Sunday, January 15, 2012

Case Study: Dell Computers

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Case � Dell Computer Corporation


THE COMPANY .


As one of the worlds premier providers of computer products and services, Dell designs and manufactures a comprehensive family of desktop, notebook, workstation, server, and data storage solutions for virtually every computing need. Dells competitive advantage is its direct customer focus. Constant interaction with its customers gives Dell the ability to understand unique computing needs that drive individual and enterprise productivity.


Within the last five years, Dell has grown from $7 billion in revenues to more than $1 billion, and the company continues to expand in its current products and regions, and also into new markets.


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COMPANY BACKGROUND .


When Michael Dell was in the third grade, he responded to a magazine ad with the headline Earn Your High School Diploma by Passing One Simple Test. At that age, he was impatient and curious�always willing to try ways to get something done more quickly and easily. Early on, he became fascinated by what he saw as commercial opportunities. At age 1, Michael Dell was running a mail-order stamp-trading business, complete with a national catalog, and grossing $,000 per month. At 16, he was selling subscriptions to the Houston Post, and at 17 he bought his first BMW with the more than $18,000 he had earned. He enrolled at the University of Texas in 18 as a pre-med student (his parents wanted him to become a doctor) but soon became immersed in the commercial opportunities he saw in computer retailing and started selling PC components out of his college dormitory room. He bought random-access memory (RAM) chips and disk drives for IBM PCs at cost from IBM dealers, who often had excess supplies on hand because they were required to order large monthly quotas from IBM. Dell resold the components through newspaper ads (and later through ads in national computer magazines) at 10�15 percent below the regular retail price.


By April 184 sales were running about $80,000 per month. Michael Dell at age 18 dropped out of college and formed a company, PCs Ltd., to sell both PC components and PCs under the brand PCs Limited. He obtained his PCs by buying retailers’ surplus stocks at cost, then powering them up with graphics cards, hard disks, and memory before reselling them. His strategy was to sell directly to end users; by eliminating the retail markup, Dell’s new company was able to sell IBM clones (machines that copied the functioning of IBM PCs using the same or similar components) at about 40 percent below the price of an IBM PC. The price-discounting strategy was successful, attracting price-conscious buyers and producing rapid growth. By 185, with a few people working on six-foot tables, the company was assembling its own PC designs. The company had 40 employees, and Michael Dell worked 18-hour days, often sleeping on a cot in his office. By the end of fiscal 186, sales had reached $ million.


During the next several years, however, PCs Limited was hampered by growing pains�a lack of money, people, and resources. Michael Dell sought to refine the company’s business model; add needed production capacity; and build a bigger, deeper management staff and corporate infrastructure while at the same time keeping costs low. The company was renamed Dell Computer in 187, and the first international offices were opened that same year. In 188 Dell added a sales force to serve large customers, began selling to government agencies, and became a public company�raising $4. million in its first offering of common stock. Sales to large customers quickly became the dominant part of Dell’s business. By 10 Dell Computer had sales of $88 million, a market share of to percent, and an R&D staff of over 150 people. Michael Dell’s vision was for Dell Computer to become one of the world’s top three PC companies.


Thinking its direct-sales business would not grow fast enough, in 10�, the company began distributing its computer products through Soft Warehouse Superstores (now CompUSA), Staples (a leading office products chain), Wal-Mart Stores, Sam’s Club, and Price Club (now Price/Costco). Dell also sold PCs through Best Buy stores in 16 states and through Xerox in 1 Latin American countries. But when the company learned how thin its margins were in selling through such distribution channels, it realized it had made a mistake and withdrew from selling to retailers and other intermediaries in 14 to refocus on direct sales. At the time, sales through retailers accounted for only about percent of Dell’s revenues.


Further problems emerged in 1, when Dell reportedly lost $8 million in the second quarter from engaging in a risky foreign-currency hedging strategy; had quality difficulties with certain PC lines made by the company’s contract manufacturers; and saw its profit margins decline. Also that year, buyers were turned off by the company’s laptop PC models. To get laptop sales back on track, the company took a charge of $40 million to write off its laptop line and suspended sales of those products until it could get redesigned models into the marketplace. The problems resulted in losses of $6 million for the company’s fiscal year ending January 0, 14.


Because of higher costs and unacceptably low profit margins in selling to individuals and households, Dell Computer did not pursue the consumer market aggressively until sales on the company’s Internet site took off in 16 and 17. Management noticed that while the industry’s average selling price to individuals was going down, Dell’s was going up�second- and third-time computer buyers who wanted powerful computers with multiple features and did not need much technical support were choosing Dell. It became clear that PC-savvy individuals liked the convenience of buying direct from Dell, ordering exactly what they wanted, and having it delivered to their door within a matter of days. In early 17, Dell created an internal sales and marketing group dedicated to serving the individual consumer segment and introduced a product line designed especially for individual users.


By late 17, Dell had become the global industry leader in keeping costs down and wringing efficiency out of its direct-sales, build-to-order business model. Going into 000, Dell Computer had made further efficiency improvements and was widely regarded as having the most efficient procurement, manufacturing, and distribution process in the global PC industry. The company was a pioneer and acknowledged world leader in incorporating e-commerce technology and use of the Internet into its everyday business practices. The goal was to achieve what Michael Dell called virtual integration�a stitching together of Dell’s business with its supply partners and customers in real time such that all three appeared to be part of the same organizational team.1 The company’s mission was to be the most successful computer company in the world at delivering the best customer experience in the markets we serve.


DELL and MARKETING MIX .


1. Promotion


Dell had made a great use of promoting deals and special offers. Prices and product specification are provided. Dell also used the companys public relations and publicity to give more impact to some promoted products and systems. Promotion has been supported by press news about Dells services are provided up-to-date. In addition, Dell had facilitated their services through their strategy of direct marketing.


. The Place


The location of the services provided and the accessibility of to these services are very important factors in the service traditional marketing. For the Web-based commerce, the location of the Web-based store or the distributor is also mattered for business such as retailing, financial service, and so on. The customer should choose the site that serves and deliver to his/her region. In addition, for industry such like the computer industry, or electronic goods, the warranty and the after sale services are very crucial issues for the consumer to decide on purchasing a product. Although Dell is an international cooperation that have franchises all over the world, in the case of their web site, www.dell.com, ordering a computer system or any peripherals are limited to US, Canada, and some times to Latin America. Customers from other countries should choose the web site that can deliver to the required location. Some countries do not offer this service, and some dont have a web site, only information about contacting those distributors is provided by this web site. The distribution channels are one of the important obstacles that prevent purchasing through the Web.


. People


The person who produces and delivers the product or the service is one of the issues that affect traditional services marketing. That is because of the direct contact between the employee and the customer, and also the indirect behavior or attitude towards the production and the operation, that might affect the final service or the product quality. In the Web-based services, the service personnel have indirect contact with customers. For example, the skills and the knowledge of the technical support representative are intangible to the web user. The user has a direct contact with the Web system or the machine. Therefore, the web site system should provide direct system design that allows interaction with the users, meeting their expectations, and dealing with their requirements. Information about any product or service should be available to browse clearly, avoiding ambiguity. In addition, providing facilities of searching and inquiring service, that answers the web visitor inquiry. Dell has been very successful in considering these issues, their support services are powerful designed, and it contains a lot of information and searching facilities.


4. Promotion.


Taking advantage of the Web features in advertisement, Dell provides as much information as possible about their products, services, and policies with a very low cost, comparing to the traditional advertising. Dells Business center pages http//www.dell.com/business/case.htm where some of well known companys like Shell Oil Company, WALMART, Unilever, Eastman Chemical Company, etc tell briefly about their experience with Dell. These testimonies boost customer confidence and thereby, promote sales and brand recognition. Also Dell’s site allows customers to view special deals and promotions available and also to order custom made systems.


PERTINENT ISSUES TO BE ADDRESSED .


1. Gain acceptance outside United States


Dell still has significant opportunity for expansion in all parts of the world, especially in markets outside of the U.S.; in all customer segments; and in all product categories, ranging from home PCs to enterprise products, such as network servers and workstations.


. Increase annual sales to $50 Billion


Fiscal 00 was Dells strongest year ever. It increased shipments, revenue and earnings per share at double-digit rates. Dell gained share across the board and raised profit margins at the same time, while it’s competitors saw shipments and revenue decline, and lost money. Dells results were accomplished in the midst of economic softness around the world, a testament to the strength of it’s direct model. The commitment of Dell to directly deliver customers the best standards-based technology at the best value led to full-year revenue of $5.4 billion, and net earnings of $.1 billion. Increasing it’s revenue to 50 billion dollars seems to be a great challenge, especially due to the worldwide economic crisis and tough competition from H.P., IBM, Sony, Gateway and other computer manufacturers.


. Sustain market leadership


HP, after it bought Compaq in first quarter of 00, became the worlds biggest PC company. However, by the end of 00, Dell’s growth in market share has allowed it to regain its position as the largest personal computer maker. Dell made the announcement as it reported a 1% rise in profits for the three months to the end of October. It added that shipments in the current quarter were set to rise by %, and forecast higher earnings and revenues.


Dell has pursued an aggressive price strategy, which has allowed it to win market share from rivals despite the slump in spending on information technology. The most important issue that Dell needs to address is to sustain market leadership and its profitability.


4. Diversification of product line


Dell, the best-known computer company today, does not have a branded-handheld or Printers it’s own. Although Dell is not known for its engineering prowess, it should have its own PDA and printers, similar to its competitors lines such as H.P. Dell currently sells handhelds through its software and peripherals division, where it acts as a rd party reseller for players such as Casio, Handspring, Hewlett-Packard, Palm and Sony. It also re-sells Lexmark printers under Dell logo.


Millions of handheld owners and printer users have proven that significant demand exists for PDAs and printers. Dell has to aggressively pursue these markets by inventing it’s own PDA and Printer line of products.


KEY RATIOS & STATISTICS .





Price/Revenue (TTM) .8


P/E (TTM) 7.07


Price/Book (MRQ) 16.15


Price/Cash Flow (TTM) .85


ROA (TTM) 15.44


ROE (TTM) 47.77


Current Ratio (MRQ) 1.0


Total Debt/Equity (MRQ) 0.10


Cash Per Share ($) 1.8


Book Value/Share ($) 1.8


Growth Rates





1 Year 5 Year





Revenue % 1.5 .4


EPS % 75.71 0.0


KEY NUMBERS .


Company Type Public (NASDAQ DELL)


Fiscal Year-End January


00 Sales (mil.) $5,404.0


1-Year Sales Growth 1.6%


00 Net Income (mil.) $,1.0


1-Year Net Income Growth 70.%


00 Employees ,100


1-Year Employee Growth 1.0%


ANALYSIS AND EVALUATION .


COMPETITIVE STRATEGY ANALYSIS


1. Cost Leadership


A manufacturer is a cost leader if it can supply same product or service at a lower price because of


a. Economies of scale, scopes, and learning


b. Efficient production


c. Simpler product designs


d. Efficient organizational processes


e. Lower costs of inputs and distribution


f. Little R&D or brand advertising required


g. Tight cost control


Dells efficiency and cost leadership comes from two factors. First, they sell directly to their customers so their distribution channels are simple and cheap (no dealer markup). Second, they build-to-order, which keeps inventories low. Low inventories mean that, when Intel drops the price of its processors, Dell doesnt have a lot of the old expensive processors sitting around. Dell can reduce the prices on its computers faster than its competitors because the components that make up those computers are the latest and cheapest. So far, no other PC maker has been able to match Dells cost structure.


Since the creation of Dell in 184, the management has operated its organization on the principle that a direct model is best for everyone�tech companies, suppliers, and customers. In manufacturing, a direct model means that the firm links supply to demand�effectively owning the entire value chain. No resellers, retailers, or intermediaries inject cost and delay into Dell’s sales model, so customers do not have to work around expensive middlemen.


Because Dell links supply so tightly to demand, it can forecast it’s product pipeline needs accurately. Essentially, Dell relies on inexpensive information rather than costly inventory. This strategy allows it to offset sudden changes in component prices-a factor that affects the bottom line and speed at which it can market competitively priced solutions.


. Differenciation


Differentiation is the supply of a unique product or service at a cost lower than the price customers are willing to pay. The need for differentiation is not new, but it is becoming more urgent. In a market where many companies produce solutions based on the same standard technology, companies must follow new principles if they want a sporting chance of success in enterprise computing markets.


From a business perspective, a build-to-order model only requires Dell to manufacture what it has already sold�Dell™. Products never grow old by gathering dust in the plant or in channel warehouses. Dell’s customers live on the opposite end of the direct model equation, where receiving products built-to-order is an attractive prospect because it helps to ensure that customers get the precise performance they want for the prices they pay. This is the main differentiation that Dell offers. Customers could design a computer by deciding the hard drive capacity, capacity of RAM, number and types of drives, motherboard type and speed etc. and Dell will manufacture the computer as per the specification provided and deliver it to the customer’s doorstep.


SWOT ANALYSIS


Strengths


• No inventory buildup


• Industry leading growth


• Cost efficiency


• Direct to customer business model


• Customization


• Internet sales leadership - $5M worth of products everyday


• Negative finance float Customers pay Dell earlier than Dell pays its suppliers.


• Industry standard technology Cheap and commoditized.


• Low-cost leadership.


Weaknesses


• No proprietary technology


• High dependency on component suppliers


Opportunities


• Network-internet, intranet and extranet


• Strong potential market in Europe, China and India


• Low costs and advanced technology


• Growth in business, education and government markets


Threats


• Competition (price and market share)


• Currency fluctuation in countries outside the US


• Political instability


• Tariff trade barriers Marketing Strategies


RECOMMENDATION .


The major business challenges Dell expects to face in the near future revolve around the growth of the service business, movement towards globalization and increased competition in the computer industry. These trends may lead to heightened competition and decreased margins.





Also, the company has been trying to expand into service business. It will be a challenge to gain business from rivals like IBM who have strong presence and head start in this area. As we see with most of the corporations, sluggish U.S economy and down turn in foreign markets, particularly Japanese and European markets will increase the challenge to sustain revenue growth and profitability.





High margins will never return in the PC business. Complete solutions will be the key to profitability in future. Currently services are 0% of Dell’s total revenues. Dell has the opportunity to grow this business and expand into other areas like consulting and support. Dell has an image of hardware vendor and not service provider. Dell must focus beyond its traditional strength and develop a strong service infrastructure.


PC demand is seen as price elastic (prices drop, demand increases). Dell’s price cutting strategy aims to keep demand away from competitors. Ultimately, by denying them market share, more consolidation will occur. Gateway’s withdrawal from European market and consolidation of HP and Compaq are indications that PC market is in the process of consolidating. In addition, Dell should be able to capitalize on the uncertainty surrounding the HP/Compaq merger.


R&D Dell.s traditional business model is based on a risk-averse approach to the marketing new products. Dell does not invest significantly in R&D and relies on supplier to provide lowest possible price and inform Dell of developments in product roadmap. Dell’s model can be a weakness if it becomes locked out. from an important part of the market.





Reliance on Microsoft and Intel Majority of PCs is based on platform created by Microsoft and Intel. New processors and OS do not boost the market demand and hence they rely on vendors to promote new technologies. Dell must look into forming strategic alliances with rivals Linux and AMD, in order to mitigate some of the market power its current suppliers have. In a recent news release, Dell blamed the shortage of Pentium chips from Intel as the reason for not achieving the target sales.


International expansion is also key to Dells quest to double the companys revenue within the next few years. In many markets outside the U.S., Dells market share remains in the single digits. Expanding globally into key international markets such as China, Japan, Germany, India and France has to be a number one priority for Dell. Companys goal should be to draw less than half its revenue from selling PC systems, with the rest coming from servers, storage, services, software and peripherals. Dell also needs to focus on more product lines such as PDAs and Printers,





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