Dells Competitive Environment and Business Model - Case Study Example

Dell’s competitive environment and Business model 1. Introduction Dell Computers, or Dell Inc., was founded in 1984 as PCs Limited by 19 year old Michael Dell, a first year student at the University of Texas, Austin (Kraemer & Dedrick 2001). Dell’s overarching personal belief and vision at the time was to create a company which would build personal computers and supply them directly to the customer, cutting out the middleman. He started by selling IBM PC-compatible computers out of his dorm room in campus under his fledgling company PCs Limited (Ransford et al 2003). His philosophy was that his company would be better placed to resonate with customer or consumer needs if they allowed them to purchase computers directly from the company. Direct purchase would also enable the company to respond to the customer’s specific needs. Dell’s vision would directly influence the company’s business model, the Direct Sales model or the build-to-order manufacturing model where the company would receive orders over the phone then build computers to the customer’s specifications. Dell produced its first in-house designed computer in 1985, the Turbo PC, retailing at $795 which was advertised in computer magazines and sold directly to customers (Kraemer and Dedrick 2001). In its first year of trading, Dell would gross $73 million in earnings. Dell Computer would become one of the front runners of the internet age when it set up its first website in 1994 giving it a first mover competitive edge. Dell would go further to establish its position as a market leader when it pioneered internet sales in 1996 with daily earnings of a million dollars barely seven months after the launch of www.dell.com. Dell’s revenues would subsequently soar from US $ 3.5 billion 1994 to more than $20 billion in 1998 and an estimated $25 billion in 1999 (Canak 2006). Dell diversified its product lines to include other products such as televisions, digital cameras, digital audio players, printers, notebooks or netbooks and software titles. The remarkable growth and high rates of return experienced by Dell were attributed to its low cost direct business model which among other things minimized the working capital requirements as customers would pay for the computers before delivery. Dell managed to post impressive results against the backdrop of brutal and cutthroat competition in the industry and global economic slowdown which resulted in sales declines and huge losses and plummeting share prices for its competitors such as Compaq, Hewlett Packard and Apple. However, the global economic recession appeared to hit Dell harder than its top US competitors and its share price has been on a five year decline (Hung 2009). This paper will analyze Dell’s competitive environment and its business model. Using SWOT analysis, the paper will establish the source of Dell’s initial and current competitive advantage as its business model and explore some of the opportunities and threats posed by Dell’s direct business model and its use of the internet as a marketing platform. The paper will then analyze the external environment’s effect on Dell or the impact of changes in technological industry on Dell’s performance using PEST analysis. The paper will then evaluate the utility of the “Customer Journey” or “Customer Activity Cycle” concept in evaluating Dell’s current offerings to its consumers and identifying new opportunities in Dell’s target markets. The paper will then establish Dell’s core competencies based on the SWOT and PEST analyses and evaluate their uniqueness and sustainability. Finally, the paper will propose recommendations for Dell based on these analyses. 2. Dell's competitive environment and its business model SWOT Analysis Strengths Dell’s traditional strength has been in its business model. Dell’s Direct Model has enabled it to interact directly with its customers. This has given Dell several advantages over its main competitors since it provides a platform for increased contact or communication with the customer as compared to indirect retail. One of the fore most advantages of the Direct Model is customization (Dell Computer Corporation, 2003). The Direct Model enables Dell customers to order laptops and PCs online with their own fully customized options. As a result, Dell has been able to respond directly to the specific needs of a wide range of customers as it collects and maintains information gathered from its interaction with customers (Hitt et al 2003). This has enabled Dell to respond directly to the standards and quality demands of its consumers by providing tailor-made solutions to its customers’ needs. Dell also delivers price for performance- it offers its customers versatile and powerful systems at lower costs by cutting out cost levels associated with distribution, wholesale and eventually retail (Cuizon 2009). This gives Dell’s products very competitive prices. Customization has enabled Dell to gain competitive advantage in the home user market segment and has made Dell the preferred option for large organizations and businesses (Ciuzon 2009). This is due to the fact that they have been able to order computers directly relevant to their organizational needs. This has helped create relationships with large businesses and government organizations which account for the majority of Dell’s business providing them with roughly 75 % of their sales