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STRATEGYANALYSESAND RECOMMENDATIONSFOR DELL,INC. March6,2006

AUTHORS KHALIDALKELABI (OrganizationCapabilitiesandResources) JENNIFERLUND (Compet dscape) KATHRYNLYNCH (IndustryCharacteristicsandMacroForces) GREGSHORR (Present dStrategy) MATTHEWSMITH (OrganizationCharacteristics) 1

TABLEOFCONTENTS AUTHORS ........................................................................ ................................................................................ ...........1 TABLE OF CONTENTS ................................................. ................................................................................ ...........2 I. EXECUTIVE SUMMARY............................................... ................................................................................ .......3 II. KEY STRATEGY ISSUES................................................ ................................................................................ ....4 III. ORGANIZATION CHARACTERISTICS......................................... ................................................................5 IV. ORGANIZATI ON CAPABILITIES AND RESOURCES .................................................. ..............................8 V. INDUSTRY CHARACTERISTICS AND MACRO FORCES.... .....................................................................10 VI. COMP ETITIVE LANDSCAPE............................................................... ..........................................................13 VII. PRESENT POSITI ONING AND STRATEGY ............................................................. .................................16 VIII. ENVIRONMENT AND STRATEGY ASSESSMENT .. ...............................................................................1 9 IX. OPTIONS AND RECOMMENDED STRATEGY ......................................... .................................................22 IX.1. FOCUS ON INNOVATION .. ................................................................................ ................................................22 IX.2. DIVESTING ............. ................................................................................ .........................................................22 IX.3. EXPANSION INTO SERVICES....................................................................... ......................................................23 IX.4. REINVIGORATE DIFF ERENTIATION ADVANTAGE .......................................................... ..................................23 IX.5. RECOMMENDED STRATEGY ................ ................................................................................ ............................24 APPENDICES A C: ORGANIZATION CHARACTERISTICS .... ..................................................................28 A. ORGANIZA TIONAL PURPOSE AND DIRECTION ................................................... ..................................................28 B. ORGANIZATIONAL CHARACTER ISTICS.......................................................................... .......................................29 C. VALUE CHAIN ANALYSIS .............. ................................................................................ ......................................31 APPENDICES D F: ORGANIZATION CAPABILITI ES AND RESOURCES..............................................36 D. KEY COMPETEN CIES ASSESSMENT ................................................................ .....................................................36 E. TECHNOLOGY ASSESSMENT ............................................................................... ................................................39 F. FINANCIAL RATIO ANALYSIS . ................................................................................ .............................................43 APPENDICES G I: INDUSTRY CHARACT ERISTICS ....................................................................... ...........45 G. MACRO FORCES ANALYSIS ......................................... ................................................................................ ........45 H. INDUSTRY ANALYSIS ................................................ ................................................................................ ..........50 I. INDUSTRY LIFE CYCLE ............................................ ................................................................................ .............53 APPENDICES J L: COMPETITIVE LANDSCAPE........................... ..............................................................55 J. FIVE FORCES OF COMPETITION ................................................................. ...........................................................55 K. MAJOR COMPETITO RS ............................................................................. ............................................................57 L. COMPETITOR RES OURCES ......................................................................... ..........................................................59 APPENDICES M O: CUR

RENT POSITIONING AND STRATEGY................................................... ..........62 M. PRODUCT MARKET MATRIX .......................................... ................................................................................ .....62 N. PORTER S GENERIC STRATEGIES ......................................... ................................................................................ 65 O. MARKET ATTRACTIVENESS AND STRENGTH ....................................... ................................................................66 APPENDIX P: B IBLIOGRAPHY .................................................................... .......................................................69 2

I.EXECUTIVESUMMARY Dell has experienced tremendous growth over the past twenty year s. Throughout this period, Dell has continued to raise its standards of excellen ce. The values, mission and vision of the company facilitate the achievement of these illustrious goals. The purpose of this document is to evaluate the interna l and external environments and Dells position within this competitive landscape. Based upon this analysis, a recommended strategy will be outlined which will gu ide Dell back to its roots. The key competencies of Dell are customer focus, man ufacturing processes, supply chain management, customer selection, acquisition a nd retention, customer service and human capital management. Dells strategy has b een to match its core competencies with key industry success factors. The PC ind ustry is facing increasingly strong worldwide competition leading to reduced dif ferentiation among competitors and increased price sensitivity among consumers. Although Dell has seen considerable growth, the company is beginning to lose its competitive edge in critical business segments. Specifically, Dell needs to imp rove in the following areas: customer service, customization options, increased marketing presence and retail solutions tailored to the global environment. Dells ability to adapt in these business segments will ultimately determine its abili ty to maintain its predominant position. The recommended strategy for Dell is to reinvigorate its differentiation advantage. Ultimately, the company must get ba ck to basics. This requires the firm to realign its core competencies with the n eeds of a global marketplace. 3

II.KEYSTRATEGYISSUES Dell is facing multiple strategic issues which may impede on th e companys top position in the computer hardware market. This section addresses t he four key strategic issues that Dell should address in order to maintain its p rominent market position. First, Dell faces slow growth for its primary product: the personal computer (PC) in a saturated U.S. market. The majority of U.S. cor porate and education PCs will be replacement units affected by a technological u pgrade cycle within the next two years. Therefore, as Dell attempts to maintain its dominant position, the company should focus on product customization and sup erior relationships with suppliers. This strategy enabled Dells past success but had become diluted over the last five years. The company should continue to impr ove itself in these areas in order to remain the top computer hardware different iator. Second, the erosion of Dells brand value continues due to the perception o f declining customer service. Although the company prides itself on superior cus tomer service, recent surveys suggest that Dells results recently declined in thi s business segment. Dells executives are aware that quality customer service is a key element of the companys success and are reportedly working towards improveme nts. Third, Dells inability to serve all market needs due to the current strategy of limited vendors in its supply chain. Dell brings few products to market and leverages technology created by other companies effectively and efficiently. Del l also remains committed to chip supplier, Intel. Although this enables Dell to offer PCs at high value to consumers, it also limits the companys ability to supp ly diverse customers. The company should consider enabling itself to offer more customized products by increasing relationships with more diverse suppliers. 4

Finally, Dells market footprint extends primarily to mature markets in the U.S., Europe and Japan. The global market for PCs continues to growcreating additional opportunities for Dell. For Dell to compete in growing computer markets around t he world including Latin America, China and other countries in Asia the company should enhance its expertise in customizing its products. This would enable it t o expand its market niche of product differentiator outside of the U.S. III.ORGANIZATIONCHARACTERISTICS By MatthewSmith Dell, Inc. has experienced tremendous growth since Michael Dell founded the comp any with only $1,000 in his University of Texas dorm-room. Today, Dell has globa l revenues of nearly $50 billion and employs more than 55,000 individuals. Despi te this tremendous growth, the organization has remained committed to its core v alues. The Soul of Dell creates an ethical framework in which people are the commo n thread which links the organizations current position and future aspirations. T he organizations mission is to be the most successful computer company in the world at delivering the best customer experience in the markets we serve (Soul of Dell , 2006). The vision of the company is: to lead in all regions we serve. The founda tion of our success is the same in the United Kingdom and France, China and Japa n, Canada and other countries. Customers want technology products that are relev ant to them, offer great value and can be easily purchased and used. Thats what o ur team around the globe consistently delivers (Fiscal 2005 in Review, 2005). Con sidering variations in customer preferences throughout the world, this vision ma y not allow Dell the flexibility to meet varying customer needs throughout its g lobal marketplace. 5

The organization, which is exceedingly results driven, has set one major goal th rough 2007. That goal, which was increased by $20 billion, is to reach $80 billi on in revenue by the end of 2007. Despite a recent decline in PC sales, the revi sed goal was established to reflect increases in service and storage revenues. I n addition, the organization believes it stands to benefit from increased sales in emerging markets. Dell is a flat organization which operates on open communic ation and demands results. Employees at every level are given the freedom to pur sue and develop new and more efficient ways of completing tasks without prior ap proval from upper management. If successful, new strategies are shared and initi ated across the organization. Likewise, open communication creates a results driven organization. The organization believes that each emplo yee should know exactly where he/she stands with regards to meeting organization al goals. To facilitate this, employees are rated every six months by their peer s. These surveys are instrumental for accountability. Those employees that earn excellent ratings on their surveys are rewarded with high appraisals. Conversely, those that receive poor ratings expe ct substandard appraisals. Dells culture is a meritocracy in which leadership rew ards achievement. As noted, Dell leadership relies heavily upon surveys to evalu ate, reward, retain and promote high performers. The organization feels that thi s method provides an honest, open assessment of employee accomplishment and pote ntial. This assessment, which is based upon open communication and honesty, crea tes a culture that is competitive, hard working and loyal to the organization. D ell utilizes key strategic partnerships to maintain efficiencies in its operatio ns. Dell currently partners with Intel for 100% of its chips. While this single source partnership has allowed Dell to contain its costs and maintain consistent supplies, it has also limited the customer choice. Many analysts believe an add itional partnership with AMD would provide Dell 6

significant price and performance advantages. Dell also partners with Costco, Sa ms Club, QVC Inc. and Target in an effort to broaden its customer base. Additiona l production partnerships include Lexmark, Fuji Xerox, Kodak, Samsung and EMC. R ather than spend significant dollars on R&D, Dell relies heavily upon the techno logical developments of its partners and competitors to recreate successful tech nologies. Dells value chain is considered to be the gold-standard of the industry . The organizations model relies heavily on technology and its employees to achieve its success. With regards to inbound logistics, the organization maintains just-intime inventories through shared EDI systems. The organizations ability to maintai n four day inventory levels are among the most cost effective of any company. Th e organization also looks to its employees to maintain efficiencies. As noted, D ells culture encourages its employees to develop more efficient ways of doing bus iness. Within operations, employee developed initiatives have saved the organization billions of dollars and quadrupled productivity over the last 4 yea rs. Dells direct-selling business model revolutionized the computer industry. The organization has maintained a massive marketing budget to push its customized PC s. Although most orders are placed via Dells website, customers may also place cu stomized orders by phone, fax or through limited retail locations. Those orders, which now include printers and consumer electronics, are then shipped within on e week for significantly less cost than its competitors. Over the last decade, f ew competitors have matched Dells legendary customer service. Although customer s ervice is considered to be a differentiator in the computer industry, recent sur veys have shown a decline by Dell. This decline has resulted in the similar decl ine in the brands inferred value. Increased outsourcing is a suspected reason for the firms decline in this business segment. 7

IV.ORGANIZATIONCAPABILITIESANDRESOURCES By Khalid Alkelabi The heart of Dells business strategy and its direct selling model is customer foc us. Dell developed a core competency in making its customers the center of its b usiness and deployed its resources and capabilities to enhance the ability to se rve them. The customer centricity in Dells strategy has empowered it to develop m ore competencies: manufacturing processes, supply chain management, human capita l management, customer selection and customer service. In order to hit the marke t in a timely manner with new products that are based on new technologies, Dell had to constantly improve its supply chain. Furthermore, manufacturing processes had to be improved to compliment the efficiencies created by the supply chain. To manage this complicated infrastructure, Dell had to recruit, train and retain a capable workforce that can grow as the company grows; thus, a healthy environ ment that endorses honesty, accountability and learning was created over time. T his efficient and logical approach helped enhance core competencies: Dell became more efficient in recognizing, acquiring and retaining customers by fulfilling their needs efficiently, delivering value and servicing them effectively. These core competencies enabled Dell to manage its profitability and performance effic iently in a mature industry (Appendix I). Dell was able to utilize its internal resources and capabilities and leverage its core competencies to match the indus trys key success factor (Appendix H.6). In addition, Dells infrastructure, human c apital, global presence and capabilities will greatly help its international growth and contribute further t o its differentiation strategy. Dells technology infrastructure is efficient and capable of supporting expansion into new markets, growing sales and delivering v alue to customers. Global manufacturing facilities supported by innovative proce sses will also support such strategies. 8

