Dusk at Dell Whats Wrong With The Companys Strategy
Dusk at Dell Whats Wrong With The Companys Strategy
Dusk at Dell Whats Wrong With The Companys Strategy
Strategy
The key competencies of Dell are customer focus, manufacturing processes, supply
chain management, customer selection, acquisition and retention, customer service
and human capital management. Dell’s strategy has been to match its core
competencies with key industry success factors.
The computer industry has grown since 1975 into a mature and dependable
industry of today. In 1975 less than 50,000 PCs were sold with a value of about
$60M. From this limited start the PC industry has grown to unit sales of over 280M
units in 2009. PC retail revenue topped $330B in 2007 and 2008, but is in a
declining phase due to continued price declines and a shift to low-cost products
such as netbooks. The next table shows the tremendous growth of the PC industry
in the last 30+ years. And the growth of the PC industry will continue, but at much
lower rates than previously-at least in terms of unit sales.
The sheer size of the PC industry limits its growth rate, but the yearly worldwide
sales will grow by over 40% in the next five years—from 231M units in 2006 to
nearly 335M in 2012 or a 6.3% compound annual growth rate. Worldwide number of
PCs in-use surpassed 900M units in 2005 and will reach 1.47B units by year-end
2011. Worldwide cumulative PC sales topped 1B units in 2002 and will top 2B in
2007 and 3B in 2011. PCs in-use reached 241M in the U.S. in 2006 and will top
300M in 2012.i
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The computer industry has undergone major changes in its market structure to
dominate the market. In the early days of development, the market was controlled
only by a few independent small firms designing their own system with minimal
compatibility. Competition within the computer industry is intensive, with dominant
players like Dell, Apple (IMAC), Hewlett Packard, Sony, etc.
The United States dominated the computer industry in 1980, with 80 percent of the
industry's revenues worldwide. Most of these revenues were produced by less than
ten companies, with IBM as the leader. All of these firms, including IBM, however,
lost ground during the ensuing decade, despite the facts that the computer industry
grew three times in size and its cost-effectiveness improved some ten-thousand-
fold.
Older firms enjoy economy of scale and relatively lower cost of production of
compared to newer firms. Due to this, new entrants typically are forced to either
absorb the higher cost wit lower profit margin, or search new market target to avoid
price war with established firms.
Figure : Product-Market-Matrix
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Dusk at Dell: What’s wrong with the Company’s
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changes in the way services are marketed as the company focuses on higher
margin products
• One of Dell's stars is its server business. Dell’s market share has grown at a
rate of over 25% and it recently surpassed Sun as the #3 provider of servers.
Political
Political factors like rules, constraints, regulations and conditions made by the
government have a direct impact on all industries.
Any change in the government policy will have a strong impact on the computer
industry. Increase in taxes by government on import would directly increase the
indirect cost of production. With the intensive competition, some manufactures
may not be able to pass on the cost to consumers directly by increasing the price.
Depending on the degree of customer brand loyalty and elasticity, it may be
possible to pass on some cost to consumers.
One such mandate affecting the computer industry is in China. As of 5 Aug 2009,
China’s Ministry of Industry and Information Technology (MIIT) has delayed a
controversial mandate requiring every new computer sold in the country to install
internet-filtering software called Green Dam Youth Escort. The Chinese ministry
describes the Green Dam as aiming to prevent children from gaining access to
online pornography and other content deemed to be harmful. Parents can also use
this software to check the online time and viewing content of their children, in order
to protect the children from “internet addiction.” However, critics at home and
abroad argue that the software still has large flaws, including a security hole that
would allow computers with the software to be easily attacked by hackers. Other
critics focus on the possible breaches of consumer rights, competition law and
government purchasing rules implicit in the law.
Most leading computer makers declined to oppose the plan publicly, with companies
either installing the software or including it uninstalled with the free software
package that comes with their computers. Asian and Chinese computer
manufacturers, including Japan’s Sony, Chinese Taiwan’s Acer and Asustek, and
China’s Lenovo and Haier mostly took the former approach, and are already selling
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or have indicated that they will sell computers that comply with the government
program. HP and Dell have categorically said they would not install Green Dam in
their new personal computers, instead only providing it in the separate software
package. Analysts also argue that concerns about corporate image played into the
decision of Western companies to not install the software, and that companies that
decided to install the software could be haunted by the decision.