revenues in 2002 (Cuizon 2009). This relationship has also extended beyond the large businesses and organizations to their customers. Another advantage provided by the Direct Model is its ability to provide an extensive range of products and services. Dell’s business model has allowed it to include products and services such as telephone and online purchases, online technical support and on-site maintenance (Ciuzon 2009). As a result of this increased and personal interaction with the market, Dell has been able to roll out the latest and most relevant technologies resonant with market demand unlike its competitors who rely on indirect distribution channels which imply lengthy responses (Schmid et al 2005). Its business model has also built Dell’s reputation for reliability and unparalleled customer service unlike its competitors who rely on indirect retail which introduces another level of communication for customers seeking technical support or maintenance. As a pioneer of internet sales, Dell has also used the internet as a platform for competitive advantage. Dell took advantage of the late 1990s internet boom to grow its revenues. The company moved from telephone orders to online orders and this was responsible for its market beating growth at the turn of the 21st century. Dell has innovatively applied the internet as a tool for technical support, sales and marketing which can be attributed to its high growth rates such as its increase in revenues from US $ 3.5 billion 1994 (Canak 2006) to $25 billion in 1999. Weaknesses While customization has provided competitive advantage for Dell’s products, it can also work against the company. Customization implies that Dell computers have to be ordered either by phone or online and are thus not readily available to home consumers. This works against Dell’s advantage since its competitors’ computers are readily accessible at retail points such as supermarkets or computer shops unlike Dell products since Dell does not use distribution channels. Thus customers who have urgent needs for PCs or laptops may end up purchasing other brands due to the time lapse between placing the order and delivery of the product which usually takes a few days (Cuizon 2009). Its dependence on large organizations has also negatively affected Dell’s ability to establish relations with smaller organizations such as educational institutions and subsequently segments of the market such as campus students. Another weakness of the direct model is that it tends to target more technologically savvy computer buyers. Dell expressly targets the more sophisticated or second time user (Martinsons 2005). Customized computer systems imply that the consumer has a relatively high level of knowledge about the working of computer systems or is not a first time user. This is a source of competitive disadvantage to Dell since competitors like Gateway, Compaq and Hewlett Packard have ready made products which can easily be marketed to and purchased by first time users on the spot. While Dell’s efficient procurement and supply chain strategies have served as sources of competitive advantage, there are also potentially embarrassing instances from its corporate strategy such as the 2004 recall of 4.4 million adapters out of the fear that they could cause electric shocks or fires due to overheating (U.S. Consumer Product Safety Commission 2006). In such a case, sourcing of components from many different suppliers in many different countries poses technical and logistical challenges in responding to such situations. This also highlights Dell’s deficiency in investing in Research and Development or innovation which has propelled competitors like Apple (Alkelabi et al 2006). Opportunities In recent years, global demand for personal computers, especially laptops, has surged. This has especially been in developing markets such as Brazil, India and China as opposed to its traditional markets such as the United States and Japan which are saturated (Alkelabi et al 2006). This has provided Dell with opportunities to meet this demand by providing ready-made, low cost computers using its efficient business model which compete with Apple Macintosh, Compaq, Hewlett Packard and other retailers (Cuizon 2009). Some of these brands include Dell acquisitions such as the Alienware brand of PCs. Dell has produced such versions of its most popularly requested high performance computers which would are not marketed as Dell branded products but has served the purpose of providing Dell with a new platform to attack her competitors and catch up with high flying retailers such as Apple (Cuizon 2009). The increase in global demand also implies that more and more consumers have already had first time knowledge about computers and will thus find Dell’s customized products a more attractive option. Product line diversification also provides Dell with competitive opportunities in the global market. This entails moving beyond its current product lines such as laptops, notebooks, PCs, printers, servers and storage devices to LCD TVs, digital video and audio players and even smart phones to be able to compete on equal footing with competitors such as Apple. There are also opportunities present for Dell in the global market as a result of increased penetration of and use of the internet in major markets. For example, Dell has ventured into the Chinese and Indian markets with the latter contributing immensely to the global surge