70 9.2
Dec 99 26.70 2.20 9.50 8.8 0.70 38.10 8.8
Dec 98 21.70 2.07 8.80 7.7 0.81 33.00 7.3
Dec 97 14.70 1.28 5.12 7.8 0.70 31.10 7.5
Dec 96 12.40 1.01 3.60 7.1 0.46 25.40 6.7

Source: MSN Money






84
Avg P/E ÷ Average price-to-earning ratio.


23



EXHIBIT 1C: COMPARATIVE ANALYSIS-DELL, HP AND IBM


Dell HP IBM Industry

Computer
Hardware
Dividends
Dividend yield NA 1.13 1 1
Dividend yield (5-year average) 0 1.60 0.60 0.28
Dividend payout ratio (TTM) 0 0 14.99 6.86


Profitability ratios (º)
Gross margin (TTM) 18.57 23.45 38.02 30.38
Gross margin (5-year average) 18.47 26.12 37.45 29.77
Operating margin (TTM) 8.77 5.19 9.94 8.65
Operating margin (5-year average) 7.86 3.59 10.61 6.95
Net proIit margin (TTM) 6.57 3.61 8.45 7.02
Net proIit margin (5-year average) 5.91 3.01 8.59 5.68


Efficiency
Revenue/employee (TTM) in US$ 859,495 564,053 291,999 631,405
Net income/employee (TTM) in US$ 56,466 20,351 24,659 45,083
Receivable turnover (TTM) 12.6 7.17 3.82 8.57
Inventory turnover (TTM) 91.63 9.57 18.05 46.97
Asset turnover (TTM) 2.41 1.13 0.93 1.50

TTM ÷ Trailing twelve months
MRQ ÷ Most recent quarter
Source: Reuters, ¡www document] http://www.investor.reuters.com (accessed September 25
th

2005).



24



EXHIBIT 1D: COMPARATIVE ANALYSIS-SHARE PRICE PERFORMANCE OF
DELL AGAINST HP AND IBM (DECEMBER 2004 TO DECEMBER 2005)
85









Company Share price (US$)
December 31
st
2004
Share price (US$)
December 31
st
2005
Dell 42.14 29.95
HP 20.97 28.63
IBM 98.58 82.20

Source: Reuters ¡www document] http://www.investor.reuters.com (accessed 1anuary 5
th
2006).

85
This chart contains 5-year weekly data.
IBM
Dell
HP


25



EXHIBIT 2: DELL'S SUPPLY CHAIN

Source: Kapuscinski, R., Zhang, R., Carbonneau, P., Moore, R. and Reeves, B. (2004)
~Inventory Decisions in Dell`s Supply Chain, ,QWHUIDFHV, 34(3): 191-205.
Customer places an order with Dell through the Iollowing ways:
www.dell.com Voice-to-voice Face-to-face
Dell processes orders and perIorms Iinancial evaluation (credit checking) and
conIiguration evaluation (checking the Ieasibility oI a speciIic technical conIiguration

Usual time frame. 2 to 3 aays
Dell sends orders to a manuIacturing plant

Dell builds, tests and packages the products
Usual time frame. 8 hours
Dell ships and delivers the products
Usual time frame. no later than GD\V after receipt of oraers

Exceptions: Dell may manipulate the schedule when there is a need to replace deIective units or
when Iacing large customers with speciIic service-level agreements (who have non-standard quoted
manuIacturing lead times) Ior their orders


26



EXHIBIT 3A: DELL'S INCOME STATEMENT

Figures in US$`000
Period
Quarter
ended
1uly 2005

Quarter
ended
April 2005

Year ended
1anuary
2005

Year ended
1anuary
2004

Year ended
1anuary
2003


Total Revenue 13,428,000 13,386,000 49,205,000 41,444,000 35,404,000
Cost oI Revenue 10,929,000 10,895,000 40,190,000 33,892,000 29,055,000
Gross Profit 2,499,000 2,491,000 9,015,000 7,552,000 6,349,000
Operating Expenses
Research & Development 122,000 110,000 463,000 464,000 455,000
Selling General and
Administrative 1,204,000 1,207,000 4,298,000 3,544,000 3,050,000
Non-Recurring - - - - -
Others - - - - -