Dells differentiation stems from process innovation. The company is very successf ul in leveraging and harnessing the value of its suppliers and partners technology innovation. This allows Dell to minimize R&D spending and improve the cost stru cture, a strategy that is rarely matched by competitors. The company is also gai ning knowledge in the retail industry by partnering with major retailers such as Costco. This is vital for the success of any strategic initiative aiming for a retail presence in global emerging markets such as China and India. Dells financi als indicate a stellar operational performance evident by above the average inve ntory, assets and receivables turnovers. The company was able to achieve a high financial performance at the operational level by utilizing its state of the art IT infrastructure, supply chain and inventory management systems. Further, the companys stock represents an attractive investment due to the companys utilization of assets and focus on capital return. This is evident when comparing Dells high return on investment, asses and invest ed capital (ROE, ROA and ROIC) to the industry and market (Appendix F). experien cing average profit margins. Profitability ratios indicate that Dell is This is contributed to hyper competition in the PC industry; competitors are running on thinner margins in order to gain market sha re. The capital structure that Dell adopts focuses on financing growth and opera tions from retained earnings, the company doesnt pay dividends or acquire debt. T he companys financial policy in this regard emulates an IT start-up company, even though its a mature company in a mature industry. Its highly unlikely that Dell w ill continue this policy in the near future as investors press for dividends and the stock price falls, as is happening already. Further, acquiring debt might be necessary to finance growth and establishing retail pres ence into global emerging markets. This will not have a negative affect on Dell since it possesses the necessary financial leverage. 9

V.INDUSTRYCHARACTERISTICSANDMACROFORCES ByKathrynLynch The current environment for the computer hardware industry is shaped by several macro forces. Primarily, Dell and its competitors are influenced by economic, de mographic, technological and national forces. Government, social, physical and national for ces peripherally affect the computer hardware industry to varying degrees. The c ommoditization of the personal computera vital tool for business and consumer cus tomersis a key driver for the economics of this industry. Corporate spending acco unts for 80% of all technology spending, and economic conditions decreasing busi ness capital expenditures has a negative and direct impact on the computer hardw are industry. While this industry is mature in the U.S., leading to decreased gr owth expectations, computer spending by other countries around the world will li kely fill this void. Specifically, the computer hardware industry is predicted t o grow exponentially in Latin America and non-Japanese Asia over the next severa l years. Demographic forces also influence the characteristics of the computer h ardware industry. Geographic areas discussed above indicate where computers are well below their penetration levelscreating the prospect of new markets. Although 2003 U.S. census data on computer and internet usage at home correlates closely with income and educational level, the commoditization of computer hardware ind ustry enables it to be accessible to lower income level consumers. Consumer race and age also influences computer usage, according to the 2003 U.S. Census Burea u. Computer hardware companies should target less educated consumers, Hispanics, Blacks and people older than 65 years to achieve additional areas of market grow th. 10

Technological forces have the most significant influence on the computer hardwar e industry. The phenomenon called the upgrade cycle is one of the most influential macro forces on the computer industry. The upgrade cycle drives waves of new pu rchases among business and consumer customers as technological change transpires . Some industry analysts assess that 50% of computer hardware product profits ar e created during the first 3 6 months of sales. In 2006, Microsoft is set to rel ease the Vista operating system which is likely to catalyze an upgrade cycle among business and consumer customers. Customers increasingly choose a single vendor to meet all of their computer needs and technology upgrades. For a computer hard ware company to remain competitive, all customers needs must be efficiently satis fied. We recommend that Dell focus on turn-key technology solutions in order to ma intain its superior differentiator status within the industry. National forces a re increasingly important in a computer companys ability to maintain its competit ive edge, both in terms of the manufacturing process and improving sales. Comput er companies are increasingly shifting their manufacturing operations outside of the U.S. to take advantage of a growing business and consumer market for their products as well as cheaper operating costs. Government, social and physical for ces influence the computer hardware industry, however, these macro forces are si gnificantly less important than those discussed in prior paragraphs. Governments throughout the world represent an opportunity for computer hardware companies, including Dell, as they aim to develop and deliver more services to their citize ns. Social forces, including holiday, back-to-school sales and a summer business slowdown in Europe also drives sales in this industry. The physical environment has very little impact on the computer industry since all computer parts are ar tificially manufactured. However, adverse 11

weather can negatively impact the competitive edge of a company such as Dell, wh ich relies on just in time inventory methods as well as direct sales to its custom ers. The electronic computer manufacturing industry is mature in Japan, the U.S. and Europe. Growth opportunities remain among certain target populations within those areas and significant areas of market expansion are likely to occur in La tin America, Asia, and the Middle East. However, computer hardware companies are likely to continue the trend towards consolidation for the foreseeable future. Mergers and acquisitions have characterized this industry over the last few year s including Lenovo Groups purchase of IBMs PC division in 2005 and HPs 2002 acquisi tion of Compaq. Pricing in the computer manufacturing industry is extremely comp etitive. IT reflects the rapid pace of technological change and decreasing PC co sts. Since 2000, the prices of chips and disk drives declined and the standardiz ation of primary components of PCs led to a decline in PC prices. Direct sellers , including Dell, have traditionally been able to under-price indirect sellers i n the industry including Compaq and HP. However, most PC vendors now offer a des ktop model for less than $500 and a laptop for $700. Key success factors for com panies in this industry continue to evolve as the industry matures. Specifically , they include: Competitive prices Superior relationships with suppliers Product customization for business and consumer customers Quality customer service Exce llent cost structure Dells business model incorporates many of these key factors; the company is worki ng to improve customer service and product customization. 12

There are also significant opportunities for computer hardware manufacturers inc luding expansion into peripheral markets and products such as printers. Dell ent ered this market in 2003. However, threats to the computer hardware industry are strongprimarily, stiff competition among top industry players such as HP. The computer and peripherals industry is firmly entrenched in the maturity stage of the life cycle. Companies in this stage, including Dell, experience stable sales, slight growth, and decr easing production costs. In order to remain at the forefront of the competition, computer hardware companies should focus on process innovationan arena where Del l has succeeded. Specifically, Dell adopted a customer-focused approach with a c losely managed supply chain and cash-flow process. Dells low-cost, direct sales m odel shaped its position in the industry and other companies have struggled to c opy this innovation. As Dell and other computer hardware companies continue to m aneuver the challenges of the mature life cycle stage, they will need to remain focused on process innovation and creating business and consumer customer value to maintain its status as industry leader. VI.COMPETITIVELANDSCAPE ByJenniferLund Understanding the external environment is key to successfully competing in the c omputer hardware industry. Porters Five Forces of Competition provide a framework for Dell to outline the bargaining power of suppliers and customers, the threat of new entrants, the threat of substitutes and the intensity of competition. In this industry, the bargaining power of suppliers is high due to the limited num ber of suppliers for key components. For instance, Intel sells 90% of the microp rocessors used in PCs and Microsoft provides 85-90% of the operating systems. In addition, 80% of the worlds laptops are assembled in Taiwan. Likewise, the barga ining power 13

of customers is also high due to the fact that PCs are now commodities. Nearly a ll PCs contain the same components or the same type of components. However, cust omers power remains limited because consumers may be willing to pay a premium to computer companies that are able to provide technological solutions. Alternative ly, the threat of new entrants is low. The 1990s saw a significant level of grow th, but the early 2000s have shown signs of contraction within the industry. The threat of substitutes is also low since the only available substitute for a Win dows-based PC is an Apple Macintosh. Finally, the intensity of competition is hi gh since there are relatively few competitors in the market. However, they all o ffer the same basic products and must compete on price. Next, Dell must analyze its competitors to determine the best way for it to successfully compete in the computer hardware industry. Dells main competitors include: HP, IBM and Sun Micro systems (Sun). In the PC market, Dell competes primarily against HP. It held the #2 spot (behind Dell) as of the 3rd quarter of 2005. HP is also doing well in A sia-Pacific, growing its market share by 250 basis points in the same quarter. H owever, HP appears to be focusing less on its PC division, enabling Dell to incr ease its own market share. IBM recently sold its PC division to Lenovo, but rema ins a strong competitor in the server market. In addition, its 2002 purchase of PwCs consulting division provided it with an established services organization. T he combination of IBMs server line and its consulting arm allow it to provide ser vices that Dell cannot. Sun competes predominantly in the server market. It held the #3 spot in the Unix server market in the 2nd quarter of 2005. It recently a dded personnel to improve its services offerings and created alliances with Elec tronic Data Systems Corp and Computer Services Corp. Sun also 14

added the Galaxy server line to regain market share but its continuing financial weaknesses may allow Dell to take server market share. Dell and its competitors were analyzed in terms of their sales, liquidity, asset management, profitabili ty and operations. IBM and HP have far outpaced Dell and Sun in terms of sales. For instance, IBM earned $92 billion compared to Dells $49 billion in 2005. The c urrent ratio reveals Sun as the most liquid competitor. Its current ratio of 1.5 1 surpassed that of HP (1.38), IBM (1.31) and Dell (1.20). Although this implies that Sun is more capable of repaying short-term assets than any of its main com petitors, this analysis reflects information available prior to Suns 2005 acquisi tion of Storagetek. Asset turnover measures the firms ability to use its assets t o create sales. With a ratio of 2.12, Dell outpaces its competition. For every d ollar of total assets, it earned $2.12 in sales. Alternatively, HP has a ratio o f 1.12, IBMs totaled 0.90 and Suns equaled 0.78. Four profitability measures were evaluated: gross profit margin, net profit margin, return on equity and return o n assets. IBM and Sun earned the highest gross profit margins in 2005 with 42.7% and 41.5%, respectively. This implies that IBM and Sun are better at controllin g input costs than HP and Dell. IBMs large consulting division generates greater sales with fewer inputs resulting in higher profitability. However, Dells gross p rofit margin trended upward over the past three years indicating that Dell has e ither increased its prices or improved its control of input costs. Net profit ma rgin paints a different picture. Sun actually earned a negative net profit margin despite its high gross profit margin. The other three competitors earned steady margins over the past three years. However, IBM still posted the highest marks (8.8% in 2005 and 2004 and 8.5% in 2003). 15

Return on equity shifts the focus from IBM to Dell. In 2005, Dells ROE totaled 46 .9%, IBMs was 26.4%, HP equaled 6.5% and Sun earned -1.6%. Return on assets prese nts a similar view of the companies. Dell is once again in the lead with 13.1%, compared to IBMs 7.9%, HPs 3.1% and Suns -0.8% in 2005. Dell is obviously the best at turning its assets into net sales. The final category analyzed was operations more specifically, inventory turnover. For manufacturing companies, this is a c ritical measure of success. Too much inventory can lead to companies holding obs olete inventory, while too little may mean that customers will turn to competito rs. As expected, Dell outperformed its competitors. In 2005, it turned its inven tory over 107 times! In contrast, IBMs ratio was 28 times. Dell is not as large i n terms of total sales or as liquid as some of its competitors, but it has prove n to be the most effective in terms of cost and asset management. VII.PRESENTPOSIT IONINGANDSTRATEGY ByGregShorr Dell competes in several international and domestic markets and currently produc es a wide variety of products. In each of these markets, Dell has succeeded due to its broad differentiation approach. This approach, detailed in Appendix N, is based on the strength of its direct sales business model, manufacturing prowess, brand stren gth and customer service. The ability to differentiate has allowed Dell to stand out within mature markets and maintain a higher than average margins for its pr oducts. Although Dell s products cover a wide swath of the industry, there are s everal product lines and markets that the company does not currently serve. The company should consider three options: 16

