Dell Case

Key Issues

Matching Dell
Industry Dynamics
How to attain advantage
How to protect advantage

2-2

Industry Dynamics
5 Forces Model Gauges the degree
of competitive rivalry in industry.
Bargaining Power of Suppliers.
Bargaining Power of Customer.
Threat of new entry.
Threat of substitutes.
Intensity of Rivalry.

2-3

Bargaining Power of Suppliers

Proprietary Standards from Microsoft
and Intel - Extract profits
Other inputs are commodities
Thus Bargaining Power of Suppliers
is Very High

2-4

Bargaining Power of Customers

Standardized product means its easy
to switch brands
Resellers and retailers have grip on
channels.
Corp. users buy direct based on price
since little differentiation
Over BP of customers is high and
rising.
2-5

Threat of new entry.

Increasing with rise of internet and
direct channel.
Main barrier is capital needed for
manuf. facility.
Only real barrier are economies of
scale.
Threat is fairly high.

2-6

Threat of substitutes.
Within product category, few direct
substitutes.

2-7

Intensity of Rivalry.
Rivalry is very high due to:
Lack of differentiation.
Reliability and Service are only diffs.

Price is similar for all competitors

If prices are similar, this is a signal of
rivalry.

Do prices go down or up?

Tend to fall.
2-8

Dells Advantages/Disadv.
Direct to order
Efficient (best cost position)
Effective (for some customers - best)

Focus!
Not distracted by other channels
Maybe not competent in other channels?

Service
By from Dell, deal w/ Dell.
2-9

IBMs Advantages/Disadv.

Direct Salesforce.
Well regarded laptop.
Costs are higher
Few non-corporate customers

2-10

Compaq Adv/Disadv.
Cost position is good
Retail relationships
Poor quality
Poor reputation

2-11

HP Adv/Disadv.
Quality reputation
Higher cost
Resellers

2-12

Gateway Adv/Disadv.
Price lower
Service
Image?

2-13

Example of Unit Price

and Cost Analysis
1998 numbers

Dell

Compaq

Unit Price

1996

1932

Unit COGS

1555

1325

135

195

309

44

124

1794

1893

202

39

12327

31169

Gross Margin

2722

9786

Margin % Rev

22.1%

31.4%

Channel Markup

0.0%

7.0%

SGA

1202

4978

SGA % Rev

9.8%

16.0%

Cost of inventory

273

2,005

Days of Inventory

10

34

2%

6%

Channel Markup/Unit
Unit SGA

Inv. Carry Costs

Cost of unit
Profit

Rev

Cost of Inv % of Rev

Notes

1-Gross Margin

Inv / (Rev-Gross Marg)*365

2-14

For all firms

1998 numbers
Unit Price
Unit COGS
Channel Markup/Unit
Unit SGA
Inv. Carry Costs
Cost of unit
Profit

Rev
Gross Margin
Margin % Rev
Channel Markup
SGA
SGA % Rev
Cost of inventory

Days of Inventory
Cost of Inv % of Rev

Dell
1996
1555
0
195
44
1794
202

Compaq
1932
1325
135
309
124
1893
39

IBM
1959
921
0
400
125
1445
514

HP
2129
1451
149
353
284
2237
-108

Gateway
1762
1406
0
242
39
1687
75

12327
2722
22.1%
0.0%
1202
9.8%
273

31169
9786
31.4%
7.0%
4978
16.0%
2,005

81667
43282
53.0%
0.0%
16662
20.4%
5,200

47061
14989
31.9%
7.0%
7793
16.6%
6,284

7648
1546
20.2%
0.0%
1052
13.8%
168

10
2%

34
6%

49
6%

72
13%

10
2%

Note: IBM numbers are likely inflated by Mainframe and service being included.

2-15

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