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UNIVERSITY OF NAIROBI
SCHOOL OF BUSINESS
MASTERS IN BUSINESS ADMINISTRATION
COURSE UNIT: DSM 608:
COURSE TITLE: ADVANCED STRATEGIC MANAGEMENT
CASE STUDY: MATCHING DELL
GROUP MEMBERS
Name Registration Number
Joshua M. Mung'atia D61/60583/2013
Edna Gacheru D61/79129/2015
Grace Mburu D61/71577/2015
Georgina Achola D61/79566/2015
Newton Nthiga D61/79238/2015
Pascalia Sila D61/79414/2015
Catherine Njuguna D61/79262/2015
Reuben Waweru D61/74703/2014
Doreen Asaasira D61/77542/2015
Mary Njeri D61/77131/2015
Benjamin Nzuku D61/79136/2015
Andrew Mayech D61/79260/2015
Winfred Nzula D61/77407/2015
Table of Contents
1.0 INTRODUCTION....................................................................................................................1
2.0 THE FACES OF TOP MANAGEMENT TEAM............................................................................3
3.0 STRATEGIC ANALYSIS............................................................................................................4
3.0.1 FORMULATION OF STRATEGY:......................................................................................4
3.0.2 STRATEGIC ISSUES.........................................................................................................5
3.0.3 IMPLEMENTATION OF STRATEGY:................................................................................7
3.0.4 Evaluation of Matching Dell’s strategy..........................................................................9
4.0 Matching Dell, out of box critical thinking.........................................................................15
5.0 CONCERNS AND CHALLENGES............................................................................................18
6.0 CONCLUSION AND RECOMMENDATIONS..........................................................................21
1.0 INTRODUCTION
The case is about the Dell Computer Corporation. A corporation that founded in 1984 by
Michael Dell. It explains how the corporation was founded and how it grew over time to a point
of tripling its market share as compared to its competitors in the personal computer (PC) industry
and early players. It further explains the various strategies that they used in order grow and
capture new markets like Direct model and retail channel.
When he was 18 years and a university student Dell started formatting hard disks for personal
computers and added extra memory, disk drives and modems to IBM clones, selling them for as
much as 40% less that comparable IBM machines. When revenue reached $80,000 per month he
dropped out of college and founded Dell Computer Corporation. In 1985, Dell shifted from
upgrading the machines of other manufacturers to assembling Dell branded PCs. This saw
growth in revenue each subsequent year. Between 1994 and 1998, their revenue rose from $3.5
billion to $18.2 billion and profits increased from $149 million to $1.5 billion. The company’s
stock price rose by 5,600%. During the same period, Dell grew twice as fast as its major rivals in
the personal computer market and tripled its market share. In the first half of 1998, Dell reported
operating earnings that were greater than the personal computer earnings of its competitors;
Compaq, Gateway, Hewlett Packard and IBM combined. Dell was ranked number four with an
estimated worth of $13 billion by Forbes Magazine’s list of richest Americans trailing only Bill
at the same age of 33 years old.
Compared to their competitors who sold primarily through distributors, resellers and retails sites
Dell Computer pioneered the “Direct Model” in PC industry. They would take orders directly
from customers, especially corporate customers. Once an order is received, they rapidly built
computers to customers specification then ship the machines directly to the customers. This
model was successful to a point of attracting intense scrutiny from their competitors who took
some steps towards matching the approach.
In late 1990 Dell departed from the Direct model and entered the retail channel. The move
provided them the opportunity to generate significant new business and increase their market
penetration, especially among PC customers who would want to physically “touch and feel” a
unit before buying. They accordingly produced two lines of standard PCs and reached
distribution agreements with computer superstores like CompUSA and warehouse clubs like
Sam’s Club. Sales through the retail channel were brisk, but they soon found out that they were
losing money on retail sales e.g their operating income from retail sales in 1994 was -3.0%
compared to 5.0% of the Direct model. With this realization they withdrew from retail stores in
1994.
2.0 THE FACES OF TOP MANAGEMENT TEAM
Michael Dell –This is the CEO of Dell computer corporation from the year 1984. He was
only 18 years old when he started dell as a apart time business in his dorm room.
He is top most person on the chain of command. He is in charge of the company’s overall
strategy. He is expected to lead strategically toward the Vision and mission. He is
supposed to
Find the strategic vision
Make the vision clear, specific and strong
Maintain the Vision
Manage towards the vision
Communicate the vision
All these he does through others and so he should be able to meaningfully influence
others.
He should therefore have the following qualities:
Visionary-Have a clear vision of the company, good in planning
Charismatic-able to influence, inspire and motivate others
Honest and ethical
Good communicator
Has a global business outlook
Decisive
Focused on customers
Morton Topfer - He was hired by Dell to become the Vice chairman of the company and
also the head of operations and manufacturing
Keith Maxwell -was Vice president for World Wide Operations and Marketing.
Marketing is a critical business function that operates in an environment that is highly
scrutinized and continually changing.
Today’s marketers undertake a variety of tasks as they attempt to build customer
relationship and the knowledge and the skill set needed to perform these tasks are varied:
Basic business skills i.e problem-solving , decision-making
Communication skills
Technological skills
Global perspective
Information seeker
3.0 STRATEGIC ANALYSIS
3.0.1 FORMULATION OF STRATEGY:Strategy formulation of organizations is better described and understood in terms of
continuity momentum. Once an organization has adopted a particular strategy, it tends to
develop from within strategy rather than fundamentally changing direction during periods
of relative continuity. At this point, strategy remains unchanged or changed
incrementally.
The top management team considers the nature of strategy implementation, capability of
the organization and resources available and the need to build a core competence.