 Adding a PC and server product line based on AMD microprocessors Developing a sh owroom style storefront in developing markets Expanding consulting services to i nclude business services Dell s addition of a product line based on AMD microprocessors would enable the company to service the entire market of PC users. Dell s exclusive use of Intel processors has limited the company s ability to match the high end products that its competitors are offering. This leaves Dell continuing to serve the low-end portion of the market and out of the very profitable high-end portion of the mar ket. In addition, as AMD gains market share on Intel, Dell will encounter pressu re on its own market share. Dell currently is the largest worldwide provider of PCs based on the strength of its U.S. business. In international markets, Dell i s currently second or third, but has struggled to gain market share with its dir ect sales business model. Issues in developing countries include lack of credit cards and buying habits that involve touching and seeing before purchasing. With out gaining market share in these large markets, Dell could surrender its top positi on to competitors such as Lenovo, who are already entrenched in these markets. D eveloping a showroom style storefront would enable Dell to compete effectively a gainst its competitors in these countries. The showroom allows Dell to maintain its competitive advantages while simultaneously meeting the societal needs of the developing mar kets. It will be a place for Dell to exhibit its product and conduct sales for l ater delivery. Dell will retain its ability to customize its products and mainta in its build-to-order efficiencies. Dell s efficiency has made the firm a player in business infrastructure services. However, the company is viewed as a leader in providing value, not necessarily complete or creative solutions. By moving i nto business consulting, Dell may be able to develop more extensive relationship s with companies. These relationships could help grow Dell s core business throu gh 17

better understanding of client s needs and stronger ties to Dell, rather than to their current consulting partner: HP, IBM, et al. This process will effectively open an additional sales channel to Dell, but it is a risky endeavor. Diversifi cation into consulting may pull the company too far from its core Before branchi ng into the development of business competency of sales and production. consulting, Dell should examine the impact on the other portions of its product portfolio. Due to its varied product portfolio, Dell cannot be cast into one par ticular quadrant of either the Boston Consulting Group Growth-Share matrix or th e McKinsey 9-cell. Each business group must be looked at separately in order to accurately portray its b usiness prospects. Dell s sole cash cow is its PC business. This market continue s to grow and as the market share leader, Dell is poised to reap the benefits of this growth. In order to ensure that this product remains a cash cow, Dell must continue to determine what products the industry wants, and consistently be a b est-in-class deliverer of value to its consumers. One of Dell s stars is its ser ver business. Dells market share has grown at a rate of over 25% and it recently surpassed Sun as the #3 provider of servers. To keep this product line a star, D ell needs to continue its growth in the low end server market, It also needs to simultaneously develop its higher end server product line to meet the needs of t he entire server market. Dell s one visible question mark is its services busine ss. Although this division is one of the fastest growing segments at Dell, its s mall market share leaves this segment vulnerable to competitors and other market forces. In order to turn this business into a star, Dell needs to increase mark et share. Dell must develop its creative infrastructure and than advertise its creativity throughout the market. By changing its market perception, Dell will b egin to draw clients that it previously would not have drawn, and thus increase market share. 18

Dell s peripheral business spans the range of cash cows to question marks. Dell must continue to feed its question marks through advertising and developing soli d product reputations. This should be done by following the outline laid out by the PC division, where Dell has used outstanding quality and value to become the market leader. VIII.ENVIRONMENTANDSTRATEGYASSESSMENT The computer industry can be ch aracterized as mature in the U.S., Japan, and Europe but there is continued room for growth in Latin America, the Middle East, and the rest of Asia. Further, bu siness and consumer customers globally are subject to a technology upgrade cycle, whereby the short product lifecycle of computer products drives repeat purchases . Pricing is fiercely competitive in the computer hardware industry. Further, me rgers characterize a significant trend and are likely to remain a defining facto r in the near-term. These deals are enabling computer hardware providers to offe r better services to their customers. Two of Dells largest competitors, HP and IB M, offer full-service products (i.e. hardware, software and consulting services) . As discussed in Appendix J, computer hardware consumers increasingly prefer an d are willing to pay a premium to vendors that are able to provide all of their IT needs: hardware, software, and the knowledge to package the items to meet the customers requirements. In addition, the technology in this industry is rapidly changing and Dell does not conduct its own research and development. This is not necessarily a problem. However, Dell does risk being considerably outpaced by i ts competitors. The computer hardware industry offers extensive opportunities fo r growth. For instance, 80% of sales over the next four years will take place in developing countries. Dell has the opportunity and the ability to earn a high p ercentage of those sales if it develops a successful strategy for entering the m arket. 19

Dells organizational structure is a vital part of the companys success. Little hie rarchy exists within the company. From the factory floor to the executive office , communication is emphasized and all employees are empowered to make decisions to improve job and business performance. Upper management approval is not requir ed for the implementation of new ideas. Dells flat corporate structure is likely to enable the company to remain at the tope of its industry. Employee empowermen t facilitates process innovationone of the main competitive characteristics of ma turing industries. Similarly, Dells fast, consistent, reliable and responsive bus iness model enables it to execute its direct sales model more effectively than a ny other company in the industry. As Dell expands into growing markets, however, the company will have to adapt its organizational structure to growing global e nvironments. Dell will need to maintain focus on its place in the industry as a product differentiator, bringing superior value to customers. Although strategic partnerships (such as with Intel) have been key to the companys success, it need s to continue to be selective about these relationships and to continually evalu ate whether they remain appropriate in the current environment. The key macro fo rce for the computer industry is technological change. The extremely short produ ct life cycle for computers, influenced by the upgrade cycle, has both positive and negative effects on companies within the industry. It challenges companies t o maintain superior inventory management and supplier relationships: areas where Dell excels. Technological change also drives waves of additional computer purchases within a mature market . Another trend impacting the computer industry is the rise of a single vendor a s a provider for all IT needs. This simplifies technology choices for customers and makes one vendor accountable and Dell does not offer this capability current ly. 20

Dells vision is to lead in all regions we serve. Dell bases its foundation for succ ess on the strategy, regardless of location. In other words, Dell assumes that w hat works in the U.S. will work in Africa, Asia or Europe. In Dells primary marke t, the U.S., the company uses a direct sales strategy, meaning that it sells its products directly to the customer either online or over the phone, thereby elim inating the cost of the middle man. This strategy proved immensely profitable in D ells early years. In fact, it was so successful that it actually changed the way its competitors did business. However, Dells reliance on its direct sales model m ay not be as beneficial in emerging markets. This is primarily due to the fact t hat consumers in these markets may be distrustful of buying items online or do n ot have the proper means of payment (i.e. credit cards) to make online purchases . In the PC market, Dell pursues three market segments: consumers, governments a nd businesses. In the U.S. market, the government provides 51.8% of Dells revenue s. It controls the corporate and government markets within the U.S. and is curre ntly working to obtain that same power in the global PC market. Dell does not ho ld the same position in any of its other markets, but is working towards gaining dominance in other markets. It has recently begun shifting its focus from low-e nd servers to higher-end cluster servers. In addition to PCs and servers, Dell has entered the peripherals market printers, digital cameras, monitors, storage, et c. At present, this segment presents the biggest question mark in Dells product p ortfolio. In addition, Dell relies entirely on Intel chips. Originally, this str ategy benefited Dell through the advantage of incentives and discounts that came from buying in mass quantities and from only needing to maintain one production line. However, Intels lead in processing power has slowly lost ground to AMDs mor e powerful chips. Dell needs to reevaluate its current strategy of relying entir ely on Intel if it wants to maintain its position in the PC market. 21

IX.OPTIONSANDRECOMMENDEDSTRATEGY IX.1.Focusoninnovation While many of its competitor working feverishly to develop the next generation of technology, Dell has been waiting. To date, the firm s strategy has been to recreate technology. In many c ases, companies that do their own R&D are able to stay ahead of the industry thr ough the development of new products. Putting more emphasis on R&D has some pote ntial benefits. Through increased R&D spending, Dell may be the first to introdu ce products to market and establish first mover advantage. Dell s recognizable b rand-name would allow it to expand into new products and potentially create insu rmountable barriers to entry for its competition. However, an increased emphasis on R&D would distance the company from its core competencies. Increasing R&D ch anges its focus from mass customization of mature products to smaller batches an d product introduction and growth. Additionally, it would force the company from its direct sales model, as new products require multiple distribution channels to ensure they are available to customers as quickly as possible. Currently Dell s strength is the sales of mature products through mass production, bringing qu ality and price without the cost of R&D. IX.2.Divesting As is the nature of many l arger companies, Dell is competing in several different product markets. Divesti ng products or services that the company is not competing near the top of the ma rket will increase internal focus. Divesting of these assets or divisions could occur through identifying a competitor and selling the business, or by spinning a division into its own company. The key benefit of this strategy is the improve d focus on core business. Stripping away these segments would enable Dell to bec ome more streamlined. Specifically, it would require all 22

segments to work for similar customer bases. Establishing a singular customer fo cus to each employee allows Dell to leaps in product creativity and adds more th an value to its brand. As a complete solutions provider, Dell is uniquely positi oned to meet a full range of customer needs. Divesting portions of their busines s, especially in its growing infrastructure segment, could potentially limit gro wth. Removing components from Dell s network will mean that as business grows, D ell would utilize external resources to satisfy customer s requests, limiting th e effectiveness of Dell s competitive advantage. A single Dell branded solution is more likely to position Dell as a differentiated service company. IX.3.Expansi onintoservices This strategy encourages Dell to move into business consulting. This is a new business segment for Dell and would open a potentially new revenue str eam. Given the firm s internal success at manufacturing and value-chain efficien cies, Dell would have a respected reputation as a consultant. While application of these theories may be difficult at other firms, Dell s expertise and proven t rack record would provide differentiation in a crowded market. Movement into the services business places Dell against largely entrenched competitors. These com petitors have levels of expertise that Dell cannot currently match, placing it a t a competitive disadvantage. While Dells specific knowledge would help it enter the market, its ability to service the complete market would be limited. Likewis e, a limited market would not allow a stable revenue stream, making this busines s segment questionable. Ultimately, a move towards business consulting would dis tance the company from its core competencies. This move would limit focus from c ore businesses and distract the company from its position of excellence. IX.4.Rei nvigorateDifferentiationAdvantage This strategy encourages Dell to return to its co re competencies and calls for the company to get back to basics. It pushes the com pany to improve upon those competencies 23

which helped differentiate it from the beginning. Specifically, improvements wil l include the enhancement of customer service, the addition of suppliers, new ma rketing campaigns, the modification of retail sales and the expansion of turn-ke y solutions. This strategy seeks to widen Dell s competitive advantage through t he further refinement of its existing core competencies. Advantages of this stra tegy are considerable. Dell has long established itself as a pioneer and expert in value-chain management. The improvements this strategy develops are located w ithin the companys existing value-chain. Furthermore, Dells culture and structure is specifically aligned to focus on improvements in these areas. Most significantly , the suggested strategy does not force the firm reinvent itself. Because improv ements are limited to existing business segments, Dell will not be required to p roduce or develop new product lines. The negative aspects of this strategy are w orthy of mention. By solely improving upon existing competencies, the company ru ns the risk of becoming stagnant. The proposed strategy does not encourage the a ddition of new products or services, potentially keeping the company out of new and profitable markets. Stagnation in the technology industry represents a signi ficant risk and may cause degradation in the firms signaling criteria. This may r educe the companys premium price and ultimately decrease profitability. IX.5.Recom mendedStrategy It is recommended that the final alternative, in which Dell reinvig orates its differentiation strategy, be implemented. With this strategy, existin g organizational resources and wherewithal can be leveraged to develop a clear d ifferentiation advantage. This strategy does not make unnecessary or drastic ope rational changes which have the potential to disrupt the successful corporate cu lture and structure. Rather, the recommended strategy identifies and improves se veral existing competencies which have made the company so successful. 24

Dell considers customer service and support to be a key differentiator. The comp any, which prides itself on this segment of business, has consistently ranked #1 in the industry. Not surprisingly, this segment represents a significant and ex panding revenue stream for the firm. However, Dells lead in customer service and support has declined in recent years. Declining training and the outsourcing of customer service and support has damaged its reputation. To rectify this problem , Dell must improve its customer service representatives selection process, ensur ing they are easily understood and well trained. By improving this segment of bu siness Dell can once again clearly differentiate itself from rivals HP and IBM. Dells hugely successful direct sales model has allowed its products to be customi zed by customers. However, Dell maintains a single source relationship with chip maker Intel which limits consumer choice. Those that prefer to have PCs powered with AMD chips are currently unable to do so. To strengthen Dells customization position, the firm must offer increased configuration choices through the establ ishment of additional supplier relationships. There is however, one significant caveat. Dell must pursue relationships with only those suppliers that are able t o integrate seamlessly with Dells supply-chain. This strategy will allow Dell to offer additional choices for its customers while maintaining production efficien cies. This strategy also recommends that Dell revitalize its marketing efforts t o target underserved markets within the U.S. while expanding its marketing abroa d into emerging and growing international markets. As noted, the first tactic is domestic. Recent surveys show that a high percentage of U.S. homes have PCs. Ho wever, there is a stark discrepancy in computer use among ethnicities. Whites an d Asians are much more likely to use and own computers than their Black or Hispa nic counterparts. This high ownership among Whites and Asians makes it difficult for Dell to grow in this demographic segment. However, the low ownersh ip among 25

