Case Study Analysis Dell’s Dilemma in Brazil

The situation. indirect distribution channels. which was followed by eleven other countries during the next four years. which had arisen from a change in the political climate within the preferred state of Rio Grande do Sul. Hewlett-Packard. Dell Corporation was faced with an unforeseen situation affecting its decision to locate its first manufacturing plant in Latin America. and Compaq (Achtmeyer.Introduction In mid-March 1999. began selling IBM-compatible computers from his dorm room in 1984. the company was based on a simple idea that it could best understand consumer needs and efficiently provide the most effective computing solutions to meet those needs by selling computer systems directly to customers. and also allowed the company to build every system to order. richly configured systems at competitive prices. In less than two decades. It eliminated retailers and shipped directly from its factories to end customers. Dell became the number one retailer of personal computers outselling IBM.50 per share four years later (About. Sustaining a direct model of operation required intensive organisation. the process followed in selecting a state. had left the company with three options. Using parts he purchased at wholesale prices. The characteristics of Dell’s global operation resemble a “global” strategy for expansion with a centralised hub. Following its re-naming from “PCs Limited” to “Dell Computer Corporation” the company grew internationally with is first operations opening in Ireland in 1987. this global setup enables them to provide localised support services. turning over inventory. Dell built the machines to closely resemble IBM models and then sold them to PC users looking to avoid the prices typically charged by computer retailers (Dell Corp History). and provides a recommended way forward for the company. Dell introduced the latest relevant technology much more quickly than companies with slow-moving. Further. Dell – the company University of Texas student. bridging any inadequacies that may arise from the lack of store front exposure. who added unnecessary time and cost. every four days. Michael Dell. And it designed an integrated supply chain linking Dell’s suppliers very closely to its assembly factories and order-intake system (Achtmeyer. 2002).com). Strategy for global expansion Dell’s core business is the assembly and sale of computers to meet specific customer requirements. or try to renegotiate with the newly elected governor. . The company outsourced all components but assembled systems itself. are made centrally from headquarters in Texas. the current situation and contributing factors. This direct business model eliminated retailers. They must leave Brazil entirely. move the plant to another state. This case study analysis assesses the appropriateness of the company’s decision to enter Brazil (through country and industry analysis). 2002). The company that was started with $1000 capital was selling stocks for $8. It took customised orders for hardware and software over the phone or via the Internet. From its conception. This is due to the fact that the key decision-making. along with financial decisions. offering customers powerful. while manufacturing or assembly of the company’s products are strategically positioned across the globe to better realise its direct to customer and speed of service business goals. on average.

150 per capita (Economic expert. Each state has an autonomous local government. This accounts to $6. Brazil was the tenth largest economy in the world. Brazil embarked on a successful economic stabilisation programme known as the “Real plan” in July 1994. Dell’s selection process Requirements The key factors that Dell would consider as requirements in settling on a potential site for manufacturing could be drawn out from the main reason for its success as a business. That is. with 36.5% in 1998. It was forecasted in 1998 that there would be more than 30% growth in computer operation in Brazil by 2001 (Information Society in Brazil. In order to stay above its competition. Paraguay. This type of drive for economic growth and the opened-up economy meant that Brazil’s foreign direct investment rose from $19 billion in 1997 to $28. The state governments are responsible for maintaining highways. 1998). 2009). Uruguay. A prospective manufacturing site must ensure that the company’s just-in-time and knowledge intensive processes perfected through time can be maintained. public infrastructure and police. Brazil had a GDP of $1. Most large industries concentrated in the south and southeast. The level of authority given to the states meant that each could attract foreign direct investment by providing a set of lucrative incentives specific to those states. fell sharply reaching a low 2.9 billion in 1998 (Encyclopaedia of Nations). the sales for personal computers were growing faster in Latin America than anywhere else in the world. Chile and Bolivia was another lucrative proposition for market leaders as this agreement enabled a country that produces 60% of a particular product to trade with member nations free from tariffs.057 trillion in 1999 at a real growth rate of 0. The computer sector employed 100.000 workers directly. Brazil operates under a federal system with 26 separate states and one district which contains the capital city. Together. these factors created an attractive prospect for Dell entering Brazil. Brasilia. States are generally based on historical.8%. the computer industry grew nearly 14% in 1999. with a population of close to 170 million. with the sale of computer goods and services generating revenue of R 25. It must also enable speed of delivery of products to its customers. It was a highly diversified economy with wide variations in the levels of development.Prospective market. Commitment to high-technology investment and . Brazil’s alliance within the South American customs union that included Argentina. These factors cumulatively endorsed Dell’s decision for market entry.23% being college graduates. According to the Secretariat of Computer and Automation Policies in Brazil. Brazil Country view Functions of doing business in a country are a function of the size of the market. housing programmes. Dell must be able to achieve this in Brazil at the lowest possible cost. its present wealth and its future growth prospects (Hill. They also collect state taxes which are generally concentrated in sales taxes (Dagapioso & Barcenas. and thus compete with other states. Inflation. Market for computers – industry level view In the late 1990s. which had reached an annual level of nearly 5000% at the end of 1993. conventional borders and have developed throughout the centuries. its business model. From a macroeconomic point of In 1998. 2009).6 billion. comprising a mayor and legislative body elected directly by the people.