Operating Income or Loss 1,173,000 1,174,000 4,254,000 3,544,000 2,844,000
Income Irom Continuing
Operations
Total Other
Income/Expenses Net 61,000 59,000 191,000 194,000 183,000
Earnings beIore Interest
and Taxes 1,234,000 1,233,000 4,445,000 3,738,000 3,027,000
Interest Expense - - - 14,000 -
Income beIore Tax 1,234,000 1,233,000 4,445,000 3,724,000 3,027,000
Income Tax Expense 214,000 299,000 1,402,000 1,079,000 905,000
Minority Interest - - - - -
Net Income From
Continuing Ops 1,020,000 934,000 3,043,000 2,645,000 2,122,000

Non-Recurring Events - - - - -

Net Income 1,020,000 934,000 3,043,000 2,645,000 2,122,000
PreIerred Stock and Other
Adjustments - - - - -
Net Income Applicable to
Common Shares 1,020,000 934,000 3,043,000 2,645,000 2,122,000

Source: Dell Annual Reports and Yahoo! Finance.


27



EXHIBIT 3B: DELL GEOGRAPHIC DETAIL

Figures in US$ million, unless otherwise stated
Period
Quarter
ended
1uly
2005

Quarter
ended
April
2005

Year
ended
1anuary
2005

Year
ended
1anuary
2004

Year
ended
1anuary
2003


Americas $8,870 $8,561 $32,940 $28,603 $25,163
° Total Revenue 66° 64° 67° 69° 71°
Y/Y Change 11° 14° 15° 14° 17°
Operating Income $859 $805 $2,978 $2,594 $2,253
Operating Margin 9.7° 9.4° 9.0° 9.1° 9°

86%XVLQHVV $7,179 $6,616 $25,339 $21,888 $19,394
Y/Y Growth 12° 15° 16° 13° 12°
Operating Income $761 $660 $2,579 $2,194 $1,945
Operating Margin 10.6° 10.0° 10.2° 10° 10°

86&RQVXPHU $1,691 $1,945 $7,601 $6,715 $5,769
Y/Y Growth 8° 12° 13° 16° 29°
Operating Income $98 $145 $399 $400 $308
Operating Margin 5.8° 7.5° 5.2° 6.0° 5.3°

Europe $2,921 $3,171 $10,787 $8,495 $6,912
° Total Revenue 22° 24° 22° 20° 20°
Y/Y Change 21° 20° 27° 23° 5°
Operating Income $191 $236 $818 $637 $388
Operating Margin 6.5° 7.4° 7.6° 7.5° 5.6°

Asia Pacific/1apan $1,637 $1,654 $5,478 $4,346 $3,445
° Total Revenue 12° 12° 11° 10° 10°
Y/Y Change 24° 19° 26° 26° 15°
Operating Income $123 $133 $458 $313 $203
Operating Margin 7.5° 8.0° 8.4° 7.2° 5.9°

Total Revenue
86
$13,428 $13,386 $49,205 $41,444 $35,404
(as per Exhibit 3A)

Source: Credit Suisse First Boston Equity Research, August 12
th
2005.

86
Rounding diIIerences are noted during the sum-up process.


28



EXHIBIT 3C: DELL PRODUCT BREAKDOWN

Figures in US$ million, unless otherwise stated

Quarter
ended
1uly
2005

Quarter
ended
April
2005

Year
ended
1anuary
2005

Year
ended
1anuary
2004

Year
ended
1anuary
2003


Desktop $5,050 $5,310 $20,792 $18,350 $16,965
° Total Revenue 38° 40° 42° 44° 48°
Q/Q Change -5° -5° - - -
Y/Y Change 2° 6° 13° 8° -