Considering that the strategy is long term, complex, covers the company’s scope and
aimed at achieving corporate’s overall goal, adequate problem analysis is required to
effectively achieve the strategy.
In the case of Dell Computer Corporation, it adopted Dell’s Direct Model early on in the
company’s history and remained relatively unchanged up to 1998. This was the major
difference with strategies adopted by competitors who supplied PCs through distributors,
resellers and retailers. Dell only entered the retail channel for about 4 years (in late 1990,
exited in1994) due retail channel losses due to poor sales margins.
They mainly served corporate customers with customized, high performance PCs at
relatively low prices.
3.0.2 STRATEGIC ISSUES
1. Customization of products : Dell specialized in making computers to customer
specifications and dealt with large companies.
2. Outsourcing : Dell employed the tactic of subcontracting other companies to
make micro-processors and other components and then doing the final assembly
of the Personal computers (PCs).This ensured ability to control the quality of the
final product. It also let Microsoft write the programs for final installation into
the Pcs before they are transported to the customers.
3. Related Diversification: The Pc manufacturing companies not only did the
manufacture and sale of the PCs but also ventured into the manufacture of the
components for sale to other companies e.g. Apple and Motorola manufactured
micro-processors and sold to other companies. It is also understood that Dell
provided related technical services by having field Technicians to fix their
products when need be.
4. Strategic Alliances: Dell worked closely with suppliers to arrange Just-In-Time
delivery of parts .Hewlett Packard (HP)’ formed a partnership with resellers in
1997 under the Extended Solutions Partnership Program (ESPP) to receive
customer orders and specifications to be able to manufacture the PCs in their
factories.
5. Total Quality Management: Because the company deals directly with the buyers
of the computers, TQM as strategy serves the company well, because of the need
to get the customer’s needs first time. This strategy ensures quality products and
reduces wastage and errors significantly.
6. Direct marketing : By using this strategy, Dell managed to build a direct
relationship with the customers without having to go through middle entities.
This ensured that customers provided their specifications directly to the
manufacturer and got value for their money first time. This made Dell the
computer selling company of choice for most buyers.
7. Market Segmentation : In 1994, Dell classified its customers into categories of
Large or small. This enabled specialized and regional customer care and
servicing.
3.0.3 IMPLEMENTATION OF STRATEGY:
Since the goal of the strategy is to unite the whole organization to achieve the strategy,
Dell needs a strategy implementation to address the above critical weak points.
Since implementation is tough and time consuming, the management needed to
incorporate action oriented people with skills to lead, organize change, motivate people
and create a strong fit between the strategy and the organization’s operations. The C.E.O
and heads of the department at Dell are the most responsible for the strategy
implementation.
Critical considerations in Strategy implementation includes the nature of strategy
implementation, building capable organization, building core competence and matching
strategy with structure. Some of the key strategic decisions adopted by Dell in
implementation of its strategies include:
1. Product distribution Strategies:
Adopted and continued to enhance direct distribution model against competitors who
adopted indirect model of working through distributors.
2. Sales and Marketing Strategies:
Focus: Dell focused institutional buyer (government and institutional buyers)
who accounted for 77% of sales. However, the institutions were well
diversified and no single client represented more than 2% of sales, mitigating
concentration risk of reliance on one big buyer.
Customer segmentation: Customer segmentation between Relationship
buyers and transactions buyers, and later into even smaller segments such as
large, midsize companies etc) helped Dell provide customized services to suit
each category.
Customer relationship management: Dell invested heavily in customer
services with both inside and outside sales reps providing after sale services
and technical support. Dell also launched a website, www.dell.com designed
for both relationship and transactional clients.
3. Production, logistics and procurement Strategies:
PCs tailored to customer needs.
Improved value-chain to cut production costs.
Strategic alliances with suppliers for JIT delivery on inputs: cut down
inventory, holding from 32 -7 days hence reducing inventory holding costs.
Quick turnaround of production and delivery- only a day and a half from order
entry to shipping.
Strategic Location of production facilities: Located in “Silicon Hills” with
huge number of high-technology companies.
4. Production and services Strategies:
Effective online support services (resolving over 90% of cases).
Strategic partnerships to outsource onsite support services.
High ratings: Ranked number 1 on“overall user satisfaction” of its products
5. Firm infrastructure Strategy-
Hired experienced managers from the industry
6. Treat from Competition Strategy:
Specialized on PCs business - accounted for 96.8% of its revenues, more than
any of the competitors.
Exploited direct sales model, which had higher net income margin than
distributors/reseller model. Dell’s net income margin (8% in 1998) was
higher than competitors
3.0.4 Evaluation of Matching Dell’s strategy
i) SWOT Analysis
Strengths:
- Strong management: Michael Dell and
seasoned new managers hired from the industry.
- Strong & sustained financial growth:
Higher net income margin and return on capital
compared to competitors
- Strong brand value: Rated 1st on overall
customer satisfaction survey
- Location & strong strategic alliances with
suppliers: Managed to implement JIT to reduce
holding costs.
- Market leader in Direct distribution Model:
Weaknesses:
- Lack of diversified products range
compared to competitors- 97% of revenue
from PCs business.
- Reliance on institutional clients (70%)
exposing the company to lower margins
due to their bargaining power
Opportunities
- Increasing demand for PCs means new
opportunities to increase sales.
Threats:
- Falling prices of PCs likely to reduce
- Improvement of technology- Emails and
internet allows better interaction with
Customers.
margins.
- Other competitors adopting and
improving on the direct sales model.
- Threat of “clones”. The PC is a very
standardized product with ease of entry of
new competitors.
