Computers
Theory-in-Practice
Prepared Dell by: Steve Ramirez
Dr. Meilich BUS 444 MW 9:00 10:50 May 7, 2004
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Company Introduction
Michael S. Dell, who believed that the best way to get a computer in every household of America was to sell it directly to the customer and cut out the middle-man, created Dell Computers in 1984, headquartered in Round Rock, TX. Not only was it an attempt to become the industry leader but also to better serve the customer. Dell believes that by interacting with the consumer directly, they are able to understand their needs and react quickly and efficiently. Dell's operations are based on a "direct model" that was inspired by the consumer. Within this model there are five elements that drive it which are: most efficient path to the customer, single point of accountability, build-to-order, low-cost leader, and standards-based technology. With this model, Dell has climbed to the top of the technology industry and is able to boast sales of over $39 billion for the last four quarters. The Internet has become Dells strongest ally; the introduction of e-commerce in 1996 was one major factor that led Dell to become an industry leader. Not only is Dell using the Internet to provide services to its customers but they are also using it to foster relationships with their suppliers by providing up-to-date information about product quality, inventory levels and more. In 1988 Dell's initial public offering of 3.5 million shares were offered at $8.50, today their stock price has sky-rocketed to $36.00 per share with over 21 million shares (New York Stock Exchange ticker: DELL). In less than twenty years Dell has grown to a gigantic force in the technology industry. I chose Dell to complete the Theory-in-Practice assignment because the rags-to-riches story of Michael S. Dell is inspiring to a business student such as me. I am intrigued by the way he was able to build an empire and continually stay so successful throughout the years.
Chapter 1
Preliminary S.W.O.T Analysis Strengths: Some of Dell's internal strengths that contribute to their success are the ability to act quickly, customize, sell direct, and innovate. Dell has become the master of customization in the technology industry. They are able to give all the power to the consumer, in regards to building a PC, they are essentially a manufacturer for the consumer and will build any PC in the configuration that is requested. Along with customization, directly selling to the consumer is a 2 of 19
Ramirez large aspect of Dell's strength in the computer industry. This direct selling has also assisted in Dell growing to be a mammoth force in the industry through their low cost leadership. Another strength that has helped Dell grow to a large company is their ability to act quickly in a rapidly changing industry. Dell is able to implement the latest technology into their product due to the strong relationships it has with its suppliers. Lastly, Dell has internal strength through their ability to innovate. Recently, Dell has introduced new product lines such as printers, cameras, PDA's and more. This innovation is what helps Dell gain a large portion of the market share. Weaknesses: Even though Dell does have strengths that have brought them up from the bowels of the technology industry, they are still prone to weaknesses and faults just as the other firms in the industry are. One weakness is that Dell has no proprietary technology, which means that Dell is basically just like all the other computer building firms in the industry. Dell is not creating something based on technology that is exclusively theirs, but on technology that all the other firms in the industry have as well. This is a weakness because it could allow other firms to come into their territory of low-cost leader and simply mimic their operations. Another weakness that is identified in Dell's operations is their high dependency on component suppliers. This is seen as a weakness because if the supplier does not meet expectations then the operations of a firm will suffer. Although this is one aspect of why Dell has become a low cost leader, it is not necessarily a good aspect because the supplier can always flex some power by negotiating higher prices or holding shipments. Opportunities: One very prosperous opportunity that Dell has is the expanded markets of Europe, China, and India. Because of the large amount of technology that is concentrated in these markets, Dell could use it to gain more market share over its competitors. Although these markets have already been penetrated, Dell could still flourish with its low-cost leadership. Another opportunity for Dell Computer Corporation would be growth in the business, education, and government markets. These markets are growing at an exponential rate and Dell has been able to claim some of this market share. For example, California State University San Marcos exclusively purchases computers on an educational contract that the California State University
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Ramirez System has with Dell Computers. This contract allows CSUSM to purchase on a discounted basis, which may seem as if it is taking profits away from Dell, and maybe so, but Dell is also gaining through in-direct advertising. Thousands of students attend Cal State Universities and many others work at them. The exposure that Dell is getting through these contracts is phenomenal and is only aiding in their growth. Threats: One major threat that Dell has in their external environment is competition. The threat of entry into the low-cost leading segment of the industry is very high. When looking at the basics of what Dell is doing with their operations, it is not something that cannot be mimicked, herein lies the threat. Because it is a basic strategy that many can copy, the threat that another company will do something similar is high, especially after the success that Dell has had. Another threat that Dell faces is overall instability in foreign markets. Because Dell is beginning to penetrate the foreign markets and those markets are becoming a large source of growth, the activities in those foreign countries can present problems for Dell. For example, currency instability as well as political instability in foreign countries could result in negative earnings for a given period, or even worse, it could force Dell out of that market. Lastly, a threat in the home external environment of Dell is the U.S. Government, which could pose tariffs on imports as well as exports. This could drive up the cost of importing raw materials and also exporting the final product to its foreign markets.
