DELL INC

COMPANY INSIGHT AND COMPETITIVE ANALYSIS

By Salman Abdulaziz

EXTERNAL ANALYSIS
KEY ECONOMIC AND INDUSTRY VARIABLES
Market Size
PC units manufactured in US increased by 2.13%, from 64.2 million to 65.6 million from 2007
2008
Global PC units produced increased by 9%, from 261.4 million to 287.6 million, 2007 to 2008
Market Growth
PC units sold worldwide increased from 231.8B to 244B, a 5% increase from 2007 to 2008
PC units sold in the US decreased from 52.6M to 50.9M, a 3.34% decrease in 2007 to 2008
Demand for PCs declined in 2008 from 2000 levels due to global economic recession
Number of Rivals
Rivals

Dell

Apple

Lenovo

Acer

HP

US Market Share 2008

Global Market Share 2008

29.4%
14.7%

7.9%
3.5%

4.1%
7.6%

9.3%
10.9%

24.7%
18.9%

PORTERS 5 FORCES ANALYSIS

Competition: Intense
The industry is highly fragmented with several large key players
HP spent $1 billion in sales and marketing in 2008.
Acer is the fastest growing company in computer industry.
Apple spent $500million in sales and marketing, and increased market share from 2004-2008 as
well globally.
Lenovo entered US market through the purchase of IBMs PC division for $1.25B in 2004
Threat of Entry: Low - Med
It takes high level of investment and technological expertise to enter the industry.
It takes $750 to manufacture a desktop PC. Entry takes place by foreign companies acquiring
companies losing market share.
Chinese PC manufacturer Lenovo entered the US market by acquiring IBMs PC division.
Taiwanese company Acer entered the US market by acquiring Gateway.
Substitutes: Medium
The switching costs are low.
Smartphones and laptops will gradually replace PCs in the future.
Supplier Power: Medium
Suppliers can be categorized into hardware and software. Hardware can be purchased in highly
global competitive market served by many companies except for microprocessors. In 2009, Intel
had 80% market share in microprocessors and charged a fixed price for all buyers.
Microsoft had a strong market share in operating systems.
All PCs companies except for Apple are strongly dependent on Microsoft software
Buyer Power: Medium
Buyer can be categorized into large business & government, small & midsize business, consumers
(home) and education.
Transactional consumers have low buyer power.

Relationship buyers have high buyer power. They can negotiate prices as they purchase in large
volumes ie. Government, education or large business
COMPETITIVE POSITION IN RETAIL SECTOR
PC Provider

Dell

HP

Lenovo

Acer

Apple

% of unit sales via retail 2008

11%

38%

25%

52%

47%

Retail channel is becoming important to sell PCs. Retailers have the sales force to educate and influence
the consumers decision to purchase a product. Since the end consumer segment is growing globally,
relationship between PC providers and retailers is critical for success.
POSITIONING MAP OF THE INDUSTRY

Conclusion
A balanced combination of price and
strength in retail distribution is
necessary to have a strong market
share. Since 93% customers accept
retailer recommendations, retail
presence is critical to maintain a strong
market share.

KEY DRIVERS IN THE INDUSTRY

Globalization
Lenovo from Taiwan and Acer from China entered the global PC market through acquisition of IBM PC
division and Gateway respectively with competitive advantage in low-cost manufacturing. In 1990s, PC
makers began to outsource their manufacturing to China and Taiwan where the labor costs were 80% to
90% lower. Dell opened a plant in India and closed some plants in US including the plant in Texas.
Marketing Innovation
HP launched a campaign, which differentiated the way PCs were perceived by consumers. Making PCs a
fashionable brand allows companies to charge a premium price like Apple.
Product Innovation
Customers demand latest up-to-date gadgets. PC makers need to stay ahead of the competition. HP
developed different types of PCs catered to different audiences. Dell customized PCs to buyer
specifications and commenced assembly only after receiving an order. Dell offered 4 lines of desktops and
laptops that catered from large organizations to individual users as well as intensive graphic designers.

Long-term steady growth in industry

PC sales increased globally by 9% between 2007 to 2008. PC market size in the U.S. increased from $4.5
billion to $50.9 billion from 1982 to 2008, an average annual increase of 11%. PC market share worldwide
increased from $60.9 billion to $244 billion from 1990 to 2008, an average annual increase of 7.5%.
Growing Buyer Preferences
Large businesses and organizations prefer customized PCs which can meet technical requirements.
Individual consumers satisfied with standardized PCs.
WEIGHTED KEY SUCCESS FACTORS IN THE INDUSTRY

Quality
Distribution
Channels
Product Line
After-sales service
Product
innovation
Advertising
Total

Weighted
Factor
0.16
0.3

Dell

Apple

Acer

Lenovo

HP

8
7.5

9
8.5

6.5
6

5.5
5.5

8.5
7

0.16
0.13
0.1

8
8.5
7.5

7
9
8.5

6.8
7
6.0

7
6.5
7.3

9
7.5
7.3

0.15
1

7
7.715

8
8.33

6.0
6.338

5.5
6.05

8.5
7.88

VALUE CHAIN ANALYSIS

Microsoft, AMD and

component suppliers
provide operating
systems, microprocessors
and PC parts to Dell's
manufacturers.

