Running head: DELL CASE STUDY

Dell Case Study Jerathen Tillman Juan Luna Nova Southeastern University Managerial Marketing MKT 5070 Russell Casey March 03, 2012

DELL CASE STUDY

Nova Southeastern University H. Wayne Huizenga School of Business & Entrepreneurship

Assignment for Course: Managerial Marketing MKT 5070 Submitted to: Russell Casey Submitted by: Jerathen Tillman & Juan Luna N01189429 (Jay) (Address) (Work phone number) (Home phone number) Date of Submission: 3/3/2012 Title of Assignment: Dell Case Study

CERTIFICATION OF AUTHORSHIP: I certify that I am the author of this paper and that any assistance I received in its preparation is fully acknowledged and disclosed in the paper. I have also cited any sources from which I used data, ideas or words, either quoted directly or paraphrased. I also certify that this paper was prepared by me specifically for this course. Student's Signature: Jerathen Tillman & Juan Luna

DELL CASE STUDY Dell Case Study Dells dictatorship in the PC industry has been nothing short of astronomical as the PC juggernaut has done everything within its power to command market share and prove critics

wrong time and time again. Dell has been able to bargain market share by developing interactive price cuts for consumers, identification of product opportunities in storage and services, and providing a one of a kind customer relationship experience that re-shaped customer relations with reference to PC support. The Dell Direct model is the engine of Dells success and is the singular factor in Dells iconic run to prominence. Integrating the internet with all facets of business catapulted Dell earnings, growth rate, and market share beyond its competitors with records numbers in profits invested capital returns; but with much success comes the question of sustainability; is Dells direct model concept sufficient to maintain rapid growth and what adjustment are necessary to asseverate such growth if possible?

What has made Dell successful to date? Dells success today has been largely because of direct sales to consumers, small business, large organizations and government contracts. Moreover, success was also attributed to its direct model, which focused on low cost, direct customer relationships, and virtual integration (Rangan & Bell, 2002). Dells build to order manufacturing systems allow operating to commence in 13 days of inventory versus industry rivals 75 to 100 days of inventory and by 2000, the inventory numbers reduced again to 6 days of inventory. This is in part to Dells suppliers moving about 15 minutes from their manufacturing sites. When I ordered my first dell computer, I remember speaking to a customer service rep, building a personalized computer, and tracking its shipment from a warehouse to my front door

DELL CASE STUDY

and the entire process took maybe two weeks. The financing options at the time were either cash or credit card and luckily my parents paid with cash. I tracked my package and counted down the days to receive my new dell computer and was diligently waiting for my product to arrive. This was the intended reaction Dell anticipated from consumers using the Dell direct model coupled with integrative customer relationship management. So, with this experience, Dell not only provided a customized PC with pricing below the industry leaders; they also gave consumers the ability to track orders via online. While that experience provides a glimpse or features of Dells iconic run; I believe the following events lead to a robust expansion in Dells burgeoning: Hyper growth in the personal computer industry During that time growth rates where near 30% Dells aggressive move on pricing Creation of an open architecture Customized options for PC

While most factors were industry related; Dell used its ability to direct sale and to provide customization in a frenzied personal computer industry. The Dell direct model was really the gasoline needed to fuel a V12 engine and accelerate growth a 100 MPH; customers enjoyed the ability to customized PC based on their needs with phone sales reps; opposed to dealing with pre-configured devices from HP or Compaq at a standalone location. Customers also embraced and enjoyed Dells ability to quickly process orders in two weeks and to make matters worse for competitors; Dell was meeting customer expectations with 13 days of inventory compared to 75 to 100 days for competitors and by 2000, Dell maintained six days of inventory by strategically

DELL CASE STUDY reducing suppliers and relocating suppliers warehouses 15 minutes from their manufacturing warehouses (Rangan & Bell, 2002). Obviously, the turnaround time for orders, reduction in inventory, and just in- time basis ordering system only fueled Dells success as a niche was developed for the Dell direct model. The other component to Dells success was customer relations and segmentation. Dell

segmentation identified the most profitable customer, which are relationship business, expressed as: Global Enterprise Large corporate accounts Federal Education State & Local government.

The relationship business accounted for 60% of Dells revenue and increased revenue given the different types of PC options needs to fund large organizations (Rangan & Bell, 2002). In addition, relationship businesses required long term financing, which resulted in leasing contracts, corporate purchases and longer payment cycles. By identifying were the revenues are generated, Dell established Premier pages that provided innovative tracking, paperless ordering, pricing, and account history. This revolution in servicing really allowed Dells sales revenue to increases exponentially enjoined by superior inventory control and execution, equaled growth. Dells unique ability to isolate opportunities in areas where profit margins were high margins gave entry to Dell. Michael Dell Remarked: High margins are a sort of paradox. You

DELL CASE STUDY look at a business and say, Gee, youve got high margins and thats good. But in this case its

not good. Because if you have high margins, that means you have this big, soft underbelly. Thats what we live for. Thats what we consider fun (Betsy Morris Reporter Associates Noshua Watson and Matthew Boyle, 2000, para. 12). Amazingly, that was not just statement; Dell dominated the personal computer market; entered the workstations market and within four years and became market leaders for Windows NT Workstation and All workstations. Furthermore, Dell gained entry into the entry level server market and again within four years gained 25.5% of U.S. market share in a untapped market and became an industry leader in that category. I think its safe to summarize that Dells success is mostly because of the Dell Direct model. However, we cannot denote that Dells success was also based on market timing and taking advantage of opportunities when others were trying to duplicate the direct model. Because of this, Dell was able to grow at a vigorous rate simply due to their commitment to meeting clients expectations and customizing PC based on clients needs; finally, driving existing sales with the most profitable customers and establishing personalized service, attributed to growth and acquiring large contracts for relationship business segment, which account for 60% of Dells revenue. Whats Dells position in the industry as of 2002?

The first item of concern is that during Jan. 2 2002 to Jan. 2 2003, the Dow Jones Industrial average for that period had a return of around 2% while Dells stocks stock price during that same period was down nearly 14%. Demand for computer systems and services declined in 2002, which resulted in -2.3% reduction in net revenues compared to 2001 (Dell,

DELL CASE STUDY n.d.). In addition, Dell employed massive layoffs in cuts to spark growth in a recessionary environment. Dells work forced decreased from 40,000.00 in February 2001 to 34,400 by November, an 86% reduction in work force (Altman, 2002). This plan was promoted to gain

market share and to continue to reduce industry profit margins by offering lowering prices for its customers. Due to market turmoil, Dell was forced to evaluate its capital structure and labor structures to reduce expenses and increases sales revenue, which was accomplished but not without backlash from employees complaining of working conditions. Professor Nadiri said, Theyre putting a lot more load on the remaining people, particularly that salaried employees, said the employee, who works on Dells information technology. Our group is just overloaded with work. Theyre asking us to put in more time on the house (Altman, 2002, para. 21). Apparently, the sacrifice was beneficial; regardless of profit decreasing because of economic conditions; Dell continued to outpace competitors and industry standards in the following segments (Dell, n.d.): Worldwide Growth in Overall Shipments o Industry below 100% cumulative change o Dell nearing 500% cumulative change Worldwide Growth in Server System shipments o Industry below 400% cumulative change o Dell nearing 1600% cumulative change U.S. Growth in overall system shipments o Industry below 100% cumulative change o Dell nearing 500% cumulative change Europe. Middle East and Africa Growth in overall System Shipments

DELL CASE STUDY o Industry below 100% cumulative change o Dell nearing 350% cumulative change Operating Expenses as Percent of revenue o Industry between 20 to 25% o Dell below 10%

Heedlessly, Dell continued to gain market share by outperforming competitors in a down market but nabbing market share in U.S. markets at 13.8% of worldwide shipments and 25% in full domestic shipments. Simply put, Dell continued its dominance in the PC industry by reducing work force, revamping labor arrangements and plant productions; such a changed was needed to keep pace with Dells unrealistic growth rate in market share. Dell made the necessary changes to gain market share although the industry as a whole was declining. By refining internal controls, Dell set the stage for increased earnings in 2003, with an improved expense ratio and a more efficient inventory and assembly plan. An August 12, 2002 Business week article, indicated that by 2007 Dell intended to double revenues to $60 billion. How should Dell go about building the nearly $6 billion annual sales growth needed to achieve that target?

Such aggressive growth will have to derive from non-pc categories, particularly in products such as Apples IPOD 1st GEN released on 10/23/2011. Apples innovation with the IPOD single handily increased units movement from 3.67% to 23% within two years for IPOD devices (Hesseldahi, 2004). If Dell was able to compete in this market and offer a similar product; achieving $ 6 billion a year target would be realistic with additional categories given the

DELL CASE STUDY IPODs growth rate. Investing or manufacturing peripheral such as printers and decreasing the small percentage of income taken from $600 million to $1 billion in resells ever year could also edge Dell towards its revenue target (Park, Keenan, & Edwards, 2002). Using the Dell direct model, I am sure Dell will be able to market printers to consumers at a lower price by challenging HP. This could be accomplished by partnering with one of HPs rivals and slashing gross profit margins in the industry to gain market share.

Finally, getting into the handheld computer markets were profit margins are 20% or more gives Dell the opening to again product a product of better quality and reduce sales price, which lower profit margins but increase sells for Dell, thus increasing market share in this category(Park et al., 2002).

DELL CASE STUDY References Altman, D. (2002). PRODUCTIVITY; We Saved Your Job, But Gave You More Work. Retrieved from http://www.nytimes.com/2002/10/29/jobs/productivity-we-saved-yourjob-but-gave-you-more-work.html?pagewanted=all&src=pm Betsy Morris Reporter Associates Noshua Watson and Matthew Boyle. (2000). Can Michael Dell Escape The Box? A brilliant managerial model enabled Dell to upend the personal

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computer business. But with PC growth slowing and its stock falling, where does Dell go next? Everywhere, says the boss: into servers, storage, and the Internet. Retrieved from http://money.cnn.com/magazines/fortune/fortune_archive/2000/10/16/289600/index.htm Dell. (n.d.). http://i.dell.com/sites/content/corporate/financials/en/Documents/arfy02.pdf Hesseldahi, A. (2004). The IPod In Perspective . Retrieved from http://www.forbes.com/2004/10/15/cx_ah_1015tentech.html Park, A., Keenan, F., & Edwards, C. (2002). Whose Lunch Will Dell Eat Next? Now, its moving into printers, storage, and handhelds . Retrieved from http://www.businessweek.com/magazine/content/02_32/b3795078.htm Rangan, V. K., & Bell, M. (2002). Dell - New Horizons. Retrieved from http://www.xanedu.com/ TECHNOLOGY; Uncertainty in PC Industry Keeps Apple Earnings Flat. (2002). Retrieved from http://www.nytimes.com/2002/10/17/business/technology-uncertainty-in-pc-industrykeeps-apple-earnings-flat.html?pagewanted=2&src=pm