Chapter 2
Five Forces Model Industry Definition and Players The personal computer industry is one segment of the general technology industry that is rapidly growing. The industry has many key players, such as the rivals which are other manufacturers of personal computers and peripherals. Compaq, Hewlett Packard, and Gateway would be companies that fall in the rival category. The buyer group in the personal computer industry is a very broad group and encompasses almost every consumer, including other firms. The suppliers of the personal computer industry would not only be the manufacturers of all the hardware that makes up a personal computer, but those that supply packaging material, services,
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Ramirez etc. to Dell would be considered suppliers for the industry. Lastly, the substitutes of the personal computer industry are a very small category that includes typewriters, calculators and also a pen and paper. Although these are substitutes, they don't fulfill all of the needs that a computer does. Threat of Potential Entrants: The overall threat of potential entrants into the computer industry is very high. The product differentiation of the personal computer is very low because many firms can produce a computer that operates and fulfills the same need. This could possibly be viewed as a low to medium level due to the fact that Dell is customizing the personal computer to the consumer's specifications. The capital requirements of the industry are low/medium because there really are not many investments needed in the production of the PC but there may be more of an investment in regards to the distribution and back-end operations of the firm. Although there could be a large investment into the distribution of the product, there is little control over the distribution channels in the industry by those already in it. Distribution is usually done by 3rd party freight companies such as FedEx or UPS. Finally, the cost disadvantage independent of scale in the computer industry is low and therefore increases the risk of entry. Although the aspects above increase the risk of entry there are some elements that reduce the risk. The economies of scale are at a high level because Dell does have increased efficiencies in their production, marketing and distribution operations. In addition, switching costs are going to be high because at Dell a consumer can customize and specify exactly what they want in their PC by paying little or nothing extra. This is impossible or difficult for other computer companies to match and unless the potential entrant is planning to offer the same service, the switching costs will be high. Intensity of Rivalry: In my opinion, the overall intensity of rivalry in the technology industry is fairly low to medium. Because the industry growth rate is high, it causes all firms to win but there are those that win more than others. The medium fixed costs are another reason for the decrease in intensity because there is not a need for high volume in order to increase the spread of costs. The low storage costs also decrease the intensity because there is not a need for the product or raw materials to be used quickly; however, there may be some issues with the obsolescence of some
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Ramirez technology if held onto for too long. Another element that decreases the rivalry is high switching costs of products in the industry. As noted earlier, the product that Dell sells is customized and the product that a competitor sells may not be customized, thus the high switching costs. The last factor is the low exit barriers in the industry, which decreases the rivalry because a firm has relative ease of exiting the industry. On the other hand, the reason why this was noted as low/medium is because of the high number of competitors, equal size of competitors and the high diversity of competitors. The competitors in this industry are not only the manufacturers of the PC but also the resellers of personal computers. Their size is relatively equal and many of them do business in extremely different ways and sell their product in extremely different manners, which increase rivalry. Power of Buyers: The power of buyers in the technology industry is medium. Due to the low percentage of total buyer's cost spent on the industry's input the buyer is relatively price insensitive. Not only are they insensitive to price but there are high switching costs which reduces the power of the buyer as well. Consumers will be more loyal to the brand as well as reluctant to go to another personal computer seller and purchase a product from them. Most consumers are unable to create a personal computer themselves which reduces the threat of backward integration as well as decreases the power of the buyers. In addition, the buyer's knowledge about the industry's cost structure is low, which does not allow them to negotiate the price and makes them more agreeable to a price that is perceived as lower than competitors. All of these factors reduce the power of buyer's; however, there are some other elements that do increase their power. Low product differentiation, low extent of buyer's profit, low cost savings from the industry's products, and low importance of the industry are all the elements that reduce the power of the buyer's and shift the power to the firm. Power of Suppliers: In my opinion the power of suppliers is medium/high. The factors that lead this to be high are the high concentration of suppliers, high switching costs, and high threat of forward integration. The factors that lead this to be medium are the low/medium availability of substitute supplies, high importance of the industry to the supplier and the low differentiation of the
