Business Strategy of Dell - Essay Example

a) I agree with the ment that something is wrong with the company strategies as the revenues have been increasing at a decreasing rate as shownin exhibit 8. If we see the revenue growth, we see that in the early 90’s the revenue increasing at higher rate than in the recent years showing decreasing revenue. From 1991-1993 the revenue increased by 41%, (63%-41%) 22%, (126%-63%) 63%, but in the period between 2003-2006 it increased by (17%-14%) 3%, (19-17)2% and (14-19) -5% which shows a decreasing rate. The firm is using the wrong competitive strategy to excel the rivals. It s using pricing as its strategy while it has failed to look at improve itself and its products. Price cannot be used as a competitive edge any longer as consumers are becoming less price sensitive and more product and feature-conscious. HP has been able to improve itself and is using its efficiency as its competitive edge. The strategy of the firm to supply customized products to customers has worked in the US as it was a controllable area but as a global strategy this does not seem to be working as their revenue in the US is increasing at a decreasing rate in exhibit 8, where in 2004 it decreased by 2%, in 2005 it decreased by 2 % and in 2006 it decreased by 2% again. Revenues in the Asian market remained the same in 2003 and 2004; in 2005 it increased by 1% and in 2006 it increased by 1% showing that the market has more growth potential than the US. Dell customizes the products and handles mass customization. This puts a strain on the supply chain as the specific demands have to be met and quality has to be maintained along with timeliness. This is easier on a small scale but on a larger scale maintaining the same quality and precision becomes difficult and demanding. The strategy of Dell to play safe and not concentrate on R&D of products is making them loose out. Dell spent 0.8% of its revenue on R&D in 2006 which is 3.1% lower than HP and 2.9% lower than Apple. Innovation is essential for a technological based industry as products are replaced by better technology and Dell would eventually lag behind if it does not keep pace with the changing needs of the consumers. Dell should change its strategy from attacking the product giving the highest profit to inventing a product that will give them highest profit. Then they could have a better market share for longer and retain a competitive edge. Dell has applied the same strategy in all the countries and has not tried to understand the market in some cases. For instance, Dell sells online, by telephone or with the help of an agent but the exact product that the customer wants to buy cannot be seen but only similar machines can be seen and the customer cannot touch or handle the machine he is buying. They do not have outlets where the customers can come and see the products. This was acceptable in the US where people are comfortable doing online business and transactions however, it is not so in the Asian countries like Japan. The firm had not done its research to know what the customers preferred and their purchasing habits. Now, by successfully experimenting with the Japanese market of having outlets, the same idea is being implemented in the US. The firm should focus more outside the US and try to excel in the global markets which it is not doing currently. As seen by exhibits 1 and 2 the graph shows that the market share in the US market has been increasing slowly while that of the global market is increasing faster and the graph is more upright. Thus the firm should explore the European and Asian markets and try to thrive there. Dell’s supply chain and the manufacturing of products itself is a business process that gives them an edge. However, Dell failed to assess the potential of its competitors and did not keep in mind that their strategies could be copied especially by their competitors HP and Lenovo. Dell will not be able to retain its competitive edge for long if the competitors make continuous progress while Dell itself doesn’t make alterations in its strategies. This is apparent by comparing world market share of Dell and HP in the first quarter of 2005 the market share of Dell was 16.9% while that of HP was 13.8% where Dell excelled by 3.1%. However in the first quarter of 2006 HP’s market share was 16.3% while that of Dell reduced by0 .8% to 16.1% with HP excelling by 0.2%. The firm’s organizational strategies do not seem to be working as key employees have left their jobs to be with the competitors. Dell ahs been conducting employee surveys but has not been able to keep the employees satisfied. The bond between the organization and the employees is deteriorating fast and the surveys have showed that if it were not for the money, most employees would have left. This only indicates that the firm had been ignoring its employees for long and their HR strategies have failed. b) PEST Analysis Political/legal A firm has to consider the legal and political restrictions that countries have before it enters a particular market. These restrictions are mainly to restrict and discourage foreign competition. every market has different rules and regulations for example the US and Europe have very