Mobility
87
$3,425 $3,270 $11,830 $9,800 $8,220
° Total Revenue 26° 24° 24° 24° 23°
Q/Q Change 5° 4° - -
Y/Y Change 20° 22° 21° 19° -

Servers $1,325 $1,294 $4,874 $4,100 $3,425
° Total Revenue 10° 10° 10° 10° 10°
Q/Q Change 2° -1° - - -
Y/Y Change 9° 12° 19° 20° -

Storage $396 $432 $1,346 $1,059 $840
° Total Revenue 3° 3° 3° 3° 2°
Q/Q Change -8° 5° - - -
Y/Y Change 26° 49° 27° 26° -

Services $1,181 $1,094 $3,686 $2,740 $2,005
° Total Revenue 9° 8° 7° 7° 6°
Q/Q Change 8° 1° - - -
Y/Y Change 41° 30° 35° 37° -

Software & Peripherals $2,051 $1,986 $6,675 $4,915 $3,775
° Total Revenue 15° 15° 14° 12° 11°
Q/Q Change 3° 4° - - -
Y/Y Change 35° 29° 36° 30° -

Printers $390 $350 $1,300 $836 -
Y/Y Change 30° 40° - - -
Other $630 $650 $2,202 $1,573 -
Y/Y Change 20° 30° - - -
Displays $680 $600 $1,827 $1,278 -
Y/Y Change 60° 60° - - -
SoItware $351 $386 $1,346 $1,180 -
Y/Y Change 17° 29° - - -
Total Revenue
88

(Per Exhibit 3A)

$13,428 $13,386 $49,205 $41,444 $35,404
Source: Credit Suisse First Boston Equity Research, August 12
th
2005

87
Includes mobile PC products.
88
Rounding diIIerences are noted during the sum-up process.


29



EXHIBIT 4: DELL'S BALANCE SHEET

Figures in US$`000
Period
Quarter ended
1uly 2005

Quarter ended
April 2005

Year ended
1anuary 2005

Year ended
1anuary 2004

Year ended
1anuary 2003

Assets
Cash and Cash Equivalents 6,337,000 5,874,000 4,747,000 4,317,000 4,232,000
Short Term Investments 2,709,000 3,967,000 5,060,000 835,000 406,000
Net Receivables 4,443,000 4,289,000 4,414,000 3,635,000 2,586,000
Inventory 570,000 483,000 459,000 327,000 306,000
Other Current Assets 2,739,000 2,439,000 2,217,000 1,519,000 1,394,000
Total Current Assets 16,798,000 17,052,000 16,897,000 10,633,000 8,924,000
Long-Term Investments 3,625,000 3,574,000 4,319,000 6,770,000 5,267,000
Property Plant and Equipment 1,843,000 1,741,000 1,691,000 1,517,000 913,000
Other Assets 345,000 320,000 308,000 391,000 366,000
DeIerred Long-Term Asset
Charges - - - - -
Total Assets 22,611,000 22,687,000 23,215,000 19,311,000 15,470,000
Liabilities
Current Liabilities
Accounts Payable 14,368,000 14,389,000 14,136,000 9,935,000 6,282,000
Short/Current Long-Term
Debt - - - - -
Other Current Liabilities - - - 961,000 2,651,000
Total Current Liabilities 14,368,000 14,389,000 14,136,000 10,896,000 8,933,000
Long-Term Debt 504,000 504,000 505,000 505,000 506,000
Other Liabilities 2,230,000 2,170,000 2,089,000 538,000 1,158,000
DeIerred Long-Term Liability
Charges - - - 1,092,000 -
Total Liabilities 17,102,000 17,063,000 16,730,000 13,031,000 10,597,000
Stockholders` Equity
Common Stock 8,996,000 8,400,000 8,195,000 6,823,000 6,018,000
Retained Earnings 11,128,000 10,108,000 9,174,000 6,131,000 3,486,000
Treasury Stock (14,558,000) (12,758,000) (10,758,000) (6,539,000) (4,539,000)
Capital Surplus - - - - -
Other Stockholder Equity (57,000) (126,000) (126,000) (135,000) (92,000)
Total Stockholder Equity 5,509,000 5,624,000 6,485,000 6,280,000 4,873,000
Net Tangible Assets 5,509,000 5,624,000 6,485,000 6,280,000 4,873,000

Source: Dell Annual Reports and Yahoo! Finance.



