Competitive Strategy

DELL IncYours is here

Yours is here The Cottle Taylor case

A BIRDS EYE VIEW:

Where is the PC industry today? How did it evolve? Was young Dell a game changer or a mere spectator as the game changed? Dell entered in the PC industry in 1984 with a humble 1000$ but generated a revenue of 56.94 billion $ in 2013. Within 8 years of its inception, the company was ranked in the Fortune 500

Group Number: H4

Abhishek Bardia(61510045) Manuj Kumar(61510346) Priyank Garg(61510570) Shruti Jangid(61510530) Dr. Sana Shaikh(61510463)

Contents1. Introduction32 The Personal Computer Industry32.1 The Growth stage (1981 1995)32.2 The Mature stage (1995 present)53. Dell Business Model74. Story of Dell84.1 Dell: Beginning (1983-1990)84.2 Growth without profit (1990-1995)84.3 Explosive growth (1995-2001)94.4 Mature Phase (2002-present)95. Analysis of Dell through Key Strategy Frameworks115.1 Key Differentiating frameworks 116. Strategic Failures of Dell146.1 Dells Strategic failures -157. Dell today:167.1 Why Private?168. Conclusion and Recommendations179. Exhibits18

1. IntroductionWith the introduction of Wintel, many players entered the market once dominated by IBM & Apple. Dell, started by Michael Dell, grew leaps and bounds from a 6 billion$ to 23 billion$ company in less than two decades. This spectacular success of Dell is owed to its direct model with information technology and World Wide Web.2 The Personal Computer IndustryComputers are the one of the biggest technological advances of past century which has had the huge influence. Since inception, Personal Computer has transformed the way of working and communicating. Source - 2011 Computer Industry Almanac & ET ForecastsGrowth by standardization in componentsGrowth through consolidationGrowth by increasing penetration

2.1 The Growth stage (1981 1995) Source - http://www.c-i-a.com/worldwideuseexec.htm 2.1.1 PC Industry analysis at the time of entry by Dell in 1980s: Barrier Entry Uncertainty regarding the emerging technology and technological standards (TS) Imitation of the dynamic nature of the PC industry was a challenge High associated fixed costs Many players entered after the introduction of the Wintel including Dell, Compaq

2.1.2 New avenues to gain Competitive Advantage Economies of scale can be achieved - With standard product lines Using retail stores channel - Alliances with leading retailers including Wal-Mart and Carrefour Low Switching cost for Consumers The standardization helped kept the prices of PCs flat Pros of Standard Consolidation Little Scope for Product Differentiation Standardization battles can constrain innovation - as PC makers are reluctant to incorporate technologies before a standard is setCons of Standard Consolidation

Standards consolidation in the market Largely controlled by Microsoft and IntelSubstitutes Given the already existing network, mobile phone companies, could be turning to the PC industry with more intense competition or substitutes No existing substitute for the home PC and with comparable performance

Buyers Compatibility was the most highly valued attribute Similar offering by many competitors so bargaining power was high of the consumers Consumers were price sensitive and were not very brand loyal Switching costs among Microsoft operated PCs were low Customers were barely able to differentiate among the offerings They were in large numbers as associated costs were low Some of them assembled parts & sold unbranded PCs for 50% lesser price and thus became threats to the PC industry brands Software makers like Microsoft had a stronger hold on the suppliers than the PC makers Due to bulk orders, they slashed prices to maintain relations with the major players -Suppliers

Industry- Many players in the industry like IBM, Compaq, HP, Apple etc- Indirect effects played through complementary products (computer hardware/ software- Technological legitimation & breakthroughs gave rise to fierce competition- Intense price wars began - High exit & acquisition rates as sustenance was difficult

Limited scope in Product Differentiation Innovations across value chain to gain competitive advantage

24 Hrs. Customer ServiceDirect Sales channelThird party logisticsVendor managed InventoryBuild-to-order production

2.2 The Mature stage (1995 present)In 1999, a PC price war started to brew. The price war bolstered large firms and reduced vulnerable firms to extinction. The constant reduction of prices is due to the following main reasons: Technology became increasingly powerful. As the cost of components dropped, so did the personal computer prices. The mail order market posed a threat. These companies, notably Gateway, did not carry any design or innovation, however captured a significant chunk (around 16%) of the industry.2.2.1 Demand trends- Demand has shifted continuously towards smaller, integrated and communications oriented devicesForm factor

Emergence of Internet - Sales of PCs have been sticky as consumers have not replaced the existing PCs with these new devices instead have purchased multiple such devices, with each device providing somewhat uniquely purposed network access.