- Reliance on 2 key product suppliers
Wintel( Intel & Microsoft)
ii) Value Chain Analysis:
Dell uses Hines Value Chain model as analyzed below;
1. Principal objective is customer satisfaction
- Dell invested heavily on customer service with a team of sales Reps
- Investment in online customer support manned 24 hours with 50,000
pages of customer support information and diagnostic software
- Outsourced services of such organizations such as Xerox, Wang Global
for onsite support
- Set targets for resolution of 24-48 hour for online support
2. Process: Pull system:
- Dell only manufactured PCs on customer orders.
3. Structure and Direction:
- Used integrated system from receiving of customer orders, electronic
allocation to appropriate manufacturing facility, ordering of specific parts
as well as synchronizing with shipping companies for delivery.
4. Primary activities
- Dell was structured around different teams such different sales reps,
after sales support, logistics etc,
5. Secondary act ivies:
- Use of JIT, electronic data interchange and TQM.
i. Dell was working with service providers to
create measures of service quality and to improve the flow of data
between them.
ii. Dell conveyed information concerning
defective parts from services providers back to its suppliers
through electronic means.
iii. Dell maintained electronic links with suppliers
which allowed them to direct suppliers’ shipment straight to
customers. Example: compute monitors supplied by Sony were
picked directly from Sony and delivered alongside the computer.
iii) Michael Porter's 5 Forces
1. Threat of competition
In the computer manufacturing industry being analyzed, completion is stiff and Dell must
keep ahead of the other manufacturers by constantly being creative and innovative. Since
all the companies are in the business of manufacturing the PCs, the only differentiation
will be in quality and other accompanying before and after sales services. Dell has so far
managed to shake off completion by employing tactics that other companies do not have;
e.g. Direct marketing, excellent marketing strategies, after sales service and ensuring
custom made PCs.
2. Bargaining power of suppliers
In this vibrant market, there are limited suppliers of computer parts due to the nature of
their specialization. These suppliers may sometimes gang up to set unprecedented prices
for their products.
3. Bargaining power of buyers
Dell has had to offer attractive prices to continue keeping the corporations who make the
largest clientele. It is noted that the company has to offer cushioning terms to its resellers
in case of price fluctuations while the goods are in the channel.
4. Threat of new entry
The Pc manufacturing industry is competitive and the existing companies need to be on
their toes to remain ahead of any new entrants. The industry is rich and the need for apt
technology will never be fully satisfied. Therefore, any new discoveries and innovations
can easily outsmart Dell in spite of being the market leader.
5. Threat of close substitutes
Dell had to deal with the threat of substitute products from competing firms since the
products sold were not highly differentiated meaning customers had a lot of variety
products to choose from other players in the market. Dell dealt with this threat by
adopting the Hines model of value chain. This enabling the company meet the customers
specifications, eliminate middlemen and also did follow ups and after sales services to
make sure the customers need were meet hence they were able to earn customer’s loyalty
to its brand.
iv) PESTEL Analysis
Political Factors
Any corporation with the size of Dell is impacted by a set of political factors such as the
level of political stability in the country, home market lobbying and international pressure
groups. It is important to note that to date there is no evidence of Dell being involved in
a political issue, nevertheless, the company is not immune from detrimental impact of
political factors in the future. Specifically, there is a risk for Dell and other US-based
computing and technology companies to become unwelcome in certain markets,
particularly in Russia and China due to spying concerns sparkled mainly after the
revelations of whistleblower and former CIA employee Edward Snowden. Moreover,
Dell might be impacted by activities of home market lobbying and pressure groups in
emerging economies advocating the interests of local computer firms, thus creating
barriers for Dell in forms of trade tariffs and other instruments.
Economic Factors
Dell is directly impacted by a great range of economic factors that include currency
exchange rates, interest rates, inflation rate, macroeconomic stability and costs of labor
and raw materials. Particularly, currency exchange rate represents a major economic
factor that affects Dell business performance directly and significantly because of the
global scope of Dell operations.
Social Factors
Increasing level of integration of various internet applications into increasing aspects of
professional and personal lives of consumers is one of the most significant social
tendencies that affect Dell’s long-term growth prospects. Specifically, company’s future
growth prospects are associated with its ability to address this important social change by
offering advanced tablets and smartphones that can serve as effective platforms for using
various types of mobile applications for working and recreation.
Increasing popularity of online sharing via popular social networking websites such as
Facebook, Google+, LinkedIn, Instagram, Twitter and YouTube is another noteworthy
social tendency that should not be neglected by Dell. The company is also greatly
impacted by additional range of social factors such as demographic changes, changes in
consumer attitudes and opinions towards consumer electronics products and services,
media perception of the brand and health and welfare of target customer segment.
Technology Factors
Dell Inc. is a global computer technology company that manufactures and sells PC,
tablets, workstations and displays. Dell practices “Direct Business Model” that involves
selling products directly to customers without intermediaries. Developed by founder and
current CEO Michel Dell, this business strategy has proved to be highly effective in
terms of gaining significant cost advantage in competition.
There are evidences that after becoming a private company Dell’s current business
strategy is associated with making a transition from PC assembler and seller to software
developer, a strategy that proved to be successful with another global computer brand
IBM.
4.0 Matching Dell, out of box critical thinking
This analysis describes the case of computer and peripherals industry especially the
successful management of Dell Computer Corporation which grew twice as fast as its
major rivals like Compaq, Gateway, Hewlett Packard and IBM.
The main reason for the success of Dell was their "Direct Model" of selling computers
which eliminated all traditional channels like distributors, resellers and retailers.
Traditionally all its competitors like IBM, HP, and Compaq etc. used reseller, retailers
and distributors to sell their computers to end users.
IBM was the first company to launch its PC in 1981 and soon held 42% of the market.
