Comparison between Apple Computers and Dell Computers - Case Study Example

Strategies in Action: Comparison between Apple Computers and Dell Computers 2007 Introduction Apple Computers was an early innovator in the market and really brought the concept of personal computers to the masses as early as the 1980s although the commoditization of the product threw it out of the competition in the 1990s. By this time, the standardization of the product, thanks to the advent of the Windows-based systems, computer manufacturing became a cost game rather than one of innovation. Dell Computers rode the bandwagon of cost competitiveness through an elaborate mechanism of direct marketing and outsourced production during this period. However, of late, Dell’s competitive advantage has been dented by the saturation of its cost competitiveness and lack of innovation. At the same time, Apple is beginning to turn around with the next round of innovative products and diversification (as is evident from its success in the ipod and its change of name to Apple Inc.). In this paper, I would argue that innovation is a more useful approach for long-term sustainable growth than cost competitiveness although the latter strategy may result in fast growth over the short or medium term. The early 1980s Steve Jobs and Steve Waxniak built Apple Computers from scratch, with Waxniak assembling a computer at Job’s parents’ garage (wikipedia). The Apple I computer that was sold in 1977 was not a complete computer but simply a motherboard with CPU, RAM and textual video chips. The Apple II computer, introduced the same year, was one of the three personal computers launched that year but became more successful than the others. From the beginning, Apple PCs were user-friendly, had open architecture, color graphics and floppy disk drives that were then available only for mainframe and minicomputers and not for PCs. By 1981, the market for PCs had grown, thanks to Apple’s innovative products and hard-edged marketing campaigns. Apple III was launched in 1983 (an earlier version was launched in 1980 but that failed because of design deficiencies) (brittanica). The original mission of Apple Computers was to offer sleek computers aimed at the home user segment. The launch of the graphical user interface technology did just that. It changed the entire way that the personal computer would be looked at (wikipedia). International Business Machines (IBM) took advantage of the mature demand and launched the IBM PC in 1981 but followed a different business strategy than Apple’s, its main competitor then. Unlike Apple, IBM did not use proprietary technology in either hardware or software. On the other hand, it assembled parts including the Intel microprocessor and Microsoft’s DOS (disk operating system) platform. Since the operating system was open ended and other hardware and software developers could also use Intel chips and DOS systems respectively, many software developers began to innovate IBM-compatible applications. As a result, not only did IBM hardware give stiff competition to Apple’s Mac, programs like Lotus 1-2-3 spreadsheet soon overtook the popularity of Visicalc, so long considered as the killer application in the corporate world. Michael Dell founded Dell Computers in 1984. Dell created its production capabilities in the early-1980s by supplying PC parts and components to IBM when the latter began outsourcing to cut costs (Dedrick & Kraemer, 1998). Thereafter, Dell expanded its network by also supplying to HP and DEC and newer computer manufacturers like Compaq, Gateway and Acer. The company set up its first production center in Austin, Texas in 1985. At the time, the market environment was in the midst of a transformation. First, corporate customers were growing more sophisticated and, instead of being buoyed by hard-selling, they were quality-conscious and adept at negotiating over prices. Both corporate and individual customers were buying their second PCs or replacing their old one hence had grown accustomed to the technology parameters. This allowed Dell to adopt the direct-selling model with minimal customer interaction of the sales force. Second, most of the parts of PCs, like the monitor, keyboard, hard disk, motherboard, software had become standardized. This enabled Dell to venture into outsourcing parts manufacturing and become an assembler. As a result, Dell has been able to focus on design and inventory management while its inventory levels have been lowest in the industry (Achtmeyer. 