in demand for laptop computers and the former experiencing exponential growth in internet usage (Chowdhury 1999). The evolving phenomenon of social networking can provide Dell with access to untapped segments of the market and can enhance Dell’s performance by increasing accessibility to its website and marketing platforms. Threats The most pervasive threat in the global PC market is the cut throat competition. This is Dell’s single biggest threat as it stands to lose its competitive advantage if its competitors successfully duplicate Dell’s corporate strategy such as procurement and customization and reap the benefits of the economies of scale (Cuizon 2009). As a result of this competition, price differentials between computer brands are rapidly diminishing and even Dell’s low cost business model has not been spared the effects of the volatile market. Changes in technology may also have the effect of wiping out Dell’s competitive advantage. Recent innovations by competitors such as Apple who have introduced newer products such as the i-phone and the i-pad have left Dell sprawling in its wake. This has been reflected by the Dell share price’s five year dismal performance. PEST analysis Political Factors The potential for growth in the laptop and PC industry is greater in developing countries than in developed countries. Thus for companies like Dell, the political environment in countries such as China and India can affect potential growth rates. Government policies in China, for example, are designed to give advantage to national or local PC vendors at the expense of foreign companies like Dell, Acer, Lenovo or HP (Shah & Dalal 2009). Some of the most commonly employed policies include a combination of high tariffs and prohibitive government regulations which discourage foreign companies from trading with Chinese companies directly. In addition, to sell goods directly in mainland China, a company has to manufacture them in China. This may interfere with a company’s corporate strategy such as procurement and supply management. To demonstrate the effect of changes in government policy, the 94 % growth in global laptop sales in 2005 was attributed to removal of import duties in India (Shah & Dalal 2009). Other governmental policies that can affect growth include imposition of environmental standards targeted at mitigating the impact of high tech trash or e-waste. The enforcement of the WEEE (Waste Electrical and Electronic Equipment) Directive in Canada, for example, was expected to increase the cost of computers by $15 (Shah & Dalal 2009). Governmental control of internet usage in China may also affect Dell’s profit margins negatively. The Chinese government’s strict monitoring of the internet includes requirements that internet users register with the authorities every time they open an account (Kraemer & Dedrick 2002). This may work against Dell’s favor especially since Dell is reliant on internet orders and Chinese buyers may be wary of purchasing computers from foreign companies fearing the consequences of governmental retribution. Economic Factors The growth of economies in developing countries such as Brazil, India, China and South Africa has recently outpaced that of developed countries. This implies that in the global laptop and PC industry, there are better growth opportunities for Dell in developing economies in such countries as opposed to previously traditional markets such as Japan and the United States which have become saturated. In these developing economies, especially India, companies like Dell have to factor in economic considerations such as consumer attitudes where customers prefer to go for the cheapest and readily available PCs or laptops (Reuters 2003). However, despite this potential, the global economic slowdown since 2008 has had a negative effect on demand for PCs and laptops. Market forecasts by Gartner Inc predicted a 3.8% decline in global IT spending in 2009 of which 14.9% was expected to be a decrease in computer hardware spending (Gartner 2009). Although recovery was expected by 2010, the global PC market was expected to experience declining growth rates measured by market value in 2012 of 4.1% compared to 5.4% in 2009 (Gartner 2009). Currency exchange rates also have the potential to determine profit margins for Dell (Shah and Dalal 2009). Dell’s procurement involves sourcing supplies from many different countries and it generates its revenues from sales throughout the world in countries such as Japan. Thus the relative strength or weakness of currencies has the potential to affect Dell’s growth through currency exchange rates. A stronger dollar implies better margins for Dell. Socio-cultural Factors Factors such as income and educational levels and preferences affect how companies operate in different regions by influencing demand patterns (Shah &Dalal 2009). Dell targets the second time more sophisticated and technologically savvy computer user and is thus more likely to entrench its market position in countries with a relatively higher penetration and use of the internet such as Japan and the United Kingdom. In addition, the performance of the computer industry as a whole is affected by seasonal sales in periods such as Christmas especially in developed economies such as the United States and the UK (Shah &Dalal 2009).. Dell also has to invest in alternative marketing strategies such as door to door marketing in economies such as India where consumers are wary of card or online transactions and prefer personalized face to face exchanges. Technological Factors The past decade has witnessed rapid technological advances in the computer industry. The introduction of smaller, faster, low cost and more compact systems such as the Intel Atom microprocessor and the standardization of Windows and Intel in laptops have seen the demand for laptops and notebooks increase exponentially. Technological advances have also wiped out the price differentials between computers and driven down the costs of production. For example, the netbook retailed at an average global price of $300 in 2009 (Shah &Dalal 2009). This implies that price competition will be a pervasive feature in this industry (Solomon 2009). 