Dell's Current Market Position and Perspectives - Case Study Example

Dell The aim of the paper is to understand the current position of Dell in terms of its market position, its strategies, its strengths and weaknesses and the various external and internal threats it faces and opportunities it has. With this background we can then define strategies for the company to help it surpass its major competitor, HP, and sustain a top market position. Dell has been a pioneer in the business of manufacturing made to order PCs and laptops and manufacture of x86 servers. To diversify its portfolio it has expanded its product range to include data storage hardware, printers and their cartridges, networking switches and hand held PCs as well as proving software solutions. The company has a global reach and has offices in Europe, Asia and Japan besides America. The company aims to produce high quality products at a low cost and use this strategy to achieve profitability. Michael Dell, who is the founder and currently the Chairman and CEO, held around 10% of the company’s shares as of 2008. Rest of the key stake holders are institutional and mutual fund owners besides the small time investors. External analysis Macro-environmental analysis The external factor analysis is important for any company to plan its future strategies. The PESTEL analysis for Dell (appendix) clearly indicates that macroeconomic environment has had great impact on the company’s performance. The company is highly susceptible to currency fluctuations as was seen in it major losses due to the same. Technology plays a vital role as it necessitates the need to change and keep low inventories. Legal factors and government regulations can easily affect the company’s bottom-line. (Cuizon). The company also needs to change marketing and servicing strategies based on preferences of the customers in a particular geographic location. Industry analysis Referring to Porter’s five force model (as explained in the appendix) we can see that any organization in computer industry is highly susceptible to quick pace of technological changes. This results in easy availability of substitutes to the customer. Thus the threat from substitutes availability is high. Also the threat of new entrants is high in this industry especially the local white-box manufacturers. They also provide low cost substitutes to the consumers. Customer loyalty is not very high here especially if the competitor provides similar services at the same or lower costs. With the speed at which products are churned out in this industry the consumers tend to shift loyalties fast. Hence, to keep a brand loyal customer segment it becomes all the more important to provide product differentiation. Cost of leaving the market if a product does not perform is very high. This is because of the amount of investments required in technology and know-how. From the supplier power point of view, though there are a number of local suppliers available in the market, the cost of changing suppliers becomes high because these suppliers are a part of value chain and require understanding of the processes. (Cuizon). Threat of substitution is high in this industry and cost of changing to a different brand can at times also be high especially for big corporations due to the size of operation. However, for an individual user it becomes easier and less expensive to switch to a local part or software as branded products turn to be much more expensive. Value chain analysis The value chain model of Dell is the differentiating factor from the other vendors. What differentiated Dell from other PC vendors in the value chain was the fact that other vendors concentrated on establishing their brand image and with the help of this image set a network of resellers. The resellers again resorted to marketing activities to reach the final customer. However, Dell focused on building brand image and directly targeted the end user rather than the reseller. This helped them eliminate one step as seen in the value chain diagram. Another differentiating factor of Dell in the first three steps of the value chain was the close communication between the supplier of parts, the assembly line of the company and their marketing staff. The marketing staff ensured real time data communication about the customer’s needs which helped the suppliers in providing only the relevant parts and thus reducing the inventory stocking of redundant parts. Problem Diagnosis Dell faced problems on certain aspects. These are discussed below: Dell’s direct to customer sales strategy did not give the advantage in certain countries like China and Japan. This was because this strategy relied heavily on internet order booking which did not appeal to the customers there. Competition from HP and Apple ate into the sales of Dell both in America and outside. HP started giving better features at lower cost and Apple had introduced ipod model and new iPhone which diverted consumer’s focus on these new products. The strategy of Compaq to keep PC prices low by diverting its huge profits from server market into its PC segment. Losses on account of unfavorable hedging position. The company’s revenues from their core product, PC, were decreasing. They