2002). The late 1980s Apple Computers, always the creative innovator in the computer industry, however, introduced the Macintosh Portable, a bulky precursor to today’s laptop computers, in 1989. Although it bombed in the market, Apple took to industrial designing with a vengeance. Once again, like IBM and Microsoft robbed the GUI model in PCs, Sony used the specs of the Mac Portable and designed the Powerbook 100 for Apple, which had a two-hour battery, a 20MB hard drive that was physically much smaller than Mac Portable. This model was a hit in the market and revived Apple’s reputation as a creative technological innovator. The same year, Apple also introduced System 7, a new operating system that was easier to use and had more attractive color graphics. Apple’s revenues spiraled and the computer press called the years 1989 to 1991 the “golden years” for Apple Computers, Inc. (Wikipedia). The 1990s By then, Windows had developed as a close substitute for Apple’s operating system and bundled with cheaper IBM-compatible machines, much of which were assembled with components sourced from Asia, took away Apple’s market share. Instead of developing a technological response, Apple decided to sue Microsoft for theft of intellectual property. The long and expensive lawsuit further diverted the management’s focus from technological upgradation that had been the company’s forte for so long. As a result, by the mid-1990s, Apple was out of the rat race. The launch of Microsoft Windows in 1995 tilted the entire personal computer market towards IBM PCs with MS-Windows operating system. By the mid-1990s, Mac PCs were completely overrun by IBM, HP, Gateway and Dell, all of which were based on Intel processors and Microsoft Windows operating system. Dell, in particular, was then the star of the computer market. Typically, the competition – which operated in the build-to-stock model – produced computers based on the industry forecasts, stored these in the warehouses and dispatched to the wholesalers, retailers and other intermediaries who added 20-30 percent margin on the costs of the products. As a result, intermediaries earned the selling margins, aided by location access to products, cross selling of brands and the general feel and touch advantage. Dell trashed this model by eliminating the intermediaries in the product chain completely, taking orders over phones – and since the late 1990s over the Internet – and aligning the supply chain closely to the assembly factories and the order-taking system (Achtmeyer, 2002). Over the years, Dell further streamlining the entire process of order-taking from customers, buying and assembling the components from its vendor network traversing the world and dispatching to the customer on time. With a minimum requirement of plants, equipment and R&D, Dell transformed the manufacturing process to a service mechanism. Over the two decades of its existence, Dell has emerged as the second-largest PC maker in the world and the largest in the United States (Dell & Fredman, 2000). In 2006, Dell was the world’s largest, with $ 56 billion revenues, 65,200 employees in over 30 countries and selling in 170 countries, taking it to the 28th position in the Fortune 500 list. From desktop and notebook PCs, Dell has now diversified also to Server, storage, imaging and printing systems and workstations (Dell website). Dell’s cost competitive strategy since the 1990s The direct-selling model worked for Dell primarily because it was able to align the supply chain intricately with its selling mechanism. The company, which assembles 80,000 PCs a day, does not have any warehouse. Its factories hold inventories for a maximum of two days while the entire operation inventory is a maximum of 72 hours (Breen, 2004). Cutting down inventories meant that Dell had a financial advantage to its competitors. Dell receives payments from its customers immediately online or through the credit card. The company places order on the component vendors and proceeds on the assembly but pays to the suppliers only 36 days after the product is shipped to the customer. As a result, the cash-conversion ratio for Dell is negative 36. On the other hand, other PC makers pay suppliers immediately for the components, assemble them and receive payment from customers on delivery. The process takes roughly 30 days hence the cash-conversion ratio is typicall positive 30 days for the other PC-makers. The challenge in the entire process is that the Dell assemblers as well as the suppliers have to be inordinately efficient in delivering on time. Along with inventory-management, Dell has also strove to make its marketing network sophisticated. It keeps detailed databases on the customer profiles so that it can predict a repeat purchase and be ready to deliver before the customer actually places the order. In the first phase of its history, Dell sold high-end PCs to consumer and corporate clients but from the beginning, it has chosen its clients with great care. It focused on corporate customers that made regular purchases so that the service