30



EXHIBIT 5A: US AND WORLD-WIDE PC SHIPMENTS AND GROWTH, 2002-
2006

Region 2002 2003 2004 2005` 2006`
USA Units (M)
Consumer 17.1 20.0 21.8 23.4 25.4
Commercial 30.5 32.7 36.5 39.5 42.1
Total 47.6 52.7 58.3 62.8 67.5
World-wide Units (M)
Consumer 49.9 56.7 64.3 76.1 82.8
Commercial 88.8 99.0 115.1 128.6 140.5
Total 138.8 155.6 179.4 204.6 223.3
USA Growth (º)
Consumer 17.3° 8.9° 7.3° 8.4°
Commercial 7.2° 11.7° 8.1° 6.8°
Total 10.8° 10.6° 7.8° 7.4°
Worldwide Growth (º)
Consumer 13.5° 13.5° 18.3° 8.8°
Commercial 11.4° 16.3° 11.7° 9.3°
Total 12.1° 15.3° 14.1° 9.1°

*Forecast data
(Shipments are in millions oI units)
Source: IDC Worldwide Quarterly PC Tracker, August 2005, ¡www document]
http://www.idc.com/getdoc.jsp?containerId÷prUS00236105 (accessed September 25
th
2005).


EXHIBIT 5B: GLOBAL PC MARKET VALUE

Year Value (US$) Growth
2000 117,900,000,000
2001 111,200,000,000 -0.056
2002 112,400,000,000 0.011
2003 119,900,000,000 0.067
2004 128,600,000,000 0.072
CAGR 20002004 0.022

Source: Datamonitor Industry Market Research, ~Global - PCs¨, October 31
st
2005.

31



EXHIBIT 6A: TOP 5 VENDORS, WORLD-WIDE PC SHIPMENTS, SECOND
QUARTER 2005 (PRELIMINARY)

(Unit Shipments are in thousands)
Q2 2005
Rank Vendor
Q2 2005
Shipments Market Share
Q2 2004
Shipments
Market
Share
Growth
2005/2004
1 Dell 8,982 19.3° 7,264 18.2° 23.7°
2 HP 7,251 15.6° 6,235 15.6° 16.3°
3 Lenovo 3,535 7.6° 952 2.4° 271.3°
4 Acer 2,032 4.4° 1,253 3.1° 62.2°
5 Fujitsu/Fujitsu Siemens 1,722 3.7° 1,527 3.8° 12.8°
Others 23,044 49.5° 22,711 56.9° 1.5°

All Vendors 46,566 100.0° 39,941 100.0° 16.6°

3 Lenovo (Merged) 3,535 7.6° 3,283 8.2° 7.7°

Notes:
Shipments include shipments to distribution channels or end users. Original equipment manuIacturer sales are counted under the
vendor/brand under which they are sold.
PCs includes desktops, notebooks, ultra-portables, and x86 servers.
PCs do not include handhelds. Data Ior all vendors are reported Ior calendar periods.
Data Ior Lenovo includes shipments Ior IBM PCD (including desktop and portable PCs and excluding x86 servers and personal
workstations) starting in Q2 2005, and only Lenovo data Ior prior quarters. This reIlects the legal status oI the companies, which
merged during the second quarter oI 2005.

Source: IDC, 1uly 18
th
2005, ¡www document] http://www.idc.com/getdoc.jsp?
containerId÷prUS00194105 (accessed September 25
th
2005).