3. ‘Customer Journey’ or ‘Customer Life Cycle’ According to Ives and Learmonth (1984), the Customer Service Life Cycle or the Customer Resource Life Cycle is a model or framework for applying information technology (IT) to customer oriented applications. The framework is based on the assumption that each customer follows a birth to death or a life cycle every time they engage a company providing a service or product (Cenfetelli &Benbasat 2002). The customer life cycle begins when a customer identifies what they need in a product or service. The customer then orders, purchases or acquires the product essentially owning it and the cycle is completed when the customer either returns the product, disposes it or for some reason ceases to own it (Ives & Learmonth 1984). The customer journey or the customer activity cycle is a framework especially useful to companies with IT capability as IT can be used within the breadth or extent of the life cycle to enhance the customer experience or to provide more comprehensive service to the customer (Ives &Learmonth 1984). This concept can be used by companies as a basis for corporate strategies to attract and retain customers by fostering customer loyalty (Verhoef et al 2009). IT has the potential to provide the necessary tools and infrastructure in assisting customers to identify the right product, manage the products or perform maintenance once purchased and speeding the return of the product replacement. The customer journey thus includes application of technology to interact with the customer through subsequent stages: shopping/planning, pre sales support, purchase, delivery, setup or configuration, use, replacement, training, management, support, service and upgrade. The customer journey or customer experience has been a cornerstone of Dell’s corporate strategy. Through the direct model, Dell has been able to interact with the customer at each stage of the customer experience. Dell customers who make orders for their PCs or laptops online come into contact with the company right from the time they are shopping for the product through to the purchase of the computer, the free software installation and maintenance offered through its website or toll free phone lines and technical support. Dell has employed this concept effectively due to its predominant use of the internet as a tool of interaction with the customer. As an illustration of the customer journey, a Dell customer can place his order online for a computer, specify his requirements, check on the progress of his order and once the machine is delivered, it is already preloaded with installed software. In the event that the machine needs repair or maintenance, the customer can simply use Dell’s toll-free line or access the relevant information from Dell technicians online (Reichheld &Schefter 2000). Dell can thus build on its reputation for a superior customer experience to expand its opportunities in new markets. In the rapidly developing markets such as China and India where other vendors are simply focused on the use of the product, Dell has the opportunity to use technology as a springboard for competitive advantage in a market where price is no longer the key determinant of a company’s performance but customer trust and loyalty (Reichheld& Schefter 2000). 4. Dell's core competencies and sustainability Based on the SWOT and PEST analysis, Dell’s key competencies or sources of its competitive advantages are; Dell’s business model Efficient procurement and supply management Increased customer interaction and superior customer experience Internal Environment Dell’s Business Model Dell’s direct model or build to order model has served as a source of competitive advantage against its competitors. Some of the advantages due to this model include customization which has endeared Dell to more sophisticated computer users. Other advantages due to this model include the low inventory, minimal efficient expenditure on research and development and the lower overall cost of its products due to elimination of costs associated with indirect retail such as distribution and storage. This business model has ensured Dell remains a compact and efficient organization. Dell has also benefited from the internet boom due to its online direct built-to-order systems. This competency has proven to be sustainable for Dell since indirect retailers have not been able to successfully replicate this model and it has become an important determinant of performance in a market with diminishing price differentials. Efficient procurement and supply management Part of Dell’s global corporate strategy involves an efficient procurement and supply management procedure where it sources its