costs were minimum. For such companies, the company maintained detailed intranet sites aimed at forecasting demand patterns. For individual customers, Dell targeted high-end replacement customers who regularly upgraded products, needed little technical support and paid by credit card. This allowed the company to tailor the backend supply chain of the business model, the front end of which was based on direct sales generation (Byrnes, 2003). Since 1994, e-commerce has been the major sales instrument of Dell. About half of the company’s revenues are generated from its web site (Magure, 2003). The corporate clients make up the bulk of the online sales. About 15 percent of the e-commerce revenues are B2C while the rest is B2B. For corporate clients, Dell offers the Premier Page where purchase managers can send in queries and put orders. Apple’s innovative strategy since the 1990s Since the late 1990s, Apple has been trying to invent new models of PCs to shore up its revenues. However, analysts feel that Apple has not been able to break through a major innovation in PCs lately. The lack of differentiation of one model from another has meant that it spends more to support the variety of models that have not earned the company as much. Besides, in the era of commoditization of the computer market, it is the selling efficiency and cost control that typically gives a competitive edge than Apple’s redundant advertisement-driven multi-model strategy. In 1994, Apple at last gave up its strategy of independence and aligned itself with IBM, its staunch competitor earlier, and Motorola. The group – called AIM – wanted to set up a new computing platform by using IBM and Motorola’s hardware and Apple’s software that would be called the PowerPC Reference Platform, or PreP (wikipedia). By then, Microsoft’s operating system was considered the company main enemy in the market that it aimed to beat. Through the 1990s, Apple tried to rewrite its operating system, upgrading it while at the same time trying to make sure that its old systems could remain in the market. In 1998, the iMac was launched after a series of failures with earlier models. Although its technology was unimpressive to the market, the attractive design of the iMac in the translucent plastic case, originally white and blue but later in many other colors, became a trendsetter in industrial computer designs. About 800,000 Imacs were sold in 1998, giving the company a profit of $309 million – the first profit for the company since 1993 (wikipedia). In 1997, Steve Jobs, who had left the company in the mid-1980s, was recalled by the then CEO John Sculley to take over at the helm of affairs. Jobs restructured the company, strengthened the research operations and in 2001 and diversified into consumer electronics. The first consumer product that Apple introduced was the digital camera – called Apple QuickTake -, once again a trend that Apple introduced soon to be lapped up by competitors. Soon to follow was the PDA, the term coined by Sculley, which was a precursor to the Palm Pilot and Pocket PC. The company released iMovie for home video users. In 1999, Apple bought the Final Cut Software, a digital video editing software, from Macromedia. The DVD market came in, soon to be a popular mass market. In 2001, it launched the Apple ipod, which revolutionized the digital music market like it did the PC market two decades ago (Business Week, 2006). Apple has a market share of 70 percent in digital music, which is expected to be $12 billion by 2009. In 2006, Steve Jobs announced that the company will soon launch Intel-based PCs, something that the company has avoided doing over its three-decade long history. It has been developing its operating system for both the Power PCs as well as Intel processors. By 2007, Apple computers would make its transition to Intel processors. This has provoked intense response from avid Mac fans who term the Apple-Intel collaboration as the ‘Macintel’, like the ‘Wintel’ – the Windows-Intel collaboration. However, Apple’s step proves that the computer market is like a commodity market now and it is not possible any more for a company to remain isolated in an increasingly competitive market for a models of a generic product that are little differentiable from each other. Competitive advantage According to Michael Porter (1985), a company can achieve competitive advantage over other companies by one of the following strategies: 1) cost leadership, 2) product differentiation or 3) focusing on a particular segment of customers. The company may achieve revenue above the industry advantage either by increasing efficiency and reduce average costs of production of the product in general or that of selling to target customers. On the other hand, the company may differentiate the