Case Study of Dell: Driving for Industry Leadership
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 1986-1993 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 selldirect 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 third ranking 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 cost-consciousness 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
Michael Dell believed the opportunities in front of Dell were tremendous:
. digital cameras. scanners. was packed with features. the Axim offered a solid but not trendsetting design. Dell announced that it would begin selling retail-store systems. monitors. That’s when we were a $1 billion business. It’s like going from baseball to soccer. If we don’t do the first one well. The learning curve for them is difficult. As Dell Computer battled Hewlett-Packard for leadership in the global PC market in 2003. and peripherals required to link retail-store checkout lanes to corporate information systems. This is an 18½ year process…. believe that they are not trying to catch up. very different than designing products to be built to stock…. But it is also safe to assume that Dell is not staying in the same place. including electronic cash registers. for any second.. up from 2 percent in 1995.” For the most part. data-routing switches—a product category where Cisco Systems was the dominant global leader.. and others. Starting in 2003. product categories where Hewlett Packard was the global leader and a category that provided HP with the lion’s share of its profits.. Since the late 1990s. many cycles of learning…. Now we’re $36 billion. ZIP drives. HP. specialized software. The second most important thing is to be profitable. printers.0. Dell’s domestic and global market share in low-priced and mid-range servers was climbing rapidly.It’s very. modems. the second one won’t happen.Our whole company is oriented around a very different way of operating……I don’t. and was priced roughly 50 percent below the best-selling models of rivals. a leader in the data storage. Dell began selling low-cost. and speakers made by a variety of manufacturers. a lot of people have written about it and tried to understand it. memory cards. And they haven’t made much progress to be honest with you. Dell had over a 30 percent share of the 2002 world market for servers. 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.shipped in 2003 was expected to be about 10 percent. Dell had been marketing CD and DVD drives. In addition. The most important thing is to satisfy our customers. In January 2003. We have a pretty simple system. “The best way to describe us now is as a broad computer systems and services company. services. I think a lot of people have analyzed our business model. In a February 2003 article in Business 2. He explained why: The competition started copying us seven years ago. Dell planned to begin marketing Dell-branded printers and printer cartridges. Its sales of data storage devices were growing rapidly. aided by a strategic alliance with EMC. In late 2002 Dell introduced a new line of handheld PCs—the Axim X5 to compete against the higher-priced products of Palm. Michael Dell said. down from about 18 percent in 1997. Dell was making market inroads in other product categories. In 2001-2002.it comes from many.
when technologies begin to standardize or commoditize.…. so we think….. We only have about a 3 percent market share in the $800 billion-plus IT market. 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…. who enjoys the strongest competitive position? Who is in the weakest overall competitive position? 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?
. as compared to IBM. Questions: What is your evaluation of Michael Dell as CEO? What does a SWOT analysis reveal about the attractiveness of Dell Computer’s situation? Does Dell’s expansion into other IT products and services make good strategic sense? Why or why not? What does a competitive strength assessment reveal about Dell.What we have been able to do is build a business system that takes those technological ingredients. we have got a lot more opportunity going forward…. Hewlett-Packard. and Gateway? Among these competitors. it’s a pretty exciting time to be in our industry and the opportunities are pretty awesome. translates them into products and services and gets them to the customer more efficiently than any company around. the game starts to change..