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.

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 Intensity of Rivalry.

• Rivalry is very high due to:

• Lack of differentiation.
– Reliability and Service are only diff’s.
• 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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 Dell’s 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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 IBM’s 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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