“Dell Case Study”

By Todd Beals
4/22/03
 TABLE OF CONTENTS:

Executive Summary……………………………………………………………………….3

Introduction………………………………………………………………………………..4

Problem Identification…………………………………………………………………….4

Company Analysis………………………………………………………………………...5

Critical Success Factors…………………………………………………………………...7

Distribution Channel Analysis…………………………………………………………….8

Sales Infrastructure Analysis……………………………………………………………...9

Industry Analysis………………………………………………………………………….9

Competitor Analysis………………………………………………………………………9

Customer Analysis……………………………………………………………………….10

SWOT Analysis………………………………………………………………………….11

Current Strategy (4P’s, Target Market, Positioning)…………………………………….11

Strategic Options…………………………………………………………………………13

Recommendations & Implementation…………………………………………………...15

Appendix……………………………………………………………………………..18-20

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EXECUTIVE SUMMARY

As one of the world's leading direct computer systems companies and a premier supplier

of technology for the Internet infrastructure, Dell's competitive advantage is its direct

customer focus. Constant interaction with its customers online and via the telephone

gives Dell the ability to understand unique computing needs that drive individual and

enterprise productivity. Even though growth rates for the computer industry are expected

to be less than previous years, Dell can still successfully operate, enjoying healthy

sustainable profits. A main problem is a sagging US economy which Dell has no control

over and a saturated PC market with lower profit margins from industry price wars. Dell

should focus on being a “market taker”, instead of trying to be a market maker and

capitalize on its ability to enter new markets and quickly dominate, as it did in the low-

end server and workstation markets. It should pursue a multi-continental expansion of its

middle and high end server products. Dell should also pursue the external data storage

market through acquiring a leading company like the EMC Corporation. Having already

captured a large share of the US market, Dell should try and increase its server, storage,

and service segment penetration overseas to gain more international market share,

particularly in China and Latin America. Studies might also be done on African and

Russian markets as Dell has no physical presence in these regions. The only viable

strategy in order to achieve Michael Dell’s goal to double Dell Computers’ current

revenue to $60 billion by 2007 is to work on methods to improve sales in these 3 new

areas. A combination of service, storage and server product growth across newly

established international markets will help achieve this ambitious goal. While the US

economy is in a recession, there is still plenty of room to grow outside its borders.

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INTRODUCTION

Dell was founded in 1983 by Michael Dell, an 18 year old college freshman from Texas

who started out upgrading hard drives for IBM compatibles on nights and weekends.

Within a year, his service business had grown to an incredible $6 million from

performing computer upgrades for local area businesses and he dropped out of school to

concentrate on the business. When Dell changed his strategy and started offering custom

built-to-order machines, the business exploded, with $70 million in sales by the end of

1985. Evolving into an assembler company, Dell was able to exploit certain events

occurring in the industry and swiftly adapted to meet market conditions. Five years later,

total sales had grown to an unbelievable $500 million and Dell became nationally known

as a supplier of state-of-the art desktop and portable computers. Dell continually

achieved phenomenal records in sales and profit growth, eventually making it the most

successful company ever in the PC industry, surpassing $25 billion in 2000. As one of

the world's premier providers of computer products and services, Dell was the US market

leader in its core products, the desktop and laptop markets by 2001.

PROBLEM IDENTIFICATION

Although Dell is seen to be a highly successful company, analysts worry that the recent

slumping economy in the 4th quarter of 2000 and the market saturation in the technology

arena could prevent Dell from achieving its prior growth rates and profits. Can it

continue to maintain its stellar track record in light of the sudden decrease in demand,

especially with lower and lower profit margins resulting from price wars in the industry ?