little legalities when compared to the Chinese market where the government has imposed licensing , technical and packaging restrictions which although are within the parameters of the WTO but still make things difficult for foreign competition. Regulated logistics by the government in china is another thing firms have to face. Separate licenses for different service components have to be obtained from different government bodies. Besides there are different licenses for different provinces. All of these make things slow and difficult for foreign firms. Also, heavy excise has to be paid in India if parts or products are imported. The firms have to consider all this when it enters the market. Economic The computer industry is surging markets that have growing economies like India and China. China computer market share increased from 45.6% in 1997 to 86.6% in 2006 which approximately double. Sociocultural The culture for computer usage is increasing posing more opportunities for the industry throughout the world. However, the consumers are becoming more conscious of the looks of the machines and the accompanying features and entertainment is also becoming a part of computers. The gaming industry is booming as customers are increasingly leaning towards this new way of entertainment. Also, different markets have different ways of purchasing. For example Japanese prefer interacting directly with the products before buying them. In India and similar countries, purchasing online is still not a developed concept as it is in the US Mainly due to password and credit card hacking and lack of internet knowledge. Technological The environment is changing and technological developments are taking place continuously. More demanding machines like “XPS” are catering the growing gaming consumers. Entertainment is also being featured into products especially by Apple and innovation is taking place increasingly in the industry. The widespread use of www has enabled use of computers has increased as the prices have decreased. Computers have commercialized and are also being used on a small scale. This has changed the trends in the industry just in a few years. Thus the industry is very unpredictable and innovations may change the industry trends entirely over a couple of years. Porter’s 5 forces The entry of competitors The industry does not have a lot of legal barriers and thus new firms can enter the industry. Firms are also entering new markets and are making a mark. A lot of new names have come up in the world market of PCs including, Acer, Lenovo, Toshiba etc. since the year 2000 which are Asian brands. The Chinese market is one of the most prospering ones and a lot of foreign brands have entered the market like Dell and HP giving tough competition to the local brands. China has imposed laws for the entry of foreign brands like licensing, technical and packaging restrictions. Permissions have to be taken from different government bodies for different provinces making the whole process time-consuming and difficult. In India the government has laid rules like duties on imports which deter those firms that do not want to set up production units in the country. Also, Dell has a competitive edge of customized production with low inventory cost which it can use against competitors by reducing prices tremendously. When HP and Compaq merged, Dell temporarily reduced its prices so much that HP lost its market share even after the merger. Threat of substitutes Desktops have laptops as substitutes and the industry is slowly tilting towards it, however, most of the brands that make PCs also manufacture laptops. Technology is progressing at a fast pace, and soon the desktop will become obsolete and would be completely replaced by the more convenient laptops. Bargaining power of buyers The industry has witnessed a lot of mergers and acquisitions like Dell acquired the Alienware who was the manufacturer of expensive PCs selling to the gaming market, Lenovo acquired IBM and HP merged with Compaq. Also, products defer tremendously with different brands in terms of features, looks and prices etc. thus consumers do not easily switch their brands easily. Bargaining power of suppliers The suppliers in the industry are strong and have a bargaining power. This is because there are very few suppliers in the entire industry and all the manufacturers depend on them. For instance processors are manufactured by just Intel and AMD. However, the suppliers are increasing as Asian suppliers have entered the PC market who manufactures parts at competitive prices. The graphics processing industry is divided between NVIDA and ATI. In the operating systems industry, Microsoft is still the major player with 90% of the market share. Rivalry among existing players Rivalry is increasing in the industry as more players enter it thus struggling for market share. There have been price wars initiated especially by Dell the market leader to make the competition lose out on its market share. For example, HP and Compaq’s merger and the slash of prices by Dell in the notebook category made HP lose 5% of its market share. Also, Dell has a competitive advantage with supply chain and lower inventory which enables it to stir