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Ramirez supplier's products/services. Because there is virtually no other industry that the suppliers can supply their motherboard or computer chips to, the importance of the technology industry is very high. Additionally, the low differentiation of the supplier's product reduces the power of suppliers but not by much. In contrast, when there is a high threat of forward integration by the supplier there is more power in the supplier's hands. Because the technology industry is all based on the same `technology', there is virtually nothing stopping a supplier of the industry from trying to create their own firm and compete with those that it was once supplying. Power of Substitutes: The power of substitutes is quite low due to the fact that there really is no substitute to a personal computer. A computer that is used at work could be seen as a stretch for a substitute but other than that there are no substitutes. Some may see laptop computers as a substitute but these are, in reality, a competitor and not a substitute. Overall, I would say that the personal computer industry is a not a very good industry to be involved in. Those players that are in this industry have already established themselves and it is very difficult to overcome the learning curve. The threat of entry by potential entrants is high which would not be an attractive quality of an industry. The suppliers also have a relatively high level of power as do the buyers. These quality's, in my opinion, are the reasons why this industry would not be an appealing industry.
Chapter 3
Four Generic Building Blocks of Competitive Advantage Efficiency: In the computer industry, Dell Computer Corp. is close to, if not already the leader in efficient production and manufacturing. This is evident in their lead over traditional computer manufacturers such as Gateway and Hewlett Packard. With most of the production being done in the United States, Dell also has many other locations under its large umbrella corporation. Dell has operating subsidiaries in over 30 worldwide locations. With the headquarters in Austin, Texas, as well as many manufacturing plants, they primarily house parts instead of whole products ready to ship. This is due to their customization (low-cost leader) strategy. Because
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Ramirez they build-to-order, Dell is primarily efficient in materials management and procurement of supplies, but also the actual production process. Quality: Dell does manage to have a good level of quality in their product as well as boasting an iron-clad guarantee on their products, however, it cannot be said that they have superior quality. This is due to their product not being highly differentiated from the other rivals in the industry. Because a computer whether it is made from Dell, Compaq, HP or another manufacturer, is mainly the same product and operates in the same manner there isn't much value placed on it. The elements that do add value for the consumer are customization and brand recognition. Dell does have a largely brand loyal consumer base and this is what contributes to their high level of quality. People continue to purchase from Dell because it is a widely popular brand as well as past experiences they have had with the products by Dell. The build-to-order aspect of Dells production process is the other element that attributes to Dells high quality. Consumers are able to place more value on the product because they specifically designed it and had it custom made. Innovation: Dell Computer Corporation has built its success on being the most innovative manufacturer in its industry. Recently, Dell had introduced new product lines that include printers, televisions, PowerConnect switches, and PowerEdge servers. The PowerConnect switches connect computers to a server in small to medium sized businesses and allow more efficient ways of doing business. The introduction of PowerEdge servers gave companies, large or small, the opportunity to streamline the critical business functions. With their ongoing process of research and development they are able to create new ways of fulfilling the customer's needs and in the process, continue growth in market share. Customer Responsiveness: Dell has backed all of their products with 24 hour, award-winning customer service, which has led to a great market share. However, because of their rapid growth some say that their customer service needs a little fine tuning. In an article posted on news.com it states, "Although Dell still topped rivals HP and IBM in the TBR survey, its score was the lowest seen
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Ramirez since the research firm began tracking Dell's satisfaction levels in the first quarter of 2001." Overall Dell has been successful in providing the best service to their consumers and even though there are reports that show their service levels are declining, they are still at the top of their game. They could use some improving in certain areas but I believe that their customer responsiveness is very high and not just because of their service efforts. Dell's ability to absorb suggestions and information from the consumer translates into high customer responsiveness. They are able to change their product lines with the changing demand in the computer industry.