Dell’s ultimate decision was affected by the perception that Minas Gerias is more suited for large industries that are more capital intensive (e. . as he was well known for long and drawn-out negotiations. The state’s foreign investments were brokered through the state-owned foreign investment promotion agency and were already exposed to a large amount of foreign investment. the state had adopted a policy of not offering special financial incentives ─ this was undesirable to Dell. with its large population. the foreign investment company that was 70% state-owned and 30% private-owned had presented a successful case for promoting the state and had offered a lucrative financial deal that included considerable tax benefits as well as financial loans with significant grace periods. The foreign investment promotion agency. Minas Gerias was a close contender as the preferred state. From Dell’s perspective. Analysis and synthesis Within Dell’s determinations in relation to each of the states above. This agency had made no efforts to address Dell’s specific requirements and gave an impression of a “one-fits-all” presentation. and his team of selectors considered five states in Brazil.g. Senior Vice President for Dell’s worldwide operations. The main attraction was the size of its market. and the focus on financial incentives offered by each of the states. The coastal city of Rio de Janeiro was overlooked purely based on the reputation of the head of its foreign investment promotion agency. Sao Paulo was one of the highest ranking states during Dell’s analysis. The following is a summary of how Dell perceived each candidate as a potential site for its business. They are: 1) 2) the involvement and the level of importance of the investment promotion agencies. This state. The state also offered no financial benefits to attract Dell and was excluded from consideration. there were two consistently prominent elements. Polo. privatised and efficient telecommunications. was Dell’s principal market for selling computers and provided the company with access to a large pool of appropriately skill labour. Dell’s decision to exclude Sao Paulo as a candidate was also influenced by the efforts of the promotion agency that were perceived to be negative in promoting the state to Dell. Due to that success. and lucrative financial incentives that included cost compensation for extended shipping required due to its geographic location. automobile) and thus not suited for Dell’s face-paced. is the only privately-owned such agency in Brazil and was able to leverage its business know how and established networks to effectively persuade Dell. Rio Grande do Sul was Dell’s eventual primary selection. just-in-time oriented company. a skilled labour pool with most having university qualifications. mining. The state of Pranha also suffered at the hands of (from Dell’s perspective) a poorlyperforming foreign investment promotion agency. States considered Keith Maxwell.availability of skilled labour and security were also important requirements driving Dell’s decision-making process. The state had a lot to offer in well-developed modern infrastructure.