But the growth of IBM proved to be short lived as with Schumpeterian rents when it
failed to take any proprietary competitive advantage and ceded rights of the
microprocessor and operating system to Intel and Microsoft.
Dell through its direct selling approach used to take orders directly from the customers,
thus selling customized machines. This proved to be a revolutionary business strategy
which would enable it gain cost leadership and competitive advantage in the PC market,
enabling the company to eliminate wholesale and retail dealers that proved to be very
expensive and wastage of time. It also provided for a cheap and efficient way of
distribution and production of computers. Furthermore, the direct model also provided a
better understanding of customer needs.
This efficient system of distribution was possible only because the company was focused
on customer satisfaction.
The DIRECT MODEL ensured that Dell was able to build relationships directly with
consumers cutting out the middleman. The outside sales process was used for relationship
while the inside salesforce was used for transaction segments.
The production processes were reengineered to cut inventory and only ensure that
machines were assembled as per order, in addition suppliers were co-located, a close
collaboration with suppliers ensured efficient logistics
DELL eliminated the need for inventory or middlemen and gave itself a built-in price
advantage, which it in part keeps as profit and in part passes on to customers.” Used
customer funds received for 5 days before passing on to suppliers.
Dell became a global player, markets all over the world with manufacturing facilities in
Ireland, Malaysia and Austin, US.
In the commercial market, Dell won a very high reputation on their PCs, with customer
satisfaction and brand loyalty Dell ensured user satisfaction - Ranked 1st overall in 1998,
and ranked evenly 2nd in from high to low price point with HP ranked 1st in high price
point, and Gateway ranked 1st in midrange and low price points.
As a growth focus, Dell anticipated to expand geographically by targeting new segments
and diversification into new markets with new products. This would be boosted by
Branding, enhancing marketing capacity and skills, strengthening sales and
distribution as well as manufacturing and assembly.
Investment in R&D and new product capacity could also be embraced to foster greater
financial success and returns on investments for Dell in the future
Entering into strategic alliances, focusing on scale economies and strategic markets
Fill out product line to serve market niches
Gain access to technology & low cost manufacturing capabilities
Branding and customer relationships
Product development
Add product features & refinement through New Generation products and new form
factors
Customer focus ie new products taking into consideration users (kids, students,
employers, elderly), Organic shape, colors, trend, age, gender etc.
Embracing Diversification Strategies
Advertising to establish strong brand positioning focusing on needs and wants of
consumers and also appealing to their emotions
Advertising for “direct sale” to build the brand by service in addition to support and
warranty
Offering solutions lack of portfolio of offering in certain segments (E.g. IBM had high
margins business solutions, HP expanded its technology service business)
Product and Market Diversifications ; Laptop, server, PlayStation, Smart phone
Printers, Servers, Projectors, TV’s, Handhelds, Software, Peripherals, Storage,
Networking, Workstations among others.
Market diversification; Asia, Middle east branches.
Strategic partnership
5.0 CONCERNS AND CHALLENGES
1. Competitors are poised to copy and succeed in direct model
2. Price and productivity advantage with competitors is narrowing.
3. Maturing industry
5.0.1 Problems Faced by the Company
1. The company has faced a lot of competition since the other firms in the same
industry began to offer increasingly integrated and assembled personal computers.
For example Start-ups such as Apple Computer and midsize firms such as Tandy
Radio Shack and Commodore led the early market in gaining popularity among
the educational institutions and they developed easy to use machines for the
ordinary people. Established firms such as Texas Instruments, Hewlett-Packard,
Zenith, Xerox, Toshiba, Sony and Sony soon joined the entrepreneurs and also
began to produce the personal computers.
2. The use of huge sales force by IBM to sell its personal computers to large
corporate accounts. The volume discounts encouraged large firms to centralize
personal computer purchases through corporate departments with whom the IBM
sales people had strong relationships with. In order to serve small businesses and
individuals it turned into retail stores such as Sears and Computer land. It also
encouraged the development of network of distributors and dealers known as
value –added resellers. The resellers not only sold their personal computers to
computers, but also guided them through the purchase of what was still unfamiliar
product. Resellers commonly handled installation, configured software, pieced
together customer networks and serviced machines on an on-going basis. This
move caused Dell to sell a few of the machines
3. Vigorous price war -Dell computer ran advertisements showing that their prices
were much lower than Compaq’s list prices. Compaq usually discounted its
personal computers well below the list price, but the advertising campaign was
highly effective. So Compaq slashed its prices by as much as 32% introduced 41
new products in1992 and added new distribution channels.
4. Change of strategy -when Dell departed from direct model to retail channel.
Michael Dell thought it would lead into generating significant new business and
also increase the market penetration through customers in the entry level. The
sales through the retail channels were brisk but Dell soon found that it was losing
money on retail sales. This lead to poor financial results in 1993.
5. A lot of replication of the personal computers from the competitors. While the
competitors sold primarily through distributors, resellers, and retail sites, Dell
took orders directly from customers especially the corporate customers. Once it
received an order Dell rapidly built computers to customer specifications and
shipped machines directly to the customer. The success of the direct model
attracted the intense scrutiny of Dells competitors by late 1998 every major
personal computer manufacture had taken some step to match Dells approach.
5.0.2 OTHER PROBLEMS
How to deploy a global strategy to manage sales in international markets?
How to leverage growth in Internet usage that is promoting PC ownership?
How to leverage growth in Asia?
How to take advantage of growth in IT industry?
What will drive growth in future? Are we betting on the right products by still promoting
Wintel laptops and PCs?
In short:
Direct model and JIT/production and logistics have put Dell into an enviable position.
How to preserve gains while ensuring growth?