were at $21.6 billion in 2006 and $19.6 billion in 2008. This shows that they were losing ground. (Cuizon) The acquisition of EDS by HP made its position 2nd after IBM in terms of sales and world market share. Its market share was 5.3% at that time, making it a challenge for Dell to overtake it. (finance.yahoo.com) With the entry of the new CEO, Mark Hurd, HP started consolidating and its revenues started improving. Thus, its position became much stronger for Dell to compete. “Dell historically has skipped resellers, while H-P has done an excellent job with it” (iht.com). HP also had one of the largest networks of distributors and the merger of Compaq gave it a further boost. This was another challenged posed by HP. Compiling laptops was more labor intensive and Dell was finding it difficult to manufacture at competitive prices. The problem was even graver than it looked owing to the fact that the consumer preference was no shifting from desktops to laptops. Strategic options We will look at some of the strategic options Dell has based on the various strategic models: 1. Market penetration with new product development – They can focus on increasing their market penetration specifically in existing markets where they have lost out to others. This can be done through new product development. As seen in America, there has been a pressure on sales on account of new products introduced by Apple, Dell should embark on this strategy to hold on to its existing client base. This would involve very extensive R&D based on market research. However, this is already Dell’s strength as it has a very efficient system of ensuring that the company has the pulse of the customers’ needs. 2. Market development and diversification – This is another strategy which Dell can use to beat HP. They need to look at new markets where HP has not yet entered. This will give them an advantage over its rival. Diversification is one strategy Dell is already good at. They have experience in diversification into non core areas like servers, printers and networking switches etc. Thus, the company should not have any problems in further diversification to other areas which may not be HP’s area of expertise at this point in time. 3. W-T (weakness-threat) strategy – Dell needs to embark on a defense plan to ensure that the firm’s weaknesses do not make it susceptible to external threats. This is one way it can ensure that HP does not take advantage of its situation. Its major weakness at this point is the production of laptops. This needs to be overcome by utilizing low cost labor markets like India, China and Brazil. The company also needs to look at methods of standardizing the production of laptops as much as possible. This can only be done by investing in R&D specific to the development of the laptop segment. This is a very important segment as today’s consumer preference has shifted away from desktops towards laptops. 4. S-O (strengths-opportunities) strategy- Dell should pursue opportunities as per company’s strengths. The major company strengths lie in its ability to provide customer tailored products in minimum time. Besides this the company has impressive experience in reducing costs through value chain optimization. It should thus identify opportunities that help it use these strengths. These could be in the field of acquisition of related companies or diversified portfolios. 5. Hybrid of differentiation strategy and cost leadership strategy – Another strategy it can use is to use the cost leadership strategy in combination with the differentiation strategy. Both these are easily achievable as the company is already focused on cost reduction as well as product differentiation. To achieve cost leadership it should shift production base to low labor cost countries. It needs to invest even further on technology that will help it bring costs down and also keep improving its current logistics. (finance.yahoo.com)To achieve differentiation, it should invest further in R&D and be committed to delivering high quality products not reproducible by competitor HP. It needs to embark on aggressive advertising in order to make the consumers aware of how Dell products are different from HP and how they are better value for the money they have spent. Evaluation of strategic options We will look at the various strategies we have discussed so far and decide which one would be the best option under present circumstances. We will understand each strategy based on its suitability, feasibility and acceptability (appendix- strategy evaluation table). The evaluation table has been created for all the 5 strategy and points allotted (between 1- 4, 1 being the lowest point and 4 the highest) to the various evaluation criteria of each strategy. The points are allotted based on whether the impact is positive or negative. For example, strategy 1, which is market penetration and new product development, is allotted on 1 point in the economic sense criteria as compared to others. This is because both the strategies individually would require more monetary backup as compared to others hence it gets less points on this criteria. Similarly, for the strategy 5, the economies of scale etc. criteria gets full points as the firm