when Polo arranged for Dell executives to meet with major business executives. Dell is also able to develop and establish useful relationships with these agencies and in turn gain access to local knowledge. With such a setup. having such an agency to deal with means that Dell has access to one source for gathering the required information and intelligence on a state. Fixed costs such as taxes. Dell executives could have missed vital information that would have been material in making a decision. could have incentivised them to present desirable information. networks and political leverage. lower costs will enable the company to offer an even more lucrative price proposition to its customers by maximising its already low cost product offerings. This could have led them to miss a better opportunity with another state. can add great value towards realising profit-based visions for business. through Polo. Therefore. especially given that this is a major benefit for direct investment in Brazil. Having one source of information means that the information can easily be manipulated to be presented from an altered and untruthful perspective. Dell disregarded a number of states purely based on the performance of the agencies. Financial incentives focus Leverage in terms of financial incentives is a common goal for a company looking to expand globally. This was done solely through the designated foreign investment promotion agency of the respective state. . Another limiting factor is that discovering a state’s true potential is dependent on how the agency performs. From Dell’s (the entering business’s) perspective. customs. which can lead to increased efficiencies during the selection process. Investment promotion agencies Each state had a unique approach to promoting its attractiveness to Dell’s requirements. a number of disadvantages that could cause both financial and non-financial costs to Dell were also prevalent. Another benefit of having one point of contact is that Dell primarily has one point of negotiation which can reduce the time taken to enter the market. the agency could have easily hand-picked local executives who would provide the desired information or worse. enabling them to have access to better-qualified staff (through higher financial offerings) within the agencies.The prominence of these elements warrants closer consideration of the implications of such perspectives in selecting Dell’s desired location. This enables Dell to refocus its capital in other areas of growth. For example. the agency may be open to corruption and unethical behaviour. especially considering the fact that Dell’s two most preferred states were represented by agencies that were either fully or partially privatised. It is easy for the agency to only disclose information that presents a favourable case for the state. there are a number of advantages with such a setup. There is also the potential of raising required capital locally through low cost loans with long grace periods on offer by state governments. It also means that the company has one point of contact into that state. The calibre of agency staff may not necessarily represent the calibre of the state in meeting Dell’s requirements. if reduced. For example. business practices. More aligned with Dell’s business model. For example. Dell was able to gain access to and gather useful market information from leading local businesses such as Gerdau Steel conglomerate and international companies such as Coca-Cola. For example. For example. A key element in realising this vision is to closely manage costs involved with setting up and maintaining a business. Dell was justified in seeking the best financial incentives on offer from competing states. The decision for global expansion is usually driven by its vision to increase profitability or increase potential for profit growth. as outlined above. which are key elements driving the success of a company entering an international market.

g. a socialist. Dell’s dilemma in Brazil eventuated as a result of one or more disadvantages affecting the key aspects discussed above becoming a reality. As a result. the financial incentives offered to Dell. could create greater costs than the benefits gained through financial incentives. In a country that has seen several political reforms and delegated so much authority to state governments. Although holding widely-divergent political views. social-cultural or environmental) risks that. arrange prominent local business executives to provide a ground level perspective and arrange dinner in a location that resembled the familiar surroundings of their home in Texas. Current situation and contributing factors Unfortunately. While Polo was successful in promoting and convincing Dell to select Rio Grande do Sul. Part of Dutra’s campaign against Britto was that excessive concessions granted to foreign transnational corporations must stop. is a successful ex-business man who knew what concerns business executives. . The foreign investment promotion agency gained Dell’s trust by comparing itself to the existing successful relationship between Dell and the Irish Development Authority. in net effect. However. Therefore. both candidates endorsed the idea of promoting economic development within the state through foreign direct investment. a thorough analysis of the political stability and risks should have been at the top of Dell’s considerations. what Dell failed to consider in its negotiation was the political opposition and the implications of the opposition coming into power. The head of Polo. During Dell negotiations. move the plant to another state. and Antonio Britto. the company was not able to properly investigate a key non-financial factor ─ political risks. Antonio Britto was the governor elect and had been elected on promises to promote foreign investment creating jobs and economic development in Rio Grande do Sul ─ promises that are well in line with Dell’s offering to the state. At no stage did the political situation of Rio Grande do Sul come into question. including the loan arrangements. would need to be renegotiated. was against the government granting benefits to foreign transnational corporations. Olivio Dutra. he was able to persuade the governor to cancel a meeting and meet with Dell executives. Political situation The state had two candidates for the position of governor: Olivio Dutra. Recommendations There are three possibilities available to Dell for overcoming its current situation in Brazil: a) b) c) leave Brazil entirely. For example. The governor elect from the 1998 elections. he was able to anticipate and tailor the state presentations to meet Dell’s needs. Upon a closer look at the factors leading to Dell’s ultimate choice of Rio Grande do Sul. it is clear that its decision was swayed by Polo’s clever promotional strategy. a pro-business moderate. Dutra. Jose Cesar Martins. or try and negotiate with the newly-elected governor. political.The main disadvantage of persisting with a strong focus on financial incentives is that it could overlook or not give due consideration to one or more non-financial (e.