The manufactures
assembles the products
and ships them to
retailers, distributors,
businesses and end
consumers.

Distributors supplied PCs

to resellers. Resellers
worked with business
customers to design,
configure, install and
support computer
networks.

End conumers, large

corporations, small
businesses, government
and educational
institutions buy PCs.

Personal computers flowed from manufacturers to customers via four channels - brick and mortar
retail stores, distributors, integrated resellers and direct distribution. Some PC makers like Apple
opened their own retail stores.
A handful of large distributors such as Ingram Micro and Tech supplied a full range of computer
hardware and software to more than 100,000 resellers. Some resellers were large enough to buy
directly from manufacturers.
Retailers and distributors typically mark up the product 3 - 4%. Distributors earn a thin margin of
1%.
In direct distribution PC makers took order by phone or Internet and shipped the PCs through third
party shippers such as UPS directly from manufacturers to the customer.
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CONCLUSION ABOUT ATTRACTIVENESS OF THE INDUSTRY

Due to the growing demand for PCs globally, the industry is attractive for large companies who have the
financial resources and technological expertise to enter the market.

INTERNAL ANALYSIS
COMPANYS RESOURCE AND COMPETITVE POSITION
Company strategy
Corporate Strategy Dells strategy was to increase its market growth by targeting large corporate
customers directly. They also targeted end customers online and kept supply chain costs to a
minimum. Now Dell is moving towards small businesses and home users through retailers and
resellers.
Functional Strategies
Supply Chain Dell was the industry leader in efficient supply chain management. Using Just-inTime distribution allowed them to reduce inventory storage costs and expedite order delivery.
Manufacturing Dell tried to reduce its cost by closing its Texas, Tennessee plant into India, and
relied more contractor to produce its PCs
Human Resources After returning, Michael Dell hired Ronald Garriques from Motorola as the
head of Dells consumer division and Michael Cannon from Solectron as Chief Global Operations.
Brian Gladdin from GE and Ed Boyd were hired as CFO and Chief Consumer Designer.
Marketing and Sales They enhanced their product line by launching a series of laptops in bright
colors and selling through major retailers globally. They also launched the Partner Direct program
to build relationship with qualified resellers.
COMPANY VISION, MISSION AND COMPETITVE ADVANTAGE
Dell vision statement
Make information technology solutions affordable for millions of people around the world.
Mission Statement
To be the most successful computer company in the world by providing the best product with
competitive pricing through the utilization of the most efficient supply chain and manufacturing
strategy.
Competitive advantage
Dell has strong direct sales compared to competitors giving it a large presence in the B2B market.
66% of Dells revenue comes from large customers.
Dell provided exceptional customer service to corporate clients. They could repair or replace highend servers of corporate customers within hours. They had personnel in five control centers around
the world to respond to IT emergencies.
SWOT ANALYSIS
Strengths
Efficient and streamlined supply chain - Dell worked closely with suppliers to arrange JIT delivery to
reduce inventory levels. Symphony a custom-built software application that used EDI links with
suppliers to monitor inventory, as a result Dell only carried four days of inventory while competitors
had 20 30 days.
Good relationship with large corporate buyers. Dell has excellent customer support system for
corporate clients.

Dell specializes in providing customized PCs based on customer specifications.

Excellent leadership and strategic direction under Michael Dell. He brought in senior and
experiences talent from different industries to add the expertise in Dell
Weaknesses
Poor relationship with retailers due to conflicting strategies.
Dells marketing was focused more on technical specifications rather than brand value.
Dells strategy did not realize the importance of small businesses and end consumers.
Dells customer service towards end consumer declined.
PC rating less than Apples Mac in 2009
Opportunities
Ability to reach new segments globally through big retailers Wal-Mart, best buy, Gome, Staples,
Carrefour, Big Camera
The acquisition of Perot Systems provided opportunities in selling IT services.
PartnerDirect program allowed Dell to provide technical, financial and marketing assistance to
certified resellers.
China and Taiwan offer low cost production opportunities than US and Europe
PC related products have expanded to include laptops, workstations, servers, notebooks, and tablet
PCs.
Potential to reach new customer segments by using multiple distribution channels.
Demand for PCs among end users in US increased at an average of 4% between 20022008.
The PC market grew from $176.4B in 2004 to 244B in 2008, an average growth of 10%.
Threats
Inventory Buyback - PC makers had to buy back inventory which did not sell. Price protection was
also provided in case the price of a computer fell while it was in the distribution. Inventory buy
backs and price protection cost PC makers 2.5% of their revenue.
In 2009, Acer surpassed Dell as world second largest PC provider in unit terms
Stagnant market in United States
HP exceeded Dell in PC market share globally
Faced a diverse set of competitive dynamics: Compaq merger with HP, Acer enter the market as
fastest growing firm in the industry, Lenovo acquired IBM`s PC department
Apples rating as the most preferred brand by consumers in 2009
KEY FINANCIAL RATIOS
Profitability ratios