6.0 CONCLUSION AND RECOMMENDATIONS
Dell has performed relatively well compared to its competitors. In order to continue
setting themselves apart they need to diversify on their product because 97% of their
revenue is from PC business. There’s danger of their competitors taking over the market
thus reduction on their revenue and profitability. They also need to diversify on their
client base because they are currently relying more on institutional clients and there’s
danger of reduction in margins due to customer bargaining power. Further, in order for
them to be market leaders they should come up with other models apart from the direct
model which is working right at the moment because their competitors are slowly
adopting it.
Table of Contents
1.0 INTRODUCTION....................................................................................................................1
2.0 THE FACES OF TOP MANAGEMENT TEAM............................................................................3
3.0 STRATEGIC ANALYSIS............................................................................................................4
3.0.1 FORMULATION OF STRATEGY:......................................................................................4
3.0.2 STRATEGIC ISSUES.........................................................................................................5
3.0.3 IMPLEMENTATION OF STRATEGY:................................................................................7
3.0.4 Evaluation of Matching Dell’s strategy..........................................................................9
4.0 Matching Dell, out of box critical thinking.........................................................................15
5.0 CONCERNS AND CHALLENGES............................................................................................18
6.0 CONCLUSION AND RECOMMENDATIONS..........................................................................21
1.0 INTRODUCTION
The case is about the Dell Computer Corporation. A corporation that founded in 1984 by
Michael Dell. It explains how the corporation was founded and how it grew over time to a point
of tripling its market share as compared to its competitors in the personal computer (PC) industry
and early players. It further explains the various strategies that they used in order grow and
capture new markets like Direct model and retail channel.
When he was 18 years and a university student Dell started formatting hard disks for personal
computers and added extra memory, disk drives and modems to IBM clones, selling them for as
much as 40% less that comparable IBM machines. When revenue reached $80,000 per month he
dropped out of college and founded Dell Computer Corporation. In 1985, Dell shifted from
upgrading the machines of other manufacturers to assembling Dell branded PCs. This saw
growth in revenue each subsequent year. Between 1994 and 1998, their revenue rose from $3.5
billion to $18.2 billion and profits increased from $149 million to $1.5 billion. The company’s
stock price rose by 5,600%. During the same period, Dell grew twice as fast as its major rivals in
the personal computer market and tripled its market share. In the first half of 1998, Dell reported
operating earnings that were greater than the personal computer earnings of its competitors;
Compaq, Gateway, Hewlett Packard and IBM combined. Dell was ranked number four with an
estimated worth of $13 billion by Forbes Magazine’s list of richest Americans trailing only Bill
at the same age of 33 years old.
Compared to their competitors who sold primarily through distributors, resellers and retails sites
Dell Computer pioneered the “Direct Model” in PC industry. They would take orders directly
from customers, especially corporate customers. Once an order is received, they rapidly built
computers to customers specification then ship the machines directly to the customers. This
model was successful to a point of attracting intense scrutiny from their competitors who took
some steps towards matching the approach.
In late 1990 Dell departed from the Direct model and entered the retail channel. The move
provided them the opportunity to generate significant new business and increase their market
penetration, especially among PC customers who would want to physically “touch and feel” a
unit before buying. They accordingly produced two lines of standard PCs and reached
distribution agreements with computer superstores like CompUSA and warehouse clubs like
Sam’s Club. Sales through the retail channel were brisk, but they soon found out that they were
losing money on retail sales e.g their operating income from retail sales in 1994 was -3.0%
compared to 5.0% of the Direct model. With this realization they withdrew from retail stores in
1994.
2.0 THE FACES OF TOP MANAGEMENT TEAM
Michael Dell –This is the CEO of Dell computer corporation from the year 1984. He was
only 18 years old when he started dell as a apart time business in his dorm room.
He is top most person on the chain of command. He is in charge of the company’s overall
strategy. He is expected to lead strategically toward the Vision and mission. He is
supposed to
Find the strategic vision
Make the vision clear, specific and strong
Maintain the Vision
Manage towards the vision
Communicate the vision
All these he does through others and so he should be able to meaningfully influence
others.
He should therefore have the following qualities:
Visionary-Have a clear vision of the company, good in planning
Charismatic-able to influence, inspire and motivate others
Honest and ethical
Good communicator
Has a global business outlook
Decisive
Focused on customers
Morton Topfer - He was hired by Dell to become the Vice chairman of the company and
also the head of operations and manufacturing
Keith Maxwell -was Vice president for World Wide Operations and Marketing.
Marketing is a critical business function that operates in an environment that is highly
scrutinized and continually changing.
Today’s marketers undertake a variety of tasks as they attempt to build customer
relationship and the knowledge and the skill set needed to perform these tasks are varied:
Basic business skills i.e problem-solving , decision-making
Communication skills
Technological skills
Global perspective
Information seeker
3.0 STRATEGIC ANALYSIS
3.0.1 FORMULATION OF STRATEGY:Strategy formulation of organizations is better described and understood in terms of
continuity momentum. Once an organization has adopted a particular strategy, it tends to
develop from within strategy rather than fundamentally changing direction during periods
of relative continuity. At this point, strategy remains unchanged or changed
incrementally.
The top management team considers the nature of strategy implementation, capability of
the organization and resources available and the need to build a core competence.
Considering that the strategy is long term, complex, covers the company’s scope and
aimed at achieving corporate’s overall goal, adequate problem analysis is required to
effectively achieve the strategy.
In the case of Dell Computer Corporation, it adopted Dell’s Direct Model early on in the
company’s history and remained relatively unchanged up to 1998. This was the major
difference with strategies adopted by competitors who supplied PCs through distributors,
resellers and retailers. Dell only entered the retail channel for about 4 years (in late 1990,
exited in1994) due retail channel losses due to poor sales margins.