Blacks and Hispanics represents an area of growth. To strengthen Dells visibility with Blacks and Hispanics, it is recommended that Dell modifies its marketing f ocus. Dell must develop marketing campaigns to position its PCs as commodities t hat are necessary for everyday life. The second marketing enhancement will be ce ntered in emerging markets where Dells direct sales model has several inherent li mitations. For obvious reasons, the model does not work well in markets which cu stomers do not have access to the internet or credit-cards. In these markets it makes sense for Dell to expand its use of retail locations or showrooms. To achi eve success within emerging markets Dell must combine its direct sales model wit h its learned experience from its retail partnerships. This tactic calls for Del l to develop showrooms in which displays are available for customers to test and use products before they place an order. Once a customer has decided to purchas e an item, they may use an in-store phone or internet connection to place their order. As in the traditional Dell model, customers may customize their product d uring this process. This tactic allows Dell to bring its product to customers in emerging markets while still maintaining its direct sales business model. Turnkey IT solutions include the planning, implementation and maintenance of IT cust omer services. opportunities. Simply stated, it provides Dells customers with one -stop shopping As noted in Appendix O, this business segment represents a tremendous opportunity for revenue growth. While Dell does offer limited turn-key or manage d lifecycle services, the firm is not considered to be a major player in the mar ket currently representing less than 1% of the total market. The aim of this str ategy is to increase market-share through further enhancement of turn-key IT sol utions. To strengthen Dells position within the market, the company must improve its focus on specific customer needs. Dell must improve its existing services to provide reliable and predictable solutions around this segment of business. 26

Specifically, it is critical that the company design and deliver services which offer superior quality and efficiency, while sustaining customization for indivi dual customer needs. The subsequent exhibit shows the gap between buyer intended value and perceived value. The difficulty for Dell stems from the lack of real differentiation between intended value and perceived value of buyers. Competitor s adoption of Dell s business model, combined with the recent decline in Dell s c ustomer service has reduced Dell s competitive advantages, forcing customers to make decisions solely based on price. Potential opportunities for Dell to reverse this trend can be found in advertisi ng, service reputation and retail locations in emerging markets. Because Dells pr oducts are highly customized and purchased infrequently, it is important for the company to optimi ze its signaling criteria. The preceding recommended strategy differentiates the organization through the initiation of tactics which fortify the link between intended and perceived buye r value. 27

APPENDICESAC:ORGANIZATIONCHARACTERISTICS By MatthewSmith

A.OrganizationalPurposeandDirection A.1.OrganizationalValues Dell considers its organ tional values to be the Soul of Dell (Soul of Dell, 2006). Specifically, this Soul i s a statement of the corporations philosophy which defines its current position a nd future aspirations. It also serves as a guide for the firms actions around the world. Dell is committed to achieving financial success through ethical busines s practices which benefit its customers, shareholders, employees and the citizen s of its global markets. A.2.OrganizationalMission The organizations mission stateme nt is as follows: Dell s mission is to be the most successful computer company in the world at delivering the best customer experience in the markets we serve (Fr equently, 2006). A.3.OrganizationalVision While not specifically stated, it has bee n surmised that Dells vision is to lead in all regions we serve. The foundation of our success is the same in the United Kingdom and France, China and Japan, Cana da and other countries. Customers want technology products that are relevant to them, offer great value and can be easily purchased and used. Thats what our team around the globe consistently delivers (Fiscal 2005 in Review, 2005). Dells visio n is quite focused and assumes customer needs to be somewhat homogenous througho ut the world. A.4.OrganizationalGoals The primary organizational goal of Dell is to achieve $80 billion in revenue by the end of fiscal 2007. Despite having missed Q3 expectations in 2005, the organization raised its original revenue goal from $60 to $80 billion. This goal was revised to reflect high levels of revenue, 28

operating profits and cash from operations in recent years (Fiscal 2005 in Revie w, 2005). While this amended goal may seem to paint a promising picture for Dells future, it may be misleading. Desktop PC sales account for 37% of Dells revenue. Contrary to the PC market in general, Dells growth in the PC market has slowed o ver the last 18 months. Although Dell shipped a record 9.2 million units in that quarter, increased its service revenues by 36% and its storage revenue by 35%, its desktop sales declined by 2% (Dell Appears, 2005). Dell must regain its reve nue in this business segment if it is to reach its $80 billion goal. Secondary g oals for the firm include increasing its lagging PC sales while continuing to ex pand in emerging markets such as India and China. B.OrganizationalCharacteristics B .1.OrganizationalStructure Dell is best described as a flat organization. From the factory floor to senior leadership very little hierarchy exists to slow down the decision process. Employees are encouraged to pursue the most efficient ways to complete their jobs and are permitted to implement these new efficiencies witho ut prior approval by upper management. This open-communication has made junior e mployees realize their ideas are welcome and respected. Once proven to be succes sful, it is not uncommon for these ideas to be implemented across the organizati on. B.2.OrganizationalCulture Dell Inc. was founded 21 years ago as a computer star t-up company by Michael Dell. While the company has grown to more than 55,000 em ployees in 80 countries, Dell has done its best to maintain a small-company atmo sphere. communication and honesty. Dell preserves its culture through open Tell Dell surveys encourage rank-and-file employees to anonymously evaluate managers and senior leadership. The firm believes this type of honesty helps bring about accountability and change. Past appraisals have br ought about improvements 29

in work/life balance, corporate objectives, and job satisfaction ratings. volunt arily with over 90% of the workforce taking part in the survey. Participation is Overall Dells culture is described as a meritocracy which rewards those employees who work hard to meet organizational goals (Culture, 2006) and is critical of t hose who do not. Employees have seen first hand the profitability achieved by th e firms stock in the 1990s. While todays employees may not realize the same wealth from surging stock options as those in the 1990s, by-and- large the culture wor ks to retain and reward those employees who remain very competitive, hard workin g and loyal to the organization. B.3.CharacteristicsofLeadership Michael Dell starte d his computer company, which would later become Dell, Inc., in his University o f Texas dorm-room with just $1000. In 2004 Dell stepped down to become the organ izations Chairman of the Board and allowed Kevin Rollins to succeed as CEO. As no ted, leadership has worked hard to maintain accountability within this relativel y flat organization. Management is made acutely aware and held accountable when it fails to maximize organizational goals. People know how they are doing, how th e company is doing, what the problems are and know that the worst state for a le ader to be in is denial (There s Something About Dell, 2005). One way in which De ll evaluates its management is through the 360-degree appraisal process (Theres Som ething About Dell, 2005). Every six months employees are given the chance to rat e the performance of every manager. This appraisal includes every manager up to the CEO. Annual appraisals and promotions for management are based upon their im provement on their Tell Dell score. B.4.KeyStrategicPartnerships Dell has maintained a long-term single source partnership with the Intel Corporation to provide the c hips necessary to produce its PCs. As Intels largest customer, Dell is virtually 30

guaranteed its requests for Intels chips. This has helped Dell maintain productio n capacity even in times of chip shortages. Furthermore, the partnership with In tel has helped Dell contain the cost of its low-end, standard-based desktops and servers. This partnership may also have produced negative results for Dell. By not partnering with chip producer AMD in at least one of its lines, Dell may be at risk of losing both a price and perfor mance advantage. Chips from AMD are viewed by many analysts to be superior to th ose produced by Intel (Scannell, 2006). As Dell enters into new business segment s, such as home electronics, it has increased its partnerships with retailers an d suppliers. Dell has recently expanded its retail partners to include Costco Wh olesale Corp., Sams Club, QVC Inc. and Target in an attempt to boost its lagging consumer sales in PCs, consumer electronics and printers. In printers, Dell has p artnered with Lexmark, Fuji Xerox, Kodak and Samsung. Dell has also initiated se veral partnerships with top players in consumer electronics to minimize initial costs within this new business segment. Lastly, Dell has developed a partnership with EMC for its data storage solutions. C.ValueChainAnalysis 31

C.1.InboundLogistics Dells direct-to-consumer sales model has revolutionized the val ue chain within the computer industry. This model, which relies heavily upon web -based technologies such as Electronic Data Interchange (EDI) and just-in-time i nventories, has clearly been one of the distinguishing factors in Dells success. Dell encourages its suppliers to use its website to track orders and inventories . This real-time information sharing allows Dells chip and component manufacturer s to better see Dells sales. The goal of the information sharing is to create a v irtual corporation where suppliers can watch their products purchased as parts o n Dells computers. By using this technology, suppliers are able to more efficient ly meet inventory requirements and maintain low costs. C.2.Operations Dell has pos itioned itself as the #1 seller of personal computers by maintaining an efficien t and streamlined operating strategy. Dells servers, storage systems, mobile and desktop computers are built-to-order in six manufacturing facilities around the world. Web-based systems control customer orders and inventory levels. Dell maintains inventory le vels of only four days, even as it serves more customers with more products in m ore markets every day (Fiscal 2005 in Review, 2005). As noted, Dells culture encou rages its employees to find ways to cut costs. Within the last 4 years, Dell has increased its productivity by 400% and saved more than $1.9 billion by removing unnecessary costs within its operations (Fiscal 2005 in Review, 2005). This eff iciency has allowed Dell to sell its made-to-order units for 10% to 20% less tha n its rivals. C.3.OutboundLogistics Dells direct-to-consumer business model enables its customers to purchase its products via its website, by fax/phone or at limit ed retail locations. Internet customers are able to 32

customize their purchases on their own Dell Homepage. Dell notes that customers wh ich utilize its website spend more and make purchases faster than those using th e fax/phone method of order. Once the order is placed, Dell prides itself on a 7 -day shipping schedule. This delivery schedule is typically better than those of fered by the companys competitors. C.4.MarketingandSales Dells marketing efforts have a ubiquitous presence across the web, television and print. Few competitors can match the marketing budget of the $50 billion firm. Internet sales currently mak e up over 50% of the firms total sales. In hopes of increasing its consumer base the organization has offered its products at discount chains Wal-Mart, Target, Q VC Inc. and Costco. Although Dell built its reputation as a low-priced computer seller, the firm has shown signs of distancing itself from its discount-price im age by expanding its product mix to include high-end PCs, televisions, MP3 playe rs and other electronics. C.5.Service Over half of Dells sales are made on its webs ite, limiting the level of direct sales interaction between its employees and cu stomers. However, once the purchase is made consumers often interact with customer service/support representatives. As cost differences become slimmer, exceptional service is one way in which computer com panies differentiate and attract new and returning customers. Revenues from enha nced services/support are significant for the firm and have grown nearly 40 perce nt for three consecutive years (Fiscal 2005 in Review, 2005). Although the firm h as long prided itself on offering the best customer service in the industry, rec ent surveys have shown declining results in this segment of the business. Consum er Reports ranked Dell behind Apple, IBM and Toshiba for its customer support wi th laptops (Computers, Desktops, & Laptops, 2006, p. 232). Despite the decline, Dell has still managed to rate higher than its competitors HP and Compaq. In rec ent years customer 33

service/support has been moved to lower wage nations. Top executives have acknow ledged the problem and are reportedly working toward improvements. C.6.FirmInfrast ructure Dell was founded in and maintains its worldwide corporate headquarters in Round Rock, Texas. To increase its global presence the firm has expanded its in frastructure to include corporate offices and manufacturing facilities in the UK , Japan, Singapore, Ireland, Brazil, China, Malaysia and other U.S. locations. T he firms infrastructure also includes several overseas call centers in India. Although the company partners with retailers, it does not have any official retail locations as part of its infrastructure. Most of the firms infrastructure is virtual or web-based. This allows the company to sidestep retail overhead costs while maintaining customer visibility. C.7.HumanResources Dell employs over 55,000 individuals. The o rganization is dedicated to creating a diverse workforce to meet the objectives of the organization and its customers. Dell-sponsored groups were formed to prom ote a sense of community among employee participants, support business goals, ai d in their personal and professional development, support business goals and pro vide a resource for organically recruiting and retaining the best and brightest talent in the industry. The organization works diligently to create a corporate environment based on meritocracy, personal achievement and equal access to all a vailable opportunities. C.8.TechnologyDevelopment Dell defines itself as a global di versified technology provider (Form 10-Q, 2005). Although it would seem that Dell spends a tremendous amount on its R&D this is not the case. Dell brings very fe w new products to market. Instead, Dell has a focused strategy which leverages t he work of partners and other firms to recreate the work others have done very we ll 34

