Matching Dell

Case Analysis

By Group C1
Aabhaa I P Ankit Thakrar Gaurav Singh Gururaj Nayak M P Prashanthi Priyanka

Rise of the PC industry

IBM establishes open architecture to encourage software developers to write programs for the IBM PC. Development of network of distributors and dealers known as Value added resellers. Makers of IBM clones rely on resellers and retail stores to reach customers. 85-90% of PCs use User-friendly operating system Windows and microprocessor Intel- standard known as Wintel. Dell rising with introducing the lower price models ran advertisements in the newspapers. PC prices continued to decline as the demand for the PCs increased.

Dell Strategy Strengths

Pioneering Direct Model strategy instead of the distributors, retailers and resellers model. Primarily served the corporate customers and offered them high performance PCs at relatively low prices. Use of call centers to provide the customer services 24/7. Sales through Online website www.dell.com. Made customized PC based on actual orders and held no finished goods inventories of standardized machines. Created relationships with large companies and this provide them the maximum of their business.

Porter five forces model

New Enrants(Low) As the capital requirements are high the barriers are more for the new entrants.

Industry Rivalries(High)
Supplier Power(High) Few Substitutes available for the WINTEL in the market so no bargaining power for the industry
IBM Compaq Hewlett-Packard Gateway

Buyers power(High) Many brands existing which are competing with the prices So will have high bargaining power

Substitutes(Low) Apple operating System Microprocessors: AMD, Cyrix, Motorola

Challenges
Competitors narrowing the gap between the prices (Exhibit 10A and 10B & refer Observation 5). Large dependence on US for the sales. Need to increase the sales globally (Exhibit 2a and 2b). Need to invest more in R&D as the technology advances (Refer Observation 4) Competitors trying to replicate the Direct Model of Dell. Authorized Assembly Program (AAP)-IBM Extended Solution Partnership Program (ESPP)-HP Optimized Distribution Model (ODM)-Compaq Significant weakness in targeting student segments and educational institutions where the segment contributes only 5% of the total sales. Buyers cant physically touch and see the product.

Highly dependent on PC model. Diversification required.

Observations of the case: 1) Inventory:

The below graph represents the average number of days the stock takes to reach the customer after production.

Days of inventory
80 60 40 20 0 70.4 34.2 7 49.4 10 Days of inventory

2) Percentage increase in the market share

% Increase In Market share (1997-98)

50 40 30 20 10 0 -10 -20 Acer -11.43 Apple Compaq Dell Gateway HP IBM -5.74 -2.22 12.2 15.75 6.25 4.37 18.31 17.65 18.18 12.5 United States World Wide 41.94 45.76

3) Net income as a percentage of revenue

Net Income/revenue (In %)

10 5 0 Dell -5 -10 -8.8 IBM Compaq HP Gateway 6.7 7.7 8 6.1 6.2 6.2 7.3 7.5 6.7 7.3 6.3 4.7 1.7 4.5 1997 1998 1999

4) Income break-up of the year 1998

As a Percentage Of Revenue Particulars Dell Gross Margin 22.08% SG&A 9.75% R&D 1.65% Operating Income 10.67% Net Income 7.65% IBM 52.99% 20.40% 6.17% 11.22% 7.74% Compaq 31.39% 15.97% 4.34% 3.07% -8.80% HP 31.85% 16.55% 7.12% 8.16% 6.25% Gateway 20.21% 13.75% NA 6.45% 4.52%

Assuming that the taxes, dividends etc. are absent, the net income percentage is considered to be the profit of the companies. From the graph, it can be seen that Dell has the 2 nd highest profit percentage, which is slightly less than that of IBM.

5) Percentage change in PC selling price

Average PC selling price Price ($) 1996 1997 Dell 2313 2405 Compaq 2660 2868 IBM 2841 2809 HP 2847 2729 Gateway 1913 1990 1998 1977 1912 2024 2147 1534 %Price Change 1997 1998 4% -17.80% 8% -33.33% -1% -27.95% -4% -21.33% 4% -22.91%

Conclusions
The current market trends in the computer industry, for PCs are driven by ever changing consumer needs, wants, and demands. So the company needs to adapt constantly to satisfy their consumers. So now by direct model it has adopted, though a very profitable model need to be modified further considering the challenges in the coming years.