Continued overseas expansion

Gains in performance or price in components and shift to lower cost locations for production has resulted in lower prices and has expanded the demand. As a result sales have grown in the emerging markets (Asia Pacific, Latin America) due to affordable income level on account of economic growth (Exhibit 3a & 3b)

2.2.2 Major Strategies of Major players Low-Cost LeadershipDifferentiation Cost Focused Leadership Differentiation

Dells Competitive Position Target Market Mass MarketLow-Cost Leadership 1. Direct sales channel results in better margins, which are passed on to consumer2. Build to Order manufacturing resulting in higher profitsLow-Cost LeadershipDifferentiation Cost Focused Leadership Differentiation

HPs Competitive Position Target Market Mass Market Differentiation with High Quality products 1. More focus towards corporate customers

Low-Cost LeadershipDifferentiation

Cost LeadershipFocused DifferentiationApples Competitive Position Target Market Niche Market Focused Differentiation 1. towards user experience2. Proprietary Operating systemLow-Cost LeadershipDifferentiation Cost Focused Leadership Differentiation

IBMs Competitive Position Target Market Mass Market Mixed Strategy

3. Dell Business Model

Customer Value Proposition Target Customer - Experienced and computer-literate customers Direct channel enables customers to order customised products and services Build-to-order manufacturing process is flexible and ensure quicker turnaround. Dell can introduce new technology quicker than competitors who are slow-moving on account of indirect channels. Efficiencies and component cost savings passed on to the customers Standardization ensures flexibility and choice for consumers which enables them to buy based on performance, cost, and customer service.Profit Formula Dell is the low-cost leader Focus on reducing days of Inventory Industry leading levels Build to order process No finished goods inventory in system Direct sales channel enabled Dell to save on Dealer margin resulting in savings of 10-15%. Focus on standardisation ensures Dell maintain low cost structure in the industry. Focus on cost reduction allow company to deliver superior customer value.Key resources and processes Highly advanced manufacturing structure and an efficient Supply chain Direct sales channel Focus on leveraging standards rather than proprietary technology resulted in significant cost saving Benefited from the extensive research and development in the entire supply chain, due to focus on standards4. Story of Dell4.1 Dell: Beginning (1983-1990): In 1984, Michael Dell, a college graduate, formed Dell Computer Corporation to sell assembled PCs to customers directly at a significant lower prices than other major players. Profitless growthExplosive growthMature PhaseLate Mature Phase

Source Dell Annual Reports4.2 Growth without profit (1990-1995): Dells low cost differentiation model was copied by several mail-order vendors, notably Gateway, who threatened to drop prices by 15%-30%. To counter the growing threat, Dell entered retail channel. The sales grew from $800 million to $2 billion within a year and Dell became top-five PC makers in the world. The rapid growth resulted in a cash crunch resulting in a first loss in 1994. The prime reason was Dells use of indirect channels, such as Retail. Dells low cost operating model did not work in the retail channel. Further, Dell sold standardised product and was not able to leverage its supreme excellence in customization. Hence the channel contributed to growth but company was not making profit on these sales. As a result, Dell withdrew out of retail in 1994 (see exhibit 4a). Dell also focused on European and APAC region during the period (see exhibit 4b). To cope with a surge in demand in these markets Dell opened numerous manufacturing facilities in the regions which helped the company increase its penetration in the regions.4.3 Explosive growth (1995-2001): Dell focused on the direct model and experienced phenomenal growth with revenue growing from $3 billion in FY94 to around $30 billion in FY01. Over this period, Dell became the no 1 US PC maker with 18.5% market share in 2000 (see exhibit 5a). Dell also forayed in the global market and became the 2nd biggest PC maker, with a 10.6% share in 2000 (see exhibit 5b). During the period, industry witnessed intense competition, with nose diving margins. As a result, the industry witness consolidation among players (see exhibit 5c).4.4 Mature Phase (2002-present): Many other payers copied Dells BTO model, due to the success of direct model and its website selling model, such as Compaq announced a new BTO process and started selling through the Web but was mired in the ensuing complexity, risen due to clash between the traditional sales channels and new direct channel. Transfer of assembly operation to distributors by IBM and HP. Adoption of direct channel, although unsuccessful, by NEC.Most of these attempts were unsuccessful. Dell has already built substantial competitive advantage and was way ahead in the curve whereas competitors started from scratch (see exhibit 6) By the turn of the millennium, Dell was one of the leading PC makers worldwide. However by 2005, Dell was feeling the heat from the increasing competition, mainly from HP on corporate side (with the acquisition of Compaq and one stop solution offerings for businesses) and from Acer on consumer side (with its focus on low cost differentiation).4.4.1 Michael Dell at the Helm, again! In a bid to arrest declining market share and profitability, Michael Dell re-joined his role as a CEO and initiated a restructuring effort at the company. The restructuring effort can be broadly classified into two main categories Acquisition of software, storage, and technology services companies - enhance capabilities which would help its end customers and channel partners. Through these acquisitions, Dell get into the growing storage area network market, offer better service to its enterprise consumers and expand its presence in growing SaaS enables services market. Focus on product design - Stress on R&D so that the company could develop more innovative products Using retail stores channel - Alliances with leading retailers including Wal-Mart and Carrefour Cost cuts initiated a layoff program, focused on reducing manufacturing costs and increasing production efficiency in its attempt to raise profit margins

