Dell Case

Key Issues
 Matching Dell

Industry Dynamics
How to attain advantage
How to protect advantage

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 Industry Dynamics

5 Forces Model Gauges the degree

of competitive rivalry in industry.
Bargaining Power of Suppliers.
Bargaining Power of Customer.
Threat of new entry.
Threat of substitutes.
Intensity of Rivalry.

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 Bargaining Power of Suppliers

Proprietary Standards from Microsoft

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

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 Bargaining Power of Customers

Standardized product means its easy

to switch brands
Resellers and retailers have grip on
channels.
Corp. users buy direct based on price
since little differentiation
Over BP of customers is high and
rising.

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 Threat of new entry.

Increasing with rise of internet and

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

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 Threat of substitutes.

Within product category, few direct

substitutes.

2-7
 Intensity of Rivalry.

Rivalry is very high due to:

Lack of differentiation.
Reliability and Service are only diffs.
Price is similar for all competitors
If prices are similar, this is a signal of
rivalry.
Do prices go down or up?
Tend to fall.

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 Dells Advantages/Disadv.

Direct to order
Efficient (best cost position)
Effective (for some customers - best)
Focus!
Not distracted by other channels
Maybe not competent in other channels?
Service
By from Dell, deal w/ Dell.

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 IBMs Advantages/Disadv.

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

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 Compaq Adv/Disadv.

Cost position is good

Retail relationships
Poor quality
Poor reputation

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 HP Adv/Disadv.

Quality reputation
Higher cost
Resellers

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 Gateway Adv/Disadv.

Price lower
Service
Image?

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 Example of Unit Price
and Cost Analysis
1998 numbers Dell Compaq Notes
Unit Price 1996 1932
Unit COGS 1555 1325 1-Gross Margin
Channel Markup/Unit 0 135
Unit SGA 195 309
Inv. Carry Costs 44 124
Cost of unit 1794 1893
Profit 202 39

Rev 12327 31169

Gross Margin 2722 9786
Margin % Rev 22.1% 31.4%
Channel Markup 0.0% 7.0%
SGA 1202 4978
SGA % Rev 9.8% 16.0%
Cost of inventory 273 2,005

Days of Inventory 10 34 Inv / (Rev-Gross Marg)*365

Cost of Inv % of Rev 2% 6%
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 For all firms

1998 numbers Dell Compaq IBM HP Gateway

Unit Price 1996 1932 1959 2129 1762
Unit COGS 1555 1325 921 1451 1406
Channel Markup/Unit 0 135 0 149 0
Unit SGA 195 309 400 353 242
Inv. Carry Costs 44 124 125 284 39
Cost of unit 1794 1893 1445 2237 1687
Profit 202 39 514 -108 75

Rev 12327 31169 81667 47061 7648

Gross Margin 2722 9786 43282 14989 1546
Margin % Rev 22.1% 31.4% 53.0% 31.9% 20.2%
Channel Markup 0.0% 7.0% 0.0% 7.0% 0.0%
SGA 1202 4978 16662 7793 1052
SGA % Rev 9.8% 16.0% 20.4% 16.6% 13.8%
Cost of inventory 273 2,005 5,200 6,284 168

Days of Inventory 10 34 49 72 10
Cost of Inv % of Rev 2% 6% 6% 13% 2%

Note: IBM numbers are likely inflated by Mainframe and service being included.
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