They mainly served corporate customers with customized, high performance PCs at
relatively low prices.
3.0.2 STRATEGIC ISSUES
8. Customization of products : Dell specialized in making computers to customer
specifications and dealt with large companies.
9. Outsourcing : Dell employed the tactic of subcontracting other companies to
make micro-processors and other components and then doing the final assembly
of the Personal computers (PCs).This ensured ability to control the quality of the
final product. It also let Microsoft write the programs for final installation into
the Pcs before they are transported to the customers.
10. Related Diversification: The Pc manufacturing companies not only did the
manufacture and sale of the PCs but also ventured into the manufacture of the
components for sale to other companies e.g. Apple and Motorola manufactured
micro-processors and sold to other companies. It is also understood that Dell
provided related technical services by having field Technicians to fix their
products when need be.
11. Strategic Alliances: Dell worked closely with suppliers to arrange Just-In-Time
delivery of parts .Hewlett Packard (HP)’ formed a partnership with resellers in
1997 under the Extended Solutions Partnership Program (ESPP) to receive
customer orders and specifications to be able to manufacture the PCs in their
factories.
12. Total Quality Management: Because the company deals directly with the buyers
of the computers, TQM as strategy serves the company well, because of the need
to get the customer’s needs first time. This strategy ensures quality products and
reduces wastage and errors significantly.
13. Direct marketing : By using this strategy, Dell managed to build a direct
relationship with the customers without having to go through middle entities.
This ensured that customers provided their specifications directly to the
manufacturer and got value for their money first time. This made Dell the
computer selling company of choice for most buyers.
14. Market Segmentation : In 1994, Dell classified its customers into categories of
Large or small. This enabled specialized and regional customer care and
servicing.
3.0.3 IMPLEMENTATION OF STRATEGY:
Since the goal of the strategy is to unite the whole organization to achieve the strategy,
Dell needs a strategy implementation to address the above critical weak points.
Since implementation is tough and time consuming, the management needed to
incorporate action oriented people with skills to lead, organize change, motivate people
and create a strong fit between the strategy and the organization’s operations. The C.E.O
and heads of the department at Dell are the most responsible for the strategy
implementation.
Critical considerations in Strategy implementation includes the nature of strategy
implementation, building capable organization, building core competence and matching
strategy with structure. Some of the key strategic decisions adopted by Dell in
implementation of its strategies include:
7. Product distribution Strategies:
Adopted and continued to enhance direct distribution model against competitors who
adopted indirect model of working through distributors.
8. Sales and Marketing Strategies:
Focus: Dell focused institutional buyer (government and institutional buyers)
who accounted for 77% of sales. However, the institutions were well
diversified and no single client represented more than 2% of sales, mitigating
concentration risk of reliance on one big buyer.
Customer segmentation: Customer segmentation between Relationship
buyers and transactions buyers, and later into even smaller segments such as
large, midsize companies etc) helped Dell provide customized services to suit
each category.
Customer relationship management: Dell invested heavily in customer
services with both inside and outside sales reps providing after sale services
and technical support. Dell also launched a website, www.dell.com designed
for both relationship and transactional clients.
9. Production, logistics and procurement Strategies:
PCs tailored to customer needs.
Improved value-chain to cut production costs.
Strategic alliances with suppliers for JIT delivery on inputs: cut down
inventory, holding from 32 -7 days hence reducing inventory holding costs.
Quick turnaround of production and delivery- only a day and a half from order
entry to shipping.
Strategic Location of production facilities: Located in “Silicon Hills” with
huge number of high-technology companies.
10. Production and services Strategies:
Effective online support services (resolving over 90% of cases).
Strategic partnerships to outsource onsite support services.
High ratings: Ranked number 1 on“overall user satisfaction” of its products
11. Firm infrastructure Strategy-
Hired experienced managers from the industry
12. Treat from Competition Strategy:
Specialized on PCs business - accounted for 96.8% of its revenues, more than
any of the competitors.
Exploited direct sales model, which had higher net income margin than
distributors/reseller model. Dell’s net income margin (8% in 1998) was
higher than competitors
3.0.4 Evaluation of Matching Dell’s strategy
v) SWOT Analysis
Strengths:
- Strong management: Michael Dell and
seasoned new managers hired from the industry.
- Strong & sustained financial growth:
Higher net income margin and return on capital
compared to competitors
- Strong brand value: Rated 1st on overall
customer satisfaction survey
- Location & strong strategic alliances with
suppliers: Managed to implement JIT to reduce
holding costs.
- Market leader in Direct distribution Model:
Weaknesses:
- Lack of diversified products range
compared to competitors- 97% of revenue
from PCs business.
- Reliance on institutional clients (70%)
exposing the company to lower margins
due to their bargaining power
Opportunities
- Increasing demand for PCs means new
opportunities to increase sales.
Threats:
- Falling prices of PCs likely to reduce
- Improvement of technology- Emails and
internet allows better interaction with
Customers.
margins.
- Other competitors adopting and
improving on the direct sales model.
- Threat of “clones”. The PC is a very
standardized product with ease of entry of
new competitors.
- Reliance on 2 key product suppliers
Wintel( Intel & Microsoft)
vi) Value Chain Analysis:
Dell uses Hines Value Chain model as analyzed below;
1. Principal objective is customer satisfaction
- Dell invested heavily on customer service with a team of sales Reps
- Investment in online customer support manned 24 hours with 50,000
pages of customer support information and diagnostic software
- Outsourced services of such organizations such as Xerox, Wang Global
for onsite support
- Set targets for resolution of 24-48 hour for online support
2. Process: Pull system:
- Dell only manufactured PCs on customer orders.
