MBA+520-Dell

Dell Case Study MBA520 9/12

Question #1 For many years, why was Dell so successful despite the low average profitability of the PC industry?

GA’s comments: Direct to Market; Speed of Delivery; Customer Service

PH’s comments: Dell was successful because of - Its "Direct Model" sales approach where customers were able to by directly for the manufacturer with the manufacturer building a computer specified to an “educated consumer’s specifications. - Dell's manufacturing practice to produce units only after an order was received, thus allowing production and delivery to be accomplished in mere hours, compared to competitors taking 20 to 30 days. - Dell primarily focused on corporate customers and offered them higher performance PCs, at relatively lower prices than what competitors offered for less powerful machines. - Dell had integrated strong customer service and strong financial practices/analysis into its operations; along with IT infrastructure such as Online Sales databases, manufacturing software, "Symphony", and customer programs such as "Premier Pages".

CG’s Comments: Dell has remained loyal to customers, corporate and individual, by providing quick delivery, computers specified according to customer requirements, and optimal prices. Dell has been able to achieve this while using resources wisely in order to maintain profitability despite the traditionally low profitability of the PC industry as a whole. Dell also was able to optimize its own system through its Symphony program which told sellers expected time frames for the specifications of each of their customers’ orders Dell was also successful due to the quick reaction to change the course of the company should a choice turn out to be a losing bet...For example, from 1990 to 1994, Michael Dell turned the company focus on retails and within a short period, with failing numbers, he quickly removed the company from retail sales. Dell’s Direct Model approach was fundamental to all areas of sale...Dell applied it to all of its products from printers, digital cameras, MP3 players, flat- screen monitors, software titles, and other products. Dell’s has a very firm infrastructure - hiring seasoned managers who was able to maintain a steady receivable and payable time frame

Question #2 What are the main reasons for Dell's struggles more recently?

GA’s comments: Change in leadership; changing market

PH’s comments: The main reasons for Dell's recent struggles can be attributed to - The decision to transfer the highly regarded Dell customer service operation to India; resulting in a significant drop in customer satisfaction levels. <span style="background-color: transparent; color: #134f5c; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">- The marketing disaster of the Sony battery and the "flaming" Dell computer,. <span style="background-color: transparent; color: #134f5c; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">- A government investigation over executives adjusting account balances to meet financial targets. <span style="background-color: transparent; color: #134f5c; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">- A perception issue that Dell was losing its earlier image and was turning into a slow decision making and boring product company. <span style="background-color: transparent; color: #134f5c; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">- A lack of confidence by Dell employees on their company leadership.

=<span style="background-color: transparent; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">CG’s Comments: = =<span style="background-color: #ffffff; color: #ff0000; font-family: Arial; font-size: 11pt; vertical-align: baseline;">__In Reference to the ‘Flaming Dell’ Incident:__ = =<span style="background-color: #ffffff; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Dell laptop explodes at Japanese conference = <span style="background-color: #ffffff; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">INQ reader's amazing snaps By <span style="background-color: #ffffff; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">[|Paul Hales] <span style="background-color: #ffffff; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Wed Jun 21 2006, 14:22

AN INQUIRER READER attending a conference in Japan was sat just feet away from a <span style="background-color: #ffffff; color: #ff0000; font-family: Arial; font-size: 11pt; vertical-align: baseline;">[|__laptop computer__] <span style="background-color: #ffffff; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;"> that suddenly exploded into flames, in what could have been a deadly accident. Gaston, our astonished reader reports: "The damn thing was on fire and produced several explosions for more than five minutes". <span style="background-color: #ffffff; color: #ff0000; font-family: Verdana; font-size: 10pt; text-decoration: none; vertical-align: baseline;">"F <span style="background-color: transparent; color: #ff0000; font-family: Verdana; font-size: 10pt; text-decoration: none; vertical-align: baseline;">or the record, this is a <span style="background-color: transparent; color: #ff0000; font-family: Verdana; font-size: 10pt; vertical-align: baseline;">[|__Dell__] <span style="background-color: transparent; color: #ff0000; font-family: Verdana; font-size: 10pt; text-decoration: none; vertical-align: baseline;"> machine," notes Gaston. "It is only a matter of time until such an incident breaks out on a plane," he suggests.