rivalry. Also, rivalry by Dell has initiated HP and Lenovo to sit up and fight back with more efficient ways of production and utilization of its resources. There has been tough competition between HP and Dell for world market share especially in the PC market where market share changes every quarter. In exhibit 11 we see that in the first quarter of 2005, Dell was ahead of HP by 3.1%, in the 2nd quarter by 3.2%, by 1.5% in the next quarter, in the 3rd quarter of 2006 however, HP overtook it by 0.2%. c) SWOT Analysis Strengths The main strength of Dell is its low inventory and low cost. The firm supplies customized products to consumers keeping direct contact with customers thereby avoiding middlemen. Also the manufacturing is done by itself therefore costs are curtailed and customers are satisfied with customized products. The firm also has an efficient supply chain and the products and parts are numbered thereby they are track able and traceable. Such a production enables Dell to have lower levels thereby giving them an edge on price and thus competitors. The firm has made production units in Europe, china and India thereby curtailing the costs of importing. Dell is also known for process innovations and devising processes of production that are cost effective and involve minimum middlemen. This enables them to keep a check on customer satisfaction and quality control. There is a very well developed system of purchasing the products online directly from the firm itself. This ensures convenience for the customers and ensures safety of products and online cheating when purchasing is conducted. The firm is still one of the biggest producers and has diversified into the gaming market, printer, IT services and notebooks etc. the firm bears much less risk as it waits for its competitors to set the standards first and the it enters the market. Weakness The main weakness of the firm is that its internal structure is falling apart. The key employees are not satisfied and want to leave the firm. Dell has fewer patents (1581) than HP which has more than 30,000 patents. Also, the firm spends less on R&D compared to HP and Apple. Dells largest product in its portfolio, the desktop is losing its mark share which is something to be alarmed about. There has also been a decrease in the “likely - to – repurchase” consumers as Dell had set up call centers via India and Philippines. The firm also had a bad reputation when it decreased its prices temporarily and recalled its notebook batteries and had to undergo US securities investigation. Dell also has not implemented the use of AMD in its products which most rivals already have. Lastly, the firm doesn’t give enough emphasis on marketing of the products as the trends are changing and the consumers demand multifeatured products which look good and have entertainment as well. Opportunities Dell has the opportunity to explore new and upcoming markets like China and India where it can easily excel its competitors. The firm can explore and diversify into other products like gaming market, more sophisticated machines, diversifying into the notebook category with full force, printers etc. with the Asian markets now in the picture, the firm now has an opportunity to explore the cheaper resources available here and to utilize them to minimize its costs. He firm should also concentrate on IT services and try to diversify in this market also which poses a lot of opportunities for Dell. Threat The major threat that comes to the firm is from HP which has improved itself tremendously and is eating into the market share of Dell. Also, things seem to be falling out for Dell with its competitive edge of low inventory being competed away by rivals. Soon this will no more be an edge for Dell and this business strategy will fail if serious steps are not taken. Innovative products is something Dell has not focused upon but the market trends are changing and now customers demand innovative products where Dell may lag behind. Competitions like HP and the upcoming Apple have gauged the market correctly and focus on R&D by continually improving their products. Dell is not in line with this changing trend and does not spend much on R&D which serves as a threat to the firm. The shares of the firm are decreasing overall and the main product on its portfolio which is desktops has falling market share which is should be alarming for the firm. If this continues, the market share of the firm could go down by a great amount. The firm can avoid this by improving its products and also by concentrating on other products in its portfolio and inventing new products. Also, Asian brands are coming up which are giving a tough competition to Dell and in the long run they may even overtake Dell with their efficient, innovative, better looking and well priced products. Dell also has to search for better cost effective ways and continuously improve its production processes to stay competitive. With Lenovo hiring key employees of Dell, their trade secrets and thus their competitive edge will become the property of the competitors. This is a serious threat for the firm and it should concentrate on improving its internal system by initiating loyalty among the employees and