4.4.2 DELL IN TROUBLE, AGAIN Michael Dells restructuring efforts seemed to yield some positive results as Dell reported a six percent year-on-year increase in revenues in FY 07-08. While Dell was trying to regain its position in the global PC market, the global financial crisis cropped up in 2008, affecting the business badly, particularly due to the companys focus on the professional segment, particularly large enterprises. Also, the crisis reduced consumer spending which affected the demand in the PC market also. Large CustomersSmall CustomersLarge CompaniesMid-Size CompaniesGovernmentEducationSmall CustomersLarge CompaniesGlobal CompaniesSmall BusinessConsumerRelationship BasedTransactional

- Competition by HP in Large Customers- Mid and Large size companies primarily affected by downturn- Competition by Acer in Small Customers segment- Reduced personal expenditure because of downturn

5. Analysis of Dell through Key Strategy Frameworks The Dell, in a short time of 15 years from its inception, has grown to be worlds 2nd largest PC manufacturer. The success of the company cannot be attributed to just one key differentiating factors. In fact, Dell has been very nimble and flexible in its approach and adapted well to the changing times by changing its strategies to keep differentiating itself from the competition. 5.1 Key Differentiating frameworks 1. Growth through Innovation

5.1.1 Innovation in Delivery - Dell Direct ServiceKey Questions we analyse below How does Dell deliver customised PCs in hours when it does not even produce any parts? Industry Standard Indirect ChannelComponent ManufacturerPC ManufacturerDistributor/ResellerCustomerComponentsOrderForecast

ProductProduct

Components for customization

Dells Innovation Direct ChannelOrderComponent ManufacturerPC ManufacturerCustomer

ProductComponents

Distributor/Reseller

Dells model, as shown in above Figure, eliminated the Distributor/ reseller and directly approached end consumers.Reduce- Delivery time to customers- Reduce Channel costs- Number of suppliers which enables close coordination- Product replacement time in case of quality issues.Create- Supply chain efficiencies achieving a high degree of coordination b/w suppliers and Dell.- Data driven decision making accelerate every facet of business, thereby increasing velocityEliminate- Dealers mark-up- Carrying cost of finished goods inventory- Work in progress inventories and process delays.Raise- Due to Build to order, a faster introduction of technologies- Quality standards- Product Improvement time Incorporate customer feedback without process delays.Dells New Value chain in Delivery

5.1.2 Innovation in ManufacturingCreate- Every product customised to customers requirement- Profit-sharing incentives, among team members and individual performance disclosuresReduce- Dells close relationship with its suppliers enables coordination to reduce inventory levels and to increase speed.- The short time lag b/w demand & supply mitigates undesirable effects of variability