As a result, Dell lost customer faith and loyalty despite recalling unsafe products and measures taken to reassure the public

<span style="background-color: transparent; color: #ff0000; font-family: Verdana; font-size: 11pt; vertical-align: baseline;">__MORE ABOUT THE SONY BATTERY RECALL:__ <span style="background-color: transparent; color: #ff0000; font-family: Arial; font-size: 9pt; text-decoration: none; vertical-align: baseline;">Dell and the U.S. Consumer Product Safety Commission plan to recall 4.1 million notebook batteries on Tuesday, a company representative confirmed Monday. The recall affects certain Inspiron, Latitude and Precision mobile workstations and XPS units shipped between April 2004 and July 18, 2006. Sony manufactured the batteries that are being recalled, the representative said. If they have one of the affected units, consumers are advised to eject the battery from the notebook after powering down and continue using the notebook with its AC power adapter, the CPSC said. Dell has so far received six reports of overheating units that caused property damage, but no injuries. Dell has faced several issues this year related to exploding or flaming notebooks, and wants to ensure the safety of its customers, the representative said. The 4.1 million units is a subset of the 22 million units shipped during that time frame, he said. Dell said it doesn't expect the cost of the recall to materially affect its earnings. The company reports earnings for the previous quarter this Thursday. At the moment, this looks like the largest battery recall in the history of the <span style="background-color: transparent; color: #ff0000; font-family: Arial; font-size: 9pt; text-decoration: none; vertical-align: baseline;">[|electronics] <span style="background-color: transparent; color: #ff0000; font-family: Arial; font-size: 9pt; text-decoration: none; vertical-align: baseline;"> industry, said Roger Kay, an analyst with Endpoint Technologies Associates. "The scale of it is phenomenal."

<span style="background-color: transparent; color: #000000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Question #3 <span style="background-color: transparent; color: #000000; font-family: Arial; font-size: 9pt; text-decoration: none; vertical-align: baseline;">3. Does Dell have a competitive advantage in selling desktop computers to large corporate customers? If so, how large is that advantage? Specifically, calculate Dell’s cost advantage over the team of a competitor and a reseller in serving a corporate customer. The case has detail in the text and exhibits that allows you to analyze relative costs in detail. To examine Dell’s costs relative to its competitors, consider a typical PC equipped for the business market. From Exhibit 9, you can calculate the price that Dell charges for such a machine. Next, you can use Exhibit 7 to calculate Dell’s cost of goods sold for such a machine. Using other information in the case, identify the major categories of cost differences between Dell and the rival PC maker/reseller team; as they provide a typical corporate PC, how do the costs they incur differ? Finally, try to quantify the savings or extra costs associated with each difference.

<span style="background-color: transparent; color: #000000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">GA’s comments: Competitive advantage? Yes Dell has a competitive advantage. They can customize the PC’s that they send to a large client. The PC’s can have the customers image(software) already on it. It saves time on the client end. All they have to do is add their own specific software.

<span style="background-color: transparent; color: #134f5c; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">PH’s comments: Yes, Dell has a large competitive advantage in selling PCs to large corporate customers for they offered higher performance PCs at relatively lower prices than the PC products offered by other manufacturers. Further Dell delivered what the MIS departments asked for, plus it was a reliable and quality product. As far as how valuable it is to have an educated customer satisfied with the quality, reliability and performance of a unit, huge. Typical Price of a Dell Desktop PC in 2008: $601.00 Average Price of a PC in US 2008: $776.00 Total PC Units sold in US in 2008: 65.6mm Dell’s 2008 Market Share of US PC Market: 29.4% (.247*65.6mm=19,286,400 Units) Dell’s Cost of Goods Sold for a PC in 2008: $1,565m HP’s 2008 Market Share of US PC Market: 24.7% (.247*65.6mm=16,203,200 Units) Typical Price of a Dell Desktop HP in 2008: $585

Costs differences: The expense of resellers and channel infrastructures. Also the costs needed to support inefficient business practices as seen with HP and component pieces.

<span style="background-color: transparent; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">CG’s Comments: working..

<span style="background-color: transparent; color: #000000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Question #4 How effective have the competitors been in responding to Dell over the years?

GA’s comments: Rivals have not been effective in responding to Dell over the years. They have not figured out a way to eliminate the resellers.

<span style="background-color: transparent; color: #134f5c; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">PH’s comments: Competitors have met little success in responding to Dell over the years, instead, they have been plagued by a sales/distribution infrastructure that focused more on the reseller or channel, and not the customer. This arrangement offered benefits to earlier times, but could not complete with Dell’s pricing, delivery time frame and ability to provide the customer, what the customer actually wanted. Attempts were made by various manufacturers to challenge Dell, but they usually were mediocre, feeble and more like half or incomplete thoughts/decisions, because of the connection to or control by the various resellers and channels.

<span style="background-color: transparent; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">CG’s Comments:

<span style="background-color: transparent; color: #000000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Question #5 <span style="background-color: transparent; color: #000000; font-family: Arial; font-size: 9pt; text-decoration: none; vertical-align: baseline;">Roughly ten years ago, Michael Dell expressed surprise that no one had been effective at copying his firm’s business model. He said, “I would have expected by now that somebody would have copied our business model I am actually quite surprised, particularly given that this has been a conversation that has been going on for at least ten years, and our competitors have been trying for at least ten years.” Why was it so difficult for rivals to imitate Dell’s approach for many years?

<span style="background-color: transparent; color: #000000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">GA’s comments: It has been difficult because people are resistant to change. The companies have found it hard to remove the middle man. The middle man also fights back by refusing to sell their product at all.

