Dells Foray into the Consumer Electronics

Strategic Change

Oestrich-Winkel, 10.03.2008

Overview: Agenda
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

Positive development during the 90s and early 21st century

Overview: Share Price Development
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Source: www.Nasdaq.com

1984: Creation by Michael Dell 1988: IPO 1990s:

Target group expansion to smaller business and individuals & launch of PC sales Introduction of e-commerce platform International expansion to Europe, Middle East, Asia-Pacific markets with opening of new facilities

2001: Largest computer manufacturer in the world

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

Entry into the CE market not coronated by success

Overview: Share Price Development
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

2003: Change to Dell inc. entry into the CE market 2004: Michael Dell steps down

Source: www.Nasdaq.com

2005: Incorporation of the independent CE unit into the Software and Peripherals business, and admittance of failure in the CE business. 2006: Acquisition of Alienware 2007: Michael Dell returns

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

Overview: Agenda
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

The market for consumer electronics (CE) comprises wide field of products and services
Overview: Consumer Electronics
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Consumer Electronics (CE)

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

Moving profit pools across industries and need to find a new core business
Overview: Sustainability Analysis - 2003
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Evaluation of Core Business

Market share (16.6%) Profitability (8% profit margin) Customer loyalty Boundaries (e-commerce, corporate customers) Size, growth, stability (113 B, 2 %, solid) Decreasing differentiation (increasing costcompetitiveness) Business models of emerging competitors (threatening e.g. Samsung)

Moving profit pools across industries and need to find a new core business Leverage economies of scope between PC and CE Repeat the formula of supply chain management and direct marketing

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

CE is an attractive market, products are similar to PC market with a stronger emphasize on soft facts
Overview: External Analysis - Market Comparison
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

PC Market
Corporate customers as growth vehicle Low margins (< 10 %) Low customer interface accepted Market saturated (growth 2 %) Product development rapid, but defined standards Quality, reliability, and costs as USPs High price sensitivity Mature product

CE Market
Private customers as growth vehicle High margins (> 10 %) Low customer interface problematic Promising market growth (2006-2011: approx. 24 % overall) Emergent market with respect to product development Product features and technology as USPs Differentiation Design and brand image Immature product portfolio

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

Dell is exposed to competitive pressures but is able to leverage powerful position with suppliers
Overview: External Analysis - Five Forces
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Products of Substitution
Smart phones Portable TVs & DVD players PC/notebook Cinema

Supplier Power
Sourcing of latest components from lowwage countries Almost no proper R&D (1.5% of revenues)

Internal Rivalry
Intensive competition amongst producers Life cycle phase: Growth (Top 5 players 32% of vol. sales) Aggressive competition from Asia Short product lifecycles, R&D critical Intensive competition amongst retailers Specialist multiples with biggest share Internet sales and non-traditional retail outlets gain momentum

Buyer Power
High switching costs Strong brand preferences Demand for innovative products Importance of design Preference for in-store purchase Pressure through requirements

Barriers to Entry
Brand & Image R&D / Design Logistics Sourcing Economies of scale Economies of scope

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

Direct marketing itself does not fulfill the criteria of being a core competency (CC)
Overview: Internal Analysis - Direct Marketing as a CC?
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

CC as a combination of technology bundle, collective learning, and capacity to share

CC has been shared across different countries and business units (CE and PC) Technology bundle given, as direct marketing is combined with customer insights Collective learning is not given (until 2007)

Attributes of CC Valuable Rare Inimitable Non-substitutable

Is Direct Marketing a Core Competency? Direct marketing creates value by enabling Dell to offer products cheaper In Dells industry and in CE, direct marketing is rare Direct Marketing is not inimitable; the only thing that cannot be obtained is Dells customer data Direct Marketing is substitutable by conventional marketing and distribution

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

10

Supply Chain Management itself does not fulfill the criteria of being a core competency
Overview: Internal Analysis - Supply Chain Management as a CC?
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

CC as a combination of technology bundle, collective learning, and capacity to share

CC has been shared across different countries and business units (CE and PC) Technology bundle given, as vendor knowledge is combined with IT infrastructure and efficient logistics Collective learning is given by continuous improvements

Attributes of CC Valuable Rare Inimitable Non-substitutable

IS Supply Chain Management a Core Competency? Configuration of value chain creates a cost advantage Supply chain management is getting more and more common among different industries The exact configuration of the value chain is difficult to imitate; however, it is not impossible to imitate For Dells business model, supply chain management is not substitutable

Question: What is Dells real core competency?

01.04.2008 11

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

Dells real CC is a combination of their direct marketing and supply chain management expertise
Overview: Internal Analysis - Dells Real Core Competency
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Dells real core competency lies in the combination of direct marketing with supply chain management, thus being able to offer products at a low cost low cost, high volume strategy This combination is only imitable by using immense resources and changing the business model

Question: Is this CC transferable?