3. Structure and Direction:
- Used integrated system from receiving of customer orders, electronic
allocation to appropriate manufacturing facility, ordering of specific parts
as well as synchronizing with shipping companies for delivery.
4. Primary activities
- Dell was structured around different teams such different sales reps,
after sales support, logistics etc,
5. Secondary act ivies:
- Use of JIT, electronic data interchange and TQM.
i. Dell was working with service providers to
create measures of service quality and to improve the flow of data
between them.
ii. Dell conveyed information concerning
defective parts from services providers back to its suppliers
through electronic means.
iii. Dell maintained electronic links with suppliers
which allowed them to direct suppliers’ shipment straight to
customers. Example: compute monitors supplied by Sony were
picked directly from Sony and delivered alongside the computer.
vii) Michael Porter's 5 Forces
6. Threat of competition
In the computer manufacturing industry being analyzed, completion is stiff and Dell must
keep ahead of the other manufacturers by constantly being creative and innovative. Since
all the companies are in the business of manufacturing the PCs, the only differentiation
will be in quality and other accompanying before and after sales services. Dell has so far
managed to shake off completion by employing tactics that other companies do not have;
e.g. Direct marketing, excellent marketing strategies, after sales service and ensuring
custom made PCs.
7. Bargaining power of suppliers
In this vibrant market, there are limited suppliers of computer parts due to the nature of
their specialization. These suppliers may sometimes gang up to set unprecedented prices
for their products.
8. Bargaining power of buyers
Dell has had to offer attractive prices to continue keeping the corporations who make the
largest clientele. It is noted that the company has to offer cushioning terms to its resellers
in case of price fluctuations while the goods are in the channel.
9. Threat of new entry
The Pc manufacturing industry is competitive and the existing companies need to be on
their toes to remain ahead of any new entrants. The industry is rich and the need for apt
technology will never be fully satisfied. Therefore, any new discoveries and innovations
can easily outsmart Dell in spite of being the market leader.
10. Threat of close substitutes
Dell had to deal with the threat of substitute products from competing firms since the
products sold were not highly differentiated meaning customers had a lot of variety
products to choose from other players in the market. Dell dealt with this threat by
adopting the Hines model of value chain. This enabling the company meet the customers
specifications, eliminate middlemen and also did follow ups and after sales services to
make sure the customers need were meet hence they were able to earn customer’s loyalty
to its brand.
viii) PESTEL Analysis
Political Factors
Any corporation with the size of Dell is impacted by a set of political factors such as the
level of political stability in the country, home market lobbying and international pressure
groups. It is important to note that to date there is no evidence of Dell being involved in
a political issue, nevertheless, the company is not immune from detrimental impact of
political factors in the future. Specifically, there is a risk for Dell and other US-based
computing and technology companies to become unwelcome in certain markets,
particularly in Russia and China due to spying concerns sparkled mainly after the
revelations of whistleblower and former CIA employee Edward Snowden. Moreover,
Dell might be impacted by activities of home market lobbying and pressure groups in
emerging economies advocating the interests of local computer firms, thus creating
barriers for Dell in forms of trade tariffs and other instruments.
Economic Factors
Dell is directly impacted by a great range of economic factors that include currency
exchange rates, interest rates, inflation rate, macroeconomic stability and costs of labor
and raw materials. Particularly, currency exchange rate represents a major economic
factor that affects Dell business performance directly and significantly because of the
global scope of Dell operations.
Social Factors
Increasing level of integration of various internet applications into increasing aspects of
professional and personal lives of consumers is one of the most significant social
tendencies that affect Dell’s long-term growth prospects. Specifically, company’s future
growth prospects are associated with its ability to address this important social change by
offering advanced tablets and smartphones that can serve as effective platforms for using
various types of mobile applications for working and recreation.
Increasing popularity of online sharing via popular social networking websites such as
Facebook, Google+, LinkedIn, Instagram, Twitter and YouTube is another noteworthy
social tendency that should not be neglected by Dell. The company is also greatly
impacted by additional range of social factors such as demographic changes, changes in
consumer attitudes and opinions towards consumer electronics products and services,
media perception of the brand and health and welfare of target customer segment.
Technology Factors
Dell Inc. is a global computer technology company that manufactures and sells PC,
tablets, workstations and displays. Dell practices “Direct Business Model” that involves
selling products directly to customers without intermediaries. Developed by founder and
current CEO Michel Dell, this business strategy has proved to be highly effective in
terms of gaining significant cost advantage in competition.
There are evidences that after becoming a private company Dell’s current business
strategy is associated with making a transition from PC assembler and seller to software
developer, a strategy that proved to be successful with another global computer brand
IBM.
4.0 Matching Dell, out of box critical thinking
This analysis describes the case of computer and peripherals industry especially the
successful management of Dell Computer Corporation which grew twice as fast as its
major rivals like Compaq, Gateway, Hewlett Packard and IBM.
The main reason for the success of Dell was their "Direct Model" of selling computers
which eliminated all traditional channels like distributors, resellers and retailers.
Traditionally all its competitors like IBM, HP, and Compaq etc. used reseller, retailers
and distributors to sell their computers to end users.
IBM was the first company to launch its PC in 1981 and soon held 42% of the market.
But the growth of IBM proved to be short lived as with Schumpeterian rents when it
failed to take any proprietary competitive advantage and ceded rights of the
microprocessor and operating system to Intel and Microsoft.
Dell through its direct selling approach used to take orders directly from the customers,
thus selling customized machines. This proved to be a revolutionary business strategy
which would enable it gain cost leadership and competitive advantage in the PC market,
enabling the company to eliminate wholesale and retail dealers that proved to be very
expensive and wastage of time. It also provided for a cheap and efficient way of
distribution and production of computers. Furthermore, the direct model also provided a
better understanding of customer needs.