Chapter 5
Advantages and Disadvantages of Low Cost Leadership Advantages: One major advantage to adopting a low cost leadership strategy is the fact that the firm will be protected by the competitors of the industry. This is due to the fact that many competitors, as well as potential entrants, will not be able to compete with the low cost leader. Because a low cost leader has already established itself within an industry and are already operating at a cost advantage, a new entrant will not be able to enter the industry at the same cost advantage even if they do adopt a low cost leader strategy. Another advantage that the low cost leader has is the increase in bargaining power over suppliers as well as the ability to change with the fluctuations of the industry. Because the computer industry is highly volatile and always changing, the low cost leader will be less impacted by the changes in input price by powerful suppliers or a decrease in unit cost if there are powerful buyers. Dell is a prime example of just how effective a cost leadership approach can be. Dell has shown that they are able to shift with the changes in the industry without a major impact on their sales. Dell has also eliminated many new entrants to the computer industry as competitors simply because they are unable to match their costs or prices. Disadvantages: The primary disadvantage of the low cost leadership approach is the competition utilizing technological change to catch up to the low cost leader. Competitors can use a change in technology to bypass experience curve economies of scale and implement low cost technologies that allow a cost advantage and even out doing the cost leader. Another disadvantage to the low
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Ramirez cost leadership strategy is the ability to imitate the cost leader's methods easily. This threat comes from the competitors taking apart the product of their rivals in order to imitate their manufacturing techniques. Although these disadvantages are valid points of concern, they do not necessarily affect Dell Computer Corp. Because Dell is in the computer industry, technology is rapidly changing and firms need to stay on top of the latest trends for their industry. Dell would not fall prey to this type of weakness because in order to maintain the low cost leadership, they are required to follow trends and in some cases lead them. The second disadvantage to the low cost leadership strategy is another that would not severely impact Dell Computer Corp. Computers are becoming a commodity item that is highly standardized with the exception of software and any additional customized parts. Even if a competitor was to take apart one of Dell's computers they would not find anything different from other manufacturer's computers. Therefore, these disadvantages are not necessarily a big threat to Dell, but should be considered, nonetheless.
Chapter 6
Industry Environment Dell Computer Corporation is operating in the Technology industry, which is currently in the mature stage. Dell has developed its competitive advantage through mass customization, which is the firm's distinctive competency that has led to their success. Dell has not only made a huge success from being able to customize its product according to the needs and wants of the customer but also has been able to sustain an equilibrium within the five forces of the industry. Another reason why Dell has been able to maintain their competitive advantage is due to the fact that they are able to maintain their resources efficiently. Dell does not operate in retail stores or through other computer retail outlets. They do not have the added expense of maintaining outlets or holding inventory for days. Dell is able to reduce through costs their limited number of manufacturing plants, importing products from around the world, as well as maintaining one distribution channel through which most of their sales are processed; the Internet. Dell is also able to build up their capabilities where they are strong, such as utilizing the Internet to the fullest extent. Dell not only offers an e-commerce site but also customer service is available online as well as over the phone.
