Dell Computer Corporation

Andreas Bierbrauer

Dell Computer Corporation and the Computer Industry

Library Project: Industry Analysis Research Method in MIS (ISQA 8060) Instructor: Dr. Deepak Khazanchi

Andreas Bierbrauer1 October 10, 2000

This sample paper is made available with the permission of the author.

Dell Computer Corporation

Andreas Bierbrauer

Dell Computer Corporation

Industry composition
Dell Computer Corporation is the worlds largest direct computer systems company, with revenues of $25.3 billion for the fiscal year ended January 28, 2000. Michael Dell founded the Company in 1984 on a simple concept: By selling computer systems directly to customers, the Company could most efficiently understand and satisfy the computing needs of customers. Dell is in the Computer Hardware Industry of the Technology Sector. The major peer group that Dell competes with includes Apple Computer, Compaq, Gateway, Hewlett-Packard, IBM, Sun, Silicon Graphics, NCR and Micron Electronics. (Multex.com, 2000) Dell is No. 2 worldwide in market-share and consistently the leader in liquidity, profitability and growth among all major computer systems companies, with approximately 37,000 employees around the globe. The company ranks No. 1 in the United States, where it is a leading supplier of PCs to business customers, government agencies, educational institutions and consumers. (Dell, 2000, [On-line]) 803 companies are classified as Electronic computer manufacturers, with value shipments (VS) of 38,205.9 (million) dollars. The concentration ratio (Herfindahl Index), or % of VS Value Accounted for by 4-largest companies is 45% (U.S. Bureau of Census, 2000). The concentration ratio is intended to measure the degree to which the industry is dominated by large firms (Baumol and Blinder, 1994, p. 484); 45% indicates a high concentration factor, evident in the computer industrys consolidation into five main players.

Geographic dispersion
Dell's corporate headquarters are in Round Rock, Texas, near Austin, the company's birthplace. Round Rock is also the home to Dell Americas, the regional business unit for the United States, Canada and Latin America. Dell also has regional headquarters in Bracknell, England, for Europe, the Middle East and Africa; in Hong Kong, to serve Asia-Pacific; and in Kawasaki, Japan, for the Japanese market. The company manufactures its computer systems in each of six locations: Austin, Texas; Nashville, Tenn.; Eldorado do Sul, Brazil (Americas); Limerick, Ireland

Dell Computer Corporation

Andreas Bierbrauer

(Europe, Middle East and Africa); Penang, Malaysia (Asia-Pacific and Japan) and Xiamen, China (China). Dell maintains sales offices in 34 countries around the world, and sells its products and services worldwide.

Industry Growth past, present and future

The computer industry has rapidly become one of the largest in the world. While annual worldwide unit sales of PCs are growing in the mid- to high-teen percentages, revenue growth has stagnated. IBM still sells PCs--at a loss--to businesses, but it has dropped out of the U.S. retail PC business. Compaq is struggling to hold its lead as the global leader in PC sales and has not become a top player in the systems-integration business despite its 1998 purchase of Digital Equipment. Gateway, after stumbling in corporate computing, has refocused on selling to small businesses, consumers, and schools. Hewlett-Packard has crept up on everyone, grabbing big chunks of market share. HP has begun selling its products directly over the Web. While information technology has evolved dramatically, Dell believes the most exciting period for computing and for the company is yet to come. The Internet is becoming more integrated into daily life and into the business environment. Businesses rely on the Internet for commerce and real-time information exchange; customers go online to shop, bank and correspond; and students from grade schools through college use the Internet as an educational tool. Industry analysts estimate that companies will spend $370 billion as they build out their Internet capabilities in the next three years. From servers and storage products that power the Internet, to desktops, notebooks and workstations, the ability to provide products and services that help businesses and institutions build an online presence and enhance the online experience is vital for companies and other organizations.

Dell Computer Corporation

Andreas Bierbrauer

Current problems and opportunities, market, competition, government, and technology

Problems: The computer industry has seen a large decrease in market capitalization as the technology stocks have taken a beating. Wall Street has been brutal on the sector: In September 2000, Dell's stock was off 28%, Gateway's 32%, and Compaq's 19%, while investors knocked off half of Apple's market cap on a single day, Sept. 29. Dell needs to beef up its revenue streams more from services and value-added support, away from the ever decreasing margins on assembling computer hardware. Opportunities: Today, Dell is enhancing and broadening the fundamental competitive advantages of the direct model by increasingly applying the efficiencies of the Internet to its entire business. About 50 percent of Dell's sales are Web-enabled, and about 50 percent of Dell's technical support activities and about 76 percent of Dell's order-status transactions occur online. And Dell is a key partner with many of its customers in helping them deploy the technology they need to capitalize on the efficiencies of the Internet. The direct model eliminates the need to support an extensive network of wholesale and retail dealers, thereby avoiding dealer mark-ups; avoids the higher inventory costs associated with the wholesale/retail channel and the competition for retail shelf space; and reduces the high risk of obsolescence associated with products in a rapidly changing technological market. In addition, the direct model allows the Company to maintain, monitor and update a customer database that can be used to shape future product offerings and post-sale service and support programs. This direct approach, combined with the Companys efficient procurement, manufacturing and distribution processes, allows the Company to bring relevant technology to its customers faster and more competitively priced than many of its competitors. Competition: In years gone by, Compaq, Hewlett-Packard, and IBM couldn't come close to matching the efficiency of Dell or Gateway. But all three have radically improved their distribution, manufacturing, and logistics--meaning that Dell's very success has given it stronger competitors.