(Fiscal 2005 in Review, 2005). Dells global teams meet regularly with customers t o gain feedback on which new technologies will have the greatest impact. This fe edback is then shared with partners such as Oracle, Intel, EMC and Red Hat to sh are in R&D costs. This strategy is in stark contrast to IBM which spends billion s of dollars annually on R&D. The savings that Dell realizes from R&D allows it to deliver cookie-cutter servers and desktops at value. However, many analysts b elieve the firms inability to adopt more state-of-the-art technologies has preven ted Dell from establishing a successful strategy for high-end products (Scannell , 2006). C.9.Procurement As previously stated, Dell has remained extremely loyal t o chip maker Intel. As the largest producer of personal computers, Dell is also the largest customer of Intel chips. Intel claims to be able to ship materials i nto Dells production facilities every two hours based on realtime customer orders . This real-time supplier allows Dell and its suppliers to forecast and manage t he most efficient levels of inventory. Dell s decision to remain solely committed to Intel chips have certainly helped contain the cost of low-end, standard-base d desktops and servers. But competitors and analysts alike believe the company m ay be losing both a price and performance advantage by not incorporating rival A MD chips in at least one of its lines (Scannell, 2006, p. 4). Despite these claim s, Dell officials say that have no plans to use AMD chips in the near future. As noted, suppliers are directly linked to Dells website and are therefore able to see its inventory levels. Purchasing orders for production facilities are initia ted when customers place orders thereby depleting inventory levels on the shared website. This form of purchasing allows both Dell and its suppliers to properly forecast, thereby maintaining low levels of inventory and capital investment. 35

APPENDICESDF:ORGANIZATIONCAPABILITIESANDRESOURCES ByKhalidAlkelabi

D.KeyCompetenciesAssessment D.1.KeyCompetencies 1. Customer focus Dell understands how to serve its customers and it knows them well. The build to order business model that Dell adopts across its product lines (servers, desktops, notebooks, PDAs an d consumer electronics) accommodates the changing needs of its customers. This m odel allows Dell to offer the latest technologies for an affordable price in a s hort period of time; and that is exactly what customers want from companies in t his industry. As an example, Dell manages the changing needs of key customers by managing product life cycles and technology shifts (Gandossy, 2005). 2. Manufac turing processes Dells direct selling business model was the first to be applied on a mass scale in the personal computer industry. The model was further empower ed by the boom of the Internet in 1994. Dell developed numerous efficiencies and proficiencies over the last decade and applied the model to multiple product li nes where standardization of production and technology accessibility were possib le (Hoffman, 2005). 3. Supply chain management The direct selling business model applied by Dell is powered by a state of the art supply chain management (SCM) system. Dell is one of few global companies that realized a competitive advantage from its SCM system; it allowed Dell to move beyond a simp le value chain mechanism into a more sophisticated value webs organism. This had a great impact on Dells just-in-time (JIT) manufacturing and JIT inventory manag ement systems. (Gunasekara, 2005). 36

4. Customer selection, acquisition and retention Supported by its sophisticated IT and customer relationship management (CRM) systems, Dell efficiently targets corporate clients with low service costs and predictable buying behavior that is tied to their budgets. To retain these clients the company creates customized c orporate portals for each client, a model pioneered by Dell. This has resulted i n significant contributions to Dells revenue streams; a great portion of Dells sal es is generated by orders from business, corporate and government clients (Byrne s, 2003). 5. Customer service Dell offers a comprehensive set of tools to its bu siness clients and end consumers. From customer care programs to technical suppo rt, Dell offers multilayered services supported by Internet enabled knowledge ma nagement solutions, corporate support portals and Intranets, and global call cen ters. Dell also offers extended service and support plans across its product lin es for additional fees. Furthermore, Dell is beginning to offer complete service packages for corporate clients comprising of hardware/software solutions that a re deployed, serviced and maintained by Dells IT professional personnel. 6. Human capital management The industry that Dell operates in suffers from the limited selection pool of talented managers, IT professionals and engineers. Unlike the majority of its competitors, Dell has constantly attracted and retained the tale nts it needed. HR policies that define fast learning, problem solving, team buil ding and goal driven as the major characteristics of a successful executive hire are proving to be effective selection tools. Furthermore, the corporate culture at Dell has no tolerance for political conflicts, lies or inefficiencies; hones ty and results are all that matters (Salter, 1999). 37

D.2.OrganizationalSkills Dells core competencies are largely based on business proce sses, IT infrastructures and people. It is fairly easy for a competitor to copy and learn Dells business model or even reproduce their core competencies. Yet no competitor succeeded in doing so for one very important reason: execution. Dell has become the example of fast, consistent, reliable and responsive execution. T he successful marriage between Dells infrastructure (DNA) and its people created an organization that possesses a wealth of skills applied through extremely effi cient execution (Theres something, 2005). D.3.OrganizationalLearning Dells set of cor e competencies and the skills it gained from them are sustained, developed, and empowered by a corporate culture that encourages learning from mistakes and oper ating under ambiguity. The organization as a whole is an example of free knowled ge traffic: high visibility at every level. Dell went through a long iterative a pproach to integrate knowledge management into its IT infrastructure. The end re sult is a huge flow of information that circles Dells value webs. Through this IT enabled knowledge system, Dell benefits from suppliers wealth of knowledge: thei r technologies, production systems and inventory management systems. It also gat hers information about customers and learns a great deal about their Dell accomp lishes this by allowing the behavior, purchasing patterns, needs and trends. suppliers to integrate their systems with its systems; thus suppliers access cus tomers orders and provide information about availability, product details and tec hnology (Kersten, 1999). Furthermore, HR policies at Dell encourage the hiring o f skilled people that are willing to learn and share knowledge with their teams. Executives at every level share these values consistently; the corporate cultur es emphasis on accountability and results requires free sharing of knowledge and open communications. This was not easy to hardwire into Dells culture: from 38

1993 to 1995, many executives left their positions because they did not think th e environment was safe for them anymore; thus, change management was at its peak (Govindarajan, 2002). For the long run, Dells successful creation of a true lear ning organization has enabled it to grow at an exceptional rate. Unlike others i n the industry, this approach did not help Dell cope with growth; it actually ma de it what it is today. E.TechnologyAssessment E.1.ManufacturingTechnology Dell, as al major PC suppliers, does not manufacture any of its products. It assembles the components of the products in manufacturing assembly facilities around the world. The automation of the assembly process is key to Dells success. Each assembly lin e in an assembly facility can produce up to 4 different product models. To accom plish this, Dells engineers standardize products in a way that allows minor modif ications to produce different models (Hoffman, 2005). Original Equipment Manufac turers (OEMs), suppliers and third party manufacturers provide Dell with all the hardware and software it needs to produce desktops, servers, notebooks, LCDs, PDAs and printers. Although the companys supply chain consists of more than a hundred major suppliers, it prefers to lower the number for each component to 1, 2 or f ew supplier(s). Dell claims that this allows it to standardize its products, cre ate valuable relationships, integrate its IT systems with the supplier, receive favorable dis counts and reduce the complexity of the supply chain. It also claims that it onl y commits large, innovative and stable suppliers. For example, Intel is the only provider of PC and PDA processors; Microsoft is the only supplier of operating systems; LG for LCDs; Lexmark for printers; Western Digital and Samsung for hard drives. (See figure 1). 39

Figure 1 Dell s information & physical flow (Kraemer, 2001) To realize cost savings and operational efficiencies, Dell constantly tries to m inimize the number of touches a single component goes through in the supply chain until it reaches the inbound logistics at an assembly facility. The less touches a single component goes through the faster it arrives and the less it costs. In most new assembly facilities, the inbound logistics are performed in the facili ty itself, not at a separate facility. This allows Dell to better utilize its as sets and increase its inventory turnover. Inventories sit idle at an assembling facility for less than 4 hours on average. Dell is so successful in managing its supply chain and inventories that, unlike all competitors, it has major manufac turing facilities in the U.S. even though most suppliers are located overseas. I n 1999 Dell started to assemble all product lines at the facilities it owns inst ead of subcontractors and contracted manufacturers in hopes of better quality an d reduced costs (Hoffman, 2005). Suppliers, OEMs, and logistics partners have dir ect access to Dells transactional systems to fulfill orders, move components to a nd from Dell and deliver products to customers. 40

This helps Dell control costs and, as a first in the industry, it enables Dell t o modify products prices in real-time through its online ordering systems. Dell r elies on a formal business process improvement (BPI) program, similar to General Electrics Six Sigma, to continuously improve operational and production processe s. Managers, employees and engineers are heavily involved in this program and ar e cross-trained to enrich their knowledge about it. This program has been respon sible, since the early 90s, for many changes in inbound logistics, assembly lines improvements and standardizing product manufacturing (Fugate, 2004). E.2.Informa tionTechnology Managing Dells sophisticated value webs, build-to-order supply chain , e-commerce and internal resources is a true story of simultaneous IT horror an d success. Dell arrived to its current state of IT infrastructure utopia after mul tiple failures to implement an Enterprise Resource Planning (ERP) system. The pr oblem that faced Dell in the past was to find a solution that integrates enterpr ise wide IT systems, but ERP systems in the mid to late 90s failed to deliver suc h a comprehensive and flexible system that can accommodate Dells business model ( Slater, 1999). The current IT infrastructure that Dell implemented is a unique h ybrid of ERP, SCM, CRM and e-commerce systems provided by a subsidiary of Fujits u Limited (Glovia, 2001), JD Edwards (recently acquired by Oracle), Oracle datab ases and Microsoft operating systems. To support its IT infrastructure, Dell dep loyed a network of data centers to enable a variety of systems that manages logi stics, sales, manufacturing and other operations. Data centers are located in th e regions that Dell operates in globally. Each data center has its own staff of IT professional to develop, manage and maintain them. 41

These data centers are located in: o Austin, TX to support the Americas. o Brack nell, England and Limerick, Ireland to support Europe, Africa, and the Middle Ea st (EMEA). o Singapore to support the Asia-Pacific region. Dell usually develops , tests, and deploys its operational, online transactional processing (OLAP), st rategic and business intelligence systems at Austins data center. Other regional data centers are responsible of adapting these systems to their local markets an d deploying them (Kraemer, 2001). E.3.IntellectualProperty Unlike the norm in the P C industry, Dell is not known as a company that focuses on product innovation. M ost of Dells patent portfolio, 1,128 patents, covers manufacturing processes (Form 10-K, 2005). Dells management does not believe that Dell should w aste its resources on research and development (R&D). This is evident when compa ring Dells annual reports to its major competitors. While HP, IBM and Sun Microsy stems spent 5% to 10% of their revenues on R&D, Dells R&D spending went down from 1.4% in 2001 to less than 1% in 2005. Michael Dell (founder and chairman of the board) and Kevin Rollins (CEO) do not view R&D as a critical component of Dells strategy. They believe that R&D is not a core competency, and that Dell excels in leveraging its partners and suppliers technolo gies and innovations (Breen, 2004). E.4.FacilitiesandPhysicalElements Dell operates g lobally by conducting business through 3 geographic segments: the Americas, Euro pe and Asia Pacific-Japan. The Americas region covers the U.S., Canada and Latin America. The headquarters is located in Round Rock, Texas. Based in Bracknell, E ngland, the 42