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Ramirez A strategy that may prove to be effective for Dell in the future is a focused low cost leadership. Dell would be able to implement this strategy for its lines of high end computers, which could be targeted towards professional users who require better graphics capabilities and other resources from a computer. If Dell implemented a focus low cost leadership strategy, it would be able to compete with Apple computers. Apple is geared more towards the professional market that requires more media production oriented computers and if Dell were to implement a focus strategy for this market, they would unstoppable. As for a strategy for suppliers, Dell has been successful with the strong relationship building it has done in the past. Dell does not need to change anything about the way they do business with their suppliers. It is my opinion that Dell will be able to continue their competitive advantage well into the future as long as they maintain their innovation and consumer customization. Dell has not only proved to be a strong adversary for many of the PC manufacturers but has also proved to be able to sustain in an industry that is highly competitive and volatile. Because Dell's success has been mostly due to their ability to create a product that their consumers have specified, as long as they continue on the same track and are able to innovate new product lines where the same theme is continued their competitive advantage will only grow as the years pass by.
Chapter 7
Technological Paradigm Shift Within the personal computer industry, the dominant technology would be considered the windows operating system, computer chips and the remainder of the hardware that is installed in a computer. Within this industry, there are many technical standards that are very important to the production and sale of personal computers. From the standard layout of a keyboard to the standard design of a computer chip, these all have a possible impact on the production of a computer. Within the personal computer industry, the main consumers that are purchasing computers are now the late majority of the consumer market. Because personal computers have now been around for years and they are becoming more user-friendly and easy to adapt to everyday life, the late majority of the market are beginning to purchase these products. One issue that the firms in this industry may have to deal with as a result of the late majority entering the market is the growing popularity of digital media being used for a variety of reasons. People
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Ramirez will begin to demand more capabilities from the digital media peripherals as well as the capabilities of their computers to adapt to the media. Firms may need to innovate new products in order to keep the consumers happy, not just for the late majority since they will be buying the older models of equipment, but for the early adopters and innovators. Another issue that established firms will have to deal with in the future is the new technology that is now being created to make computers smaller, faster, and more durable. In the personal computer industry, there are many designs that dominant different aspects of a personal computer. For instance, there is one design that most keyboards adhere to and this dominates the industry. Also, there is one main operating system that about 95% of personal computers adhere to which is Microsoft Windows. In addition, there are many other dominant designs within the hardware of the personal computer that many manufacturers maintain in their production. These dominant designs diffused rapidly through the personal computer industry due to a strong supportive network of software that secured these designs. For example, Microsoft and Apple had both created operating systems for personal computer's that were extremely different from each other and software was not compatible for both types. Because of a number of supporting software in favor of Microsoft Windows, many manufacturers implemented this design as the standard for the industry. Apple had been locked out of the market after losing the format wars to Microsoft. In conclusion, I do not believe that the personal computer industry is threatened by a technological paradigm shift. Because this industry, as well as the high-technology industry, is so volatile and ever-changing, it has created firms that are able to change with it. For example, Dell, Gateway, Hewlett Packard, and other manufacturers are able to utilize the latest technology in computer hardware with little or no change to their production process and supporting production lines. These firms have been able to fluctuate with the technology that is constantly innovated within the industry. Because of this, one could say that there is a continuous paradigm shift occurring in the personal computer industry, but there does not appear to be a major revolution of established technology.
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Chapter 8
Global Strategy Dell Computer Corporation operates in more than ten different countries which allow the firm to realize location economies in manufacturing their personal computer systems. Like many manufacturing firms, Dell has gone abroad to utilize cheaper labor in other parts of the world to create their products, with plants in Ireland, China and other overseas locations, they are taking advantage of different workforces and different benefits to operating in other countries. Dell has built an empire based on one simple rule, customization, because of this their strategy is the same in all parts of the world that they sell in. Dell does not change their marketing strategy for each country that they sell in. This is partly due to the fact that it cuts costs to have one global strategy in marketing, but also due to the fact that their message transcends borders and means the same in all locations. In addition to utilizing the same marketing plan in all countries, it also sells the same product in all countries, a customized personal computer. Because the product that Dell sells is customized to fulfill customer needs and wants they don't have to change what they produce in different parts of the world that they operate in. The basic strategy that Dell uses in its home country, low cost leadership, is the same it uses in all other parts that it operates. This has proven effective in the United States; however, it may not be the best strategy for the global market. In the global market there are many more competitors that you have to compete with who may be a smaller operation and have a more desirable price. Because of this, Dell should consider changing their strategy for the global market to a focused low cost leadership. This type of strategy may signal to global consumers that their product is affordable while catering to a specific target market and while here in the U.S. they are targeting all computer owners, globally they are only targeting specific computer owners.