Should Dell continue forward with its highly successful ‘direct model’ strategy to try and

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sustain its profitability in light of the industry’s -10% growth rate and 50% reduction in

profit margins in late 2000, or should it change its expectations and react to the

commodity nature of the environment? Dell’s immediate challenge is to try and sustain

its positive growth rate, spike its stock prices, and conquer new markets. But how does

Dell choose its next product or service to offer the world ? It must make the right choices

as to what is the next value proposition that really matters to its customers. Another

challenge for Dell is how to cope in a new world where technology devices and

components cost less and less (resulting in shrinking profit margins) that become obsolete

practically overnight. Perhaps, Dell’s biggest challenge will be to have the discipline to

know when and how to change strategies that have worked so well up to now. If Dell

does not have the vision and adaptability, it will be just a matter of time before another

company does a Dell on Dell.

ANALYSIS –Dell’s Competitive Position

Dell’s success is directly attributable to its “direct model.” Customers have the ability to

contact Dell directly and order technologically advanced systems at competitive prices.

This direct contact with consumers gives Dell the unique opportunity to know exactly

what its consumers want and offer products that would satisfy their specific needs. Dell

responded to market slowdown indicators by pursuing an aggressive pricing strategy

designed to increase profits through volume. Management felt that they could still thrive

and dominate the highly competitive market even during the tough times, functioning as

the lowest cost producer. Continually trying to improve their position in the PC

marketplace, Dell pursued a multi-pronged growth strategy looking to gain domestic

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marketshare in the storage/server and computer service markets, as well as implementing

a market penetration approach to attract new international business. One of the most

significant factors contributing to Dell’s success was the fact that its corporate customers

“not only valued the ability to customize their PC configurations to meet the unique

needs of users but also liked being able to deal with the manufacturer directly and to

receive Dell’s attractive pricing that was the result of its direct model.” This model was

the engine of Dell’s success, which provided additional value to customers with the

ability to custom-configure products, kept internal costs low, and provided lofty returns

for shareholders. Dell’s Direct Model was an efficient distribution system targeted at

specific market segments. It was also about direct and meaningful customer relationships

and virtual integration. Some of Dell’s success can also be attributed to the

differentiating fact, when compared to its competition, that it kept its product range rather

narrow and limited the distribution to 1 main channel (refer to exhibit 6.) Another initial

success factor was timing, as the company had been created as a result of the PC’s open

architecture, unlike Apple’s, and was able to take advantage of building and selling

clones. Dell’s highly successful customer service internet/phone model was another

major innovation in the PC industry, which resulted in satisfied customers, requiring less

service dispatches, resulting in lower cower costs and more sales. Well before the

internet explosion in 1995, Dell began integrating the internet and delivering online

technical support and order status information which strengthened its efficiencies on both

the transaction and relationship sides of the business. As a result, external sales reps

were able to devote more time to face-to-face contact and less time dealing with

administrative matters. In fact, the internet model was so successful that by 2000, 50% of

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Dell’s revenues were being generated through the internet resulting in increased

marketshare. Dell also excelled in virtual integration, choosing the best providers for

each component and leveraging their scale investments in R&D. (Financially speaking,

it is interesting to note that long term investments listed on the Balance Sheet as assets

went up 511% from $532 Million in 1999 to $2,721 million in 2000, perhaps as a result

of significant R&D investments for future products. Dell also experienced a significant

increase of 3012% in long term debt of $17 million in 1998 to $512 million 1999, just one

year prior to the asset increase (refer to figures 2 and 3.) Another interesting statistic

was that by 2001, the total revenue per unit was the lowest ever at $2,050, resulting in

lower profits at the current sales levels.)

Critical Success Factors

• Supply Chain - A key component of Dell's supply chain management was having

materials in close proximity to Dell factories; therefore suppliers are required to

have inventory hubs near the manufacturing plants. A huge benefit of this supply

chain solution is communicating with these hubs in real time to deliver the

required materials. Dell had reduced its inventory to an all-time low of a 5 day

supply, which comparatively was 20 to 70 days for its major competitors, thereby

creating a competitive advantage. By operating on a just-in-time basis, (a result

of an 87% reduction in primary suppliers-see figure 4) Dell was able to provide

better service with a faster turnaround time. Also by reducing the total vendor

pool and choosing suppliers physically close to Dell’s factories, supplier loyalty

was increased, leading to further economies of scale.

