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Dell Inc.

In
2008
Can it overtake Hewlett-
Packard as the worldwide
leader in personal computers ?
1. What is your evaluation of Michael Dell’s performance in his roles as Dell’s CEO and
Chairman? How well has he performed the five tasks of crafting and executing strategy
that were discussed in Chapter 2?

➢ Michael Dell’s performance in his roles as Dell’s CEO and Chairman


Michael Dell started his first stamp-trading business at the age of 12, which marks the beginning
of his career as one of the most respected executive in the PC industry. Indeed, in 1984 and at only
19 years old, he invested $1,000 and founded Dell Computer. His company soon became unavoidable
and Michael Dell was given by 1992 the title of the youngest CEO ever to head a Fortune 500
company (27 years old).
Combining technical knowledge and marketing know-how, he brought to the industry a brand
new vision of management, which opened the doors to new competitive strategies. As a CEO, he also
focused on his image and worked hard to overcome his shyness and control his ego. Thus he became
a real source of inspiration, especially for his employees. Well delegating and very risk taking, he
really involved them in the company, motivated them and trusted them, like when he transferred his
tittle of CEO to Kevin Rollins.
However, focused on his goals (“all businesses should make money; if you can’t figure out how
to make money in that business, you shouldn’t be in that business”), Michael Dell didn’t hesitate to
take important decisions such as withdrawing from his new-shared leadership structure and taking
back his CEO title when he judged Rollins performances as bad.
Michael Dell appears to have developed and earned all the qualities required to be a real and
effective leader. He has played a key role in his company’s growth and without his involvement Dell
Inc. would never have been able to compete against the biggest companies or to become so quickly
the leader of the US market.

➢ Five tasks of crafting and executing strategy


1. Developing a strategic vision, a mission, and a set of values
From the very beginning, Michael Dell had an ambitious vision of the future. He wanted his company
to reach the top as soon as possible following his own approach to the PC business. He wanted his
company to seize on the opportunity to use its considerable resources and capabilities in making low-
cost PCs. This low-cost strategy became the direction of the company, which he kept and is still
keeping.
2. Setting objectives for measuring performance and progress
Michael Dell's main objectives were to satisfy the customers by keeping the lower price in the market,
to be profitable, and to make enough profits to give his company a substantial cost and profit margin
advantage over rival PC vendors.
3. Crafting a strategy to achieve those objectives
Focused on his goals, Michael Dell never hesitated to abandon a strategy that would have proven to
be unprofitable. That’s why in 1990-1993, after trying to sell PCs to retailers, Dell refocused on direct
sales. Indeed, with its efficient supply chain, Dell’s best approach to the PC business remained its
initial sell-direct and built-to-order strategy, which helped reduce costs and risks.
4. Implementing and executing the chosen strategy efficiently and effectively
The goal being to lower the price of its products, or at least not to increase it, Dell had to find attractive
ways to increase his company’s profits. Besides strategic acquisitions and alliances – with EMC for
example (leader in data storage), the company incorporated e-commerce technologies and used the
Internet to expand its offering. Also, Dell opened itself to other categories of products and began to
market and sell printers, TVs, scanners, cameras, etc. which helped target additional markets.
5. Monitoring strategic developments, evaluating execution, and making adjustments in the
vision and mission, objectives, strategy, or execution as necessary
Dell's early adoption of the newest technologies has allowed the company to be fully aware of the
profitability of each piece of hardware it sold and helped predict future trends in consumer demand.
Besides, it also allows the company to react quickly in case of bad results and to adjust its strategy.
2. What are the elements of Dell’s strategy? Which one of the five generic competitive
strategies is Dell employing? How well do the different pieces of Dell’s strategy fit
together? In what ways is Dell’s strategy evolving?
The strategy of a company is about setting an action plan regarding its present situation and all
the goals it wants to reached. It is important for a company to do a strategy in order to improve its
financial performance, strengthen its competitive position and also be sustainable competitively.

