STRATEGIC MANAGEMENT

DELL CASE STUDY 0475498 (3)

Rahman Olanrewaju

101733881

1/29/2010

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Dell Inc. since its inception in 1983 has been one of the leaders in the supply of computer systems around the world. Its initial strategy was based on two (2) primary principles:1. Dealing directly with customers. This allowed them to cater to specific customer

needs (customization) and also avoid third-party involvement which reduced the price of the commodity

2. Securing the lowest cost for production and passing these onto customers in the form of reduced price.

It is also important to note that Dell has been recognized as a leader in its industry for its quality, service and customer satisfaction even though it had a low-cost strategy.

In recent years however Dell has experienced some difficulties and has not performed up to expectations. This is as a result of issues within the company but also due to external events affecting the industry. These issues are listed below:1. The loss of market share to its competitors. This is highlighted by the fact that is has

lost its place as the market share leader to HP.2. The competitive advantage it had as the industry’s lowest-cost leader is not as strong

as it was. Competitors are just as efficient and also offer lower prices.3. Its failure to capitalize on the growth in the amount of computer systems sold through

retailing because of its absence from the sector. While it is now offered in retail stores it is behind its competitors who have already established a foothold in that sector.

4. The most important issue is the fact that its strategy is not as effective as it used to be. The change in the consumer market coupled with advancements in technology and reduced costs means that Dell competitive advantage initially gained from its customization and low-costs are now lost. The fact that it did not realize the change in the external environment is what has led to a lot of these issues.

Now that some of these issues have been identified the next step will be to analyze Dell’s current state and from there gain an idea on how they can rectify the issues it faces. In order to do this it is necessary to analyze: Its Internal Environment Its External Environment

1. Internal environmentDell primarily is a supplier of computer systems. Over the years they branched

into other sectors which they believed would complement their primary focus and enable them to apply their core competencies. This ensured their resources were somewhat homogenous and in fact similar to those of its competitors, what made Dell particularly successful however were its capabilities i.e. its ability to use its resources more efficiently than its competitors in the creation of its product. This relationship also works backwards in that because of its capabilities it produces excellent products and services which in turn create brand equity which in itself is also a very important resource. However, with its competitors gaining capabilities of their own it is important to examine whether or not the competitive advantage possessed by Dell still exist and what areas it can use its resources and capabilities to create new competitive advantages.

This will be done using the VRINE model. This is done below: Value: Does Dell’s capabilities in using its resources have any value?

Yes. Dell is a leader in operational efficiency in the industry. This has resulted in cost-savings and customer satisfaction, the former ensuring reduced costs and thus higher

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profit margin.

Rarity: Are these resources and capabilities rare?No. In the past competitors were not as efficient as Dell and this gave it an

advantage albeit a temporary one. These capabilities are no longer rare and are possessed by almost all Dell’s leading competitors.

Nonsubstitutability: Can these resources and capabilities be imitated?Yes. As stated earlier on Dell’s competitors have imitated its process and this has

yielded similar benefits to them.

Exploitability: Are these resources and capabilities exploitable?Yes. Its capabilities have led to fast customer response and operational efficiency.

These pay dividends in the form of reduced cost and quality which in turn result in customer satisfaction.

Verdict: Even though Dell’s resources and capabilities have value, value that can be exploited, this does not represent competitive advantage. It will contribute to profits because of low costs but the fact that competitors have access to the same capabilities mean that no competitive advantage is gained by resources or capabilities.

2. The External EnvironmentA number of events in the external environment have had an impact on Dell, from

its competitors to global economic weakness to changing customer trends. An analysis of the external environment is therefore imperative in looking for threats, weaknesses, strengths and opportunities. This is done using the five-forces of industry model below:

RivalryThe intensity of competition in the industry is very high. Most of the firms are of

about the same size and power with similarities in resources, capabilities and products. This leads to cost curves that almost the same and lower prices which also lower profit margin. In order to secure brand loyalty a lot is spent on advertising and this also reduces profits. The fact that high exit barriers also exist means firms most compete aggressively and this increases competition and price wars.

Threat of New EntrantsOverall it is difficult for new entrants to enter the industry without acquiring an

already existing firm due to a number of barriers to entry. These include economies of scale, economies of scope, capital requirements, lack of brand awareness and access to distribution.

Supplier PowerSupplier power in the industry is mixed depending on what is being supplied.

Items such as microprocessors can be purchased from a number of suppliers so the presence of substitutes reduces supplier power. In another example most firms in the

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industry use Microsoft operating system; while there are other options and some firms such as Apple and Acer use other systems Microsoft has some leverage as a supplier.

Buyer Power A distinction must be made between retailers and consumers here. Retailers

represent indirect distribution and consumers represent direct distribution. The similarity of products and services supplied means that buyers have considerable power in the industry. The competition among firms which usually results in lower prices is also in favor of the buyer.

