Will Dell's Competitive Advantage Last Long - Case Study Example

Case Study Analysis Dell versus HP Dell has a range of products including PC’s, servers, laptops, printers, scanners, DVD drivers, LCD’s, Plasma screens, MP3 players, cameras, memory cards, data storage devices and speakers. The company sells its products in more than 170 countries and 95 percent of its revenues are generated from sales in 60 countries. Dell focuses on a low cost strategy, and to achieve this, the company closely works with the suppliers as to cut costs by as much as possible. The company’s mission is to incorporate technology, internet and e-commerce within the supply chain to help minimize costs. This strategy is implemented in their everyday business. The major stakeholder of the company is Michael Dell, who owns 10 percent of the common stock. Michael Dell is also the founder of the company. He had a vision to produce customized computers which will help reduce the costs. HP is Dell competitor and offers almost the same products. Its product range includes; laptops, mini net-books, desktop PC’s, printers, monitors, scanners, calculators, servers, and storage devices. The operations of HP are also in 170 countries around the world. The company believes in producing products which are simple and easy to use by all people, even if they have any disability. Thus, the core value of the company is accessibility. (HP Website) In 2007, HP’s new CEO introduced a new strategy which overtook Dell in the international arena. The market share for HP was 18.8 percent compared to that of Dell which was just 14.9 percent. In the US market, Dell was still doing fairly better than HP; it still was at the number position when it came to shipments and market share. The market share for Dell was 28 per cent as compared to HP for which it was 23.9 per cent. EXTERNAL ANALYSIS PESTEL Analysis The PESTEL analysis comprises of the following components; political, economic, social, technological, environmental and legal analysis. The political scenario for Dell is difficult because the government in countries such as China prefers to subsidize and promote the local PC companies. Also, because of the financial crisis, the US government is revamping its policies relating to tax and interest rate; this may also affect the business. The economic environment is precarious with issues such as piracy of software in the market. Also, the disposable income per family has also decreased leaving less money to spend. Families have moved towards saving from spending. The social environment for Dell is positive in the US but in other countries, Dell needs to establish itself. In countries such as China, Dell has a lot of potential if it adopts the right strategy. Dell will have to alter its strategy according to the culture of the country, for example in China people like to get a feeling of the product before paying for it. Thus, the current strategy of online direct selling may not work there. The technological environment is rapidly changing and growing at the same time. There is a lot of potential for a company like Dell, especially in the developing countries; technology has recently been introduced in these countries on a large scale and there are many potential sales. Dell will need to continuously invest in research so that they can stay ahead of the competition. The environment in general is pro-technology. People all over the world are adopting technology in their everyday lives and there are many potential products and services which can be introduced. (Thinking Made Easy) The legal environment for Dell has not been very good. They had to pay warranty claims because of defective computers which did not work. Apart from this, there have been other suits involving Dell, such as the one regarding Intel. (Parloff, 2007) Porter’s Five Forces Model The Porter’s Five Forces Model includes the following components; rivalry, bargaining power of suppliers, bargaining power of consumers, threat of new entrants and threat of substitutes. (Berry, T.) For Dell the major rivals include companies like Hewlett Packard, Oracle, EMC, Cisco Systems, IBM and Sun Microsystems. These companies have been giving Dell a hard time. They have made many acquisitions and increased their revenues. According to Ashlee Vance, HP has increased its annual revenues from $45 billion in 2001 to $130 billion. On the other hand, Dell’s growth has not because of acquisitions but because of internal operations. The threat of substitutes is high because all the products, i.e. those from other companies and brands are offering the same services. There is not much differentiation in the product itself, except for the design which is not a very important factor when it comes to purchasing technology. The bargaining of suppliers is low because Dell has focused on building relationships and long term contracts. Also, there are many suppliers in the market and the cost of switching is relatively lower, thus reducing the bargaining power of suppliers. Also, since Dell has the highest market share and is one of the top technology companies, suppliers will not want to jeopardize their relationship with Dell. The bargaining power of customers is also low because there are many other brands which may give the customer the specifications they are looking for within their price range. Also because the market for computers is vast, there are many people and companies which are looking to buy computers. If the customer does not agree to the price that the company is offering, the company can go to other corporate or private customers in the market. The threat of new entrants is high because the assembling of a computer has become a very simple process. Technology is easily available, all the components need to be bought and just put together. Anybody with an advanced knowledge of computers can do that. (Private Writing) Critical Success Factors The technology industry especially the computer industry is very competitive and keeps changing rapidly. In such an environment, it is imperative for a company to be able to distinguish itself from the rest. Dell was able to achieve this differentiation with the help of some factors which were critical to it becoming such a success. First of all, Dell decided to build long term relationships with its suppliers. This helped with the quality of