➢ The element of Dell’s strategy


Since its creation, DELL has for objective to lower the costs of its product in order to have the
lower cost compared to its competitors. For example, DELL’s CEO has always thought about the
supply chain of its company in order to reduce the cost. Indeed, the strategy of DELL corporation
was to sell directly to its final customers (professional and individual) in order to eliminate the retail
markup. In this way, DELL was capable to sell PCs at 40% less of the price of IBM PCs. This strategy
allowed DELL to have rapid revenue growth. At first, DELL was able to distribute its product directly
to its customers. Moreover, DELL has also a just in time inventory model and a build-to-order
strategy.
However, in some countries the sell-direct-to-customers strategy couldn’t work. Indeed, in China
for example, people needed to touch, see and test the products before buying them and this
phenomenon was the same in other countries. As DELL noticed that it lost sales, it has developed
kiosks in leading electronics stores. In 2005, DELL ended by having 145 DELL direct store kiosks
in 20 states in the USA which represent 50% of the US population. DELL didn’t stop its expansion
here. In 2006, DELL sales has suffered a lot because of the competition (Hewlett-Parckard’s took
some market share to DELL and Apple started to be famous on the computer market). This is mainly
due to the fact that DELL refused to create partnership with retailers. In fact, while its competitors
were selling in every distribution channel, DELL was still reluctant to distribute its products in some
distribution channel. In this way, DELL lost sales and market share. To correct this, DELL has
reduced its direct sales and it has developed more partnership with retailers such as Walmart, Staples
and Best Buy. DELL has made partnership with the biggest retailers in each continent.
DELL also developed long-term relationship strategy with its suppliers. These partnerships
allowed a complete trust in both side. Having a long term partnership with reputable suppliers allowed
the company to have components with high quality. Moreover, having a long-term partnership insure
DELL of having a certain volume of components even when there is a lack on the market. So, DELL
will never be running out of components. Finally, having long-term partnership allows the company
to develop its products by making its suppliers participate to the creation of new product. Suppliers
can bring new ideas or solutions thanks to their knowledge about the components they can have or
create.
DELL has also a high customer service and high technical support strategy. DELL has developed
a new way to repair its computer by developing partnership with local service providers and offer a
buying contracts for on-site repair services for a defined period. In 2006, customer problems could
have been resolved through internet and with their computer. In 2008, the customer satisfaction
ratings were at 92% in Asia, 90% in Europe, Middle East and Africa region and 80% in America.
DELL has developed a diversification strategy. In fact, it has diversified itself in different market
such as data storage hardware market, switches, handhelds PCs, printers and printer cartridges.
Thanks to this strategy the firm is less vulnerable and less dependent to one and unique market and
has much more growth resources.
DELL also follow a custom-built product strategy. Indeed, the computers that DELL sells can be
customized in function of the customer desired. Thanks to this strategy, DELL can catch the customer
needs and DELL produce something that its competitors don’t.
➢ Which one of the five generic competitive strategies is DELL employing?
DELL has built its competitive advantage by developing the best-cost provider strategy which
gives customers more value for the money by offering upscale product attributes at a lower cost than
rivals. Thanks to all the elements of its strategy, DELL has been able to make the difference by
offering to its customers high quality product at a lower price. Except the high quality of its product
DELL also offer to its customers an efficient customer service and technical support. In general,
products with low costs don’t really have an after-sales service. But, for DELL products there is.
To conclude, DELL tend to produce the same products as its competitors do, but DELL company
really want its customers to have the best proportion quality/price.

➢ How well do the different pieces of Dell’s strategy fit together?