This efficient system of distribution was possible only because the company was focused
on customer satisfaction.
The DIRECT MODEL ensured that Dell was able to build relationships directly with
consumers cutting out the middleman. The outside sales process was used for relationship
while the inside salesforce was used for transaction segments.
The production processes were reengineered to cut inventory and only ensure that
machines were assembled as per order, in addition suppliers were co-located, a close
collaboration with suppliers ensured efficient logistics
DELL eliminated the need for inventory or middlemen and gave itself a built-in price
advantage, which it in part keeps as profit and in part passes on to customers.” Used
customer funds received for 5 days before passing on to suppliers.
Dell became a global player, markets all over the world with manufacturing facilities in
Ireland, Malaysia and Austin, US.
In the commercial market, Dell won a very high reputation on their PCs, with customer
satisfaction and brand loyalty Dell ensured user satisfaction - Ranked 1st overall in 1998,
and ranked evenly 2nd in from high to low price point with HP ranked 1st in high price
point, and Gateway ranked 1st in midrange and low price points.
As a growth focus, Dell anticipated to expand geographically by targeting new segments
and diversification into new markets with new products. This would be boosted by
Branding, enhancing marketing capacity and skills, strengthening sales and
distribution as well as manufacturing and assembly.
Investment in R&D and new product capacity could also be embraced to foster greater
financial success and returns on investments for Dell in the future
Entering into strategic alliances, focusing on scale economies and strategic markets
Fill out product line to serve market niches
Gain access to technology & low cost manufacturing capabilities
Branding and customer relationships
Product development
Add product features & refinement through New Generation products and new form
factors
Customer focus ie new products taking into consideration users (kids, students,
employers, elderly), Organic shape, colors, trend, age, gender etc.
Embracing Diversification Strategies
Advertising to establish strong brand positioning focusing on needs and wants of
consumers and also appealing to their emotions
Advertising for “direct sale” to build the brand by service in addition to support and
warranty
Offering solutions lack of portfolio of offering in certain segments (E.g. IBM had high
margins business solutions, HP expanded its technology service business)
Product and Market Diversifications ; Laptop, server, PlayStation, Smart phone
Printers, Servers, Projectors, TV’s, Handhelds, Software, Peripherals, Storage,
Networking, Workstations among others.
Market diversification; Asia, Middle east branches.
Strategic partnership
5.0 CONCERNS AND CHALLENGES
4. Competitors are poised to copy and succeed in direct model
5. Price and productivity advantage with competitors is narrowing.
6. Maturing industry
5.0.1 Problems Faced by the Company
6. The company has faced a lot of competition since the other firms in the same
industry began to offer increasingly integrated and assembled personal computers.
For example Start-ups such as Apple Computer and midsize firms such as Tandy
Radio Shack and Commodore led the early market in gaining popularity among
the educational institutions and they developed easy to use machines for the
ordinary people. Established firms such as Texas Instruments, Hewlett-Packard,
Zenith, Xerox, Toshiba, Sony and Sony soon joined the entrepreneurs and also
began to produce the personal computers.
7. The use of huge sales force by IBM to sell its personal computers to large
corporate accounts. The volume discounts encouraged large firms to centralize
personal computer purchases through corporate departments with whom the IBM
sales people had strong relationships with. In order to serve small businesses and
individuals it turned into retail stores such as Sears and Computer land. It also
encouraged the development of network of distributors and dealers known as
value –added resellers. The resellers not only sold their personal computers to
computers, but also guided them through the purchase of what was still unfamiliar
product. Resellers commonly handled installation, configured software, pieced
together customer networks and serviced machines on an on-going basis. This
move caused Dell to sell a few of the machines
8. Vigorous price war -Dell computer ran advertisements showing that their prices
were much lower than Compaq’s list prices. Compaq usually discounted its
personal computers well below the list price, but the advertising campaign was
highly effective. So Compaq slashed its prices by as much as 32% introduced 41
new products in1992 and added new distribution channels.
9. Change of strategy -when Dell departed from direct model to retail channel.
Michael Dell thought it would lead into generating significant new business and
also increase the market penetration through customers in the entry level. The
sales through the retail channels were brisk but Dell soon found that it was losing
money on retail sales. This lead to poor financial results in 1993.
10. A lot of replication of the personal computers from the competitors. While the
competitors sold primarily through distributors, resellers, and retail sites, Dell
took orders directly from customers especially the corporate customers. Once it
received an order Dell rapidly built computers to customer specifications and
shipped machines directly to the customer. The success of the direct model
attracted the intense scrutiny of Dells competitors by late 1998 every major
personal computer manufacture had taken some step to match Dells approach.
5.0.2 OTHER PROBLEMS
How to deploy a global strategy to manage sales in international markets?
How to leverage growth in Internet usage that is promoting PC ownership?
How to leverage growth in Asia?
How to take advantage of growth in IT industry?
What will drive growth in future? Are we betting on the right products by still promoting
Wintel laptops and PCs?
In short:
Direct model and JIT/production and logistics have put Dell into an enviable position.
How to preserve gains while ensuring growth?
6.0 CONCLUSION AND RECOMMENDATIONS
Dell has performed relatively well compared to its competitors. In order to continue
setting themselves apart they need to diversify on their product because 97% of their
revenue is from PC business. There’s danger of their competitors taking over the market
thus reduction on their revenue and profitability. They also need to diversify on their
client base because they are currently relying more on institutional clients and there’s
danger of reduction in margins due to customer bargaining power. Further, in order for
them to be market leaders they should come up with other models apart from the direct
model which is working right at the moment because their competitors are slowly
adopting it.