the product; Dell has access to better quality components. The suppliers were considered as partners and this made them more responsive to the needs of Dell. Second, the company became known for being able to deliver customized products in time. Consumers would specify the configurations online and place an order and Dell could deliver the product within the same day. All of this was possible because Dell had innovative and efficient assembly lines. This allowed the company with greater flexibility which was helpful in producing customized products for the consumer. The users of computers have become aware of their needs and requirements from their PC’s; they are better able to configure their needs than a computer salesman. Dell is providing ease of access to the consumers; they can visit the website and order the computer they want directly from the manufacturer. This reduces the cost of the product as there is no retail margin as well as makes it easier for the customer as he does not have to travel to the store. INTERNAL ANALYSIS Opportunities As the global economy was hit by the global financial crisis, people everywhere were cutting down on expenditures, this lead to people switching to cheaper products. The financial crisis was an opportunity for Dell because their products were sold at a price which was 250 percent less than the price of Cisco. Many of the Cisco consumers started purchasing Dell products. Although people were purchasing less technology, the size of the pie has increased because now people from all over the world are using technology. There are technology up-gradations taking place all over the world and on a fast basis. Innovative, flexible and efficient products are required by everyone as they help keep costs low in the long run. This poses as an opportunity for Dell because they are known for making flexible and efficient products at a low cost. Also, people have become aware of the brand of computer that they are using, even in the Asian countries. The Asian countries were not as badly hit by the financial crisis as the Western world. There is a large market of consumers present in Asia who would be interested in purchasing Dell computers with their own preferred specifications. The world has evolved and people want to be different, they do not want to use what everybody else has. This has led to an increase in customization as compared to standardization. This provides Dell with an opportunity because their focus has been on selling customized products. Threats The threats that are being faced by the computer industry in general and Dell in particular are the same that are being faced by any company today. The global financial crisis has led to a decrease in spending and an increase in saving among the people. The financial sector has also to some extent becomes conservative and are not willing to lend out money that easily. Even the investors do not have much liquid money that they can invest. Also, oil prices around the world are increasing which increases the cost of the basic necessities in life. After covering the cost for these basic necessities, there is very little disposable income left to spend on other products and luxuries. Some people have also lost their jobs which makes it even more difficult. The unemployment rate has risen to 10 percent, while the consumer expenditure has decreased to 4.3 percent in the year 2008. The job market is also doing badly; the supply is much more than the demand. Fresh graduates and student are finding it difficult to get jobs. There are many people who have been let go by companies; this increases the pool of applicants in every company. For Dell this becomes a threat because most of its consumers were young people who were college going or fresh graduates. With less people getting jobs, it reflects into less people who are purchasing Dell computers as they do not have the financial capacity to do so. Also, the policies relating to the tax structure and the interest rates are not stable. Their instability has a direct affect on the business environment; this may become a threat for the company. Strengths Dell has been able to develop a number of strengths over time. The major strength that Dell has, which also gives the company its competitive advantage is being able to customize products and deliver them to the consumer at his house. The customer gets the exact specifications they want and reduces the cost of inventory for the company. Low cost is also a strength for the company. Dell has been able to develop partnerships with the supplier which reduces the cost which would have been incurred if the company had sold to retailers. This has reduced the price of the computer and the benefit has been transferred to the customer. These strengths are gained because of the strong supply chain network that Dell has developed. This allows them to save time by having the raw material delivered on time and then having an efficient production system in place which assembles the product, and lastly the delivery system which delivers the product within the specified time. This process of customization and direct selling to the customer has enabled the company to stay in touch with the customer. It allows them to be proactive and understand what the consumer wants. Weaknesses Some of the strengths have resulted in some of the weaknesses. One weakness is that because of its low cost product, Dell has developed an image of a low cost brand. It is not categorized as a premium brand, such as Apple, which is able to charge high prices because of the brand image that has been developed in the minds of consumers. Second, there are many consumers who want a laptop or a PC on a short notice and are not willing to wait a day or two for the delivery. This market is not buying Dell computers and is not being exploited by the company. Such consumers are purchasing other brands in PC’s and laptops. Third, advertising and marketing for direct selling products is limited. There is more flexibility for products that are sold through retailers. The retail outlet and its design add to the brand’s value. Also, many new technologies are introduced and these may not be conveyed to the consumer correctly by just reading about online. In such a case, it is better to have a salesman who can inform the consumer and generate more sales. TOWS Matrix