We know that different pieces of a company fit together when the fit test shows that it can exhibit
dynamic fit with the external and internal aspects of the firm’s overall situation, when the competitive
advantage test shows that it can help the firm achieve a significant and sustainable competitive
advantage and when the performance test shows that it can produce good performance as measure by
the firm’s profitability, financial and competitive strengths and market standing.
In the case of DELL, we can notice that there is a real fit with the internal and external
environment of the firm. Indeed, by having good relationships with it suppliers DELL (external
environment) is able to provide products with high quality components and with a lower price than
its competitors. DELL also cares about its customers and this can be noticed thanks to the custom-
built product strategy that DELL have developed. This shows to customers that it wants to create
product that really correspond to their need and what they really want. In order to understand its
customer better and to create what they need, DELL has launched in 2007 a website called
“IdeaStorm”. In this website, customers are able to post their idea and their proposition about DELL’s
product. In April 2008, customers had posted more than 8,900 ideas and 45 of them were
implemented.
Thanks to all the element of its strategy, DELL has been able to be competitive through the years.
Some of DELL’s competitors have tried to copy its model but never succeed in doing it because of
its complexity. Many times, DELL was considered as the as one of the best producer of computers
or electronic devices.
In the first quarter of 2008, DELL has been ranked as the second company to have the biggest
worldwide unit sales and market shares in the PC market (exhibit 12).
In this way, we can say that the different pieces of DELL’s strategy fit very well together. It
happens that sometimes the different pieces don’t work. However, DELL has always been reactive
and it knows to react rapidly.

➢ In what ways is Dell’s strategy evolving?


The company has changed its strategy a lot since its creation. At first, DELL was really attached
to the fact that it has to sell directly to the final customers (individual and professional) but when the
percentage of sales dropped, DELL changed its strategy and has developed kioks in leading electronic
stores. It is the same with the fact that DELL refused to make partnership with retailers. Finally,
DELL ended by creating a lot of partnership with the biggest retailers in each part of the world. This
is mainly due to the fact that at that time, the computer market was so developed that computers were
democratized. In this way, households were able to acquire them so, company needed to be where
individuals were. So the strategy of DELL needed to adapt to the changing market conditions.
The company has also developed new initiatives. Indeed, DELL has developed itself in new
markets such as data storage hardware market, switches, handhelds PCs, printers and printer
cartridges. These new initiatives have allowed DELL to diversify it source of revenue. The fact of
entering in new markets was really risky because DELL was specialized in computers and not in data
storage hardware or switches. But thanks to its performant R&D department, DELL has been able to
produce performant products even if it was not it specialization at first. Moreover, DELL had an
advantage compared to its customer is that DELL was well known by people in general and DELL
was really appreciated for the high quality of its products. So, when DELL entered in new markets,
people already knew the brand and they knew that they could trust in its products.
3. Does Dell’s expansion into other IT products and services make good strategic sense?
Why or why not?
Dells’s expansion into IT products and services seems obvious. Dell was the number one in the
US on the desktops and notebooks markets and had a good name. The problem is that when you are
number one in a market your perspectives in it are limited. Indeed, the expansion of Dell in 1995 was
a necessity and servers were an opportunity. For Dell it was quite logical that customers who already
trust its computers will trust its servers. And it worked. Indeed, competitors such as Hewlett-Packards
(HP) had underestimated the importance of the value, the power of the relationship and the service
of Dell. Then, Dell develops the PowerVault which is a line of storage products. The mains
competitors in this sector are Hewlett-Packard and IBM. The strategy of Dell is to use standardized
technology and components in order to underprice rivals and drive down storage costs for its
customers by 50%.
When Dell entries into the printer market in 2003, some observers saw it as an offensive to
unsettle HP’s position in this market. Indeed, the printer market stands for the most profitable segment
for HP and Dell management thought that HP used the printer market to subsidize charging lower
prices on its computers. Even if HP’s computers are still 8 percent more expensive than Dell’s. But
Michael Dell explained the only aim is to provide good products with low price for customers.
Nevertheless, the fact that the printer market was a success for Dell added competitive pressure on
Hewlett-Packard.
Finally, Dell’s expansion into other IT products and services make good strategic sense because
all the IT products it has developed were products that HP or IBM producted too. Dell’s strategy is
to do what its competitors do but cheaper. It makes sense but on the longer-term it may be difficult
for Dell to keep its position.

4. Is Dell’s strategy working? What is your assessment of the financial performance that
Dell’s strategy has delivered during fiscal years 2000-2008? Use the financial ratios
presented in the Appendix of the text (pages 240-241) as a basis for doing your
calculations and drawing conclusions about Dell’s performance.
In the case, we are given financial data concerning the 2000-2008 period. Among these given
information, we’ll use the Gross Profit Margin, the Operating Profit Margin, the Earnings per
Common Share; and we’ll calculate the Return on Stockholder’s Equity and the Long-Term Debt-to-
Equity Ratio.