Threat of SubstitutesThe advancements in technology have created a number of substitutes. Cellular

phones, gaming systems and PDA’s are just some of the examples of substitutes that are available. It is important to note however that even though these are substitutes they also have the potential to be complementors as well.

Verdict : Even though competition is intense usually leading to lower prices and profit margins the fact that there are entry barriers, similar cost curves, similar products, demand for these products and competition on a large scale means that this industry is profitable for firms already in it.

We have now looked at the issues facing Dell and also examined its internal and external environments. Now it is time to use these to formulate a strategy and a course of action that will solve Dell’s problems.

RecommendationsDell Inc. is still very much a profitable organization. The issue is its

underperformance compared to past standards. It is therefore important to set markers that highlight Dell’s progress towards returning to the power it was in the industry. Two measures have been chosen for this:1. Dell’s market share2. Dell’s cost structure and more importantly the competitive advantage it can gain from

it

In order to increase profits and sustain long-term growth Dell must do at least one of the following: increase its market share or reduce its costs structure. The recommendations listed below attempt to accomplish both. It is important for Dell to not just reclaim its place as market share leader but also to ensure that it also uses its cost structure as a competitive advantage as it done in the past. The recommendations are listed in line with the objective they fall under:

Reduction of Cost structure1. The outsourcing of manufacturing to low-cost countries (Exhibit 1)2. The sale of manufacturing plants three (3) manufacturing plants in Europe and North

America namely Florida, North Carolina, and Ohio (Exhibit 2)

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3. Turning the manufacturing plant in Athlone to an independent contract manufacturer that can accept jobs from other firms (Exhibit 3)

4. Reconfiguration of supply chain to improve productivity and increase efficiency5. The reduction of the workforce. The employment of temporary workers in unskilled

positions and the elimination of benefits (Exhibit 5)6. The sale of following product lines namely inkjet printers, digital music players, LCD

television and digital projectors. (Exhibit 4)7. A commitment to focus on new product that are aligned with core competencies that

can provide economies of scope and synergies that cut costs and improve supply(Check Appendix A for cost-savings from new cost structure)

Increase in Market shareAs we have seen in the analysis the Dell is in an industry in which its cost curve,

product and price are somewhat similar to those of its competitors. The consumer market has changed and in order to re-capture its market share leadership it s important for Dell to reposition itself in the minds of consumers. Because products between competitors are fairly homogenous Dell must strive to differentiate itself from its competitors if it is going to assert itself as the industry leader. These are the recommendations:

1. Conduct consumer survey to find out their needs

2. Enhance brand imageDell possesses brand equity but so does its competitors. It is hard establishing

brand loyalty. This however can be done in a number of steps Creating a new slogan. An example is “Your PC is U” Running commercials emphasizing the advantage dell offer through customization,

enabling the PC to be a reflection of their personality Giving consumers a wide range of option as to what they can customize. An example

is the color they want their systems to be. Using the results of the survey in recommendation 1 adding product features that are

not already available Emphasize quality. Dell has won numerous awards for quality and customer

satisfaction and these should be highlightedUsing these steps Dell can differentiate itself enough from its competitors to make

a difference

3. Aggressive adoption of indirect distribution and expansion into the retail sectorDell’s failure to establish a presence in the retail industry meant that it failed to

capitalize on the growth of units sold through retail.

Appendix A

Exhibit 1Cost Savings from Outsourcing to low cost countries

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Typical Cost StructureSavings from Manufacturers Total CostFor PC Manufacturers in low cost countries Savings

Materials 75% 15% 11.3%Labor 12% 70% 8.4%Overhead 7% 35% 2.5%Other 6% 10% 0.6%Total 100% 22.8%

Exhibit 2Revenue gained from sale of Manufacturing and Distribution plans

Location Owned (Square feet) Value (in $)Florida - Miami 570,000 70 millionNorth Carolina - Winston 450,000 39 millionOhio - West Chester 320,000 32 millionTotal 1,340,000 141 million

Exhibit 3Cost Saving as a result of economies of scale gained by turning manufacturing

Plant in Athlone into an independent contract manufacturer

Typical Cost StructureSavings from Economies Total CostFor PC Manufacturers of Scale Saving

Materials 75% 10% 7.5%Labor 12% 10% 1.2%Overhead 7% 15% 1.05%Other 6% 7% 0.42%Total 100% 10.17%

Exhibit 4Revenue from the sale of inkjet printers, digital music players, LCD television and digital

projectors product linesProduct Line Value (in $)Inkjet printers 7 millionDigital music players 3 millionLCD television 15 millionDigital projectors 11 millionTotal 36million

Exhibit 5Expected reduction in workforce and use of temporary workers operational expense

savings (in $)Typical personnel annual salary With Reduction Total Savings

560 million 440 million 120 million