Matching Dell

Jonathan S. Leonard

Two Fundamental Strategies

Beat them on costs

Sidestep them with differentiation

Two Fundamental Strategies

Dell relentlessly drove down costs

Methods

Corporate Financial Comparisons? These are

clouded by differences in Business Organization,
Product Mix, Industry Mix, Pricing, Cost
Allocation
Product level Comparison:

Apples to Apples

Five Forces Analysis

Bargaining Power of Some Suppliers (very high)

Proprietary standards + customer desire for compatibility

Microsoft and Intel positioned to extract profits from
industry
Other inputs are commodities

Bargaining Power of Customers (Low)

Resellers and retailers have some grip on end-user

relationships, giving them ability to extract price protection,
but users more sophisticated (and less in need of
assistance) over time
Millions of customers

Five Forces Analysis

Intensity of Rivalry (very high)

Threat of new entry (high)

Wintel standards little distinguishes machines of leading

companies except price vigorous price competition
Growth of processing power outstrips growth in need for processing
intense excess capacity and saturation fight for market share
Capital costs of mfg facility low
Stream of low cost entrants (white-box makers) and contract
manufacturers
Absolute cost advantage difficult to maintain since inputs are
available at fixed prices

Threat of substitutes (growing)

PDAs, phones,etc.
Alternative sales methods (online)

Industry Evolution

Technology and customer desire for compatibility means

standard emerge that reduce the costs of switching
IBM relinquishes standards to Microsoft and Intel (oops).
Microsoft and Intel play cards well and use control of
standard to extract profits
Looks like the CSD industry: all profits extracted by
suppliers

Industry Summary

The PC industry is highly competitive

Low barriers to entry

Low switching costs among customers
Weak differentiation among most rivals
Vigorous price competition
Severe hold-up by Intel and Microsoft

The PC Industry: Some Lessons

Industry structure is not delivered by nature. It is

influenced by firm decisions, good and bad
In choosing what to do, industry leaders have to balance
their desire to attain a leading position with the
management of industry structure
IBM ends up with a strong position in an unattractive
industry

How to Compete in a Competitive Industry

Find attractive growing segment of the market

Provide quality of service leading to WTP comparable or
above others in the industry

Outperform industry on costs

Interlinked strategies

Value Creation Approach

Dell
WTP

Cost

Compaq

Dells Approach

Attractive segment:

Raise (or equalize) WTP:

Educated business consumers

Speed of delivery
Reliability
After sales service

Lower costs:

Direct channel
Build to order
Speed of delivery

Linked Activities

Dell focused all of their activities in an

integrated and complex way to achieve
advantage:

Direct sales focused on knowledgeable customers

No finished goods inventory, little WIP
After-sales service via direct online
Ship everything directly with no warehousing

No one activity was sufficient, combination of

activities created position

How Big Was Dells Cost Advantage?

Cost Analysis of PC for Corporate Customer in 1996
Dell
Assumptions
Dell price
Dell gross margin
Rate of decline in component prices/week
Annual Cost of Capital
Days Inventory
Channel markup
Competitor channel costs
commodity input and output markets
Calculations
Dell's cost of goods for one PC
Rival's Increased costs due to:
inputs purchased 7 weeks earlier
higher inventory costs
channel-related costs, buybacks
channel markup
Total Dell Cost Advantage
Rival's COGS
Dell Cost Advantage / price

Compaq+Reseller
2313
21.50%
0.60%
20%
15
7%
2.50%

1,816

65

Separate WTP from cost

Value-chain equivalence?

$1,816

Product/Customer Mix
Business Mix

% Revenue?

$76
$50
$58
$127
$311
$2,127
13.4%

Compare financials?

Potential Analytic Pitfalls

Direct vs Mfg + Reseller

Average or Marginal Cost?

Competitive Industry

Q&A with Kevin Rollins, Dell Vice Chairman

Q: What is it about the direct sales model and mass

customization that has been difficult for competitors to
imitate?
A: Its not as simple as having a direct sales force. Its
not as simple as just having mass customization in plant or
manufacturing methodology. Its a whole series of things in
the value chain from the way we procure, the way we develop
product, the way we order and have inventory levels, and
manufacturer service and support. The entire value chain has
to work together to make it efficient and effective.
Q: What is the competition looking for?
A: So many of our competitors are really looking at our
business and saying, Oh its an asset management modelseven
days of inventory. Thats what were going to do, rather
than looking at every one of 10 things and replicating
those.

The sincerest form of flattery

Rivals attempts to duplicate Dell
Straddle

Reposition

IBM and Compaq attempt to both direct and indirect

Gateway attempts to copy Dells operational and segment

strategy

Entry

New competitors (including some resellers) try to replicate Dell

Not Matching Dell

I would have expected by now that somebody would

have copied our business model. Actually, I am
quite surprised that it hasnt happened,
particularly given that our competitors have been
trying for at least ten years. If you look at the
economics, Dells operating expense ratio to sales
is less than 10 percent, whereas most of our
competitors is over 20 percent. I think what were
coming to believe is that its just very, very hard
to make these changes and Dell is a company that
from the ground up, from the design, from the
manufacturing, from the sales, from the support
started with a very distinctive and different way of
doing business. Michael Dell, remarks at MIT
Sloan School of Management, September 2002.

Why was it so hard to match Dell?

Preemption

May have prevented Gateway from getting

into the corporate segment

The Package, not the Parts

Intimate connections among the pieces of

Dells strategy make it difficult for rivals to
master all parts simultaneously and penalize
those who only go half-way

Why was it so hard to match Dell?

Avoiding Decisions

Occupying two distinct positions at once (straddle) is

difficult.
Hybrids (e.g., indirect sales with channel assembly)
inflexible and inefficient

Failure to Choose, Failure to Change

Compaq, Gateway, HP strategies had been

successful. Why change?
Compaq CEO sings song of the road-kill:
We want to do it all, we want to do it now.

Why was it so hard to match Dell?

Competitive dynamics

Tradeoffs are accentuated (and straddling is made

difficult) because of HP
Every time Compaq/IBM move towards direct, HP
tries to pick off channel
It is especially hard to straddle two positions when
competitors are willing to specialize in one.

Strategic Commitment

IBM and Compaq invested heavily in the valueadded reseller (VAR) channel. The VAR channel
brought them success at first, but their
commitment to this channel created an
uncomfortable straddle and interfered with their
attempts to compete with Dell as the direct
channel grew in importance.

Hang Ups

2007: Analyst says it is time to buy with Wall St

currently 'hung up' on elasticity and price war
theories. Says Dell still knows how to run a
business. Establishes $31 price target
Analyst fails in attempt to perform
psychotherapy on market. Theoretical price
war continues and Dells stock price falls by a
third.

Dells Stock Price

Dell vs HP: the last decade