Gross profit margin:


We can see that since 2000, Dell’s GPM is quite stable as it doesn’t drastically increase or
decrease from one year to another. Even though 19.1% isn’t Dell’s best result, the trend isn’t
downward anymore, which is very encouraging. Anyways if we focus on the whole period, these
figures show that Dell is still very competitive and that the profitability of its business is still as good
in 2008 as in 2000.

Operating profit margin (return on sales):


We can see that Dell has struggled and failed to keep its OPM as high as in 2000. Indeed the
balance sheet shows that it has declined and has lost 3.4% in 8 years. The trend is clearly downward
and these figures are not good for Dell. However they can be explained by the declining price of PCs
during this period.

Return on stockholder’s equity:


The results show a low rate before 2004 (<30%) that increasingly grew reaching a peak of 89%
in 2006, and remained high until the end of the 2008 exercise (78.9%). Considering that return in the
12-15% range is “average”, we must admit that the return stakeholders are earning on their investment
is extremely high, which is very attractive for other potential stakeholders. Moreover this very
impressive increase proves that the company has used the monetary capital invested in its operations
and the returns to those investments very effectively.

Long-term debt-to-equity ratio:

For the 2000-2008 period, the rate remained quite low except maybe in 2006, which is a very
good thing for Dell and proves the success of its strategy. Indeed, a low ratio indicates greater capacity
to borrow additional funds if needed. Besides, these very low ratios have a very good effect on the
creditworthiness and the balance sheet strength of the company

CONCLUSION:
Through this analysis we can say that, even if there are some margin decreases, Dell’s strategy
is still effective and still helps earning a lot of money every year. There was no remarkable increase
in profit during the 2000-2008 period, but the costs have been successfully controlled during the
whole period and there was no remarkable decrease either.

5. What does a SWOT analysis reveal about the attractiveness of Dell’s situation in 2008?

STRENGTHS WEAKNESSES
-M Dell: one of the most respected executives -Directs sales don’t touch small business
-Direct sales to customers reduce costs because it customers and individual consumers
eliminates the markups of resellers.
-The lowest-cost producer thanks to a highly
efficient supply chain and manufacturing
organization + advantage thanks to its long-term
partnerships with reputable suppliers. The
relationship is based on trust since it has been a
long time they work together.
-Its cost-saving assembly innovations
(implemented worldwide)
-Allowing customers to purchase custom-built
products and custom-tailored services
-Close partnerships with retailers + only with
biggest retailers in each part of the world
(Walmart)
-Use standardized technologies in all product
offerings
-Its quality certification program
-Shortened the time to get new generations of its
computer models
-Web site strategy (more than 50% of its sales
were web-enabled in 2005)
-Marketing focus
OPPORTUNITIES THREATS
-Dell’s competitors have underestimated the -Its competitors (HP, Apple, Acer, Toshiba,
importance of value Gateway, and Lenovo/IBM)
-Growing demand for information technology -HP’s aggressive and successful efforts (lower
products and services in emerging markets around pricing and better feature sets)
the world (Brazil, Russia, China, India…) -Surging US sales of Apple’s PC models
-Consumer expectations changed in 2008 (wanted: -Rivals started adopting DELL’s strategy (direct
instantaneous access to content, low tolerance for sales)
complexity) -Acquisition of Compaq by HP (HP will gain
-The number of PCs shipped is still growing more market share by having an ally)
(according to exhibit 8) -Compaq is doing what DELL does
-HP lost ground to DELL in PCs and low-priced
servers (in 2008)

6. Which company is competitively stronger—Dell or Hewlett-Packard? Use the weighted


competitive strength assessment methodology shown in Table 4.2 of Chapter 4 to
support your answer.

DELL HP
TANGIBLE
RESOURCES
Physical -Low-cost structure = costs saving = -Next-generation data centre
resources lower prices
-Kiosks store
-Call centre
-25 customers service centre worldwide
in 2008
Financial -Total net revenues 2008 : 61,133 -Total net revenues 2007: 102 614
resources Millions Billions
-Operating income 3, 440 Millions -Operating income 2007: 10 410
-2007: 2 billion to make series of Billions (combined result for HH et
acquisitions that give it an altogether Compact Computer)
new value-added capacity -2007: 7 billion to acquire more than a
dozen of software, technology and
service company
Technological -Assembly efficiency: “cell -The world’s biggest and most diverse
asset manufacturing” → assembled an entire network of distribution partner
PC according to customers
specifications (120 Units per hour)
-Web site

Organizational -Highly efficient supply chain and -“go to market” model


resources manufacturing organization -Company’s supply chain and internal
-More of 10 factories cost structure was scrutinized to reduce
-“build-to-order” strategy costs.
INTANGIBLE
RESOURCES
Human assets -Michael dell: ideas -Mark Hurd (CEO)
and intellectual -Lee walkers: Dell’s mentor -Direct sales force
capital -Dell’s quality control program -Important IT service business
-Dell’s sales and support personnel
Brand -Obj : become the global market leader -Good value for money
in the global PC industry -Until 2010 it was the informatics
-Reliability, robustness world leader
-Dell PCs are among the best and most
popular gaming systems in the industry.
External -Partnerships with direct retailers like -Retailers have their own physical or
relationships Walmart, Staples, Tesco, Carrefour, internet stores
Gome (China) -Contract manufactured
Company Top culture attributes that drive the The «HP Way»: Mutual trust, sincerity,
culture and company's success include: customers, openness, teamwork and commitment
incentive wining together, innovation, results, to quality, innovation and flexibility
system integrity

“Both of brands are competitively strong. Each of one are in the top position in the market. It
seems that HP and Dell have advantages. Even though strategic model is different, a real competition
exist between them. In fact, Dell has a build-to-order strategy and HP a go-to-market model.
Dell’s competitiveness is stronger on PC’s and servers. Furthermore, Dell offers more customization
than HP and has an excellent worldwide customer service. This aspect is really appreciating by Dell’s
customers.
However, HP has a better Brand image than dell. HP breadth of product line is bigger than
Dell and it is an import aspect of competitiveness. The distributor partners of HP are also superior to
Dell. Moreover, the financial result of HP are higher than Dell result as we can see in previous table.
So, it seems that HP steel competitively stronger than Dell, thanks to his important breadth of product
and good cost competitiveness. Even if Dell seems really performant in the PC market, HP is most
powerful. “

7. In what respects, if any, is Hewlett-Packard’s strategy in PCs more appealing or better


than Dell’s strategy?

Dell’s sell-direct and build to order build-to-order business model and strategy had provided the
company with the most efficient procurement, distribution capabilities and manufacturing in PC
industry. Thanks to his model, in 2003, Dell was a global leader in the PC industry. In fact, his costs
was very low in comparison to other companies because he obtains his PCs by buying retailers’
surplus stocks at cost. Dells was able to sell IBM clones 40 percent below the price of their
competitors. The main strategy of Dell is search to decrease cost continuously. Dell dispose of this
own factories and a very efficient web site because of his Direct Sales Strategy.
At the beginning, HP adopted a build-to-stock value chain model. So, HP’s costs was higher than
Dell. To stay competitive, HP had begun outsourcing assembly to contract manufactured and focusing
on marketing and product design. In 2002, HP acquire Compaq Computer but this action was not
very efficient in the PC’s industry. In 2005, Mark Hurd, new HP’s CEO, bringing new managers and
attacking bloated cost. HP’s new strategy in PCs differed from Dell. Indeed, HP didn’t use a Direct
Sales Strategy. HP’s retailers have their own stores. Furthermore, HP’s didn’t have their own factories
and HP’s PC was assembled by contract manufacturers located in various parts of the world. New
supply chain and cost structure permitted to HP become more efficient.
To conclude, the new strategy in PC’s follow by HP since 2005 permitted to the company to
become more competitively than Dell’s model.
8. What issues and problems does Michael Dell need to address?