European region covers Europe, the Middle East and Africa. Lastly, from Singapor e, the Asia Pacific-Japan region covers the Pacific Rim, including Australia and New Zealand. Dells corporate headquarters are located in Round Rock, Texas (Comp any Info, 2006). As of January 2005, Dell owned and leased 11,700,000 square fee t of manufacturing, office and warehouse space worldwide. 7,300,000 square feet is located in the U.S. and the rest is located internationally. Its manufacturin g facilities are located in Austin, Texas; Eldorado do Sul, Brazil; Nashville an d Lebanon, Tennessee; Limerick, Ireland; Penang, Malaysia; and Xiamen, China. De ll also has technical and customer support, operations, and distribution centers in India, Panama, Slovakia, Morocco, China, Brazil, Taiwan and Singapore. Dell has more than 55,000 regular employees; more than 24,000 of them are employed in the U.S. (Form 10-K, 2005). Table 1 Capabilities relating to people and processes at Dell (Fugate, 2004) CAP ABILITIES Demand management Internal collaboration Leverage partners Business fun damentals PROCESS Manufacture-to-order Information technology Integrate partner p lanning & execution Balance sheet and P&L PEOPLE Maniacal about execution / Bias for action Learning & sharing Value of personal / business relationships Rewards for decreasing costs F.FinancialRatioAnalysis The table below compares Dells financial ratios to the person al computer industry and to publicly held companies operating in the same market s for the 2005 fiscal year. Bold values indicate better performance. It is worth noting that Dells top management, since the mid 90s, focused on the return on inv ested capital (ROIC) as a key performance indicator (KPI). This focus, managing profitability, made the company s stock a very attractive investment; Dells ROIC and ROE are way above the industrys and competitors average. All other profitabili ty 43

ratios indicate good performance and profitable operations. There is no major in dicator of risk or weak performance in Dells financials. Table 2 Comparative financial ratios data (Comparison Data, 2006) Profitability V aluation Operations&Efficiency Financial&Liquidity PerShareData($ n Pre-Tax Profit Margin Net Profit Margin Return on Equity Return on Assets Retu rn on Invested Capital Price/Sales Ratio Price/Earnings Ratio Price/Book Ratio P rice/Cash Flow Ratio Days of Sales Outstanding Inventory Turnover Total Asset Tu rnover Net Receivables Turnover Current Ratio Quick Ratio Leverage Ratio (asset/ equity) Leverage Ratio (debt/equity) Revenue Per Share Diluted EPS from Operatio ns Book Value Per Share 12-Month Revenue Growth Dell 18.3% 8.32% 6.2% 46.9% 13.1% 60.60% 1.37 24.43 15.38 20.6 32.29 107.2 2.12 12 1.2 0.9 4.74 0.1 23.02 1.29 2. 05 14.60% Industry 20.95% 8.50% 5.71% 26.80% 10.40% 25.40% 2.06 37.34 9.72 31.12 30.46 67 1.9 11.9 1.53 1.3 2.57 0.06 18.09 1 3.84 9.20% Market 48.23% 10.64% 6.96 % 13.20% 2.20% 6.50% 1.46 20.65 2.77 12.06 50.53 7.5 0.3 7.2 1.41 1 6.1 1.35 21. 66 1.53 11.39 1.80% Unlike many competitors, Dell does not rely on debt to finance its capital struc ture. This is contributed to cost cuts in operations and efficiencies in manufac turing and inventory management. Dell also outperformed the industry in terms of annual growth. It is wise though to lower future expectations in light of recen t reports of lower than expected growth rates and net profits in the 3rd and 4th quarters of 2005 (Louise, 2005). Lastly, Dell does not pay dividends to stockho lders. Instead, Dell uses net income to fuel its growth. 44

APPENDICESGI:INDUSTRYCHARACTERISTICS ByKathrynLynch

G.MacroForcesAnalysis G.1.EconomicForces Spending on computer hardware represents near y 40% of global information technology (IT) spending. It is expected to grow to $1.5 trillion in 2006 (Graham-Hackett, 2005). Although the consumer is increasin gly important in the computer hardware market, corporate spending represents app roximately 80% of all technology spending. Therefore, economic conditions depres sing business capital spending decreases computer hardware sales (Graham-Hackett , 2005). Since demand from new users and applications is likely to increase, inf rastructure development and internet-related spending is likely to continue to r ise, according to IDT. The commoditization of the PC in the U.S. is a major forc e driving the economics of this industry. Computers are now a necessity for all U.S. businesses and increas ingly, for householders. Real Gross Domestic Product (GDP) growth, rising consum er confidence, and currency exchange rates all provide insight into the health o f the computer hardware industry. Internationally, mixed PC sales and geographic areas where computers are well below their penetration levels create the prospe ct of additional markets. A weakened economy in Europe through 2001 plunged PC s ales and resulted in unrealized growth potential throughout the continent. Howev er, in 2005 a strong Euro and improving economies in Europe revived consumer dem and for PCs resulting in double-digit revenue growth for computer makers. In Asi a, outside of Japan, weakened currencies, high interest rates and slowdowns in e conomic growth plagued the PC industry through 2001. However, in 2007 the Chines e market is expected to grow 86% and South Korea by 40%. India has remarkably lo w technology penetration, which leaves much room for industry growth (The Gale G roup, 2006). Latin America was the fastest 45

growing region in the global computer market in 2005. A recovering Argentine eco nomy is expected to contribute to substantial growth in this region as is 53% gr owth in Venezuela and 49% in Chile. G.2.DemographicForces Demographic forces are cri tically important to computer hardware companies. Business and personal computer usage remains on the rise. Businesses can obtain a competitive advantage throug h better servicing, and supporting their customers through their Web sites or li nking with suppliers via the internet. Individual customers increasingly use the Web for communication, commerce, and educational purposes (Graham-Hackett, 2005 ). These trends suggest that the computer hardware industry is likely to continu e to experience growth, despite a projected slowdown in the U.S. market for PCs. An estimated 75%-80% of total U.S. corporate and education PC units will be rep lacement units by 2008 (Datamonitor, 2005). As competing PC vendors struggle to emulate Dells efficient business model, this company continues to be the market l eader in raising the penetration of PCs into nearly 60% of all US households (Gr aham-Hackett, 2005). However, in the U.S., decreasing PC prices (a typical trend in a maturing industry) also expand market opportunities for manufacturers. Mos t manufacturers now offer a sub-$1,000 model thereby increasing the number of ho useholds with incomes below $50,000 who can afford computers. Personal computer use in the U.S. has also increased exponentially since 1997. The U.S. Census Bur eau has collected data in the Current Population Survey to assess computer usage since 1984 and internet usage since 1997. Data reported in 2003 indicates sever al areas of opportunity for computer hardware providers. First, the Southern U.S . had the lowest rate of computer ownership in the country at 59%. Householders throughout the country who do not 46

have internet access (but may own a computer) cite high costs as the main reason . As the cost of internet access decreases, this capability will become availabl e to more of the population. 2003 U.S. census data on computer and internet usag e at home correlates closely with income and educational level (U.S. Department of Commerce, 2005). This data suggests that as the prices of computers and inter net access decreases areas of market growth remain for computer hardware compani es, particularly among lower income consumers. ComputerAtHome 75.7% 47.2% 74.3% 88.1% 93.6% 97.1% 72.6% ComputerAtHome 75.7% 47.2% 74 .3% 88.1% 93.6% Internetathome 66.2% 33.0% 62.1% 82.2% 90.4% 94.8% 60.0% Internetatho me 66.2% 33.0% 62.1% 82.2% 90.4% FamilyIncome(annual) Total families Less than $25,000 $25,000-$49,999 $50,000-$74,999 $75,000-$99,999 $100,000 or more Not reported EducationalAttainment ofHouseholder Less than high school High school graduate Some college Bachelor s degree Advanc ed degree Additionally, computer hardware companies should target less educated consumers on the benefits of computer and internet use including comparative shopping oppo rtunities, ease of household finance management, etc. ComputerAtHome 80.3% 75.3% 47.3% 49.5% ComputerUsebyRace andHispanicOrigin White alone, non-Hispanic Asian alone Black alone Hispanic (any race) Race and age is also a factor in computer usage, according to the U.S. Census Bu reau report. Blacks and Hispanics have the lowest rates of computers at home of any U.S. racial groupproviding a market opportunity for computer hardware compani es which target these groups. Further, people 65 and older had the lowest rates of computer (28%) and internet (25%) 47

use of all age groups. As the baby boomers age, this demographic is likely to in crease its use of both technologies, partially due to exposure at younger ages. However, the current 65 and older population is also a market opportunity for co mputer hardware companies. G.3.TechnologicalForces Technological change is critical ly important to the computer hardware business, contributing specifically to the perilously short product life cycle for computers. A phenomenon known as the upg rade cycle continues to be one of the most influential macro forces in the comput er industry. For example, the replacement of the floppy disk by the compact disk and color monitors drove new waves of purchases as did additional technological change that made computer hardware faster and more efficient. In 2006, Microsof t is expected to release its new Vista operating systemspurring an upgrade cycle. S ome industry analysts argue that 50% of a computer hardware product profit is cr eated during the first 3 6 months of sales. An additional technological trend im pacting the computer industry is that customers prefer to use a single vendor fo r all of their computing platforms (Graham-Hackett, 2005). From the customers per spective, this simplifies technology upgrades and one company is accountable for all of its needs. For a computer hardware company to remain competitive, it mus t be able to satisfy all of its customers needs in a timely manner. G.4.GovernmentF orces Governments around the world also represent an opportunity for the computer hardware industry. They are likely to continue to invest in internet infrastruct ure in order to improve the standards of living of their respective populations as well as to become more globally competitive (Graham-Hackett, 2005). In 2002, the U.S. federal government relaxed restrictions on computer exports of computer s which have 190,000 Mtops to China, Russia, India, Pakistan, and other areasprov iding a needed boost to the computer industry (The Gale Group, 2006). 48

G.5.SocialForces Seasonal factors influence the sales of computer hardware manufact urers. Specifically, these factors include the retail cycle for home PCs, the ye ar-end sales push for corporate hardware, and differences in customs and busines s practices in other parts of the world (GrahamHackett, 2005). Holiday and backto-school seasonal sales are also a key influence on the social forces of this i ndustry which drives sales. Similarly, a summer business slowdown in Europe regu larly results in decreased computer sales to this region during this period. In the computer hardware industry, the fourth quarter is the most important revenue and earnings period. This is due to two important factors (Graham-Hackett, 2005 ). First, most businesses close their books in December and managers try to depl ete their capital spending budgets in order to avoid funding cutbacks in the nex t year. Second, the industrys sales representatives are often offered substantial financial incentives to meet year-end sales goals. G.6.PhysicalEnvironment Physica l resources, environmental issues, and weather has little impact on the computer industry given that all computer parts are artificially manufactured. However, weather issues may affect the ability of a computer companys supply chain to oper ate efficiently. Adverse weather can negatively impact the competitive edge of a company such as Dell which relies on just in time inventory methods as well as di rect sales to its customers. G.7.NationalFactors National factors are increasingly important in a computer companys ability to maintain its competitive edge, both i n terms of the manufacturing process as well as improving sales. According to th e Wall Street Journal: Scores of Western companies have been cutting costs by shi fting software development, engineering design and routine office functions to c ountries such as 49

India, where English-speaking workers are plentiful and wages are low (Associated Press, 2006) Computer companies are increasingly shifting their manufacturing o perations outside of the U.S. to take advantage of a growing business and consum er market for their products as well as cheaper operating costs. They also need to pay attention to the value of the dollar versus the currencies in which the c ompanies trade. H.IndustryAnalysis H.1.NAICSIndustryCodes Dell operates within the NAI S Industry Code 334111 Electronic Computer Manufacturing. According to the U.S. Census, companies in this industry are: engaged in manufacturing and/or assembling electronic computers, such as mainframes, personal computers, workstations, lap tops, and computer servers (U.S. Census Bureau, 2006). Companies in this industry sell devices which are able to complete diverse tasks which can be freely progr ammed in accordance with user specifications. H.2.IndustryHistory The introduction of the PC in the early 1980s marks the advent of the modern computer industry. T he Altair 8800, which was the first commercially successful PC, inspired the bul k of the modern computing environment and introduced two key concepts that remai n critical to computer hardware manufacturing today. These include: mass product ion resulting in the obtainment of Intels chips at an attractive price and are based on open-systems a rchitecture. The first PC brought to a wide customer base was created by IBM in 1981. The open architecture of it enabled other companies create compatible PCs and ancillary devices including printers, video and sound devices. It also facil itated the commoditization of the PC. Servers and workstations coincided with th e birth of the PC. Dell entered the industry in the late 1980s. 50