already has cost leadership capabilities and also is into product differentiation on account of providing made to order products. Based on the points allotted in the strategy evaluation table (appendix), we can conclude that both strategy 4 and strategy 5 have obtained equal points. The company can use both the strategies of using its strengths to pursue the opportunies it has as well as carry on in the cost leadership strategy and keep producing value for the customers through product differentiation. Both these strategies when combined can put the firm ahead of HP. Chosen strategy description As per our recommendation from the strategy evaluation we have chosen a strategy whereby the firm needs to use its strengths wherever there are appropriate opportunities as well as follow low cost leader along with product differentiation. The company has strengths in terms of customer understanding, relationships with suppliers, value chain optimization, diversification experience and utilization of IT to provide value to the customers at each step. The company has the history of entering into new products for example when it entered the servers market, and then providing substantial cost advantages to the customers as compared to the standardized vendors. It has also built long term relationships with its suppliers which gives it logistic synergies. It has always kept an eye on the customer’s pulse and this has resulted in providing customer satisfaction by keeping low inventories and reducing redundancy cost of components. It has used technology to enhance its sales efforts with minimum capital investment. This can be seen in the use of website for booking orders. This also saves time for the customer and hence is a value addition. Its innovations in value chain optimization resulted in the assembly line changes every now and then. Thus the company has been very flexible in adapting to changes. These are a few of its key strengths which it needs to use for further product diversification at low costs. Resources that the company needs to implement this strategy are: A visionary leadership team which can take commitment from top executives to ensure that the company meets the strategic goals. A well advanced and organized R&D department (which to some extent the company already has) and R&D staff. Good market intelligence systems and related staff. Increased R&D budget More customer facing staff Conclusion Dell is a company which has kept a clear focus on customer satisfaction followed by profitability. The company has some key strengths which cannot be easily copied. Thus it can strategically use these strengths to make use of the opportunities it has in the current market scenario. It has already been using some of the opportunities like those provided by internet to enhance its sales, but it has the opportunity to do much more to be able to compete with HP. The major weakness of the company lies in its inability to tame the laptop segment of its business. This is one segment which is expected to rise fast due to changing consumer preferences. If the company is unable to increase sales in laptops, then it might face challenges at a later stage. The company needs to follow a strategy of providing value or product differentiation while maintaining cost leadership. This is the key to sustained leadership position in the market. This strategy should be further backed by continuous exploitation of opportunities in the external environment so as to use the core strengths favorably. References Cuizon, Gwedolyn. SWOT Analysis of Dell Computers. March 5, 2005. April 19, 2010. http://strategic-business-planning.suite101.com/article.cfm/swot _analysis_of_dell_computers Dell, Michael. What You Don't Know About Dell. April 19, 2010. http://www.businessweek.com/magazine/content/03_44/b3856001_mz001.htm finance.yahoo.com. Dell Inc. (DELL). April 19, 2010. http://finance.yahoo.com/q/in?s=DELL iht.com. Retail expansion fails to lift profit at Dell. 2008. April 19, 2010. http://www.iht.com/articles/2008/02/28/technology/28dellfw.php marketingteacher.com. Dell SWOT analysis. April 19, 2010. http://marketingteacher.com/SWOT/dell_swot.htm mindtools.com. Porter’s Five Forces. April 18, 2010. http://www.mindtools.com/pages/article/newTMC_08.htm Savitz, Eric. Apple: Israel Bans iPads (For Now). April 15, 2010. April 16, 2010. http://blogs.barrons.com/techtraderdaily/2010/04/15/apple-israel-bans-ipads- for-now/?mod=yahoobarrons Appendixes VIRO framework: Value: The value chain shows that the resources are put to optimal utilization to produce value for the customer as per customers’ needs. The suppliers were linked to the company through long term relationships and hence had no qualms in setting up their plants and distribution channels in close proximity to the Dell’s assembly line. This helped in reducing transportation costs which were passed on to the customer. Similarly, the real time information about customer’s requirements helped the company keep low inventories of components and provide value to the customer to his complete satisfaction. Low inventories again added to cost saving and hence increased value to the customers. Imitable: As confessed by Michael Dell himself, the model has been