Opportunities 1. Increase in market share 2. Supply chain 3. Financial Crisis Threats 1. Decreasing in spending 2. Increase in oil prices 3. Change in policies Strengths 1. Customization 2. Low-cost 3. Consumer knowledge SO Strategy ST Strategy Weaknesses 1. Low-cost image 2. No retail outlets 3. New products are not conveyed properly to consumers WO Strategy WT Strategy CURRENT PROBLEM DIAGNOSIS There are some problems that Dell is facing because of the strategies and the policies that it is pursuing. First of all, cheaper products lower the image of a company. Thus, a person looking to buy his first computer may not think of Dell as a premium brand, as most premium brands are categorized by their price. Secondly, as mentioned earlier, those people who want a computer urgently may purchase other brands because with Dell they need to wait for it to be delivered to their house. Thirdly, Dell is not able to deliver products in those countries where it does not have an assembling plant. Even if it can deliver products, all the specifications are not available and the customer’s ability to customize his product may be limited in these areas. Also, some consumers in the Asian countries prefer to get the product before they make the payment. To these consumers the ability to feel, touch and see the product is important. They are not very willing to order the product just by looking at the picture online. Fourthly, Dell recently experienced some quality problems in 2008. This was because a supplier had supplied a defective product. This resulted in the warranty claims of $300 million which Dell had to pay. STRATEGIC OPTIONS Dell has many options available to it. One of the biggest strategies that Dell can pursue is expansion. It can expand its business by opening retail stores and maintaining some inventory. Also by expanding into new markets, Dell can take advantage of the growing business in the developing countries. These countries are growing and are in need of cheap technology. The second strategy that Dell can pursue is that it should start marketing its product and developing a brand image of a premium product. Through this strategy, Dell can sell some of its PCs at a higher cost while the rest can have the same price or a slightly higher price. The competition is already doing this. Some of their products have very high prices while the rest are lower and affordable. Along with these strategies, Dell needs to have a stricter quality assurance plan in place. There should be more quality checks, which can be carried out at various times; for example, once when the raw material is received to ensure that the supplies are not faulty and then during the assembly. EVALUATION OF STRATEGIC OPTIONS The first strategy will help increase the market share for Dell as currently these consumers are going to the competition when they need a computer. In America, Dell already has a higher market share and people prefer to buy a Dell computer, this strategy will even help those people who want to buy Dell but do not have the time to wait for the delivery. The customer base for the company will be increased world over. Currently, HP and other companies such as Acer already exist in these markets. The second strategy will help the company develop a premium brand image for the company. This will help increase the prices that Dell can charge its customers, but Dell is known for low-cost, this strategy will eliminate the differentiating factor for Dell. Also, it takes a lot of time in years to build a brand on emotions and feelings. This strategy will require constant effort. The third strategy should be followed alongside either one of the above two strategies. It will help improve the product and ensure that there are no costs from warranty claims for the company. This strategy is something that the company should be doing anyway; it does not offer an increase in market share or the ability to charge higher prices. DESCRIPTION OF STRATEGY & ACTION PLAN The strategy that I would suggest that Dell follow is the expansion strategy. It will give Dell access to new markets and new consumers. To be able to launch computers in new markets, Dell will need to conduct market research and collaborate with companies which already exist in these markets. Currently Dell has a lower market share internationally and the main reason behind this is that it not operating in countries which are growing and have a high potential for sales. Dell will also need to collaborate with retailers on a global scale to ensure availability of the product in all areas. The company does not need to maintain a large level of inventory; it can start by a small inventory. This gives people to touch and feel the product, considering it from a marketing view point; it allows the customer to experience the brand. It engages the customer and may result in a sale even if the customer was not in the market for a computer. CONCLUSION Dell needs to remain competitive in the market and the competitive advantage of customization will not last them long. Other companies, such as HP are developing systems which will help them customize their products as well. In the long term Dell should focus on going global and its global strategy. HP is ahead of Dell in the global arena with a much higher market share. Dell needs to enable itself to compete in the global forum and give HP head on competition. BIBLIOGRAPHY Berry, T. Porter’s Five Forces, Bplans, Available from http://articles.bplans.com/business/porters-five-forces/119 [April 19, 2010] HP Website, About Us, Available from http://www.hp.com/hpinfo/abouthp/accessibility/commitment/index.html [April 19, 2010] Parloff, R. (2007) Suit: Intel paid Dell up to $1 billion a year not to use AMD chips, Legal pad, Available from http://money.cnn.com/blogs/legalpad/2007/02/suit-intel-paid-dell-up-to-1-billion_15.html [April 19, 2010] Private Writing, (2006) The Value Chain of Dell, Available from http://img.privatewriting.com/1/samples/term_paper_bachelor_IT_16s.pdf [April 19, 2010] Thinking Made Easy, (2008) Dell Computers, Available from http://ivythesis.typepad.com/term_paper_topics/2008/01/dell-computers.html [April 19, 2010] Vance, A. (2008) Dell Trails Its Rivals in the Worst of Times, NY Times, Available from http://www.nytimes.com/2008/12/16/technology/companies/16dell.html [April 19, 2010] Read More