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 • Customer Efficiency – Dell constantly monitored the customer’s shifting

preferences, which helped in pricing, inventory management, and cost accounting.

Also, Dell’s factory assembly process was highly organized (i.e. bar codes),

efficient (i.e. systems were “burned in”) and extremely fast (i.e. 36 hour

turnaround) and its customer service was exemplary for the industry.

Dell also had a superior

ability to execute its plans and objectives, which were always proactive and

forward thinking.

• Market Sensing - Dell consistently sensed market changes before they happened

and was able to anticipate and identify product areas to maximize sustainable

profits using its Direct Model. As a result of this ability, Dell could pick and

choose which market they entered, making sure it was a market leader quickly

upon entering.

Channels – Dell used its Direct Model approach when entering major markets, but for

smaller markets it operated through its distributors. Dell was labeled as a “mail order

company”, but less than 5% of sales actually came from individual consumers. Most

sales were to business customers through its direct sales force, with 50% of sales going to

large corporate accounts and the other 50% of sales going to medium and small

businesses. Computers were shipped directly to the customer, cutting out the middle man.

(Dell briefly altered this direct approach by selling computers in CompUSA and Sam’s

Club in 1992, but unfortunately, entry into retail channels was not successful in

broadening its penetration of the consumer market because customers no longer had the

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option to custom configure their machines - a previous leverage for Dell). Dell also sold

servers through its direct sales force to larger relationship clients and through telephone

and online channels to smaller business clients using a three-tiered architectural system.

Sales infrastructure – Orders for the factories came in from 2 different sources.

Consumers and small business customers responded to print ads calling toll free numbers,

while Dell’s inside sales representatives placed orders for their large corporate customers.

Industry- Dell entered the server market in 1996, and within 3 years, servers accounted

for 12% of its sales. It entered the workstation market in 1997 and by 2000 was the

worldwide market leader. Dell had 2 US plants to service the North American market in

Texas and Tennessee. It also had plants in Ireland, Malaysia, Brazil and China to support

its global business. By 2000, Dell generated $7.4 billion, with 25% ($1.85 billion dollars)

coming from outside of the US, but surprisingly, international market share was half of

what it was in the states. With the US computer industry pretty well saturated with 53%

of homes already owning PC’s coupled with consumer fears of a recession, there was a

significant decrease in demand. The industry had recently just gone through a hyper

expansionary phase with 30% growth rates in 1999-2000, but gross profit margins overall

have dropped from 50% to 25% in the last decade. Therefore, the economic downturn of

2000 resulted in predictions of desktop and laptop revenues decreasing by 10% from the

previous year.

Competitors – The computer industry is fragmented. New products are coming out all

the time, the competition is brutal, and customers are changeable. Dell’s main

competitors were Apple, IBM, Compaq, Gateway, and HP, but the “Others’ segment had

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the most percentage of vendors marketshare at 34%. Many of these companies could not

continue making profits operating in Dell’s “low-margin sweet spot” as the gross margins

of the industry consistently kept dropping (i.e. total unit sales dropped from 46.9 billion

in 1999 to 30.4 billion by the 3rd quarter of 2001, which was comparatively a 14%

decrease--See Figure 1 in the appendix.) Compaq had been the market leader in desktops

and portables in 1997, but by 2001, Dell had overtaken them. Customer Analysis -

Customers valued Dell’s uniqueness of: offering the ability to easily customize their

PC’s, dealing directly with the manufacturer, and the attractive pricing resulting from the

‘direct model’. Dell understood the different needs of its large corporate, small business,

and governmental customers and attempted to optimize its 7,500 worldwide sales and

support reps for each particular segment. In order to do this, Dell segmented its customer

base into 9 US geographical regions. Dell also had created 3 regions outside of the US:

Americas International, EMEA, and APCC (refer to exhibit 7). Dell’s four main types of

customers were differentiated through the buying process as primarily relationship

(consumers with ongoing purchases) or transactional customers, (consumers making 1

purchase at a time) broken down into the following segments (refer to figure 5).