H.3.IndustryTrendsandForces The computer industry is mature in Japan, the U.S., and E urope (The Gale Group, 2006). Growth opportunities continue to exist, however, i n Asia, Latin America, and the Middle East. To meet growing demand from new user s and new applications, Internet-related spending should continue to increaseprop elling the electronic computer manufacturing industry. The trend of consolidatio n between companies in this industry is expected to continue (Graham-Hackett, 20 05). Mergers receiving the most attention recently include: HPs 2002 acquisition of Compaq and Lenovo Groups purchase of IBMs PC division in 2005. Further, many of these acquisitions are also occurring to enable computer hardware vendors to of fer better services to customers. Finally, pricing is likely to continue to be i ncreasingly competitive. H.4.IndustryMarketingandPricingPractices The electronic compu ter manufacturing industry practices pricing reflective of the rapid pace of tec hnological change and decreasing PC costs. Since 2000, the prices of chips and d isk drives declined resulting in more competitive PC prices overall. The PC also became commoditized due to the standardization of their primary components, including M icrosoft Corporations Windows operating system and Intels processors (Graham-Hacke tt, 2005). Price competition is intense in this industry. Direct sellers, such a s Dell, have traditionally been able to under-price indirect sellers including Compaq and HP due to the companys. Since 2005, most PC vendors offer a desktop model for less t han $500 and a laptop for around $700 (Graham-Hackett, 2005). The phenomenon of declining prices is expected to continue in this industry and affect pricing for servers, workstations and large-scale systems. H.5.IndustryCapitalRequirements Sinc e the computer industry is maturing, competition based on price is intense. Succ essful companies in this industry, have found ways to streamline costs and trans fer value to 51

consumers. Common methods of reducing costs include shifting software development, engineering design, manufacturing, and routine office functions to countries suc h as India that have low wages and many English speakers (Associated Press, 2006 ). Some of the most capitalintense aspects of this industry include managing inv entory and supplier relationships. Many computer hardware manufacturers also sel l indirectly to customersforcing them to maintain expensive retail costs. Streaml ining processes is a critical aspect of remaining competitive in this industry a s it continues to mature and the price of component technology declines. H.6.KeySu ccessFactors Key success factors for companies competing in the computer industry continue to evolve as the industry matures. Certain factors are critically impor tant towards enabling the success of companies in the industry. They include: Co mpetitive prices, superior relationships with suppliers, product customization, quality customer service and excellent cost st ructure. H.7.ConsolidationandStrategicPartnerships Consolidation and strategic partne rships are common and will continue to increase in the computer industry. This p henomenon enables companies to offer more computing products and services in ord er to broaden their customer base. Some examples of recent mergers include Hewle tt-Packard Co.s May 2002 acquisition of Compaq Computer Corp for $19 billion and China-based Lenovo Groups acquisition of IBMs PC division in May 2005 for $1.75 bi llion. Hardware vendors are also positing the importance of service. Therefore, as computer networks increase in complexity and size, business and consumer cust omers will increasingly choose a single vendor for all of their computing needs. Most computer hardware companies maintain strategic partnerships with software and chip providers such as Intel and Microsoft. However, increasing numbers of P C makers are teaming up with Microsofts software rivals, according to the Wall St reet Journal (Guth, Robert 52

A. 2006). Specifically, Dell is in serious negotiations with Google in order to get its software installed on millions of Dell PCs before they are shipped to us ers, according to the report. This change challenges the strategic development p artnership formed between Dell and Microsoft in November 2004 enabling customers to reduce IT cost and complexity through using a single tool for managing hardw are and software (Datamonitor, 2005). H.8.IndustryOpportunitiesandThreats Opportuniti es for computer hardware manufacturers include expansion into peripheral markets and ancillary products such as printers. Dell entered this market in 2003 and h igh growth is expected in this market and will likely generate higher revenues. Other areas with expansion potential include consumer electronics. In October 20 04, Dell launched plasma TVs, compact photo printers, and updated Dell Digital J ukebox music players. As U.S. job growth continues, energy prices decrease, and stock and housing prices rise, consumers are likely to be in a spending moodpoten tially boosting sales to companies such as Dell. There are also significant thre ats to the computer hardware industry that should be considered. These include t hreats from competitors. Stiff competition exists among the top major players in the PC business: Dell and HP. With forecasted slowing growth in the U.S. PC mar ket, competition is likely to intensify. Component price fluctuations are also a threat to the price of the products of computer hardware companiesparticularly D ell. Since Dells direct business model enables it to operate with reduced levels of component and finished good inventories, price fluctuations can severely impa ct the companys margins when component prices rise. I.IndustryLifeCycle Companies com prising the computer and peripherals industryincluding Dell Inc.are firmly entrenc hed in the maturity stage of the industry life cycle (Grant, Robert M., 2005). 5 3

Companies in this stage experience stable sales, slight growth, and decreasing p roduction costs. All of these characteristics have been discussed in detail with regard to the computer and peripherals industry in Appendices G and H. Companie s find it difficult to innovate at the maturity stage since most of their produc ts are a commodity. Instead, they compete on cost and focus on process innovatio n. The key success factors for companies in the maturity stage include cost effi ciency through capital intensity, scale efficiency, and low input costs while de livering high quality (Grant, Robert M., 2005). Successful mature companies shou ld target their strategies to address these issues. Dell Inc. is the market lead er in the computers and peripherals industry due to its ability to transform the rules of engagement to a standards-based approach. Specifically, Dell rejected protected franchises and a tiered distribution system and adopted a customer-foc used approach with a carefully managed supply chain and cash-flow process (Emera ld Group Publishing Ltd., 2005). Further, other companies throughout the industr y copy Dells low-cost, direct sales model. As Dell continues to negotiate the challenges of the mature life cycle st age, the company will need to continue to focus on process innovation and creati ng business and consumer customer value in order to maintain its status as indus try leader. 54

APPENDICESJL:COMPETITIVELANDSCAPE ByJenniferLund

J.FiveForcesofCompetition J.1.BargainingPowerofSuppliers Suppliers hold considerabl in the computer hardware industry. Although Intels grip on the market has decrea sed slightly with the emergence of AMD, the company still supplies about 90% of the microprocessors used in PCs. Similarly, the Microsoft operating system is us ed in an estimated 85% to 90% of PCs worldwide (Graham-Hackett, 2005). Threat of substitutes Low Bargaining Power of Suppliers High Industry Rivalry Hi gh Bargaining Power of Buyers High Threat of New Entrants Low Also, almost all PC manufacturing is outsourced. Taiwanese companies now produce approximately 80% of the worlds laptops. In fact, one Taiwanese company (Quanta) produces nearly 25% of the worlds portable computers, which are then sold by com panies such as Dell and HP (Dean, 2005). Outsourcing the manufacture of PCs and laptops is a valuable cost-cutting measure taken by OEMs (original equipment man ufacturers). Further, the OEMs have begun playing their contract manufacturers a gainst each other to keep any one supplier from gaining too much power in the ma rket. J.2.BargainingPowerofCustomers Consumers also have a significant amount of powe r within the PC market. As a result, PCs have become commodities requiring vendo rs to maintain competitive prices in order to retain customers. In addition, alm ost all providers allow customers to customize the PC to match 55

their needs. Plus, nearly all PCs contain roughly the same components and may ha ve been manufactured by the same Chinese/Taiwanese firms. As discussed in Append ix G, the addition of new technology to a market (such as the introduction of a new operating system) will lead consumers to upgrade their systems, thereby limi ting some of the consumers power. In the server market, the demand for midrange a nd high-end UNIX servers appears to be swinging back from the volume servers. Al so, as discussed in Appendix H, as computer networks become larger and more complex, customers increasingly prefer and are w illing to pay a premium to use a single vendor for all of their computing platfo rms (Graham-Hackett, 2005). J.3.ThreatofNewEntrants The explosive growth in servers i n the late 1990s attracted new entrants to the market. In addition, PC server pa rticipants, drawn by projected growth rates of 25%, further stimulated the marke t with dramatic price cuts (Graham Hackett, Industry Profile, 2005). However, th e computer hardware industry has been in a consolidation phase for a number of yea rs (for example, Compaq purchased Tandem then HP purchased Compaq). J.4.ThreatofSub stitutes The threat of substitutes is low in the computer hardware industry. Cons umers only have two choices for PCs Apples Macintosh or Windows-based PCs. Howeve r, the cost of switching between the two systems is significant, thereby making it unlikely tha t customers will substitute one for the other. Servers, on the other hand, have no available substitutes. J.5.IntensityofCompetition The number of competitors in th e PC and server markets is relatively low; nevertheless, the level of competitio n is exceptionally high. In the PC market, the largest (Tier 1) vendors are IBM (a lthough its PC business is now owned by Lenovo), Sun Microsystems, HP, and Dell. Smaller (Tier 2) vendors include Gateway and Toshiba. However, below the second t ier lies 56

another group of manufacturers - companies selling unbranded white box computers t hat they have either assembled themselves or purchased from a local assembler. S ince white boxes increasingly use the same components as branded computers, thei r functionality differs little from those sold by the Tier 1 and 2 vendors (Grah am-Hackett, 2005). The recent trend towards consolidation and the decreases in c omponent prices has led to the intense competitive pricing now facing the indust ry. Given the long-term downtrend in PC pricing, vendors will need to continue t o cut costs from their operations. The growing white box market will require the T ier 1 and Tier 2 vendors to maintain competitive prices. Companies with more fav orable cost structures increase their chance of profitability. K.MajorCompetitors F or the purposes of this analysis, Hewlett-Packard, IBM and Sun Microsystems have been identified as Dells main competitors. Each company will be evaluated on its strengths, weaknesses, generic strategy, threats and opportunities. Hewlett-Pac kard held the #2 spot in PCs behind Dell as of the 3rd quarter of 2005. Its posi tion in the server market is even more impressive. It held the #2 slot in the Un ix server category in the 2nd quarter of 2005 and the #1 place in the Linux serv er group at 24.3%. At this point in time, HP is operating under a broad/cost str ategy. It is offering a significant number of products at a wide range of prices . Strength & weaknesses: HPs recent acquisitions have provided it with considerab le market expertise. For instance, Compaqs acquisition of Tandem provided it with a knowledgeable sales force and skills in clustering computers. Its purchase of DEC provided it with a high-end Unix system and a worldwide services organization. F inally, HPs 2002 purchase of Compaq was designed to create a company with $12 billion in services revenue (Graham-Hackett, Industry Profile, 2005). HP is still struggling to reor ganize itself after the exit 57

of Carly Fiorina. Adding to its difficulties is its place in the market: it is t rapped between the efficient Dell and the innovative IBM. In addition, its produ ct portfolio is rather cumbersome ranging from ink cartridges to multimillion do llar computers (Burrows, 2005). Threats and Opportunities: HP is doing exception ally well in the Asia-Pacific. It grew by 52.4% in the region, for a market shar e increase of 250 basis points (Graham-Hackett, Current Environment, 2005). It o ffers products but also the ability to leverage the channels massive infrastructu re to meet customers specific needs at the most granular level (Pereira, 2005). H owever, HP appears to be focusing on its servers, data-storage equipment, mobile computing devices and computer security and imaging (Tam, 2005). The companys la ck of focus on the PC market opens the door for Dell to gain a portion of HPs sha re of the market. IBM holds the largest overall market share in servers. It led the Unix server category in the 2nd quarter of 2005, with a 31% share. In additi on, IBM has made much about promoting its Linux lineup and maintained a 20.3% ma rket share (Graham-Hackett, Current Environment, 2005). IBM is using a broad dif ferentiating strategy: it is appealing to a number of different consumer groups while differentiating itself based on its services organization. Strength & weak nesses: IBM led the high-end server market in 2004 with a total share of 55.2% ( Graham-Hackett, Industry Profile, 2005). In 2002, it acquired the consulting uni t of PricewaterhouseCoopers. IBM faces strong price competition and technologica l disruptions. With product transitions, it faces the risk that customers will n ot adopt new products as quickly as hoped (Fortuna, International Business Machi nes, 2006). Threats and Opportunities: IBMs consulting arm can provide services t o customers that Dell cannot. However, IBM spends billions annually on research and development. Dell has the ability to reverse engineer IBMs successful product s for its own use. 58