imitated by a number of competitors but none of them have been able to imitate it to the fullest. It has been a source of learning by university students but its practical imitation has not been achieved so far. Many of the competitors wanted to imitate the direct to customer strategy but they feared alienation from their direct sellers which they couldn’t afford. Rarity: The model used by Dell is rare as this is the only firm which engages in customized production of PCs and servers. All the other companies make products based on general market assessments and then sell them through resellers or distributors. The model is unique from industry standards looking at the low inventory turnaround of 2.7 to 4 days’ which Dell achieved in fiscal years 2003-2007. It also involves engineers from the suppliers to work in their product design teams, which is again a unique attribute. Organization: The organization has full control over the entire value chain and employs able staff in their R& D departments. Michael Dell himself understands the intricacies of his business and is thus a capable leader. Michael Dell (2003 qtd in Business week) says: “Celebrate for a nanosecond. Then move on.” During the recession, Dell resorted to changing the ratio of their workforce from back office job to jobs that involve direct contact with the customers. This was to ensure that the company had a complete hold on the pulse of the customers. Strategy evaluation Strategy 1 2 3 4 5 Suitability Economic Sense 1 2 3 4 4 Can firm obtain economies of scale, scope and experience 2 3 2.5 4 4 Suitable in terms of environment and capabilities 4 2.5 2.5 3 4 Feasibility Cash flow analysis 2 2 3 3 3 Acceptability Return for key stake holders- shareholders, employees and customers 3 3 4 3 4 Risks 1 1 3 4 2 Stakeholder reactions 2 2 1 3 3 Total 17 15.5 19 24 24 PESTEL analysis Political: Political factors that impact the computer industry as a whole are stability of an economy and taxes levied on computer related services and hardware. An unstable economy will discourage growth of business as well as other institutional setup thus the demand for computers will decrease. Increased taxes also have negative impact on the growth of market. These will either eat into the company’s profits or will have to be passed on to the consumer which will cause a shift to either a cheaper brand or a different product altogether. Other political factors such as amount of restrictions posed on foreign investment to protect the domestic industry and other trade barriers also impact the establishment of industry. Economic: Economic growth of a country is an important factor deciding the demand for computers. Growing economies like China, India or Eastern European countries will have higher demand for computers as they as setting up new businesses and other institutional systems like education, social welfare etc. which would require computerization and hence higher demand for computers and services as compared to developed economies. Other economic issues affecting a computer firm engaged in import and export of computer hardware as well as provides IT services to consumers in different countries is the impact of currency fluctuations. This can be seen in the losses incurred by Dell on account of unfavorable Hedging positions in the currency market. Economic recession also has impact on sales. Social: Social factors determine the preferences of the consumers with regards to products and services. Based on these factors firms need to analyze the products to be introduced in the market, services to be provided and methods of marketing and advertising etc. This can be seen from the fact that Dell’s direct to customer sales strategy worked very well in other countries but not in China. This is because in China the cost of a computer is worth an individual’s 2 years’ savings and the people there are very particular about testing a product before parting with the precious savings to buy a commodity of that cost. Thus, Dell had to introduce kiosks where consumers could test what they are buying. Another factor that the demand for computers depends on from the social perspective is the educational level of people. The more literate an economy is, higher the demand for computers. Technological: Computer industry on the whole is highly impacted by the fast pace of innovations which makes products obsolete within months. Thus, it is very important for organizations in this industry to keep pace with the technology and ensure low inventories as these old inventories will soon become obsolete and there will be no demand for the products within a short span of time. Even the technology costs go down very fast as the new products are introduced. Environmental: The major concern for computer industry is the impact of the waste or redundant components on the environment. As the e-waste produced by the computers is very harmful for the environment, there needs to be proper waste disposal system to ensure safe riddance of the waste. Computer firms face a lot of opposition from environmentalists on this aspect. Legal: Legal issues can lead to whole lot of problems for a computer firm. For example in a latest incidence, Israel banned the imports of