components from different suppliers across the globe. This has ensured efficiency and given Dell mobility advantages since it is not reliant on specific suppliers and the market shocks that may affect them. However, this competency is has easily been replicated by other multinational competitors such as HP and Lenovo who have also successfully diversified their sources of raw materials and components from developing economies such as China. Increased customer interaction and superior customer experience Dell has consistently received top consumer or customer satisfaction ratings by computer magazines. Dell’s Value chain is often used as the gold standard in the computer industry. This exemplary record stems from its relatively intense communication and interaction with its customers as compared to its competitors. By offering superior customer service through the customer journey or customer experience, Dell has managed to retain its competitive edge in an increasingly volatile market where consumer loyalty has replaced technology and price as key drivers of performance (Meyer & Schwager 2007). 5. Recommendations Alkelabi et al (2006) have proposed several strategic recommendations for Dell. First, they propose that Dell focus on innovation or dedicate more effort and resources into Research and Development to keep up with indirect retail competitors such as Apple who have come up with revolutionary products and taken a market lead. While Dell’s minimal expenditure on Research and Development has kept its costs low, it has fallen behind more innovative companies. This in essence is a proposal to turn around Dell’s wait and see approach to a more aggressive one which may require them to digress from the direct model and introduce some ready-made retail innovations. Secondly, Dell should divest some of its product lines or businesses in which it is not competing to allow Dell to focus on its core business or the computer industry. Divesting can be done by selling some of these businesses to competitors. Another recommended strategy for Dell is expansion into services which Dell has successfully implemented by introducing IT consulting and financial services. However, the most urgently recommended strategy has been reinvigoration of Dell’s product differentiation strategy which is expected to maintain Dell’s competitive advantages (Alkelabi et al 2006). It is argued that product differentiation will reinforce Dell’s key competencies and strengthen its position and reputation in the industry. 6. Conclusion Dell as a company was founded on the philosophy of its CEO Michael Dell who envisioned that the best way to ensure that there was a PC in every home was by delivering them directly to the customer from the point of manufacture. Built on this premise, Dell Computers developed a direct business model or a built-to order system where customers order their computers directly from Dell and have them delivered built to their specifications. This business model propelled Dell to the apex of the ultra competitive computer industry and it remained the second largest maker of PCs in the US for a long period of time. Dell also gained first mover advantages from using the internet as a sales and marketing platform when it started selling its computers online on its website www.dell.com. In addition it offered exemplary customer service through toll free technical support, free installation of software and maintenance. Dell’s corporate strategy has been built on a low cost business model which includes features such as a diversified supply chain management, efficient procurement and minimal expenditure on Research and Development. These factors combined with the elimination of costs associated with distribution and retail have served as traditional sources of Dell’s competitive advantage and core competencies. . However, Dell was not immune to global declines in demand for PCs following the 2008 global economic slowdown and recession. As a result, Dell has to look for new opportunities and constantly readjust its corporate strategies to keep in touch with her major competitors such as HP, Apple, Acer and Lenovo. Dell, like most companies in the industry, faces greater growth potential in developing countries and stands to benefit from the increase in internet usage. Dell also has to navigate the policy environment in these new markets such as China. However, Dell’s weaknesses have also come to the fore such as its unavailability of its products on retail stores and its minimal expenditure on Research and Development which has left it sprawling in the wake of its more innovative competitors. Going forward, Dell has to adopt subtle changes into its corporate strategy such as increased focus on innovation through Research and Development, enhancement of its exemplary customer service and rejuvenation of its product differentiation through customization which is the key to maintaining or sustaining its core competencies in an industry where competition is intense and changes in technology have wiped out price differentials. Bibliography Alkelabi, K., Lund, J., Lynch K., Shorr G. & Smith, M., 2006, Strategy Analyses and Recommendations for Dell Inc, Retrieved on December 15, 2010 Cenfetelli, R., & Benbasat, I., 2002, Measuring the E-Commerce Customer Service Life Cycle, ECIS 2002, June 6–8, Gdańsk, Poland. Chowdhury, N., 1999 “Dell Cracks China.” Fortune. 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