EXHIBIT 6B: ASIA/PACIFIC (EXCL. JAPAN) PC SHIPMENTS BY VENDOR,
SECOND QUARTER 2005 (PRELIMINARY)

Rank Vendor Q2 2005
Market Share
Q1 2005
Market Share
Q2 2004
Market Share
Year-on-Year
Unit Growth
1 Lenovo 19.0° 10.9° 11.7° 90.9°*
2 HP 12.3° 11.6° 10.7° 34.4°
3 Dell 9.0° 7.6° 7.1° 47.9°
4 Founder 5.5° 5.3° 5.2° 25.9°
5 Acer 4.9° 4.7° 4.2° 34.6°
Others 49.3° 59.9° 61.1° -5.4°
Total 100.0° 100.0° 100.0° 17.2°
1 Lenovo
(merged)
19.0° 16.5° 18.8° 18.6°*

Note: *Data Ior Lenovo includes shipments Ior IBM PCD (including desktop and portable PCs and excluding x86 servers and
personal workstations) starting in 2Q 2005, and only Lenovo data Ior prior quarters. This reIlects the legal status oI the
companies, which merged during the second quarter oI 2005. For historical growth analysis, however, IDC has provided a
merged IBM PCD ¹ Lenovo line item at the end oI this table.

Source: IDC, 1uly 20
th
2005, ¡www document] http://www.idc.com/getdoc.jsp?
containerId÷pr2005_07_20_140500 (accessed September 25
th
2005).

06/285C Dell: Overcoming Roadblocks to Growth


32



EXHIBIT 6C: TOP 5 VENDORS: EUROPE, MIDDLE EAST, AND AFRICA (EMEA)
PC SHIPMENTS, SECOND QUARTER 2005 (PRELIMINARY)


(Unit Shipments are in thousands)
Rank Vendor Q2 2004 Q2 2005 Share Q2 2004 Share Q2 2005 YoY Growth
1 HP 2,017 2,436 17.1° 16.7° 20.8°
2 Dell 1,452 1,928 12.3° 13.2° 32.8°
3 Acer 787 1,325 6.7° 9.1° 68.4°
4 Fujitsu Siemens 836 1,065 7.1° 7.3° 27.4°
5 Lenovo (*) - 677 0.0° 4.6° -
Others 6,723 7,167 56.9° 49.1° 6.6°
Total EMEA 11,816 14,598 100.0° 100.0° 23.5°
5 IBM/Lenovo (**) 662 677 5.6º 4.6º 2.3º
Notes:
Shipments are branded shipments Ior all Iorm Iactors (including desktops and notebooks) and excludes x86 servers as
well as original equipment manuIacturer sales Ior all vendors.
Data Ior all vendors is reported Ior calendar periods.
(*) Data Ior Lenovo in Q2 2005 includes shipments oI IBM PCD up to the acquisition by Lenovo and encompasses
desktops (excl. personal workstations) and notebooks (incl. mobile workstations).
(**) Historical data Ior IBM PCD (excl. desktop workstations and x86 servers) and comparison with Q2 2005 is
provided here Ior reIerence purposes to allow year-on-year analysis but does not reIlect the historical perIormance oI
Lenovo prior to Q2 2005.

Source: IDC, 1uly 19
th
2005, URL: http://www.idc.com/getdoc.jsp?containerId÷
pr2005_07_19_214510, accessed September 25
th
2005

06/285C Dell: Overcoming Roadblocks to Growth


33



EXHIBIT 6D: CHINA PC SHIPMENTS, FIRST HALF OF 2005

Vendor 1
st
half of
2005 (units)
Market
share
1
st
half of
2004 (units)
Market
share
Year-on-
year growth
Lenovo 2,613,828 31.3° 1,964,070 27.5° 33.1°
Founder 873,092 10.5° 650,420 9.1° 34.2°
TongIang 684,856 8.2° 455,775 6.4° 50.3°
Dell 664,057 7.9° 481,355 6.7° 38.0°
HP 525,035 6.3° 320,925 4.5° 63.6°
Others 2,992,628 35.8° 3,272,636 45.8° -8.6°
Total 8,353,496 100.0° 7,145,181 100.0° 16.9°

Source: Gartner`s August report, extracted from E-zone Issue 367, August 26
th
2005.