Global: Primarily relationship and transactional, then broken down into 3 core areas:

Relationship Business, Small/Medium Businesses, and Consumer Business

• US Market (Relationship = 60%): Business-global, enterprise, large corporate

accounts, federal government, education, state & local government

• Small/Medium Businesses (Relationship = 30%): Preferred account division,

Business systems division

• Consumer Business (Transactional = 10%): knowledgeable buyers.

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Dell has combined and implemented a multi-segment target marketing strategy with 90%

of its business being relationship based.

SWOT

Strength – By offering superior telephone customer services such as Premier Access,

and outsourcing their shipping, Dell had the lowest operating cost in the industry at
11.5%. It had a unique ability to predict which new high margin technology product
could be driven to scale w/lower priced products driven by its direct model, which was
continuously improving, making it hard to copy. Dell set the industry standard for
customer service/relations resulting in satisfied customers and less downtime (Dell
resolved 72% of problems remotely, which was twice the industry average.)

Weakness – Dell was late getting into the Latin American market (5th place in overall
market share), resulting in lost sales. It also had weak international market share in 2002
(Western Europe =3rd, Asia/Pacific = 7th, Japan = 8th, and 5th place in the rest of the
world. In addition, jumping into the laptop market too soon, entering the workstation
market late and signing unsuccessful retail agreements all brought losses to the company.
Dell doesn’t have robust products to support mission critical environments and is shut-out
of big enterprise storage accounts.

Opportunity – Dell can further capitalize on the remaining build-out of the Internet
infrastructure and increase market share in the external storage market (i.e. SAN/DAS
were expected to take 2/3rds of the market by 2005) and participate more in the midrange
and high-end server markets (2000 saw a 7% worldwide increase from 1999.) It can
develop itself into the premier Internet partner for customers around the world by heavily
targeting sales to first-time PC buyers and introducing new product categories and
services. With only a 5% global market share, Dell can easily increase business revenues
from international growth.

Threat – Computer industry consumers have traditionally been notoriously fickle in their
buying habits and trends, affected by the rapid pace of technology and the bursting
Dot.com Economy. While the growth of the Internet should produce more demand for
servers and storage, those markets will test Dell in areas that haven't been its strong
points: sophisticated product engineering and labor-intensive services.

Current Strategy

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“High Quality, More Powerful, Faster, Customized and Cheaper”. For every new

product or service it introduces to the market, Dell consistently implements its startup

mindset of “build-to-order computers” (referred to as the direct model approach) from the

very beginning of the development and production process. Dell’s business was unique in

that it was able to consistently make significant profits in low margin product areas.

Its’ direct model approach evolves for every new product and service achieving delivery

of high quality PC’s in a very cost efficient manner; one of continuous improvement.

Dell is a continuous-growth model, constantly adapting, changing and finding ways to

master its environment, as opposed to just responding to it. In addition, Dell has been

able to take flexibility and speed, and build it into the company’s DNA.

Positioning- Michael Dell portrays his company as “the good guy”, the Robin Hood of

the computer industry offering more for less. Their mantra is “better, faster, cheaper”

using brand name components, build to order manufacturing, and customized customer

service, which led to high quality and more powerful computing power. Dell had a

reputation for “effectively entering product markets where core proprietary elements had

become standardized and undercutting existing players based on price.” Dell’s strategy

was to choose the best in class providers (like Intel and Microsoft) for each component

and leveraging their scale investment in R&D. By 2001, Dell had become the US market

leader in Wintel server sales.

Target Market – Dell’s main focus is on large corporations with secondary efforts on

small and medium sized businesses. In addition, they also target the global consumer

directly, but with minimal effort. Dell mainly focuses on the segments that are already

knowledgeable about computers.

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Products - Dell currently has 6 main products: PC’s, laptops, customer service, storage

devices, workstations, and auxiliary services.