<span style="background-color: transparent; color: #134f5c; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">PH’s comments: Well, technically Gateway copied the Dell business model for a period of time, only to be overtaken by a series of confusing initiatives between 1997 – 2004. As for the majority of competitors for the PC manufacturing market, Dell was correct. Companies, such as IBM, Compaq, HP were wedded to a sales and distribution model that tied the manufacturers to “resellers” and “channels”. Any attempt to break or compromise the connection so that manufacturers could deal direct with consumers was met with a quick and forceful response by “resellers” that manufacturers believed could impact their bottom more so than the benefit of selling direct to consumers.

<span style="background-color: transparent; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">CG’s Comments:

<span style="background-color: transparent; color: #000000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Question #6 How would you compare Dell's strategy to rivals such as Lenovo, Apple, HP, and others?

GA’s comments: Dell made a decision at the start to sell to the consumer. They have not varied much from that strategic approach. They are consistent vs the competitors who are trying to responds and catch up with Dell.

<span style="background-color: transparent; color: #134f5c; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">PH’s comments: Dell’s initial strategy has focused on unit quality price and meeting the specific needs/ expectations of their customers directly and at a level of the highest standard. The other PC manufacturers, excluding Apple, strategies involved making cookie cutter PCs (defined by 3rd parties), typically at a higher price, utilizing a middle agent (reseller) and through inefficient and expensive delivery systems (i.e. IBM).

Apple, in the latest generation (Jobs), focused on product research and development, all with the goal of providing state of the art products, in the IT arena, that were in demand by educated and willing customers; sounds a little like an earlier Dell.

<span style="background-color: transparent; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">CG’s Comments:

<span style="background-color: transparent; color: #000000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Question #7 What is your assessment of Dell's strategic moves over the past few years, particularly since the return of Michael Dell? How would you modify their strategy moving forward?

GA’s comments: Dell has tried to move outside the PC are broaden its business scope. It bought Perot Systems and entered the IT outsourcing business. Dell has a competitive advantage in the outsourcing arena because it can sell the PC’s to their outsourcing customers at a discounted rate. This will allow Dell to under bid it’s competitors. It has also been looking at the printing options. They want to offer an all around package....cheaper price.

<span style="background-color: transparent; color: #134f5c; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">PH’s Comments: With respect to the assessment of Dell’s strategic moves over the past few years, I think their actions demonstrate misdirection for the company, like the quote, “Dell reminded some observers of IBM”. Their actions focus more on quick ways to make profit, contradicting some of their founding principles. A good example is the selling of low end Pc units to Wal-Mart; I do not see much for quality of product or an on slot of educated consumers. However, I believe that their reseller/integration service has some potential benefits, but the details need to be clarified.

With respects to moving forward, I would recommend a return to the basics for Dell. Reestablish their position for quality and price. Utilize resellers as integration teams for services and support needs. Look to expand technology services, in hardware, software and consulting arenas.

<span style="background-color: transparent; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">CG’s Comments: In January of 2007, after a period of dropping net margins and stalled growth, Michael Dell returned to his position as CEO of Dell.

He has moved away from focusing on the direct model sales of PCs to the purchase of Perot Systems, sale of PCs to retailers, entering the IT outsource sector...all of these decisions have resulted in movement away from the basics of what Dell has traditionally provided customers.

I would recommend: 1- to return to what they are best at..which was providing high quality PCs directly to customers with optimal and competitive pricing 2- Without looking at the numbers, I can only say that I would suggest expansion into areas of technology services, corporate sales focus, and IT outsourcing.

<span style="background-color: transparent; color: #000000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">Question #8 What is your evaluation of HP's announcement two weeks ago that it is considering whether to exit the PC business? What impact will such a move have on Dell?

GA’s comments: HP is looking to leave the PC business. Selling off that division. The PC business is low margin. HP currently holds 17.9% of the PC marketplace. They are number 1. Dell is number 2 at 12.9%. Dell could possibly climb back into 1st place if HP left the market. Dell hasn’t been first in the market since 2006.

<span style="background-color: transparent; color: #134f5c; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">PH’s comments: HP is looking to rid itself of business elements that it cannot master, that are outdone by competitors (Apple) or that experience low profit margins, as it does for PCs. The move will allow the company to refocus itself, some say like IBM, expanding in existing high profit margin areas (such as servers and equipment sales to corp. level customers) and venture into new business arenas, such as HP’s plans to buy business software maker Autonomy Corp. for about $10 billion in one of the biggest takeovers in HP's 72-year history.

This is an opportunity for Dell to benefit from, but the question is whether it will be short or long term benefit. Naturally customers will shift to Dell as a possible replacement to the HP PC, but if Dell does surpass initial price positions, equipment quality expectations and service needs, other companies, whether existing or new, have the potential to step in and replace Dell as the obvious replacement option for the HP PC.

<span style="background-color: transparent; color: #ff0000; font-family: Arial; font-size: 11pt; text-decoration: none; vertical-align: baseline;">CG’s Comments: