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In 1984, at the age of 19, Michael Dell founded Dell Computer with a simple vision and business concept—that personal computers could be built to order and sold directly to customers. Michael Dell believed his approach to the PC business had two advantages: (1) bypassing distributors and retail dealers eliminated the markups of resellers and (2) building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components, and finished goods. While the company sometimes struggled during the 19861993 period trying to refine its strategy, build an adequate infrastructure, and establish market credibility against better-known rivals, Dell’s strategy started to click into full gear in the late 1990s. Going into 2003, Dell’s sell-direct and build-to-order business model and strategy had provided the company with the most efficient procurement, manufacturing, and distribution capabilities in the global PC industry and given Dell a substantial cost and profit margin advantage over rival PC vendors. Dell’s operating costs ran about 10 percent of revenues in 2002, compared to 21 percent of revenues at Hewlett Packard, 25 percent at Gateway, and 46 percent at Cisco Systems (considered the world’s most efficient producer of networking equipment). Dell’s low-cost provider status was powering its drive for market leadership in a growing number of product categories. Dell Computer was solidly entrenched as the market leader in PC sales in the U.S., with nearly a 28 percent market share in 2002, comfortably ahead of Hewlett Packard with 16.8 percent and Gateway with 5.7 percent. Dell had moved ahead of IBM into second place during 1998 and then overtaken Compaq Computer as the U.S. sales leader in the third quarter of 1999. Its market share leadership in the U.S. had widened every year since 2000. Worldwide, Dell Computer was in a neck-and-neck race with Hewlett Packard (which acquired second-ranked Compaq Computer in May 2002) for global market leadership— Dell was the world leader in unit sales in the first and third quarters of 2002 and HP was the sales leader in the second and fourth quarters. Dell had overtaken Compaq as the global market leader in 2001. But when HP, the thirdranking PC seller in the world, acquired Compaq, the second-ranking PC vendor, Dell found itself in a tight battle with HP for the top spot globally. Since the late 1990s, Dell had also been driving for industry leadership in servers. In 2002 Dell was the No.1 domestic seller of entry-level servers and high performance workstations (used for applications with demanding graphics). It was No. 2 in the world in server shipments and in striking distance of taking over the global market lead. In the mid- and late-1990s, a big fraction of the servers sold were proprietary machines running on customized Unix operating systems and carrying price tags ranging from $30,000 to $1 million or more. But a seismic shift in server technology, coupled with growing costconsciousness on the part of server users, produced a radically new server market during 1999-2002. In 2003 about 8 out of 10 servers sold were expected to carry prices tags below $10,000 and to run on either Windows or the free Linux operating system rather than more costly Unix systems. The overall share of Unix-based servers shipped in 2003 was expected
to be about 10 percent, down from about 18 percent in 1997. Dell’s domestic and global market share in low-priced and mid-range servers was climbing rapidly. Dell had over a 30 percent share of the 2002 world market for servers, up from 2 percent in 1995. In addition, Dell was making market inroads in other product categories. Its sales of data storage devices were growing rapidly, aided by a strategic alliance with EMC, a leader in the data storage. In 2001-2002, Dell began selling low-cost, data-routing switches—a product category where Cisco Systems was the dominant global leader. In late 2002 Dell introduced a new line of handheld PCs—the Axim X5 to compete against the higher-priced products of Palm, HP, and others; the Axim offered a solid but not trendsetting design, was packed with features, and was priced roughly 50 percent below the best-selling models of rivals. Starting in 2003, Dell planned to begin marketing Dell-branded printers and printer cartridges, product categories where Hewlett Packard was the global leader and a category that provided HP with the lion’s share of its profits. In January 2003, Dell announced that it would begin selling retail-store systems, including electronic cash registers, specialized software, services, and peripherals required to link retail-store checkout lanes to corporate information systems. Since the late 1990s, Dell had been marketing CD and DVD drives, printers, scanners, modems, monitors, digital cameras, memory cards, ZIP drives, and speakers made by a variety of manufacturers. In a February 2003 article in Business 2.0, Michael Dell said, “The best way to describe us now is as a broad computer systems and services company. We have a pretty simple system. The most important thing is to satisfy our customers. The second most important thing is to be profitable. If we don’t do the first one well, the second one won’t happen.” For the most part, Michael Dell was not particularly concerned about the efforts of competitors to copy many aspects of Dell’s build-to-order and sell direct strategy. He explained why: The competition started copying us seven years ago. That’s when we were a $1 billion business. Now we’re $36 billion. And they haven’t made much progress to be honest with you. The learning curve for them is difficult. It’s like going from baseball to soccer. I think a lot of people have analyzed our business model, a lot of people have written about it and tried to understand it. This is an 18½ year process…..it comes from many, many cycles of learning…..It’s very, very different than designing products to be built to stock…..Our whole company is oriented around a very different way of operating……I don’t, for any second, believe that they are not trying to catch up. But it is also safe to assume that Dell is not staying in the same place. As Dell Computer battled Hewlett-Packard for leadership in the global PC market in 2003, Michael Dell believed the opportunities in front of Dell were tremendous: …..when technologies begin to standardize or commoditize, the game starts to change. Markets open up to be volume markets and this is very much where Dell has made its mark—first in the PC market in desktops and notebooks and then in the server market and the storage market and services and data networking. The way we think about it is that there are all of these various technologies out there…..What we have been able to do is build a business system that takes those technological ingredients, translates them into products and services and gets them to the customer more efficiently than any company around. We only have about a 3 percent market share in the $800 billion-plus IT market, so we think….we’ve got a lot more opportunity going forward….it’s a pretty exciting
time to be in our industry and the opportunities are pretty awesome.
Suggestions for Using the Case
Dell is a fascinating company with a powerful competitive strategy and the resource capabilities to not only be the global leader in PCs but also to wrest market share from rivals in a growing number of other IT products and services. The case describes Michael Dell’s background and management style, explores Dell’s strategy in some detail, and presents brief profiles of Dell’s principal competitors—Hewlett-Packard (now the parent of Compaq Computer), IBM, Gateway, and Sun Microsystems. Because Dell’s strategy in PCs and other IT products is embedded in restructuring the industry value chain to drive costs out of the business and provide customers globally with more value-added for their IT dollars as compared to rivals, you should defer assigning the case until you have covered Chapters 3 and 4 and maybe even Chapter 5. You’ll find that the Dell case is a study in value-chain restructuring, crafting a low-cost leadership strategy in the high-velocity/hypercompetitive IT marketplace, leveraging its resource strengths to grow the product line, and then perfecting the process of strategy execution. It is a case where the lesson for students is how to craft and execute strategy in a top-notch fashion, how to build sustainable competitive advantage, and how to win the battle for global market leadership. It is not a case where students are challenged to identify problems and come up with a comprehensive set of action recommendations to restore company performance. You’ll find that the Dell case is a huge eye-opener for students, exposing them to some pretty powerful strategizing on Dell’s part and how Dell has maneuvered itself into a very enviable market position. We created a case preparation exercise on Case-TUTOR that pushes students to think through all the details of Dell’s strategy, do a serious evaluation of the company’s resource strengths and weaknesses, and probe the nature and durability of the company’s competitive advantages over rivals. The exercise is structured around the assignment questions below and it will serve the valuable purpose of walking students step-by-step through the process of developing answers to the assignment questions. We strongly recommend on this case that you have students complete the case preparation exercise and bring their notes to class for use in the discussion. You might even want to have students chosen at random turn in their printouts at the end of class and peruse them to see what kind of preparation they are doing. Such an action sends a signal that you expect completion of the exercise and are likely to do some spot checking of the work they do. The Dell case works very nicely for a written case assignment or oral team presentation if you want students to go through the exercise of fleshing out the elements of a company’s strategy, do a detailed resource assessment, and understand how a company builds sustainable competitive advantage. Our suggested assignment question is Prepare a report to your instructor identifying all the pieces of Dell’s strategy and how these pieces fit together, presenting a detailed resource strength/resource weakness assessment, and discussing whether and why Dell’s strategy has (or has not) resulted in a sustainable competitive advantage. End your report with an assessment of Dell’s chances for outcompeting Hewlett-Packard and becoming the recognized world leader in PCs.
1. What is your evaluation of Michael Dell as CEO? How well has he performed the tasks of strategic management discussed in Chapter 1? 2. What are the elements of Dell’s strategy? How well do the pieces fit together? Is the strategy evolving? 3. Does Dell’s expansion into other IT products and services make good strategic sense? Why or why not? 4. What does a SWOT analysis reveal about the attractiveness of Dell Computer’s situation? 5. What does a competitive strength assessment reveal about Dell, as compared to IBM, Hewlett-Packard, and Gateway? Among these competitors, who enjoys the strongest competitive position? Who is in the weakest overall competitive position? 6. Has Dell’s strategy resulted in a substantial competitive advantage over its rivals? What is the basis for whatever competitive advantage it has? 7. What is your assessment of the company’s financial performance the past five years? 8. Is Dell’s strategy potent enough to beat out Hewlett-Packard? What are Dell’s chances for becoming the dominant leader in the global PC market?
Teaching Outline and Analysis
1. What impresses you about this company?
This is a fun question to trigger the discussion of Dell Computer and gives you a chance to gauge the mood and preparation of the class. Several things ought to be judged as impressive: Michael Dell (he is the youngest—at age 38—and longest-serving CEO of a major computer company); he has emerged as one of the world’s most respected and influential CEOs. Dell Computer’s strategy The incredible rise in Dell’s stock price during the 1990s The company’s meteoric rise from irrelevant also-ran to potential global market leadership
2. What is your assessment of the job Michael Dell has done as the company’s CEO? What grade would you give him? Has he done a good job performing the five tasks of strategic management?
We think Michael Dell deserves a solid A+. It is hard to see how he could have done a better job, given his age and lack of experience in the company’s early years. At age 38, he is a multi-billionaire, one of the richest people in the world, and one of the most respected CEOs in the world. To structure this facet of the discussion, you can go to the board and create five headings: (1) Vision, (2) Objective-Setting, (3) Crafting Strategy, (4) Executing Strategy, and (5) Making Corrective Adjustments. As students offer their evaluations, you can have them suggest the proper category for their assessment. Most of the
following points ought to be identified by class members. Forming a Strategic Vision Michael Dell is definitely the company’s chief strategic visionary. He came up with the concept for the business and has guided the evolution of Dell Computer’s business model. Objective Setting In 1990, Michael Dell set an objective for Dell Computer to become one of the top three PC companies.
It achieved this objective in 1998 and has since moved into a battle with Hewlett-Packard for first place worldwide. Dell Computer has turned in a very solid financial performance since 1997, except for fiscal 2002
He has presided over Dell’s very good financial performance (see case Exhibit 2).
Crafting a Strategy Michael Dell is the chief architect of the company’s strategy.
The direct sales approach and the build-to-order approach are both Michael Dell contributions.
Michael Dell has been the driving force behind the company’s initiatives to revamp the traditional industry value chain, cutting out middlemen by selling direct, streamlining supply chain activities, and applying Internet technology. Using alliances with suppliers, Michael Dell and Dell Computer have pioneered the creation of an exceptionally efficient supply chain (supply chain management is one of Dell’s distinctive competencies, along with use of Internet technology) There is plenty of evidence in the case that Michael Dell’s prints are on many key pieces of the company’s strategy. Executing Strategy Dell is active in pushing for better execution of just-in-time inventory management and reduction in the number of days of parts inventories. Dell’s strategy requires smooth execution—from customers all the back to the operations of suppliers. And the evidence in the case is that the strategy is being executed very, very well. The company’s astute application of Internet technology is one of its keys to effective strategy execution and squeezing out cost savings ($1 billion in costs were eliminated in 2002 and more cost savings are on the horizon). Leading Corrective Adjustments He stays in close personal touch with customers.
Selling direct gives Dell firsthand intelligence about customer preferences and needs, as well as immediate feedback on design problems and quality.
Dell has responded to changes in the PC marketplace by pursuing ever greater market segmentation. Michael Dell has led the evolving refinements in the company’s strategy.
The most recent refinement is the expansion into other IT products—data storage products, Internet switches, printers and cartridges, handheld PCs, and IT services.
On the whole, it should be clear to class members that Michael Dell is an effective CEO and that the tasks of strategic management are being quite well performed.
3. What are the elements of Dell Computer’s strategy? How well do the pieces fit together? Is Dell’s strategy evolving?
Dell’s strategy has a number of key elements: Cost-efficient build-to-order manufacturing and mass customization
Shifted from assembly-line manufacturing to “cell manufacturing”—resulted in cutting assembly times by 75 percent and doubling of productivity. More recently, Dell has taken the assembly process to even more efficient heights via innovative assembly techniques that reduce the number of touches by workers during assembly and shipping Has six plants across the world—Texas, Tennessee, Ireland, Malaysia, China, and Brazil All PCs built to customer specifications—Dell has pioneered mass production of customized products The company has proven to be a world-class manufacturing innovator—a distinctive competence Extensive testing of parts, components, and subassemblies obtained from suppliers Participation in quality certification programs with suppliers Form long-term partnerships with reputable suppliers of name-brand parts and components and stick with them as long as they maintain their leadership in technology Partner with as few vendors as possible z Dell commits to purchase a specific percentage of its requirements for each of its long-term suppliers—assures Dell of getting the volume of components needed on a timely basis Alliances and partnerships have enabled just-in-time delivery Developed a three-year plan with each key supplier Minimize the number of days of component inventories
Partnerships with suppliers
Strong commitment to just-in-time inventory practices
Take advantage of the economies of minimal inventories Over the years, Dell has refined and improved its inventory tracking capabilities and its procedures for operating with small inventories, driving the average number of days of parts/components inventory down from 6 days in 1999-2000 to 4 days in 2002-2003. Orders come in by phone, fax, Internet, and field sales force Direct sales helped the company keep its pulse on the market, be customerdriven, and respond quickly Created special in-house groups to develop sales and service programs appropriate to the needs and expectations of different market segments (see case Exhibit 8). — global enterprise accounts — large and midsize companies (over 400 employees) — health care businesses (over 400 employees) — government: federal, state, and local — education: K-12 and higher education (including special programs for faculty, staff, and students) — small businesses — individual consumers — global market participation: Europe, Latin America, China, Japan, North America
Direct sales and extensive market segmentation
Use of Dell Direct Store kiosks to access individuals and households Contracts with local service providers to handle customer requests for repairs; on-site service was provided on a next-day basis; some on-site Dell support Call centers (U.S., Europe, and Asia) to take calls from customers Provide technical support via toll-free number, fax, and e-mail First-call resolution initiative Premier pages Value-added services—place asset tags on PCs for corporate customers and load software On-site services—provide training to service-provider personnel Bring down the cost of IT services for large enterprise customers www.dell.com—technical support, e-support Dell talk, Ask Dudley Help customers migrate their systems and application from one generation to the next generation of technology Customer forums
Pioneering use of Internet and e-commerce technology
Using Internet technology and sharing information with supply partners and customers to squeeze cost-savings out of supply chain Streamline order-to-delivery process Encourage greater customer use of website—give customers a better experience online than they can get offline Gather and use all types of information Data storage hardware (the PowerVault line) Data routing switches (PowerConnect switches) Handheld PCs Printers and cartridges—an attack on Hewlett-Packard (go after HP’s biggest and profitable business at the same time it is trying to beat out HP for global market leadership in PCs Entry into white-box (unbranded) PC segment—such PCs accounted for 33% of total PC sales and 50% of sales to small businesses (expected sales of $380 million in 2003) IT services Sort out all the new technology coming into the marketplace and help steer customers to the options/solutions most relevant to their needs. Dell has about 1,600 engineers working on product development and spends about $250 million annually to improve users’ experience with its products. Promote common standards and standardized technology as opposed to proprietary technology Studies conducted by Dell indicated that over time products incorporating standardized technology delivered performance per dollar of cost about twice as good as products based on proprietary technology. Run regular, prominent ads in leading computer publications as well as in USA Today, Wall Street Journal, and other business publications. The “Be Direct” and “Dude, You’re Gettin’ a Dell” tag lines
Expansion into new products
Research and development
Yes, the pieces of Dell’s strategy fit together beautifully. Yes, the strategy is evolving—as evidenced by the series of product line expansions
4. Does Dell’s expansion into other IT products and services make good strategic sense? Why or why not?
Dell’s expansion into other IT products and services signals a major offensive on Dell’s
part to leverage its low-cost expertise and brand name reputation and enter important product categories where the leaders are companies charging premium prices for their proprietary technology. Dell, using standard low-cost technology, seems to be in an excellent position to take sales and market share away from the current market leaders and capitalize on customers’ desire to cut their IT costs. We think Dell’s new strategic initiative to enter markets offering very big growth opportunities for a company pursuing a low-cost leadership strategy (in competition against companies pursuing high-end differentiation strategies—Cisco, HP, and IBM) makes excellent strategic sense. And we predict Dell will, in time, be quite successful in these markets. We, in particular, like Dell’s recent entry into printers and printer cartridges—HP’s stronghold and “profit sanctuary.” To the extent that Dell is able to win sales and market share away from HP in the printer market, it puts downward pressure on HP’s prices in printer products and weakens HP’s ability to support growth in its PC business with cash flows and resources provided by its printer business. We see Dell’s offensive in printers as a shrewd move which is likely to present HP with problems in defending its leading market position in printers and divert HP management’s attention away from beating out Dell in PCs.
5. Given that Dell is a global player, how would you characterize the company’s strategy—is Dell using a multi-country strategy or a global strategy? And if it is a global strategy, what kind of global strategy?
This is an appropriate question if you have assigned and covered Chapter 5 prior to assigning this case. Otherwise you should skip this question. We think students should see that Dell is employing a global low-cost leadership strategy. Some might claim that Dell is using a multi-country strategy because of its product customization approach, but we would argue that Dell customizes its products to fit the customer’s needs and wants, not those of a particular country market. So there’s little support for calling Dell’s as a multi-country strategy. It is fair to say that dell does tweak its global strategy somewhat to tune it to local country conditions (i.e., China and in Japan where it has used kiosks to reach individual PC buyers).
6. What does SWOT analysis reveal about Dell Computer’s situation?
The Dell case is an excellent vehicle for drilling the class in proper SWOT analysis. It should be apparent that much of Dell’s success stems from the core competencies and strong competitive capabilities that top management has built and conscientiously nurtured. Dell’s Resource Strengths/Capabilities/Competitive Assets Build-to-order capability—capability to mass produce customized products Proven capabilities as a world-class manufacturing innovator Just-in-time inventory know-how and capabilities Long-term partnerships with key suppliers
Pioneering use of Internet and e-commerce technology—information-sharing and close collaboration of parts/component suppliers, Dell, and Dell customers Dell appears to be the low-cost leader among the major players in the IT industry— a very powerful strength and competitive asset Capability to load customer software, install asset tags, create Premier Pages for corporate customers; Dell’s value-added approach to customer service lowers customer costs Intimate knowledge of customer requirements Dell’s global manufacturing and global sales capabilities More potent direct sales capability than any other rival R&D expertise in steering customers to “best” technologies and equipment configurations Reputation /image Growing breadth of product line Dell’s Resource Weaknesses/Deficiencies/Competitive Liabilities Direct sales is probably not the best way to access first-time buyers No in-house repair service capabilities (as some rivals have)—warranty repairs and fulfilling service contracts is outsourced to local service providers Lacks the product line and service breadth of Hewlett-Packard and IBM The direct sales approach is not the “preferred” or “normal” distribution channel in Europe, China, and in several other parts of the world Dell’s Market Opportunities Continue to take market share away from rivals and PCs in all the world’s major markets Make further inroads in servers, data storage products, data routing switches, handheld PCs, printers and ink cartridges, IT services Threats to Dell’s Well-Being Corporate customers and other large buyers decide to rely more and more heavily on the systems and service capabilities that IBM and HP can provide and that Dell cannot, thus giving HP and IBM an advantage in providing such service-conscious customers with their brands of PCs and servers A long-term slow-down in global sales of PCs, servers, and other IT products— many large enterprises are looking to cut their IT costs. You should not miss the opportunity here to take the SWOT list to a higher analytical plateau by getting the class to identify which of Dell’s resource strengths qualify as core competencies and/or distinctive competencies. Dell’s Distinctive Competencies Just-in-time inventory practices and supply chain management (no one in the PC industry does it better—or even comes close to matching what Dell can do)
Build-to-order manufacturing and mass customization—a world-class manufacturing innovator Direct sales capabilities (no rival can yet match Dell)—and the capabilities are global Leadership in use of the Internet and e-commerce technologies Dell’s Core Competencies Value-added customer services Market segmentation capabilities and skills SWOT Analysis Conclusions: The SWOT listings should make it clear to students that Dell’s strategy and competitive situation is quite attractive and why the company has been extremely successful in gaining market share in the PC market and the other segments it has entered. Dell has a very attractive, hard-to-imitate set of resource strengths and competitive capabilities. Having 4 legitimate distinctive competencies is most impressive (no other companies in any of the cases in this edition have more than 1 or 2). Overall, the company’s situation is very, very attractive; there is solid reason to believe Dell will have very strong revenue growth in the next several years. Dell’s status as the low-cost leader in a market where IT customers are becoming increasingly interested in reducing their IT costs and where many products are incorporating standardized components and technology (as opposed to proprietary technology) puts it in the right place at the right time to wrest sales and market share away from rivals who are marketing products based on proprietary technology and sell in them at premium prices.
7. What does a competitive strength assessment reveal about Dell, as compared to IBM, Hewlett-Packard, Gateway, and Sun Microsystems? Among these five competitors, who enjoys the strongest competitive position? Who is in the weakest overall competitive position?
There is ample information in the case for students to do a competitive strength assessment and practice using the methodology presented in Table 3.4 in Chapter 3. We urge spending about 10-15 minutes of class time drilling students on proper use of this tool. The Case-TUTOR exercise incorporates a competitive strength assessment that calls upon students to select strength measures, assign weights, and assign ratings. A representative competitive strength analysis is presented in Table 1 of this note. We think the two most important competitive strength measures are relative cost position and company capabilities to deliver what buyers view as good service. Relative cost position is becoming increasingly important because of falling prices and mounting price competition. Customer service capabilities are a big strength factor because many buyers are looking for value-added services from PC suppliers who can meet their particular needs for technical support and for after-the-sale service.
The competitive strength ratings in Table 1 indicate that Dell is the strongest player overall, chiefly because of its low-cost leadership status in a marketplace where buyers are increasingly price conscious and where products are becoming more like commodities. We see this as entirely justifiable. Dell has the best overall strategy in the PC industry. It has substantially lower costs than IBM and Hewlett-Packard/Compaq who are currently losing money or barely breaking even on PC sales. Dell’s PC business is, of course, quite profitable. And Dell’s value-added customer services and after-sale customer service capabilities are pretty impressive and growing. Dell’s weaknesses are in its smaller IT service and technical support capabilities (where it is no match against IBM and Hewlett-Packard), in its narrower product line (especially as compared to Hewlett-Packard), and in its somewhat weak access to first-time PC buyers (individuals who are looking for PCs under $1000). Gateway perhaps has an edge over Dell in appealing to the home and individual consumer segment in the U.S. (with both its sell direct and its retail stores) and Hewlett-Packard/Compaq has a global distributor/dealer network that is unmatched (its biggest strength, but also its biggest weakness because of its higher costs compared to Dell’s direct sales business model). One suspects that Carly Fiorina at Hewlett-Packard would disagree with our view that Dell will pull out in front of HP in 2003, given the pitch she made that was quoted in the case. But we think the evidence suggests that HP will have difficulties driving its costs far enough down in its PC business to compete on even-footing with Dell’s supply chainefficiency and direct sales model. There is clear channel conflict for HewlettPackard/Compaq to try to sell direct at the same time that it is relying on dealerdistributors to push its PCs and interface with end-use customers. HewlettPackard/Compaq’s dealers and distributors will be angered by any moves on HP’s part to shift over to a direct sales model for some/all customers and could shift their allegiance to competing brands. So, in some respects, HP is trapped into pursuing sales through re-sellers; it really can’t risk alienating its global network of dealers and distributors. If time permits, we suggest asking the class several questions about their assessment of HP’s prospects: Has Carly Fiorina overestimated or exaggerated HP’s strengths and future prospects (based on the lengthy quote of her views in the case)? What will it take for HP to fend off Dell and retain its recent lead in the global PC market? Why would corporate and other large enterprise customers prefer HP over Dell? Why would corporate and other large enterprise customers prefer Dell over HP? We see IBM’s position as steadily eroding and almost certainly likely to continue to erode. Its strengths are its image/reputation (a holdover from times past) and its extensive systems support capabilities (unmatched by anyone else in the world). But it is clearly a high-cost producer and its “premium price” policy is costing it sales and market share in a market where price competition is growing ever more vigorous. We predict that IBM will be a non-factor in PCs by 2005 or sooner, but it likely to be a very strong contender in medium and high-end servers for the foreseeable future. Gateway, though rated weakest and currently trying to turn its operations around, might move back into stronger contention, but students should be skeptical whether Gateway can do much better. It appears to be struggling, despite the turnaround.
If time permits, you can ask class members what they think of Gateway’s turnaround strategy and whether it will get Gateway back in the ballgame. Gateway’s strengths, historically, have been in the education and individual consumer segments, but we see Dell growing in strength here and Gateway as not being in a particularly strong position to defend against Dell’s inroads. Gateway is unlikely to make much headway with large corporate customers and its ability to compete globally is almost nonexistent.
8. Has Dell’s strategy resulted in a sustainable competitive advantage over rivals? If so, what is the nature and source of the advantage?
The evidence in the case points squarely to the conclusion that Dell has achieved a competitive advantage over rivals and that the advantage is likely to be sustainable. Dell has competitive capabilities that its rivals don’t have. As discussed above, we think a strong case can be made that Dell has 4 distinctive competencies (all of which represent superior competitive capabilities) Just-in-time inventory practices and supply chain management (no one in the PC industry does it better—or even comes close to matching what Dell can do) Build-to-order manufacturing and mass customization—a world-class manufacturing innovator Direct sales capabilities (no rival can yet match Dell)—and the capabilities are global Leadership in use of the Internet and e-commerce technologies In addition, Dell has two other core competencies: Delivering value-added services to customers Market segmentation capabilities and skills In concert, these competencies combine to give Dell competitive strengths which, in our opinion, are not matched by any of Dell’s competitors in PCs and servers. Dell has used these competencies to become the industry’s low-cost leader in delivering what customers view as a very appealing product. It should be clear to most students that Dell is the low-cost leader as compared to IBM, Hewlett-Packard, Sun Microsystems, and Gateway. Its costs relative to other leading contenders are unknown but seem to be relatively low given the sales and market share that Dell is winning. Some students may see Dell as a solidly-entrenched best-cost provider, given the package of value added services the come with its appealingly low prices. Students ought to be able to single out any of several factors that make Dell an appealing choice for PC buyers: Its build-to-order approach Its direct sales approach Its attractive prices (because of its good cost position)
Its ability to save customers money (putting on asset tags, loading customer software, Premier Pages) Its strong understanding of customer preferences and requirements Its growing product line and lineup of cost-saving IT services The close working relationship it has forged with customers But we think the best answer as to the nature and source of Dell’s competitive advantage is its entire business model, not any one or two of the components of Dell’s business model/strategy. It is a combination of things that make Dell such a potent competitor. Taken together, Dell’s resource capabilities constitute a powerful competitive package; individually, no one of its strategy components or resource capabilities might be sufficient to add up to a sustainable competitive advantage. The tests of whether Dell’s competitive advantage is sustainable, we think, hinge on the answers to two questions: How easy is it for rivals to imitate/copy Dell’s business model or key aspects of Dell’s resource strengths/competitive capabilities? How easy is it for rivals to trump Dell’s business model with something better? We think the answers to both questions are “not easy at all.” Hence, a good case can be made that Dell has achieved sustainable competitive advantage and that it is destined to continue to grow rapidly and take market share away from rivals.
9. What is your assessment of Dell’s financial performance since 1997?
Students need to get in the habit of crunching the numbers enough to diagnose the company’s financial condition. You can always signal them that you expect them to spend time assessing the financial statements in the case by spending a few minutes questioning the class about the company’s performance (even if, as is the case with Dell, the company’s performance is good to excellent—fiscal year 2002 being the outstanding exception). From case Exhibit 2 students can determine several things: Dell’s revenues grew at a compound annual rate of 28.8% from fiscal 1997 to fiscal 2003. Earnings have risen from $518 million ($0.19 per share) in 1997 to $2,122 million ($0.82 per share or a diluted $0.80 per share in 2003). The company earned a spectacular 43.5% return on shareholders’ equity in 2003 versus 26.5% in fiscal 2002, 38.7% in 2001, 31.3% in 2000, and 62.9% in 1999. The number of outstanding shares is trending downward. Profit margins are good but not as high as the 1997-1999 period: 2003 2002 2001 2000 1999 1998 1997 Gross profit margin 17.9% 17.7% 20.8% 20.7% 22.5% 22.1% 21.5% Operating profit margin 8.0 5.7 8.4 9.0 11.2 10.7 9.2
Net profit margin
Fiscal 2002 was not a good year for Dell. From case Exhibit 2, it can be determined that: Operating expenses declined as a percentage of sales revenues are trending downward— a clear sign of improving efficiency: 1997 12.3% 1998 11.4% 1999 11.3% 2000 11.7% 2001 11.9% 2002 11.7% 2003 9.9%
The company’s R&D spending has increased from $126 million in 1997 to $455 million in fiscal 2003—but is down from 1.6% of revenues in 1997 to 1.3% in 2003 S,G,&A expenses are declining as a percent of Dell’s sales revenues (a very positive sign of growing internal efficiencies): 1997 10.6% 1998 9.8% 1999 9.8% 2000 9.4% 2001 10.0% 2002 8.9% 2003 8.6%
From case Exhibit 3, students should see that: The company is in a strong cash position, with over $4.6 billion in cash and marketable securities as of February 1, 2003. The company has little long-term debt—$506 million in 2003 versus stockholders’ equity of $4.9 billion, a very good debt-to-equity ratio. Dell has a very skimpy (inadequate) current ratio of 1.00, down from 1.57 in 1999 and 1.48 in 2000. Working capital (current assets minus current liabilities) has dropped substantially over the past over the past 3 years. Overall, it is fair to say that Dell’s financial performance has been reasonably impressive (aside from fiscal 2002) and that the company is in good overall financial shape—declining expense percentages, modest long-term debt, $4.6 billion in cash and short-term investments, and acceptable profit margins (except for 2002).
10. What are Dell’s chances of becoming the global market share leader in PCs? Is its strategy potent enough to beat out Hewlett-Packard?
We think Dell’s chances are excellent and students should reach the same conclusion. We expect Dell to regain the lead by a comfortable margin over HP before the end of 2003. Carly Fiorina, HP’s CEO, would probably disagree, of course. Dell’s competitive position is strongest in PCs and low-end servers, where it appears to have a solid cost advantage. Dell’s low-cost position gives it excellent capability to continue to make market inroads in PCs and low-end servers. A strong case can be made that Dell is poised to be the global leader in PCs and low-end servers. However, what Dell can do outside of these market arenas remains to be seen.
Dell was the global market leader in PCs in the first quarter of 2003. In May 2003, Dell reported its best-ever fiscal first-quarter operating results, recording exceptional growth and profitability in all product and regional markets. Dell’s worldwide shipments in the first quarter of fiscal 2004 ended May 2, 2003 were up 29 percent from the same quarter in the prior year; volumes for the rest of the industry declined an average 1 percent. Dell’s growth was robust outside the United States—40% in Asia-Pacific and Japan, and 29% in Europe, the Middle East and Africa; Dell’s operating income in both these regions nearly doubled to record levels. The company’s 40% increase in server shipments was more than four times the average of other suppliers. Dell accounted for almost one-third of U.S. server volumes, and had led the category for more than two years. Dell continued to extend its lead over Hewlett-Packard in all of the remaining quarters of the year. Dell’s fiscal fourth-quarter 2004 was its best operating period ever. The company achieved record product shipments, revenue, operating and net income, and earnings per share. Dell continued its leading growth in enterprise computing. Shipments of PowerEdge servers jumped 40 percent from the year-ago quarter, more than double the rate for the rest of the industry. Storage revenue was 47 percent higher. And company strength was global: product shipments were up more than 30 percent in Europe, the Middle East and Africa and in Asia-Pacific and Japan, and exceeded 20 percent in the Americas. Dell’s full-year sales for fiscal year 2004 were $41.4 billion (versus $35.4 billion in fiscal 2003), operating income was $3.5 billion (versus $2.8 billion in FY 2003) and per-share earnings were $1.01 (versus $0.80 in FY2003). Dell’s full-year product shipments, revenue, operating profit and earnings per share were all company records. Dell was the world’s leading supplier of computer systems in 2002 and 2003, and its business in FY 2004 was profitable in every geographic market, customer segment and product category. Dell product shipments grew 26 percent, nearly three times the average of other companies. Whereas Dell’s revenue increased 17 percent, to $41.4 billion; total sales by the rest of the industry declined. Dell’s operating expenses accounted for just 9.7 percent of revenue, the lowest full-year rate in our history, and were 9.6 percent for the last three quarters. Earnings per share were up 26 percent, to $1.01; competitors lost money in their computer-systems businesses. Going into 2004, Dell had been the market leader in the U.S. for five full years; its 22percent growth in unit shipments in 2003 was nearly four times the rate of the rest of the industry. Dell was the most preferred supplier by every segment of U.S. customers: businesses of all sizes, government agencies, educational institutions and consumers. The company’s distinctiveness is similarly profound in other regional markets. Dell shipments in Europe, the Middle East and Africa were up 30 percent, twice the average for other companies. In Asia-Pacific and Japan, the increase was 38 percent, versus 8 percent for the industry without Dell. Effective July 16, 2004, Kevin Rollins took on the title of president and CEO of Dell Computer, with Michael Dell retaining the title of Chairman of the Board. Rollins had previously been president and COO. Rollins was also appointed as a member of the board of directors of the company. Michael Dell was to remain deeply involved in the company’s day-to-day business as chairman of the board, leaving intact a unique, successful “two-in-abox” senior-management structure. The company said the title change was consistent with current primary roles, with Michael Dell emphasizing trends in technology and customer preference, including research and development and Kevin Rollins leading company strategy and operations.
For further updates, you can go directly to www.dell.com and peruse the latest press releases and the investor information or you can check our periodically updated case epilogues at the password-protected Instructor Center (www.mhhe.com/thompson) for the latest information. The online epilogues are updated quarterly.
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