Pricing - When Dell decides to enter a particular market, it consistently uses the Direct

Model approach, pricing their product below that of their competitors. These low prices

are the result of multi-level leveraging and from achieving economies of scale.

Promotion - On-line model, direct mail order, catalogues, Premier Pages, special training

and certifications, word-of-mouth, editorials, reviews, sales reps, and awards

Place - Direct from Dell: On-line, telephone, mail-order. (Dell does not use any retailers

or wholesalers to sell their products.)

In conclusion, Dell’s strategies do match the company’s 4 P’s, targeting, and positioning

and can be summarized as a low-cost, fast and efficient business model, with superior

customer value with virtual integration.

STRATEGIC OPTIONS

Market Penetration – Maintain status Quo and continue to do more of the same. “If it

ain’t broke don’t fix it”. Many people believe the recession will end soon, so Dell could

just ride it out and hope to hang onto the marketshare it currently has. This option is not

a proactive approach and could prove to be risky, resulting in declining market share,

lower profits, and the possibility of the competition advancing while Dell stays stagnant.

Product Development –

• Pursue Mid-Range Server Growth. By 2001, Dell was the market leader in entry

level servers, but had no presence in the mid-range server market. Pursuing this

growth option could result in increased market share and higher profits due to the

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 higher selling prices and markups of these units, but could be risky if technology

suddenly changes. Increased post sale costs are also a concern, as server sales

don’t just stop upon delivery, they require continued service regarding reliability,

serviceability, availability, and manageability.

• Increase product line: By introducing new products like a PDA, Dell can capture

new markets and increase sales and awareness. However, Dell’s R&D budgets

are well below that of its primary competitors. This option contains increased risk

and high initial start-up costs.

• Pursue Associated Services Growth – within the US, 2000 service revenues

accounted for over 37% of $2 billion in total revenues. This business unit was

becoming an increasingly important part of Dell’s portfolio with longevity, able to

stand the test of time and market uncertainty, no matter what turn technology

took.

New International Market Development – Target new segments and enter new markets

with existing products. The Potential benefits of international expansion are increased

market share, revenues, profit, and buyer awareness. However, the successful Dell

Model might not work everywhere. The product chosen for expansion should be a

commodity where the demand is already in place and the country must also value on-time

delivery. In addition, terrorism, cultural barriers, political systems, and longer ROI must

be taken into consideration as well as limits on foreign ownership and tariff barriers.

Diversification

Merger and Acquisitions: By 2000, the external storage market was growing at 23% per

year. By acquiring an innovative leading company like the EMC corporation, Dell can

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effectively enter the external storage and software market previously untapped,

leveraging EMC’s expertise and experience. Due to the sagging economy, EMC’s stock

price had fallen over 800% in 2001, meaning now might be the perfect time to buy the

company at a significant discount. The Pros include increased market share and

economies of scale, but cons are higher costs and the need to re-train employees to learn

Dell’s culture and mission.

RECOMMENDATIONS & IMPLEMENTATION

Server/Storage/Service Growth

The booming PC market seems to have bottomed out, with little signs of improvement

due to market saturation. Positive signs have come mainly in the form of limited PC

replacement programs at some large companies and sales of notebook PCs. Any future

PC market recovery will most likely be tied to an improvement in the economy.

Therefore, Dell should ramp its efforts in three non-core areas as key for future growth:

servers, external storage and services. Meanwhile, it can carry on with its aggressive

price-cutting strategy for all of its products. Hopefully, these moves will allow them to

gain traction in some markets, and even overtake some competitors in others. Once Dell

has used its lowest price strategy to increase its installed base of clients in hardware sales,

particularly in the enterprise market, the company can leverage its expertise in customer

support to keep those clients. Even though Dell has already made some impressive

progress in server and storage developments, it still lags behind other server vendors in

total shipments and sales. The company needs to create a greater presence among

enterprise and service-provider customers.