Dell has promised to develop joint research and development projects with the local universities. However. the key factors should be presented from a socio-cultural perspective (such as the pledges made by Dell for returning value to the state) rather than a purely economic perspective ─ a socialist party would better relate to sociocultural perspectives. Moreover. it is important to consider the situation from the perspectives of the key entities involved. These benefits from foreign direct investment for the state. in its current agreement. . Dell’s selection process did not favour many of the states considered. the company had pledged to hire 260 employees locally rising to 700 in five years of operation. Following the loss of the Ford investment. This leaves the governor in a vulnerable position from which Dell could negotiate to arrive at a similar or better position for establishing its business in Rio Grande do Sul. coupled with the unfavourable position developed for Dutra through Ford’s decision to abandon the state. with its developing economy. From the perspective of Rio Grande do Sul. the findings of country and industry analysis suggest that Brazil. Dutra’s Partido dos Trabalhadores (Workers Party) is a socialist party that believed in honest and effective government. In fact. should provide a compelling case for financially incentivising Dell in order to encourage Dell to establish its business in Rio Grande do Sul. Dutra did not stand in good stead with his voters in remaining true to his campaign promises. there is merit in Dell renegotiating its deal with Dutra. Renegotiating with Dutra Based on the factors discussed above. They were about promoting development for people of the state by creating jobs and development opportunities. politically. In addition. was overlooked by the executives under the belief that the state could not provide for Dell’s specific requirements. The closest competing state. For example. a capitalist party would focus more on economic factors. Even Dell’s principal market for computers in Sao Paulo was seen to be inappropriate for meeting Dell’s business model.Key entity perspectives In determining the appropriate direction for Dell to recover from this situation. Further. the company’s $128 million investment in the plant would create work opportunities for the state through construction and maintenance contracts for the facility. the state had just lost the investment of a major international business in Ford. This loss of investment raised dissatisfaction within the state and its people and had even triggered protests. based on the analysis process followed by Dell. Minas Gerias. growth in the computing market and potential access to Mercosul countries is a market that should not be discounted lightly. Rio Grande do Sul was the only potential state for establishing its business in Brazil.

L. Retrieved from History. W.about.pdf . Dell Computer . Retrieved from mba.Appendix About. M.html Hill. 12(420).com. Mission Statement and Retrieved from http://retailindustry.. Explanatory Notes.htm (2009).. (2002). Information Society in Brazil. (2009).Facts. Retrieved from http://www. W. Dell Corp Early History.html Encyclopedia of the Nations.hostip.html Economic expert. C. Trivia. (1998).ehealthstrategies.dartmouth.nationsencyclopedia. & Barchenas. Retrieved from http://www.pdf Dagapioso. McGraw Hill International Dell Computer corporation. Brazil foreign investment.. Computer Technology and Telecommunication in Brazil. Retrieved from http://www.tuck.scribd. Research. International Business – Competing in the global F. Retrieved from http://www.

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