product to target to a section of customers or offer an innovative product to the market. Apple’s strategy through the years has been through product differentiation through innovation. In 1984, when the Mac was launched, Apple was high on its advantage over the competition, being the first to use the graphical user interface and offering an innovative product. However, it did not strike the management of the company that it needed to license its unique operating system. As a result, competitors like Microsoft used a similar graphic user interface in the Windows operating system and bundled it with IBM PCs, thus beating Apple to its own game. More recently, Apple licenses the open-ended Darwin operating system but by then Windows-based operating systems have become the rule of the PC game. Over the years, however, it lost its edge in the PC market unable to synchronize with the trends in the commoditized market. In particular, Dell, incorporated in 1984, operated on a different business model from that of Apple’s. Dell realized that PC manufacturing being open-ended had become more or less commoditized. From the beginning, it partnered with leaders like IBM, Intel, Acer and Gateway. At the same time, Dell maintained a cost advantage over the competitors through its direct selling model and just in time production. On the other hand, Apple’s manufacturing process was close-ended and it failed to leverage on cooperation with the industry leaders like Dell did. In the 1980s, companies like Apple beat the competition through cutting-edge technological innovation. The 1990s were the period of cost control and quality, areas in which companies like Dell excelled. In the 2000s, it has been marketing innovation and customer orientation that has ruled the market. Not surprisingly, computer companies like Dell and Gateway have been trying hard to reach the retail customers aggressively through various marketing channels like retail stores, presence in shopping malls and advertising splash. Dell has reversed its strategy of targeting corporate and high-end individual customers and is now targeting the individual segment more aggressively. But in this segment, Apple, with its innovative and aggressive advertising strategy, has an edge. Comparison of the two strategies Dell’s entire supply chain is geared to fit into its build-to-sell business model. Typically, components like disk drives, CD-ROM drives, power systems, cables and connectors are shipped from Asia while motherboards are largely procured locally. Since its inception, Dell has selected its suppliers carefully, with only about 50 to 100 suppliers contributing 80 percent of the components and parts. The company chooses suppliers on the basis of various factors, only 30 percent of which is contributed by the cost structure and the remaninig factors are quality, service, delivery scheduling and flexibility (Byrnes, 2003). However, Dell’s sourcing pattern is changing. While it began by primarily sourcing parts and components from Asia, regional components manufacturers are increasingly supplying to Dell. The regional networks, too, however, are a combination of Asian, European and American suppliers. Dell spends little on research and development, at $400 million in 2003, a fraction of HP’s $4 billion (Maney, 2003). Yet, it manages the supply chain so efficiently that its production process is near perfect. Also, the assembly operations are highly efficient and designed such that a PC is assembled by one worker so that any defect can be traced down to him and made accountable. Despite its phenomenal success over two decades and the business model being a pioneer in the industry, there are signs of strains in Dell’s financials since 2005. The company missed its growth targets in two successive quarters this year. The scale of Dell’s revenues are so huge that a small dip can affect its long term market share. There are doubts raised in the investor community whether Dell will be able to retain its market share. In a bid to capture market share in this segment, the company has opened 10 by 12 feet kiosks at shopping malls to acquire individual clients. These kiosks are connected to the Dell site online as well as give consumers a touch and feel of the product. Thus, it is a combination of direct and retail selling that the company now aims at (Magure, 2003). All Dell products run on Intel microchips. However, Intel’s competitor Advanced Micro Devices (AMD) are increasingly being viewed as the more efficient high-end microchip (Allison, 2006). Most of Dell’s competitors now offer customers a choice of Intel and AMD. Dell is increasingly focusing on its off-core products like storage and server systems, the revenues from which have grown, but the consumer business seems to be slipping. In a