Eliminate- Facility has no warehouse space- No inventory other than work in process- No Finished goods inventoryRaise- Components arrive from suppliers just in time for manufacturing- Synchronization achieved in manufacturing avoiding WIP or finished goods inventory.Dells New Value chain in manufacturing

5.1.3 Innovation in Customer ServiceDell provides 24 hours customer service to address the needs of customers thereby it maximizes performance, efficiency, and return on investment. It employs third-party maintenance providers who provide on-site support. However it is Dell who maintains accountability for customer service. This close feedback loop has enabled Dell to attain new technologies developed by the suppliers whereas traditional vendors depend heavily on resellers which hinders their response time to customer needs, because the resellers may place their own interests first. 5.1.4 Growth through DiversificationIn 2007, the PC market was in a decline stage and remaining in PCs wasnt enough. Dell needed to expand its services offerings. This was achieved through acquisitions, Dell went on a $30 billion shopping spree (exhibit 1). Key component of Dells business strategy is to continously evolve portfolio to include more products and services which provide larger profit and a constant source of revenue over time. As part of this strategy, they emphasized expansion into enterprise services which included storage products, networking and servers. The growth of non PC business has improved the operating margins. Dells focus, going forward, is to develop next generation capabilities for client products including mobility and desktop PC products. 6. Strategic Failures of Dell - Till early 2000s, Dell has been the blue eyed boy of the industry, always ahead of the curve by clearly differentiating itself from its competitors. Dells differentiating strategies during various phases of growth -Source of Competitive AdvantageLow-Cost LeadershipDifferentiation Cost Focused Leadership Differentiation

Introduction PhaseDells Competitive Position Target Market Specific Niche Segment: Computer Literate Source of Competitive Advantage 1. Cost Leadership Due to direct sales channel better margins2. Focused Differentiation Innovations in Service, Manufacturing and Delivery

Growth PhaseDells Competitive Position Target Market Mass Market Source of Competitive Advantage Low-Cost Leadership 1. Direct sales channel results in better margins, which are passed on to consumer2. Build to Order manufacturing resulting in highly customized products at a low price.

Low-Cost LeadershipDifferentiation Cost Focused Leadership Differentiation

The above differentiating strategies worked well for Dell as it grew to become top PC maker worldwide by 2001, only 16 years since its inception. Nonetheless in the early 2000s PC industry entered in a mature phase as the customers moved on from computers to smartphones, tablets and other mass media & communication devices. This slowdown triggered two major trends in the industry Price War in the industryConsolidation in the industry

6.1 Dells Strategic failures - 1. Focus on Low Cost leadership even in mature phase in industry Dell initiated a series of Price cuts to regain market share. However, the move resulted in decline in operating profits from 6.3 percent in FY 2007-08 to 5.3% in FY 2008-09 combined with a fall in PC business revenues from $46.9 billion to $46.4 billion. The Low-Cost differentiation strategy was not a differentiator anymore as Asian manufacturers, particularly Acer, had significantly build its capabilities to compete with Dell in the Low-cost market, namely the Consumers segment.2. Late entry in the enterprise markets Dell expanded into the enterprise market since the demand in the PC market was low and with an eye to diversify its business, Dell focused energies on entering the virtualization and managed services business. Reactive Dell Move: Dells latest move received mixed response - many felt that it came a bit too late with analysts questioning the timing of such a transformation this late in the game, especially when it means disrupting the ongoing operations, increasing operational risk and opening customers to uncertainty? Move gives a perception of being untimely and reactive.3. Entry into the Devices market: In November 2009, Dell entered into the cell phones, Dell wanted its customers to connect anytime, anywhere through its products and services. However, high barriers to entry and a low probability of success in the mobile space was a risky decision (Cell Phone Porter Analysis below).Threat of Suppliers (Low)- Fragmented Industry - Vertical Integration difficult

Threat of Rivalry (High)- Concentrated markets- Limited Differentiation in hardware- Huge scope of differentiation in Software- Price wars- Brand name a big factorThreat of Entry (Low)- Economies of scale difficult at hardware level, but easy at software level- Huge capital requirement- Investments in R&D and operations

Threat of Buyers (High)- Elastic Demand- High Bargaining power- Technology driven- High switching costs

Threat of substitutes (High)- Tablets - PDAs - Laptops - Notebooks- Brand name a big factor

