CASE DISCUSSION NOTES STRATEGY 2014

Name:
Eunice Chua Huimin
NRIC/FIN: S9236018J
Group:
12
Case:
4
Evaluation:
Point Range
Issues

Below Standard
0-4

Meets Standard
57

Exceeds Standard
8-10

Does not recognize a problem or

mentions problems that are not
based on facts of the case.

Recognizes one or more key

problems in the case.

Recognizes multiple problems in

the case. Indicates some issues are
more important than others and
explains why.

Knowledge

Simply repeats facts listed in case

and does not discuss the relevance
of these facts.

Considers facts from the case and

cites related knowledge from
theoretical or empirical research.

Discusses facts of the case in

relation to empirical and
theoretical research and add
knowledge from personal
experience.

Analysis

Does not attempt to draw

meanings from facts presented in
the case, or uncritically accepts
opinions as facts.

Uses tools, approaches, or

methods as necessary to combine
facts or derive meanings from facts
in order to reach conclusions about
potential courses of action.

Provides thorough and

sometimes insightful analysis of
facts presented in the case, using
multiple methods or tools to reach
conclusions about potential
courses of action.

Alternatives

No alternative courses of
action considered.

Discusses alternative courses

of action that reasonably might be
taken.

Provides thorough
consideration of multiple
alternative courses of actions,
identifying strengths and
weaknesses of each.

Actions &
Consequen
ces

No action proposed or proposes

infeasible action(s). No positive
and negative consequences are
identified.

Reasonable action(s) proposed.

Positive and negative
consequences for each action are
discussed.

Proposed actions seem to deal

with the most important issues.
Consequences are tied to the
issues deemed most important.

Feedback:
Try to improve identifying the right theory to address the question.
Try to improve identifying the right facts from the case.
Try to improve linking the theory with the facts.
Try to refine your arguments or provide more detail.
Try to improve your writing.
Other:

Question 1: How and why did the personal computer industry come to have such low
average profitability?
The personal computer (PC) was an innovation that revolutionize how people work, spiking a
huge global demand where every household was a customer. The innovations of e-mail and
the Internet also further stimulated the global demand. This made the PC industry seem very
attractive, luring new entrants into the PC manufacturing market.
To efficiently manufacture PC, the manufacturer would only be required to set up a basic
assembly line that cost roughly a million dollars. Furthermore, there were Asian contract
manufacturers readily available. The attractive PC industry coupled with low barrier to entry
of low capital requirement and accessible contract manufacturers, led to continuous entries of
new PC manufacturers, resulting in a very saturated market.
PCs in the market lack product differentiation as a large majority of the market players were
Wintel and a minority player, Apple. Wintel PCs all conformed to the IBM standard
which uses the same Intel microprocessor and Windows operating system. Both the
microprocessor and operating system were critical components of the PC.
Since Wintel PCs were essentially the same, with no key proprietary differences, PC
manufacturers could only engage low cost leadership as its business level strategies. However
industry suppliers held high bargaining power. Microprocessors were supplied by a few large
companies but was largely monopolised by Intel and Intel sells its microprocessors to all
manufacturers at the same price. Microsoft was the only supplier of the Windows operating
system which manufacturers pay a fee to install into their PC. Manufacturers had no
competitive advantage in its supply costs.
To gain a competitive advantage, manufacturers need to achieve optimal logistics and
operations management.
From the supplies end, manufacturers face the high risk of stock obsolescence as
microprocessors tend to have short product lives as Intel continuously innovates to push out
new microprocessors. This translates into high depreciation and write-downs of its stock of
PCs installed with old microprocessors.