Dell Computer Corporation

Andreas Bierbrauer

"Michael [Dell] has been absolutely brilliant at getting the industry to compete on his best basis for competition--price, delivery, and the ability to configure to order. But now the others can differentiate in ways that matter to the customer" (Kirkpatrick, 2000). Government: No significant government interventions are on the horizon with the exception of the Microsoft antitrust case, which will probably not have any effect on the direct marketing of computers. Technology: The technology industry is characterized by continuing improvements in technology, which result in the frequent introduction of new products, short product life cycles and continual improvement in product price/performance characteristics. While Dell believes that its direct model and asset management practices afford it an inherent competitive advantage over some of its competitors, product transitions present some of the greatest challenges and risks for any computer systems company. (Dell, 1999, p. 199-212)

Cost patterns and profitability patterns

Dell's high return to shareholders has been the result of a focused effort over time to balance growth with profitability and liquidity. Dell has consistently led its largest competitors in each of those categories, and did so again in fiscal year 2000, even as the company further expanded its infrastructure to support significant growth around the world. (Dell, 2000, [On-line]) Financial analysts anticipate Dells profits will reach higher levels in both 2001 and 2002. Analysts expect earnings of $0.93 per share in 2001 and earnings of $1.23 per share in 2002. The investment community has a very high level of confidence in the forecast earnings for the company. There is a much lower deviation in the consensus estimate for the company than for the market as a whole. (Wall Street Research Net, 2000)

Dell Computer Corporation

Andreas Bierbrauer

Company revenue for the last four quarters totaled $28.5 billion. (in millions, except pershare data) Net revenue FY00 $25,265 FY99 $18,243 FY98 $12,327 FY97 $7,759 FY96 $5,29 6 $377 $272 $0.08 34% $0.86

Operating income $2,457 $2,046 $1,316 $714 Net income $1,860 $1,460 $944 $518 Diluted earnings per share $0.68 $0.53 $0.32 $0.17 Return on invested capital 243% 120% 107% 67% Closing stock price $37.25 $50.00 $12.43 $4.13 Full year FY'00 data exclude effect of acquisition of ConvergeNet Technologies Inc. FY'96-FY'99 return on invested capital amounts have been restated to conform to the FY'00 presentation.

Cost and Profitability summary (Market Guide Inc., 2000): ?? The 5-year earnings growth rate is faster than the industry average. ?? Dells 5-year revenue growth is faster than the industry average. ?? Dell Computer is less leveraged than the average for the Computer industry. ?? Dells return on assets is higher than the industry average. ?? Dells revenue per employee is higher than the industry average. ?? Dells TTM gross margin is lower than the average for the industry

Competitive Advantage
Dell's key competitive advantages are grounded in our unique, direct business model. Dell entered the business with no channel conflicts; Dell was and still is the entire channel, from procurement through service. As a result, Dell has one integrated process for managing the entire value chain, from component supplier to end customer -- and Dell controls all the aspects inbetween. This integrated process provides inherently lower cost by eliminating middlemen margins, as well as from the cost efficiencies of higher quality that result from greater control and "fewer touches" of both product and process. Each of Dells customer-oriented business segments controls its own product, manufacturing, sales and support operations. Dell's ability to segment the market to provide closer understanding of distinct customer needs, and to tailor products and services accordingly, is the key to having the lowest cost and most effective service for each segment.

Overseas Development
Dell management believes that opportunity exists for continued worldwide growth by increasing the Companys market presence in its existing markets, entering new markets and pursuing additional product opportunities.

Dell Computer Corporation

Andreas Bierbrauer

China is a market that Dell started selling directly into this past August. Dell now have a plant operating in Xiamen, China, delivering products directly to consumers. Estimates vary widely on the potential for China's growth, but most people agree that within the next few years, China will become one of the top three markets in the world. A number of people believe that China will surpass Japan within a few years to become the number two market. Dell thinks, as do others, that the market will grow at roughly 30 percent per year for the next several years. Not all of the market is accessible, but when you reach one computer for every 500 or even 300 people in China, this becomes one of largest markets in the world very quickly. Dell is about to open a new manufacturing facility in Brazil, which is the largest market in Latin America. Dell has been operating in Mexico since 1992, and in the last quarter Dell had more than 100 percent growth in Mexico. These markets will continue to grow because there is an affluent consumer base that is buying products, as Dell as businesses that realize they must have information in order to compete. (Dell, 2000 [On-Line])

Dell Computer Corporation

Andreas Bierbrauer

REFERENCES

Baumol, William J., Blinder, Alan S. (1994). Microeconomics: Principles and Policy. New York: Dryden Press. Dell, Michael, with Fredman, C. (1999). Direct from Dell: Strategies that revolutionized an industry. New York: Harper Business. Kirkpatrick, D.(2000,October 16). Please Dont call us PC. Fortune, Vol 142. [On-line]. Kraemer, K. L., Dedrick, J., Yamashiro, S. (2000). Refining and extending the business model with information technology: Dell Computer Corporation. The Information Society 16, 5-21. Mabin, C. (2000, September 27). Dell Slashes Computer Prices. Associated Press. ProVestor Plus Company Report: Dell Computer Corporation. Market Guide Inc, (2000). September 16, 2000. Stock snapshot: Dell Computer Corporation. Multex.com. (2000). http://www/multex.com NY, NY. U.S. Bureau of the Census (2000 October), Concentration Ratios in Manufacturing, 1992 Census of Manufactures Report, MC92-S-2 . Wall Street Research Net. (1998). Quick source report: Dell Computer Corp. [Online].