making sure they are satisfied in their work environment. d.) Dell needs to change its strategies and set new goals for itself. In the short run which is within a span of one year, the firm should improve its internal structure. Also, the firm should keep a tab on its competitor moves and be proactive instead of being reactive. In the longer run say 5 years, the firm should be able to develop its R&D and swarm the market with its innovative products as its competitive edge. At the same time it should work on the continuous improvement of its production processes exploring the most cost effective way of production which gives them a competitive edge. Short term goals Internal environment The employees are the key and soul of the firm and they should be satisfied. Employee assessments and motivational techniques should be used. Training, bonuses, team building initiatives and empowerment should be used to retain employees and to keep them satisfied. The firm should also attempt to hire key employees in the market to get innovative ideas and change management. This should be implemented within three months. Commercialize products Dell should study the needs and wants of the consumers. It is apparently not doing so. The products should be appealing to the consumers and have differential appeal in features and not in price as consumers are not price sensitive anymore. New product feature should be introduced instead of cutting price as a means of competition. This should be incorporated with immediate effect. Long term goals Concentrate on R&D The research and development of the firm needs tremendous improvement. Instead of the firm being he attacker of the highest profiting product in the market, the firm should instead be the trendsetter and innovation oriented. The technological industry is changing so fast that in the future that being the follower would not be enough rather being the inventor and capturing the larger share of the market would give the firm an edge. Change strategy of customization The firm should be versatile and should also explore the option of retail selling in the future. This is because with the changing trends, the consumers are becoming more demanding and they would want to see and experience the product that they are buying. This should be done globally. Agreed it would involve a lot of middlemen but the strategy of no-middlemen doesn’t seem to be working as it is giving decreasing returns. Retail outlets should be set and at the same time online purchase should be available too. Also, in the future customers may not want customized products, instead they might want all features in their products which would make the customization immaterial and les in demand and thus the competitive edge would be gone. Change the competitive strategy Till now Dell had an edge over its competitors on the basis that it had a cost effective supply chain that gave a price edge to Dell over its competitors. Today the competitors have been able to make their process more efficient bridging the price gap that Dell once had. Also, when HP and Compaq merged Dell reduced the prices drastically which did not serve as a long term competitive edge. Dell has to make improvements in its products and make its systems more efficient to be Improving products as competitive strategy rather than the price Acquisition of key firms Dell should think of mergers vertically both backwards and forwards. By buying out suppliers Dell can control price and remove middlemen. With forward integration by buying out distributors and retailers, the firm can again lessen middlemen thereby having more control over the process and curtail costs. Also, mergers with firms like Lenovo can also make Dell the market leaders of both the US and China and give a tough competition to HP. Diversify into new products Dell should diversify into new products as the demand for desktops would eventually decrease. Desktops have the largest share in their portfolio and if the demand falls Dell could be in trouble. The firm should diversify into IT services, notebooks and printers etc and try to venture new markets as the desktop will eventually reach the maturity stage and will decline as a product thus Dell should look for alternatives. Dell should avoid making mistakes like floating defecting notebook batteries or by unethically slashing prices deliberately to make HP suffer. Dell also hired call center services from India and Philippines which created problems with customer services and reduced the repeat purchase customers. Any decision Dell makes has to be researched well and then implemented. Conclusion Dell has to make changes in its strategies and reset its goals. It has to concentrate on its processes and improve them. Also it has to diversify and invest more in R&D. the competitors have already started making drastic improvements and some core competitor HP has already excelled in its market share. Dell has to reassess itself and improve itself both internally as an organization and externally as competitive threat. It has to innovate, diversify and explore newer markets to be able to sustain its competitive edge or else its competitors will exceed Dell and eat away its market shares. Read More