Chapter 9
Corporate Strategy Dell Computer Corporation has become an enormous entity in the personal computer industry and surprisingly enough, they have not pursued any horizontal integration strategies. Because the personal computer industry is so volatile and changes all the time due to changing technology it is typical for companies to purchase each other to gain a bigger advantage against common competitors. Although horizontal integration isn't part of Dell's corporate strategy, 13 of 19
Ramirez vertical integration is. Dell has built their success on their ability to bypass the retail distribution outlet and sell directly to customers. They even went as far as creating a Direct Model that showcases how Dell achieves direct access to the customer and what they do with the interaction they have. This is the extent to Dell's vertical integration; however, they do manufacture some of their parts as opposed to having them made by a third party. These parts are manufactured worldwide in places such as the U.S., Brazil, Ireland, and China. Because Dell is a low-cost leader and has a distinctive competency in distribution methods, it would not be a good idea to vertically integrate in any other aspect of the value chain. Although the operations of a firm should constantly change to become better and gain more advantage over competitors, vertical integration is not necessarily the route that Dell should take. For example, if Dell were to vertically integrate into producing computer chips instead of purchasing them from Intel, it would create major costs and require expertise in areas that they may not possess. In the quest to become the best and be the most successful, Dell has created other ways to restructure their operations, such as outsourcing customer service jobs. In their efforts to cut costs and utilize resources in other parts of the world, Dell lost the ability to offer the service that was expected. In an article printed in Computerworld it states, "They complained about rigid, "by the book" technicians who wasted their time wading through fixes already tried. They ran into problems with bad phone connections, strongly accented English that was hard to understand, and just plain incompetence." This is why Dell decided to pull their offshore call center and bring the technical support/customer service back to the U.S. Dell was attempting to transform their operations by sending jobs to India, however, it backfired and they were forced to bring the jobs back.
Chapter 10
Diversification Strategy Dell Computer Corporation is constantly reinventing itself, as it is definitely needed in within the personal computer industry. This reinvention is done through new product lines, new services, as well as other different ways of running a rapidly growing company. One such example of Dell diversifying into a new business area is their venture into producing printers for their personal computers. For years, Dell had only focused its efforts on producing customized personal computers and slashing their production costs by implementing a just-in-time type 14 of 19
Ramirez production management. The line of printers that Dell created was introduced in 2003 and was an immediate success. In the last three quarters of 2003 Dell was able to sell 1.5 million worth of printers as well as snatching 3% of the market share in inkjet printers. The rationale for entering into this new business area was pretty logical for Dell; it was the next step in their evolution. Since Dell had proved worthy within the personal computer industry and basically dominated the market by providing excellent service as well as quality products, there was only one way to grow...produce peripherals for their personal computers. It was safe to assume that Dell would be successful in their printers but there was still some hesitation due to customer loyalty to other brands. In an article printed in Business Week it states,
"No matter that he can only buy replacement ink cartridges online or over the phone since Dell doesn't sell through retail stores. He says it's less hassle than refilling his old Hewlett-Packard printer, thanks to built-in software that detects when he's running low and automatically directs him to the right cartridge on Dell's Web site. Dell even ships the $29.95 part to him for free. `It's like gas in the car, I don't wait until I run out.'"
Although many people may have been comfortable with the brand that they currently own and may think it suspect to purchase a Dell printer, there are some benefits and advantages to owning a Dell printer. The basic strategy that was used by Dell to sell their line of printers was a wide differentiation strategy. This is due to their ability to make their printers unique from all other printers in the market by creating its own software and developing them to use only Dell ink cartridges. Although Dell is marketing the printers as a unique and different product, they are marketing to all personal computer owners and not just the owners of a Dell computer. This could be seen as a negative aspect of the printers and could be compared to an Apple-like strategy in the sense that they are separating themselves by not making their ink cartridges available in stores; however, this strategy will work as the majority of Dell customers as well as personal compute...