On the distribution side, customers include retailers, distributors, resellers and the direct
consumer. Most PC manufacturers largely distribute its products indirectly to consumers and
indirect channels held high bargaining power as manufacturers would provide inventory buybacks and price protection. The high rate of stock obsolescence and falling PC prices led to
frequent and high costs of reimbursement to indirect channels, resulting in thinner profit
margins. Furthermore, manufacturers who tried to expand its direct sales to lower cost of
selling faced high channel resistance and eventually the threat of backward integration from
some of its resellers.
Despite the increasing global demand for PCs and the relatively high prices initially, PC
industry came to have such low average profitability as prices for PC plunged due to the
following reasons: The oversupply due to continuous entry of new manufacturers as barrier to
entry was low; the eruption of price war as there was a need to pursue low cost leadership due
to the lack of product differentiation; the lack of competitive advantage as suppliers held high
bargaining power due to suppliers monopolies and standard pricing; and the thin margins due
to high cost of stock obsolescence and high cost of selling as indirect buyers held high
bargaining power.

Question 2: Why has Dell been so successful despite the low average profitability in the
PC industry?
While PC manufacturers strive to establish low cost leadership in the low average
profitability PC industry, Dell succeeded in carving a sustainable competitive advantage
through its integrated cost leadership/differentiation strategy, using the Direct Model.
Unlike its well established competitors, Dell only sold to direct customers since
incorporation. This gave Dell a competitive advantage as the inherent risk of stock
obsolescence associated with rapid technological advancement led to high selling costs of
buybacks and price protection, which thinned margins for competitors who sold indirectly
through distributors and resellers. Dell history of direct sales reduced the cost of using
distributors and retailers as it protected Dell from the channel resistance and the inertia to
drop indirect sales channels that its competitors face as they tried to expand into the more
profitable direct sales channel.
The Direct Model features a just-in-time production which allows Dell to have high
inventory turnover. This reduced Dells exposure to the inherent risk of stock obsolescence
and the cost to write-down and dispose of inventory which was a key cause for its
competitors low profitability. Dell did not suffer from wastage costs as it only buys the
supplies it requires with no buffer inventory.
The Direct Model was a sustainable competitive advantage for Dell as it enables Dell to
meet customers need for low price and customised PC features. The Direct Model consists
of 4 components: investment and maintenance of customer relationship, supplier contracts,
shipping contracts and creating synergy with its suppliers and third-party shippers.

Having direct access to its customers, Dell was able to receive information about its
customers needs and is able to profile them into Relationship and Transaction buyers
and further categorise them into subdivisions. To facilitate customer interactions, Dell
invested in teams of sales rep, hotlines and websites specifically for each customer
profile so that it could understand each customers specific needs and provide the
relevant information.

Dell invested in a vendor management system that allows vendors to access real time
inventory information to optimise inventory management. By working closely with its
suppliers, Dell created a system that allocates resources efficiently and creates a cost
advantage over its competitors as it eliminates inventory holding costs.

Dell also actively maintained its shipping contracts with third-party shippers and
created a three-party synergy as suppliers were encouraged to co-locate their facilities
to Dells manufacturing plants. This allows efficient resource allocation as shippers
could easily pick up goods from both Dell and its suppliers and ship it directly to the
customer. This eliminates redundant shipping and storage costs of suppliers goods to
Dells warehouse. It also shortens the production process to 1.5 days which is below
the industry average of a few weeks. This also allows Dell to accept emergency large
orders and fulfil them quickly.

Other than its Direct Model for its production process, Dell also provided reliable and
accessible after sales support. Dell invested in a customer support information website, a 24
hour hotline and a diagnostic software that allows support specialists to solve customers
problems over the phone. Remarkable service was provided for problems requiring on-site
visits. Diagnostic reports were also used to identify any areas of defect and areas for
continuous improvement.
Dell success was also due to its effective capital management that has experienced senior
management to closely monitor and manage the days of inventories, payables and receivables
to be better than industry average. Senior management also strategically monitored and
reviewed margins, selling price and overheads were optimised. The result was a 186% return
on invested capital.
Dells commitment to provide good customer service in both its sales and after sales service
was what differentiated Dell from its competitor and its efficient manufacturing process and
capital management gave Dell a cost advantage over its competitor in this low profitability
industry.