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

12

Dell consolidated the traditional marketing and distribution step to create a unique business model
Overview: Internal Analysis - Dells Value Chain
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Infrastructure IT (information transparency, holistic integration) HR R&D (outsourced; spending approx. 1.5% of revenues)

Sourcing

Production

Marketing & Distribution

After Sales Service

Low wage countries Cost advantage standardized

Outsourcing Assembly inhouse; close to regional markets (Ireland, Malaysia, China, Brazil)

No retailer EDLP Customer Loyalty Viral Marketing

Partly outsourced

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

13

Threats support the move into the CE market

Overview: Internal Analysis - SWOT Analysis PC Market
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Strengths
Market power in corporate customer segment Strong focus on customization of product portfolio Market leader in the computer manufacturing industry Direct distribution strategy Price leadership

Weaknesses
High reliance on corporate customers (85% of revenue in 2005) Customer service perceived as dissatisfactory

Opportunities
Core Competences might be applicable to other business segments

Threats
PC business declining across business customers Low margins (<10%) Market is saturated Notebook computers become increasingly popular Price war and resulting profit erosion

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

14

Going into the CE market bears a lot of opportunities for Dell, but threats need to be assessed as well
Overview: Internal Analysis - SWOT Analysis CE Market
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Strengths
Economies of scope with products and production processes from PC business Direct marketing and supply chain management Established supplier network (cost efficiency) Competitive pricing

Weaknesses
No presence in retail stores, while customers want to physically experience products Low brand equity in CE market Weak brand image due to lack of innovations No design expertise (standard mass products) Lack of expertise in lifestyle products

Opportunities
Application of existing distribution model High margins No competitor using direct marketing Growing market Cross selling effects

Threats
Price erosion No acceptance of direct distribution by private customers Products too sophisticated (expensive) for Dells core customers High switching costs in multi media systems

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

15

Dell failed to enter the CE market properly reasons for that need to be identified
Overview: Intermediary Conclusion
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Expanding into the CE market bears considerable potential

Dells decision can be supported by several acknowledged frameworks

Nevertheless, the venture can be considered a failure

In order to identify reasons for the failure, the mode of entry chosen needs to be analyzed

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

16

Overview: Agenda
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

17

Dell tried to enter the market using an indirect attack

Overview: Evaluation of Entry Mode
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

A Indirect Attack is given when two of the following strategies are combined

1. Reconfigure the Value Chain

Transfer of business model from PC market to the CE market

2. Leverage Existing Assets

Going from PC to TV screens Leveraging of production lines / suppliers Using existing direct distribution model Leveraging of Core competency Attempt to transfer brand name from PC to CE market

3. Create a Niche
Beginning trend for integrating many functions in one device Integrated TV / PC screen and multimedia centers serve this need Rebel customers but very little not enough differentiation to call it a niche Conclusion: Indirect Attack, because two criteria fulfilled and combined Leading to a combination of 1. and 2.: Dell introduced a new distribution system within the CE market (1.) by using their main suppliers and components from the PC business (2.)

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

18

Dells competitors perceived their entry as a direct attack and acted accordingly
Overview: Evaluation of Entry Mode
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Unfortunately, competitors perceived it as a direct attack towards retailers and CE products, and hence Dell could not reap the benefits of an indirect attack.

Possible reasons for that:

Aggressive marketing (low price strategy; competitors need to act) Business model already known by competitors and hence corrective actions taken

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

19

Breakaway positioning as chosen product positioning strategy

Overview: Product Positioning
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Reverse Positioning
Service Categories Adding new Product attributes by discarding others

Breakaway Positioning
Consumer goods Associating a product with a radically different category

Stealth Positioning
Consumer technologies Acclimates leery customers by cloaking a products true nature

Breakaway positioning attempted by combination of PC and CE

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

20

Increased competition requires enhanced innovation to establish a competitive advantage

Overview: Competitors and Complementors
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Complementors (demand side): Manufacturers of complementary CE equipment, e.g. cameras and smart phones Manufacturers of gaming consoles Movie industry and TV channels Software manufacturers (Potential area of conflict: diverging business models) Service providers installing the system Music industry (iTunes music store not being the only online music store any longer reduces music industrys dependency on Apple pay me to play) Competitors (demand side): All manufacturers of CE equipment Retailers Competitors (supply side): Other TV and hardware manufacturers All manufacturers of CE equipment (also cell phones, digital cameras, etc.)

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

21

Overview: Agenda
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

22

Overview: Conclusion
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Owing to moving profit pools Dell was forced to find a second core business
The CE market seemed to be very promising

Transferability of core competencies from PC to CE market was overestimated

PC: Success based on price and reliability CE: Success based on marketing and innovation

Fighting on too many fronts is counterproductive and confuses consumers (negative effect on success) Attempted indirect attack was perceived as a direct attack Enhanced market complexity leads to cross competition between different product sectors Increased competition requires enhanced innovation to establish a competitive advantage Failure to management complementors appropriately

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

23

Dell underwent two major strategic changes within the last five years
Overview: Strategic Change
Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Phase 1
Instead of offering existing products at a low price with the opportunity for the customer to customize them, Dell invested in a fairly innovative system (Home entertainment systems) Dell went from commodities to lifestyle

Phase 2
Moving from standardized functional products to more lifestyle and design oriented products Product innovation becomes a major role within Dells strategy

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

24

Overview: Recommendations for the Past

Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Transform perceived direct attack into a real indirect attack and disappear from competitors radars Create a niche by offering CE products exclusively to business customers Do not fight war on two fronts at the same time (retailers and manufacturers) Take advantage of customer database in order to gain insights into customer needs for CE products Make CE products independent brand with different value proposition Endorse products with the help of complementors

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

25

Overview: Recommendations for the Current Situation

Dells Background | Analyses | Reasons for Failure | Conclusion and Recommendations

Stealth positioning of products in order to increase acceptance of their products Cooperation with other companies either being active in the industry (e.g. Apple is responsible for product design and development, and Dell builds and distributes products using existing assets) or being industry outsiders (e.g. Porsche design) Take advantage of customer database in order to gain insights into customer needs for CE products Make CE products independent brand with different value proposition serving as a differentiating from low cost competitors

01.04.2008

Marie Debreux

Florian Jahns |

Jan Schlichenmaier

Jasmin Pfeifer

Ferenc varaljai Laban

26

Thank you for your attention !

Any questions ?