2002

2004

2005

2006

2007

2008

Gross profit

18.3%

18.4%

17.7%

16.6%

19.1%

17.9%

Operating Profit Margin

7.8%

8.6%

7.9%

5.3%

5.6%

5.2%

Net Profit Margin

5.8%

6.1%

6.5%

4.5%

4.8%

4.1%

2.3

2.1

2.4

2.2

2.2

2.3

41.9%

47.1%

89.0%

59.70%

78.9%

58.0%

Return on total assets

Return on stockholder's equity

STRATEGY
Issues
Product Differentiation Dell is not able to differentiate itself as a unique value provider. Acer provides
the most affordable PCs while HP and Apple are leaders in brand value. Competitive Advantage is vital to
survive in the competitive PC market.
Competition Entry of new firms, mergers within competitors and return of Apples Macintosh
increased the rivalry in the industry. Dells inability to respond to the evolving competitive landscape
resulted in loss of market share.
Distribution Issues Dell experienced significant losses in retail sales and was forced to temporarily
withdraw from retail channels. Retailers were not comfortable with Dells direct and online distribution
strategy.
ANALYSIS
Product Differentiation
The prices of PCs have reduced significantly. Dells price for Desktop PC decreased from $1,052
in 2002 to $601 in 2008 due to outsourced manufacturing in China and Taiwan where the labor costs are
80 90% lower. Customers are now satisfied with standard PCs and do not require a high level of
customization. As a result R&D budgets have been reduced to less than 4% as a percentage of sales in
2008. Creating brand value is necessary to charge premium prices and increase margins. Dell does not
differentiate itself as a low cost provider or the most premium product. Acer has the lowest operating
cost in the industry while Apple and HP are leaders in brand value. Even though Dell spent 800M in
advertising and sales in 2008, it was not able to position itself as a unique product or an iconic brand.
Increasing Competition
Dell lost significant market share to its competitors. Lenovo entered the market with acquisition
of IBMs PC division for $1.25B giving them the rights to IBM brand for five years and access to
international markets. Similarly, Taiwanese company Acer purchased Gateway and Packard Bell, making
it the fastest growing PC provider. Acers product line focused on inexpensive computers with good
internet connectivity and economies of scale allowed it to achieve lowest overhead costs in the industry.
In 2009, Acer surpassed Dell to become the second largest PC provider in terms of units sold.
Furthermore, HPs move to acquire Compaq for $25B created a company which ultimately became Dells
biggest rival. In 2007, HPs consumer PC revenue grew by 39% and notebook PC revenue grew by 47%.
HP spent $1B in innovative marketing campaigns to position itself as a unique PC provider. They also

worked with retailers and resellers to capture the growing consumer market. In addition, Apples
Macintosh resurfaced in the market. Its PCs which were known for sleek design and high prices were
improved with a shift to Intel microprocessors and the release of new operating systems. Along with its
own independent retail stores, Apple also sold through resellers, storefront retailers and direct sales. As
a result Apples revenue from laptops and PCs experienced annual growth rates of 35% and 6%
respectively. Dells re-entry in the retail market with limited product lines was an ineffective strategy in
targeting end consumers.
Distribution Channel
Dells current competitive advantage in direct model is becoming less and less advantageous in a
global market. Direct sales to end consumers in US have decreased through by -7.6% between 200408
as end consumers are less receptive to the direct model. Only 27% of the global market share can be
attributed to the direct distribution channels, but 73.25% of the global market belongs to retailers and
resellers. In 2008, sales for large businesses reached $20.2B as compared to $45.9B for the end
consumers. This is critical as of 2009, 74% of Dells sales took place directly. Also, 38% of Dells sales take
place in the stagnant US market which decreased 3.2% between 2007-2008 in dollar sales whereas the
international markets increased by 5%.
End consumers prefer to buy the personal computer in the store because it allows them to
touch and feel the product. But Dells presence in retail is weak with only 11% units sold through retail.
Since, 93% consumers accept retailer recommendations, Dell misses a vital opportunity. Retailers and
resellers are hesitant to work with Dell because Dells direct strategy eliminates them. Since end
consumer segment is increasing globally, retail channels are vital to reach the market. The sales by
indirect distribution channel in US increased from 39.7% in 2004 to 55.9% in 2008, compared to direct
distribution 56.6% in 2004 to 42.2% in 2008. Michael Dell downplayed potential conflicts by stating that
direct and indirect businesses were separate. However, retailers and resellers were hesitant to work
with Dell and preferred HP over any other PC.
Recommendations
Significant restructuring in the way Dell operates is necessary to improve the competitive
position of the company. Dell should partner with retailers to target the 73.25% PCs sold globally
through retail channels. We recommend that Dell merge direct sales to end-consumers with its retail
channel. Customers who order directly may pick up their orders from closest retail stores who can
charge a small fee for their service. If retailer relationships cannot be developed, opening independent
stores will enable Dell to avoid retailer conflict and retain the margins. Furthermore, creating a
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competitive advantage for its products such as built-in applications or hardware capabilities is necessary
to create a unique value proposition for the customer. A marketing campaign focused on creating brand
value should be implemented which will allow Dell to charge premium prices and maintain brand
loyalty.