Dell was not successful in its foray in the smartphone business as hardware is not the key differentiator, something which Dell is good at, due to which it was not able to leverage its existing synergies into the cell phone business. Dell officially pulled the plug on smartphone business in 2012.7. Dell today: Dell announced on February 5, 2013 that it had stuck a $24.4 billion leveraged buyout deal to take the company private. The buyout is the brainchild of Michael Dell, the namesake founder of Dell who bought the shares at $13.65 apiece. 7.1 Why Private? Dell was losing confidence of its investors rapidly. By Dec12 stock prices, which had traded above $40 in 2005, had sunk below $10 (exhibit 8a). Even though investors are sceptical, this buyout will give Michael Dell freedom to restructure the PC business and beef up the offerings in enterprise solutions and cloud computing without worrying about quarterly results and stock prices.7.1.2 Can Michael Dell transform Dell into an enterprise powerhouse? The buyout has handed Michael Dell an absolute power to implement his vision, however a lot of lingering questions and doubts remain whether the company, worlds third-largest personal computer maker, can successfully push into enterprise solutions and services. Theres a long way to go to successfully re-align the business. After spate of acquisitions (Exhibit 1), worth more than $13 billion, in non-PC segment, consuming more than 20 firms; the firm still gets around 50% of revenue from PCs (exhibit 8b-d). 7.1.3 Challenges facing Dell 1) Dells is witnessing increasing competition from HP & IBM and IT newcomers such as Amazon & Rack space in enterprise space. 2) Slowdown in PC business - Profit dropped 32% from a year earlier due to Dell strategy to gain market share even at the expense of profit (Price wars).Dell has often delayed strategic decisions be it - switching from a direct to a mix sales model; diversification into end user computing devices such as smartphones. Dell has to prove that it will be able to transformation itself and that it can outsmart many of its publicly owned competitors by going private.

8. Conclusion and RecommendationsAs the consumer shifts from PC autonomy to one with greater emphasis on distributed and mobile computing, there is an absolute need for Dell to transform. Due to the increasing adoption of technology resulting in increasing data driven decision making in the industry, End-user devices are all changing. Dell, as evident by its many acquisitions, is changing its stripes. Hence, the decision of Michael Dell to take the company private is correct as it will allow the company to test the waters in different avenues. Dell is seeking to branch out in services and beef up its offerings in end-user computing and enterprise space. No doubt, this will be challenging. However, it is Dells tendency to play safe because of which the company has missed several opportunities at crucial stages which has given its competitors competitive advantage like Being in the PC business, Dell has missed capitalising on the tablet and smart phone devices segment, & has failed to effectively leverage its core strengths into enterprise services. When it entered Enterprise business, it did not appropriately integrate acquisitions within Dells landscape as a result most business are still standalone. Therefore, the timing of related diversification becomes extremely critical.Absorbing and optimizing its acquisitions presents a significant set of hurdles & changing market perceptions from a hardware manufacturer to an all-rounder in technology space will be Dells challenge. Market is full of uncertainty and fierce competition. Nevertheless, standing still is unacceptable. 9. ExhibitsExhibit 1 Dells acquisitions from 1999 -2014 (Source Wikipedia)YearCompanyCompany Area of FocusAmount