Apple iPad citing security concerns. Even the tourists are not allowed to carry them unless they are certified to be compliant with the local transmission standards (Savitz 2010). These kind of legal hitches are not uncommon in the IT industry and can result in major sales losses. Porter’s five forces analysis SWOT analysis Strengths Dell’s business model of direct-to-customer products is a great strength of the company. This not only helps to provide true value to the customers as per his/her requirements, but also a low inventory for the company. This helps the company in two ways. A satisfied customer tends to remain loyal to the brand and low inventories help in cost saving in terms of cost of holding the inventory as well as the depreciating prices of the components which happens very fast in the computer industry. This relationship with the corporate as well as the individual clients helps Dell sell products and provide other solutions to the customers through internet, phone etc. Because the customer has confidence in the products purchased from Dell, they do not mind purchasing further products online without actually looking at them. Dell is well known for its great customer service. It has a low cost leadership in the market. No other brand has been able to squeeze out as much cost advantage as Dell from its supply chain management. Dell is a pioneer in producing customized systems for corporate as well as individual customers. This is one unique attribute which none of its rivals have been able to imitate. Dell ensures that the technology it provides to its customers is the latest. In fact, the company feels that it is the responsibility of the organization to present to the customer the technology that suits them best from among the myriad or technologies available around them. In this the company takes it upon itself the responsibility of providing ease of choosing for the customer and thus avoiding getting stuck with the wrong technology. Because of this attitude of the company it ensures that it keeps an eye on the customer’s pulse and thus ensures that suppliers are informed about their at the earliest so as to provide the desired products. This has resulted in inventory holding time for the company to 2.7 to 4 days which is a great cost advantage. Weaknesses Dell has not been able to focus on educational institution as it has on corporate and government institutions. This can be clearly seen from the exhibit 5. Build to order strategy of Dell created problems for its customers in some countries where they were apprehensive about buying computer without actually testing them. Dell is not a manufacturer but a maker of computers. It is highly dependent on its parts suppliers. Huge suppliers are not easily available hence the company is vulnerable from supplier perspective. The company has diversified itself to so many product ranges as well as part suppliers spread across so many countries that it becomes very difficult to contain the negative publicity which ensues from defective products and parts. Having diversified from the core competence also poses challenges in terms of learning curve of new products. Opportunities Dell has diversified to non-core products like LCD TVs and other computer peripherals. This provides a great opportunity to reduce risk as fluctuations in demand for one product can be countered by the other. This experience also gives confidence to the company management to carry on diversification into other products like iPods etc. The huge demand from emerging markets for computer systems and related services is an opportunity Dell cannot miss. As per the Forester Research estimate, the demand for PCs worldwide would reach 2 billion by 2016. This translates to a flood of services requirements as well. The opportunities opened by internet both in terms of service delivery and hardware requirements in terms of number of servers needed for running the internet services are also huge. With the advent of social networking sites, e-mail and search engines, there is a huge opportunity in this sector. India, China, Russia and some other Asian economies provide maximum opportunities for growth of this sector. Cheap labor and know-how availability in the emerging markets is another area which Dell can use to keep its costs at low levels. Threats Dell is at a great risk in terms of currency fluctuations. This risk increases further because the extent of its operations is spread across a lot of countries. Technological redundancy is another factor that poses a threat to Dell. Since computer parts become obsolete within a matter of months, the company has to be on the edge all the time to ensure that they use their inventories optimally. This is because components depreciate very fast in value and it becomes difficult to recover money on technology that has become obsolete. People prefer to buy the latest. Another hazard that the speed of technology poses is that the company has to keep coming up with innovative ideas for new products and keep launching them at close frequencies. The threat from competitors is also high in this industry. There are both local and branded competitors who compete for suppliers, components and products. Read More