Economic
There are several factors within the economic environment that affects the
performance of the computer industry. Interest rates, GDP growth, inflation rate,
exchange rates, etc are some factors within the economy region. In addition,
stability and fluctuations in the economy have a direct impact on the cost of capital,
price revenue and profitability level of the computer industry and its players.
Prior to the recent upswing in the national economy which sees lower
unemployment rate, tax relief measures were passed to reduce amount of taxes
paid for both companies and households. Such economic factors contributed to a
larger disposable income and spending power for individuals. For companies,
higher budget for more capital expenditures can be seen. Purchasing power
increases which leads to increase in demand.
Similarly, the international economy has a strong impact on the exchange rate.
Fluctuations in the exchange rates typically affect companies’ profitability. Such
impact is stronger for companies involving more with import and export of
computer and related parts and products.
Apart from fluctuating exchange rate, the export tax provision is another
uncontrollable factor for computer firms. Higher tariffs will impact profitability and
export opportunities.
In particular for Dell, the two main countries are the United States (US) and China.
Out of the two, the US has been struggling to stimulate the economy back into life.
Sales across the board have been down, including in the IT industry. However, with
the US government implementing policies to re-start the economy, things are
beginning to look up – albeit slowly. This is an ideal time for Dell to ‘put its house in
order’ so to speak, regarding the US market. Other emerging economies like China
have suffered less, and continue to hold good prospects for Dell.
Societal
Social factors, which include age distribution, ethnic groups, religion, etc have
widen in the computer industry. The social attitude towards technology and
computers has changed along the years. Unlike in the past, the age range of
consumers has far widened. Children are seen using computers are much younger
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age and in fact, computer education has been incorporated into schools. Demand
for computers was seen to have increased and likely to continue increase.
Technological
Info-communication and technology has now become a major part in all business
sectors. Businesses are seen to be improving quality through technology. In the
computer industry, the rate of technology change is high. The extraordinary
demand for latest technology has drive firms into developing at a faster pace to
meet the demand.
With the development of new technologies, prices of existing technology are forced
downwards. As each new technological breakthrough is introduced into the market,
the “current latest technology” became shelved and cheaper. In order to stay
competitive, firms are driven to slash pricing to clear stocks on hand. This constant
pressure to stay ahead in the market has led to the players in computer industry
reducing their price while continuing to improve in the research and development
activities of their products.
Technology innovation and the availability of system compatible software are the
main contributing factors for new entrants. Unless they are able to excel better,
consumers are still more likely to purchase more familiar and established brands.
Some PCs continue to bulk up and tout their speed and raw power, others represent
a new trend: slimming down. These smaller, simpler machines are aimed at a
potentially lucrative market: the next 1 billion PC users around the planet. Intel, the
chipmaker, calls the category "netbooks" recognizing that much of what people do
on their laptops involves going on the Internet. The new machines are also being
called ultra-low-cost PCs, mini-notebooks or even mobile Internet gadgets. In
appearance, they have the familiar clamshell design, but they're smaller, with 7 to
10 inch screens. They offer full keyboards (albeit with smaller keys) and weigh less
than three pounds. Perhaps most important, the majority cost less than $500 --
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some as little as $299. Intel says it expects more than 50 million of these netbooks
to be sold by 2011. It has introduced a tiny, low-power processor called Atom to run
them, putting 47 million transistors on a chip about the size of a penny. Intel has
created the Classmate PC to show the potential market for students around the
world. In Brazil, they're sold under the Postivo brand. In India, Intel partners with
HCL Infosystems to produce them. Asus, a computer manufacturer in Taiwan, burst
out of the gate last fall with its Eee PC, priced at $299 (running on the Linux
operating system) and $399 (with Windows XP). And other major computer makers
like Dell, HP and Toshiba follow them to release their new small notebooks. In
January 2009, Sony debuted its P-Series Lifestyle PC, an 8-inch laptop computer that
shoehorned netbook-level innards into a men’s suit wallet (or women’s wallet)
-sized form factor.
Currently Dell showed their new netbook Latitude 2100 and expects hundreds of
thousands of children to use its netbooks when they return to school this fall. They
said 970 U.S. school districts have placed orders for its netbook since it was
announced in mid-May. That adds up to 73,000 units in the U.S, and since students
will share the netbooks, the total number of users will be in the hundreds of
thousands. There are two forces propelling sales of the 2100: educators' desire to
adopt new technology at a reasonable price and Dell's desire to gain share in a
market it entered late. School administrators say the 2100, which starts at $369, is
not particularly cheap for a netbook but it is much more affordable than a typical
laptop. Dell, in turn, sees the educational market as an area where it can lead
netbook sales, since rivals like Acer and Asus already dominate the consumer
space.
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Potential entrants
Low Entry Barrier,
Assemblers, High
Demand.
Buyer’s Power
Supplier’s power Competitive Multiple
Intel, AMD, Nvdia Rivalry Configurations,
Limited source of HP. IBM.SUN, Many competitors,
products Assemblers, Product Assemblers
Substitutes
New tech Mobile, TV
PC, Palm Tops.
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Threat of New Entrants
The explosive growth in servers in the late 1990s attracted new entrants to the
market. In addition, PC server participants, drawn by projected growth rates of 25%,
further stimulated the market with dramatic price cuts (Graham Hackett, Industry
Profile, 2005). However, the computer hardware industry has been in a
consolidation phase for a number of years (for example, Compaq purchased
Tandem then HP purchased Compaq).
Threat of Substitutes
The threat of substitutes is low in the computer hardware industry. Consumers only
have two choices for PCs – Apple’s Macintosh or Windows-based PCs. However, the
cost of switching between the two systems is significant, thereby making it unlikely
that customers will substitute one for the other. Servers, on the other hand, have no
available substitutes.
Intensity of Competition
SWOT Analysis.
Strengths
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A track record of overcoming financial turbulence in Markets like the Dot.com
bust and still making good returns. Overcoming the merger of HP and
Compaq and taking a lead in the market.
Weaknesses
The central focus of Dell is unclear for the future as its take the market that
makes sense for it based on the city it wants to operate in. Its does not build
any long-term brand allegiance with its consumers. The segment it operate
its treat Dell as the lowest cost in relation to it peers.
It does not invest heavily in R&D and does not introduce any sort of new
products into the market.
Its marketing presence via television or social media is lacking compared to
HP which is selling their products via celebrity’s as lifestyle items versus a
cheap computer.
It has no stores thus its limited in its ability to capture more “hinterland”
markets or locations in developing world where accesses to credit cards or
even the internet could be challenging. Thus is not able to actively get new
masses into the pipeline of order.
High staff turnover and high senior level departures from the Dell, shows that
there are issues within the company culture that remain unresolved.
Opportunities
PC and Laptop market will grow and China and India will be amongst the new
frontiers of the growing masses in demand for PC and Laptops
The low cost model will appeal to cost conscious rural Asian markets where
such items are considered a luxury item.
Dell has yet to review the options of setting up stores in selected cities thus
the room to adapt to local needs is not a limiting factor to growth
In India and China by joining forces with a local partner the expansion
timeline could be shorted and the market share expanded via some local
acquisitions of local and known brands.
Threats
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A weak or inexperienced senior management team due to attritions could
find they do not have the necessary experience or expertise to plan and drive
the company into the future and overcome obstacles.
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Strategy
New Strategies
No single strategy or strategies can guarantee long term success indefinitely.
Environments change, industries change, competitors change and customers
change – so it goes without saying, strategies must also change.
Between 1996 and 2006, Dell’s revenues multiplied more than tenfold from $5.3
billion to $55.9 billion – its stock price rose by approximately 87,000 percent, from
lowest to highest – it was the world’s largest producer of personal computers (PCs)
with nearly 18% of all shipments in 2006. Dell’s unequalled success also saw a
disastrous merger between Hewlett-Packard (HP) and Compaq, and the former
inventors of the PC, IBM, leave the PC business altogether.
Taking into account the analysis up to this point regarding Dell’s internal strengths
and weaknesses, and the external opportunities and threats in the market, we
recommend Dell do the following:
1. Cost leadership
To date Dell has excelled in its cost leadership model. It has managed to
keep costs low by maintaining a direct business model with its customers,
and by running a very efficient supply chain. These are obviously core
competencies that Dell has maintained over the years, and one that it should
hold on to.
2. Differentiation
This is where Dell desperately needs work. Over the years Dell has become
extremely complacent with its pole-position to its own detriment. Dell has
several areas to work on in differentiating itself.