1999ConvergeNet TechnologiesData storage$340,688,000

1999NetSageSoftware$10,000,000

2002PluralIT Services ProviderUndisclosed

2006ACSInformation technologyUndisclosed

2006AlienwareComputer desktopsUndisclosed

2007ASAP Software ExpressInformation technology$340,000,000

2007SilverBack Technologies, Inc.Network MonitoringUndisclosed

2007EverdreamSoftwareUndisclosed

2008EqualLogicStorage area networks$1,400,000,000

2008The Networked Storage CompanyInformation providerUndisclosed

2008MessageOneOffice software management$155,000,000

2009Perot SystemsIT Services Provider$3,900,000,000

2010BoomiCloud Integration VendorUndisclosed

2010Ocarina NetworksStorage Deduplication VendorUndisclosed

2010ScalentData Center Management VendorUndisclosed

2010ExanetOEM NAS Software Provider$12,000,000

2010KACE NetworksAppliance Based Systems Management ProviderUndisclosed

2010CompellentStorage Systems Manufacturer$960,000,000

2011RNA NetworksSoftwareNetworkingUndisclosed

2011Force10Data centerethernet switches$700,000,000

2011SecureWorksSecurity services$612,000,000

2012Gale TechnologiesInfrastructure Automation SolutionsUndisclosed

2012Quest SoftwareSystems Management and Security Software$2,400,000,000

2012Make TechnologiesServicesModernizationUndisclosed

2012Clerity SystemsServicesModernizationUndisclosed

2012Wyse TechnologyCloud TechnologyUndisclosed

2012SonicWALL, Inc.SoftwareSecurityUndisclosed

2012AppAssureSoftwareSecurityUndisclosed

2012Credant TechnologiesUndisclosed

2013Enstratius (enStratus Networks)Cloud ManagementSoftware$3,500,000

2014StatSoftStatistical Softwareand servicesUndisclosed

Continuum of Devices with Varying Price Points and Purposes

Source Bernstein Research, Let's Talk Tablets: A Form Factor Revolution?Exhibit 2a: Continuum of Devices with Varying Price Points and Purposes Exhibit 2-b: Technology Price-Performance Wedge Source - Computer Industry Almanac & eTForecasts July 2007 Worldwide PC Market

Exhibit 3-bSource - 2010 Computer Industry Almanac & eTForecasts

Exhibit 4 Cost structure in Direct and Indirect channel

RetailDirect

Channel Mark-up4-6%0%

Co-op Marketing3%0%

Financing1%1%

Price Protection *4%0%

Obsolescence1.50%1%

Total13.5%-15.5%2%

Source -stuff.mit.edu/afs/athena/course/15/15.823/attach/Dell%20CASE.pdf * Price protection is a scheme whereby the PC manufacturer protection resellers

Exhibit 4b Dell expansion in Europe and APAC

Source Dell Annual Reports

Exhibit 5a US PC Market - Top 4 Market Shares

Source 2011 Computer Industry Almanac & eTForecasts

Exhibit 5b World Wide PC Market - Top 5 Market Shares

Exhibit 5c World Wide PC Market Consolidation

Source - 2011 Computer Industry Almanac & ET Forecasts

Exhibit 6 PC sales Dells for major competitors in mature phase

Exhibit 7 IBMs acquisitions from 1995 onwardsYearCompanyCompany Area of Focus

1996Object TechnologyData storage

2001Informixdatabase management capabilities

2001Mainspring

2002PWCs consulting practiceBusiness consulting

2002CrossWorldsSoftware

2005MicromouseIT Services Provider

2006MRO SoftwareInformation technology

2006FileNetComputer desktops

2007Daksh eServicesbusiness process outsourcing

2007Softekdata mobility and Web conferencing

2009SPSSstatistical analysis software

2012Kenexasocial business, big data, talent management, customer experience

2012TeaLeafsocial business, big data, talent management, customer experience

Exhibit 8a Dells stock priceSource: Yahoo financialExhibit 8b Dell revenue by business segmentation Source: Dell financial reportPC Business CAGR = 1.2%Non-PC Business CAGR = 9.1%

Exhibit 8c Dell revenue share of business segments

Exhibit 8d Dell business segments revenueReferences 1Data quoted from Dell Annual Reports 2Data from IDC 3http://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore/ 4http://ovum.com/2013/02/06/where-will-private-ownership-leave-dells-enterprise-services/ http://www.thehindubusinessline.com/opinion/can-dell-do-an-ibm/article4633956.ece http://www.forbes.com/sites/patrickmoorhead/2012/04/30/hp-and-ibm-need-to-be-very-afraid-of-dell/ http://news.yahoo.com/dell-confirms-exit-smartphone-business-drop-android-003848278.html http://www.zdnet.com/blog/btl/dell-throws-in-the-towel-on-smartphones-in-u-s/72681 http://www.forbes.com/sites/jeanbaptiste/2012/12/12/dell-quits-smartphone-business-globally-android/ Dell (II): A Company in Transition 2009, http://practicalstockinvesting.com/, November 24, 2009 http://www.nytimes.com/2009/11/20/technology/companies/20dell.html?_r=0 http://www.businessweek.com/magazine/content/09_43/b4152036025436.htm http://in.reuters.com/article/2009/03/11/dell-layoffs-idINN1130306420090311 Page 1 of 25