way, Dell seems to have reached the pinnacle of its direct business where the margins have plateaued out. Without a dramatic change in its sourcing strategy, the company does not seem to capable to maintain its competitive edge. A prime reason for this is, perhaps, the company’s reluctance to extend its production capabilities and continue to depend on component and part suppliers and also its relatively low spend on research and development. (Nagle & Hogan, n.d). The main threat to Dell is the commoditization of the computer market. The industry has reached a stage where customers are not looking at increasing performance of computers any more. Rather, with the trend towards central computing systems, the focus is more on client margins rather than productivity and speed. Standardization of products has meant that assemblers can put together a computer by sourcing 90 percent of the components. Hence, the computer market is fast becoming a commodity market like the television or the refrigerator. As a result, there is the threat of other low cost, low brand suppliers capturing the market, like what Dell did two decades ago. Dell’s business model, which has been its key to success for so long, will then become its disadvantage. First, Dell will lose its edge from sourcing benefits since assembly costs will become higher than what the competition can sell. Second, Dell will lose the low cost advantage that it derives from low inventories and absence of retailers since the cheaper brands will be able to offer even lower prices or at least the same price as Dell. Third, the just-in-time component requirements will become more expensive that bulk procurements by producers of commodity computers (Ottink, 2004). On the other hand, Apple’s strategy of growth through innovation is more sustainable. Applying the Barney’s VRIO model to Apple Computers, Inc., it is obvious that it had inherent value in its resource and capabilities in its early years. The company’s creative and technological resources have produced pathbreaking products like the Mac, the PowerBook PC, iMac, ipod, digital camera, laser printer, PDA. Over the years, all these products have proved to be extremely popular both in the industrial computing segment and in consumer electronics. While a commoditized market of PCs has its limits to growth, Apple has been wise enough to explore new related products. Works Cited Wikipedia, Apple Computers, http://en.wikipedia.org/wiki/Apple_computer Encyclopedia Britannica, Apple Inc., http://www.britannica.com/eb/article-92995 Business Week, Apple Computer, April 3, 2006, http://www.businessweek.com/magazine/content/06_14/b3978407.htm Business Week – Boston Consulting Group, The World's Most Innovative Companies April 24, 2006, http://www.businessweek.com/magazine/content/06_17/b3981401.htm Porter, Michael, Competitive Advantage, Free Press, New York, 1985 http://www.ecofine.com/strategy/RBV%20of%20the%20firm.htm Barney, Jay, B. Gaining and Sustaining Competitive Advantage, Addison-Wesley, 1997 Achtmeyer, William, F., Dell Computer Corporation, Center for Global Leadership, Tuck School of Business, Dartmouth, 2002, available at http://mba.tuck.dartmouth.edu/pdf/2002-2-0014.pdf Allison, Kevin, Dell in Ding-Dong Battle: A New Leader has Growing Pains, The Weekend Australian, available at http://theaustralian.news.com.au/common/story_page/0,5744,18450159%255E36375,00.html Byrnes, Jonathan, Dell Manages Profitability, Not Inventory, Harvard Business School Working Knowledge of Leaders, available at http://hbswk.hbs.edu/item.jhtml?id=3497&t=dispatch Dedrick, Jason and Kraemer, Kenneth, L, Asia’s Computer Challenge: Threat or Opportunity for the United States and the World? New York: Oxford University Press, 1998 Dell, Michael and Catherine Fredman, Direct from Dell: Strategies that Revolutionized and Industry, Collins, 2000 Kraemer, Kenneth, L and Dedrick, Jason, Dell Computer: Organization of a Global Production Network, Center for Research on Information Technology and Organizations, available at http://www.crito.uci.edu/GIT/publications/pdf/dell.pdf Maguire, James, Case Study: Dell.com, March 3, 2003, e-commerce guide.com, available at http://www.ecommerce-guide.com/news/trends/article.php/10417_2013731 Maney, Kevin, Dell Business Model Turns to Muscle as Rivals Struggle, USA Today, available at http://www.usatoday.com/money/industries/technology/2003-01-19 dell-cover_x.htm Nagle, Thomas T and Hogan, John, Managing Pricing Through Competition Thoughtfully, available at http://www.imakenews.com/strategicpricing/e_article000533685.cfm?x=b11,0,w Ottink, Frank, Dell’s Biggest Enemy: Commoditization, The Interactive Investor Journal, 28 April 2004 available at http://www.yeald.com/Yeald/a/29821/dell_s_biggest_enemy___commoditization.html Read More