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a. Innovation
For ten years Dell churned out extremely aesthetically and functionally
bland computers, but because of its price superiority, and other pretty
boring computers, it stayed in the lead. In a recent newsletter Donald
Norman, a renowned product designer wrote about Dell’s new high-end
computers “... sensible, logical, ugly.” But in a world where all
computers are ugly, who cares? The re-emergence of Apple, and in
particular its entry into the notebook market with the MacBook Pro in
2006, made customers realise that boring isn’t trendy anymore.
b. Quality
c. Service
d. Human Resources
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Recently Dell has suffered a high-rate of executive defections to
competitor companies. This has been caused by a combination of an
excessively driven work culture and falling morale. Dell has to realize
that it cannot continue to lose top executives, or to become satisfied
with a more transient pool of human resources. Good human resources
are the very life-blood of innovation which is really lacking at Dell. It is
also the source of the company’s greatest competitive advantage. Dell
needs to rethink its HR strategy, attract and keep talented employees
at all levels.
In 2006 Dell’s US market share was 32.1% beating all its rivals, and its global
market share was 16.1% a fraction behind the leader HP. Dell would need to
maintain market development to remain a major player in the industry. China and
India are fast becoming prime emerging markets for growth, so Dell needs to
consider its entry strategies carefully.
Out of the two countries China represents the biggest immediate opportunity.
It already boasts 133 million internet users in 2006, almost twice that of
Japan, and more than twice that of Germany. Its major cities are therefore in
a prime position to accept Dell’s current direct business model. The model
also lends itself well in removing unnecessary layers of bureaucracy in the
supply-chain. The only caveat would be that relatively few Chinese customers
use credit cards, or are used to purchasing online or by telephone. This can
be overcome by using more stalls and more flexible payment methods.
Dell currently stands third in Chinese market share behind two local
companies, Lenovo and Founder. With the correct marketing, education and
product development Dell could remain a serious contender in the Chinese
market.
Lenovo
Lenovo is clearly becoming a large threat to Dell. It currently has the top
market share in China and the number four position globally. Chinese
customers are still very loyal to local producers, but key innovation and
reputation enhancements by Dell could change that, rapidly increasing Dell’s
position in China.
HP
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Diversification Strategies
Dell has already seen the results of its moves into diversification within the IT
industry with substantial growth in IT services, printers and the hand-held PC
market. There is also value creation with this related diversification. Dell must
continue to innovatively attack the hand-held segment as there obviously seems to
be a gap between the notebook and mobile phone markets. It must also develop its
related products (services, printers, etc) to provide a 360 degree approach to IT, for
both the corporate and individual segments.
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The objective is to make its current PC business more resilient to the price
wars by adopting the model Apple has taken with the I-Mac and other new
devices. This will help to create a buffer to its traditional core strength of PC
manufacturing based on its cost leadership advantage. It is this category that
provides 38% of income based on 2006 2nd Qtr data.
2) Create a line of products catered to the gaming markets not only in screen
design but total gaming PC and Laptop’s meant for exclusive and serious
gamers.
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e) Hardware (or Virtual Machine or Software Platform) layer: or the
providers of the underlying platform, which may be console-based,
accessed through online media, or accessed through mobile devices
such as the iPhone. This layer now includes non-hardware platforms
such as virtual machines (e.g. Java or Flash), or software platforms
such as browsers or even further Facebook, etc.
f) End-users layer: or the users/players of the games.
Dell has the ability to contribute items c and f in this niche market through a
focused differentiation strategy.
The focus areas will be Enhanced Services and Software and Peripherals that
are currently under Dell. A Dell team of up and coming competent managers
within Dell and major consulting firms with an external CEO to be established.
This will ensure that a new set of core competencies can be sowed and
developed without the shadow of Dell current management issues or cost
driven culture weighing down the new company. Based on Dell’s strengths
the new entity would offer the following to non competitive markets or
business the following.
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Conclusion
References
1. http://www.cibmagazine.com.cn/Features/Obizuary.asp?
id=1038&green_dam_postponed.html
2. http://laptop.org/en/vision/mission/index.shtml
3. http://articles.moneycentral.msn.com/Investing/Extra/ComputerMakersChase
HundredDollarLaptop.aspx?page=all
4. http://www.forbes.com/2009/08/06/dell-netbook-schools-technology-
enterprise-dell.html
5. http://prmac.com/release-id-6778.htm
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i
http://www.c-i-a.com/worldwideuseexec.htm
ii
http://en.wikipedia.org/wiki/Video_game_industry#Game_industry_value_chain