➢ Michael Dell has to cope with changes in IT uses.


First, we live in a time of explosion of digital information and data. In fact, according to Forrester
Research, the world’s data doubled every three years and probably multiply by six between 2003 and
2010. In this situation the issue of process and save those data raises.
Secondly, Dell has to cope with the rapid expansion of search engine activity, e-mail, text
messages, social networking web sites (Facebook, My Space), blogs, and online video and images;
these fed the store, share, and print the mushrooming volume of digital information and content.
Thirdly, the rapidly growing demand for information technology products and services in
emerging markets around the world (like Brazil, China, India, and some countries in Southeast Asia
and Eastern Europe) where over half of the world’s population resided.

➢ Dell has to cope with more commercial issues.


First, Dell had to adapt its offer to the demand. Facing a breakdown in desktop PCs, Dell had to
offset with the sales of other products categories. Dell tried to avoid a fall in its total revenue by
diversifying its offers. Between 2006 and 2008, Dell faced a breakdown in Desktop PCs sales from
21.6$ to 19.6$ whereas the total sales raised. In fact, sales balanced thanks to the raise in sales of
mobility products, software and, servers and networking hardware, consulting and enhanced services,
and storage products. The declines were driven by Dell’s ability to improve productivity and take
costs out of its value chain, and Dell’s strategy of passing along cost savings to its customers and
trying to deliver more value to customers than its rivals did. Even so, the very small increases in
average revenues per unit between 2006 and 2008 reflected slowing declines in components prices,
a shift in the PC sales mix away from desktops to laptops, and Dell’s more restrained pricing.
Secondly, Dell had to cope with the competition. In 2003, the major competitor of Dell, Hewlett-
Packard, bought Compaq Computer. To face the growing competition, Dell began to diversify its
offers. Indeed, it contracted with Lexmark to make printers and printer and toner cartridges for sale
under Dell label. At the end of 2005 it was concluded as a success because Dell had sold more than
10 million printers and had an estimated 20 percent of the market for color network lasers and color
inkjet printers in the United States.
Thirdly, Dell had to face the problem of satisfaction of its customers. For example, Dell had 25
customer service centers worldwide in 2008. Dell opted to move a large portion of its support services
to countries where labor costs were low. However, there were a sharp rise in customer complaints
especially among small business and individual customers. To solve this problem, service processes
were standardized worldwide.
So Michael Dell faces a serious competition whereas customers demands evolves quickly with
demanding customers in a fast changing world.

9. What actions and strategy changes would you recommend to Michael Dell to boost the
company’s performance and its prospects for overtaking HP in global sales of PCs?

High technology industry, especially laptops are becoming more and more competitive as
technology develops. Potential new entrants in this industry should be stay low because there is strong
entry barrier for new small businesses. However, this situation is indicating that this industry has a
lot of substitutes within the industry, which means competition is high and it leads customer service
or loyalty to more important.
To boost the company’s performance and increase global sales, there are several things Michael
Dell should implement. Innovation and develop in technology is one of the most important key factor
to make big changes and differences. Dell has some great products but they didn't have successful
new innovation in the industry, which indicates that Dell became successful with a strategy and low
cost leadership in the past. They need changes. In order to improve these performance, Michael Dell
needs to invest on research and development department and human resource department. Developing
people in the company will lead to come up with a new technology idea, better management teams
and better performance. New innovation can reduce the competition from the company in the same
industry. Information management should be also improved to have closer and effective
communication with customers.
Product development strategy will be the action to get into the global market by taking the
products you have already to the new market in other country which Dell haven’t been thorough.
There are a lot of possibility that Dell can increase their sales and revenue by globalizing but there
are high tariffs on IT products from United States. Michael Dell and the company need to reduce the
cost to put the price lower in order to make positive profit. Even in global section, customer service
is important part that Dell should implement the action to improve. Other country has other law,
culture and society. Connection with customers provides a loyalty and reliability to the company. It
will be the challenge for Dell to do a growth in foreign market. Marketing strategy is necessary.