Sun Microsystems garnered the #3 spot in the Unix server category with a 29.5% m arket share in the second quarter of 2005. Suns strategy is to be a narrow differ entiator. It focuses primarily on consumers in the server market. Strength & wea knesses: Sun added personnel to improve its service offerings and has made allia nces with companies such as Electronic Data Systems Corp. and Computer Services Corp. Sun will have trouble reaching levels of sustained profitability without b etter gross margins, further cost cuts or significant top line growth (Fortuna, Sun Microsystems, 2006). Threats and Opportunities: Sun recently added the Galax y server line in an attempt to win back customers. However, its financial weakne sses may allow Dell to move more firmly into the server market. L.CompetitorResour ces AnnualSales(inmillions) Dell HP IBM Sun Microsystems 2005 $49,205 $86,696 $92,000 ,070 2004 $41,444 $79,905 $96,293 $11,185 2003 $35,404 $73,601 $89,131 $11,434 In terms of sales, HP and ever, this alone does not ul than their competitors es and services. 2005 1.20 1.38 1.31 1.51 CurrentRatio Dell HP IBM Sun Microsystems The current ratio is primarily used to estimate a companys ability to repay its s hort-term obligations with its short-term assets. A ratio above 1 implies that a company will be able to repay all of its current debt should it come due. It ca n also be used to measure a companys operating efficiency i.e. companies with low current ratios often have difficulty collecting their 59 IBM are much larger than Dell or Sun Microsystems. How prove that HP and IBM are more competitive or successf it only proves that they are bigger and offer more sal 2004 0.98 1.50 1.18 1.47 2003 1.00 1.61 1.19 1.64

receivables or have high turnover ratios. In this instance, Dell has the lowest current ratio implying that the other three companies are more financially sound at least in the short-term. However, Dell also posted substantially higher asse t turnover and inventory turnover ratios than its competitors, as will be shown below. 2005 2.12 1.12 0.90 0.78 2004 2.15 1.05 0.88 0.76 2003 2.29 0.99 0.85 0.89 TotalAssetTurnover Dell HP IBM Sun Microsystems Asset turnover measures a firms ability to use its assets to create sales. Dell i s the obvious leader in this category. For the past three years, its turnover ra tio has been double that of its nearest competitors meaning that Dell is the mos t efficient company in terms of asset use. 2005 18.3% 23.6% 42.7% 41.5% 2004 18.2% 24.5% 37.4% 40.4% 2003 17.9% 26.8% 37.0% 43 .2% GrossProfitMargin Dell HP IBM Sun Microsystems The gross profit margin looks at the percent of revenue remaining after the cost of goods sold has been accounted for. Dell has been slowly trending upward, as has IBM, possibly because both have become better at controlling costs. HP, on t he other hand, has seen its gross profit margin slowly eroding a sign that it ma y be having difficulty controlling its supply costs. 2005 46.9% 6.5% 26.4% -1.6% 2004 42.1% 9.3% 28.3% -6.0% 2003 43.5% 6.7% 27.2% -52.1 % ReturnonEquity Dell HP IBM Sun Microsystems Net profit margin measures how much revenue is actually retained as earnings. In sharp contrast to the gross profit margins, Sun Microsystems has actually been losing money in the last three years. Dell and IBM have maintained relatively st eady margins. IBM has posted higher net profit margins than its competitors for the last three years. 60

ReturnonAssets Dell HP IBM Sun Microsystems 2005 13.1% 3.1% 7.9% -0.8% 2004 13.7% 4.6% 7.7% -2.6% 2003 13.7% 3.4% 7.3% -26.2% ROE measures the amount of profit a company generates with its shareholders inve stments. Dell is, once again, out in the lead nearly doubling the ROE earned by IBM. Sun continues to show signs of a recovery although the company is still pro ducing negative results. 2005 6.2% 2.8% 8.8% -1.0% 2004 6.4% 4.4% 8.8% -3.5% 2003 6.0% 3.4% 8.5% -29.6% NetProfitMargin Dell HP IBM Sun Microsystems Return on assets indicates how well a company is able to use its assets to gener ate profits. Higher percentages are typically regarded as better because the com pany is earning more money on less investment in assets. In this instance, Dell is clearly the best at turning its assets into net income. IBM also appears to b e doing well. However, Sun Microsystems is clearly having some difficulties, alt hough it has made improvements since 2003. 2005 107.20 12.61 27.96 25.68 2004 126.74 11.30 29.04 24.11 2003 115.70 12.14 30.30 27.49 InventoryTurnover Dell HP IBM Sun Microsystems For manufacturing companies, inventory must be monitored extremely closely holdi ng too much or too little can lead to serious problems. In the computer hardware industry, where technology frequently changes, extended inventory holding perio ds may mean that companies are holding obsolete products in their inventories. A s expected, Dells inventory turnover rate far exceeds those of its competitors (a ccording to these calculations, Dell turned its inventory over 107.2 times in 20 05, compared to 27.96 for IBM, 12.61 for HP and 25.68 for Sun Microsystems). 61

APPENDICESMO:CURRENTPOSITIONINGANDSTRATEGY ByGregShorr M.ProductMarketMatrix Dell currently serves a global market through the sales of its products and services. Its core business is computer related and is based in th e U.S., where the company has the largest percentage share of the computer marke t. M.1.PresentProductsandservices Dell s present product line can be segmented into 5 ma jor categories: Desktop and Mobility Computing, Software and Peripherals (Printe rs, Monitors, Plasma TV s, Cameras, etc.), Servers and Networking, Infrastructur e Services and Storage. These 5 categories span the computing industry and allow Dell to be engaged in all aspects of the individual and corporate computing experience. Within each of these categories, Dell offer s products that appeal to many market segments. While often known as a low-end p rovider (Lee, 2005), Dell is expanding its personal 62

computing offering to include high end products with the reintroduction of its X PS brand. This product offering will allow Dell to market its products to the en tire spectrum of computer users, rather than approach the market from a broad pe rspective. M.2.PresentMarket Dell, through the creation of subsidiaries, has expand ed its business model worldwide. While its core business resides in the U.S., op erations in Europe, Asia and Japan continue to grow, making up 34.5% of Dell s y ear-to-date (YTD) revenue (Form 10Q, 2005). In each market, Dell utilizes a dire ct sales methodology to eliminate the costs of the middle man. In each geographi c market, Dell pursues three independent market segments: consumers, government and businesses. Of these three, Dell is the most reliant on the U.S. business se gment, which is responsible for 51.8% of Dells YTD revenue (Form 10Q, 2005). M.3 .Relatedproductsandmarkets Dell s CEO, Kevin Rollins, set an aggressive goal of becom ing an $80B company by the end of 2007. To reach this goal, Dell must continue t o gain market share in each of the markets described above and expand their busi nesses. The company should begin by adopting a broader market offering of intern al workings of PC s, expanding its service business to include creativity and bu siness solutions and developing a retail option to better match societal realiti es in developing countries such as India and China. As the sole remaining PC pro ducer that relies entirely on Intel chips, Dell benefits from the advantage of i ncentives and discounts that arise from volume and the ease of only having to ma intain one production line for attachment of microprocessors (Yager, 2005). Over the last several years, AMD has developed fresh new microprocessors that surpass Intel s offerings in capability and speed. Until Dell begins to offer these components, it has the potential to lose market share. While offering their customers a full range of chip options and im prove product 63

line offering, adding AMD would challenge Dells manufacturing process since chip attachment methods vary by company. However, Dell s newest plant, WS1, is built in a lean manufacturing mentality, where diverse product models can be built by the same manufacturing line executing Single Minute Exchange of Die (SMED) metho ds (Null, 2005). This should reduce the impact of changing between chip vendors, as the plant already has flexibility built into its operating procedure. As the market for PC s expands globally, companies such as Dell have begun to grow in developing countries. This market is expected to be where 80% of sales will be o ver the next four years (Kharif, 2005). Dell has already penetrated the market i n China, where they are currently the #3 PC makers. However, Dells direct sales m odel is not providing the returns expected in China due to differences in buying patterns and the relatively low u se of credit cards. Dell should invest in partnerships or storefronts similar to the Apple store concept where the entire Dell product line can be seen and to uched, a method that will probably work better with Chinese buying habits. This would put the company in direct competition with the #1 computer maker in China, Lenovo, who operates over 4,800 retail shops (Lee, Burrows, 2005). M.4.UnrelatedP roductsandmarkets Currently Dell s service provisions are limited to infrastructure services. Dell works with a customer to determine the necessary technology, del iver it and set it up, and then terminate its involvement with the customer (Mar engi, Cotshott, 2006). This market is based on single event purchases, rather th an a continual relationship and has limited interaction with customers. By expan ding into consulting services, Dell will establish more ongoing relationships wi th customers and become a company offering a solutions focus, an area currently dominated by rivals IBM and HP. In addition, this strategy will help ensure a co ntinuing market for the Dell PC, server and integration service businesses. It w ill also change Dell s Business-to-Business 64

brand from a solely value provider to a creativity and complete solutions provid er (Slavens, 2005). N.Porter sGenericStrategies While Dell participates in many different markets and industries, its corporate differentiations strategy is best exemplified by its core businesses, PC sales a nd services. The company has dedicated itself to making the customer the most im portant voice in the value chain. Its direct sales model changed the way the ind ustry did business, eliminating the middle man and putting consumers and busines ses directly in touch with production. Dell has been able to eliminate unnecessa ry costs and reinvest in areas that create value for the end user, such as mass customization and world class service and support. By utilizing just-in-time inv entory through supply chain management and SMED methodologies, Dell is able to m anufacture computers with a world class cycle time. This enables the firm to mai ntain a cost structure that other PC makers cannot currently match. This also he lps Dell to eliminate stocks of finished products, reducing component stocks and replacement costs (Tournois, 2004). Not only does this allow Dell to quickly re spond to competitor price shifts, but also allows the consumer to get the high quality pr oduct it wants very quickly and for a reasonable price. By introducing mass cust omization to the market, Dell 65

created a brand name, which was ranked as the 19th most recognizable consumer br and by CoreBrand (Slavens, 2005). Another key aspect of Dell s brand is its high quality customer service reputation. Among low end customers, Dell s ranking ha s slipped due to changes in the way services are marketed as the company focuses on higher margin products (Lee, Thornton, 2005). Within this segment, Dell cont inues to provide high quality services and is recognized as the industry leader. In either case, the company continues to focus on providing high initial qualit y, instituting rigorous checkouts for each PC before the product is shipped. As the market has changed, Dell s business model continues to differentiate itself by focusing on customers. However, Dell is now building service into its busines s model. It will begin charging for services on its lower end products while pro moting some higher end products that will continue to receive free service (Lee, Thornton, 2005). In either respect, Dell focus is on increasing customer value, but is keeping the value consistent with the product purchased. O.MarketAttractiv enessandStrength Using the Boston Consulting Groups growth share matrix, and the McKi nsey 9 cell matrix, Dell s many businesses can be independently analyzed. Dell s PC division, comprising both desktop and mobility segments can be categorized as a Cash Cow, due to the company s front running p osition and ownership of over 18% of the world market (Williams, Cowley, 2006). This market is expanding, especially in developing countries (Kharif, 2005), wit h an expected increase in shipments of 10.5% worldwide in 2006 66

(Kanellos, 2006). Dell s strength in this segment comes is evidenced by their co ntrol of the corporate and personal markets in the U.S. where they are the top v endor. Outside the U.S., Dell is currently either the #2 or #3 PC maker, where t hey are seeing greater than 20% Year over Year (YOY) growth , depending on the m arket (Young, 2006) (Evans, 2005). The server business is one where Dell continu es to make show consistent growth in market share, making it a star in Dell s po rtfolio. Dell s market share has increased substantially over the last several y ears to almost 11%, overtaking Sun to rank as the #3 producer of servers (Shankl and, 2005). To grow market share, the company focused on lower end, higher volum e servers, posting between 2225% YOY growth over the last several years. As the company matures in this market, Dell is expanding its business by growing into h igher end Windows markets such as clustered servers (Yager, 2005). These new pro duct offerings put Dell in a strong position to capitalize on the expected 6-8% growth of the market in 2006 (Graham-Hackett, 2005). Unlike their PC and server businesses, Dell does not have the current strength of market to categorize thei r service business as more than a question mark. This segment is the fastest 67

growing business segment at Dell, with over 30% of growth for each of the last s everal years. However, Dell estimates that it currently services less than 1% of this over $670B industry. The company sees this segment as an opportunity to gr ow its business through continued refinement of its depth of expertise and capab ility of its consultant base (Marengi, Cotshott, 2006). The company has develope d a focused strategy to continue to expand this business through the development of suite services and packaging services through product sales. In order to mov e this segment of business to a Star or Cash Cow, Dell must develop this busines s into a more consistent and recognizable portion of its product portfolio. The final market Dell competes in is the peripherals market, which includes printers , digital cameras, monitors, storage, HDTV s and many other products. These prod ucts together make up 16% percent of Dell s overall revenue and have shown more than 20% YOY revenue growth (Form 10Q, 2005). Within this segment, however, Dell s product offerings cannot be categorized together, as the products range from cash cows to question marks. The largest revenue producer and cash cow is the di gital display business due to the product linkages between monitors and computer purchases. Outside of digital displays, where Dell does not have the same produ ct ties to its PC line, Dell faces competition from many entrenched market leade rs. Despite this, Dell is experiencing significant sales growth for its peripher al products. For example, its printer unit, while a distant #2 behind HP, has gr own to over a 13% market share in just over 2 years (Singer, 2005). Its storage division, based on a partnership with EMC, is ranked a distant #4, holding just over 8% of the market for external and disk storage (Nisbet, 2006). However, due to its ranking in PC sales, Dell is the #1 reseller of storage, more than 16% a head of its nearest rival (Zerekes, 2004). Within each of these markets, Dell ha s experienced over 20% YOY growth (Form 10Q, 2005). 68

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