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 Dell can quickly grow its storage business by providing simplified and

standardized storage solutions to customers ranging from small businesses to large,

global corporations with enterprise-class requirements. It can leverage its ties to

Microsoft, Intel and other prestige component vendors to focus on providing Windows-

based storage and server products. This move will make its high-end storage products

work with IBM, Hewlett-Packard and Compaq Computer Windows servers, as well as

Dell servers. This allows Dell to widen its customer base by appealing to customers that

don't have Dell servers, or have a mixture of servers from different vendors. With

comprehensive support for multiple platforms, Dell can also offer customers a storage

solution that leverages their existing Windows server investments, while scaling to

accommodate their growing data requirements.

An expansion of the services group should also be pursued based on customer

needs, which will vary from country to country. While Dell continues to partner with

third-party services firms in some areas, it should also bulk up on its own services

capabilities so it can provide customers with more complete services offerings. Dell

should realize that it would need to expand its services capability significantly in order to

be taken seriously by some global enterprise and service-provider customers. Dell can

also implement a fixed-price approach to services that will boost its presence in that

market. New services, such as migrating from Unix-based servers to new ones based on

Linux can be offered and combined with Dell's hardware. A total of $2 billion to $3

billion in service revenue can be achieved if this strategy is correctly implemented. Dell's

three-pronged growth strategy by no means guarantees a sure-fire path to future

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profitability, but Dell's deliberate and measured steps to expand beyond its PC roots

could result in additional good news in the future.

International Expansion

As Dell looks at expanding into international markets, it needs to consider entering the

markets that are key to the region. For example, Germany in Europe, China in Asia, and

Brazil in South America. Dell needs to carefully study these types of key markets and

implement its Direct Model only after it understands how these regions economically and

politically function. However, this expansionary growth will place extensive demands on

Dell’s information infrastructure needed to support such global operations. To be

successful in these new markets, Dell must update its websites in the particular languages

and modify the accounting systems to handle the specific currencies. Keeping these new

employees in touch with one another and with customers, suppliers, and partners will be a

gigantic task requiring the latest technology, increasing the demand for instant

information. The global market is huge and virtually untapped and Dell is in a great

position to take advantage of this market, especially with the use of the Internet and its

advanced online capabilities. Dell’s most important strategic advantage is the ability to

sell direct from Dell, eliminating all the middlemen in the normal distribution line.

Anyone who wants a Dell must order it through the mail, online, or over the phone,

which is a perfect method for doing international business. Dell just takes the order and

ships the computers via one of its many shippers. Dell should focus on dominating the

Asian market where they only have a 3.7% hold on a market with over 19.9 billion units.

Asia is a virtually untapped market and is expected to grow rapidly in the next few years.

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Dell currently has two manufacturing plants and four technical support offices in the Asia

area. Dell should look for ways to optimize these facilities and budget some advertising

towards attracting enterprise and big businesses in that region. If Dell can capture a few

large clients in China, it may be able to dominate the Asian market, drastically increasing

its revenues.

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 Appendix

Figure 1

Total Unit Sales

50 46.9
45
40
Units in billions

35 30.4
30
25
18.5
20
15
8
10
5
0
1985 1994 1999 2001

Figure 2

Long Term Debt Growth

512
Debt in millions

17

1998 1999
Series1 17 512
Year

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Figure 3

Investment Growth

3000 2721
Investments in millions

2418
2500

2000

1500

1000
532
500

0
1999 2000 2001

Figure 4

Primary Supplier Cuts

250
200
200
# of suppliers

150

100

50 25

0
1992 2000

There was an 87% decrease in the number of primary suppliers from 1992-2000

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Figure 5

Dell's Market Segmentation

Consumer
Business, 10%

Small
Business, 30% Relationship
Business, 60%

Figure 6
THE DELL
MODEL

IBM
Multiple

# of Channels HP

Single Dell
Gateway

Narrow Broad

Product Range

Figure 7
Americas
International EMEA APCC/Japan
Canada Europe Asia Pacific
Mexico Middle East China
South America Africa Australia
Central America India
Japan

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