Strategy

[pic] Strategy Assignment Matching Dell November, 10th, 2010 Index Question 1 3 Question 2 4 Question 3 5 Question 4 6 Question 5 6 The first step in the formulation of a good business strategy for any firm is the comprehensive assessment of two key parameters – industry attractiveness and the firm’s competitive advantage. Subsequently, in order to ensure long-term profitability, the firm also needs to establish the extent to which it can sustain its competitive advantage against competitors. In question 1) of this report we use the Porter’s Five Forces framework to analyze the attractiveness of the PC industry in the 90s. In question 2) we establish Dell’s competitive advantage and consequently it’s strategy in the PC industry. In question 3), we identify some of the barriers to imitation which enable Dell to sustain its competitive advantage identified in question 2). Question 3 and 4 explore the recent developments in the PC industry and Dell’s performance in the industry. Question 1: How would you describe the PC industry in the 90´s' Please refer to Exhibit 1 for the Porter’s Five Forces analysis of the PC industry in the 90s. Below we summarize the major conclusions: 1. Product Since all innovation was concentrated with industry wide Wintel supplier and all other components were commoditized, the PC was a commodity product with no significant product differentiation - the industry had low margins, was susceptible to price wars and all cost savings from suppliers & production were passed onto end consumers. Due to commoditized nature of the value chain, a low cost product was critical for profitability. 2. Consumers The PC industry had two contrasting end consumer segments – 1) home consumers that were brand conscious but price-sensitive and 2) business consumers who were brand indifferent but drove prices down through bulk orders. Demand for PC increased a lot especially in the late 90’s. Consumer segments demanded both a pull and push strategy – home consumers were targeted through a pull marketing strategy behind investments in advertising and business consumers were targeted through a push strategy behind dependence on distributors / resellers and investments into channel development. 3. Distribution Most PC manufacturers chose to sell through intermediate distribution channels versus a direct sales force. This concentrated disproportionate power with distributors / resellers and retailers while saddling manufacturers with added financing cost of insuring channel inventory. 4. Entrants Proliferation of white-box manufacturers was an indication of low barriers to entry for the industry such as low entry capital, no absolute cost advantages with incumbents, easy access to distribution channels and minimal upfront advertising expenses to build brand equity. Also it costs only about 1million to build assembly equipment for PC. 5. Substitutes The threat of substitutes was low due to the monopoly exerted by the Wintel supplier. Question 2: What has been Dell’s strategy' It´s competitive advantage' How has it been reflected in its value chain' As a start-up entrant into the PC industry in the early 80’s, Dell was confronted with engineering centric, vertically integrated behemoths such as IBM, Compaq and HP who had discard a direct sales model and were selling through intermediate distribution channels. With reference to Porter’s Five Forces analysis, Michael Dell came up with an innovative strategy for Dell behind three major pillars: 1. Direct sales model With its direct sales model and built-to-order demand forecast, Dell achieved the industry’s lowest days on hand inventory of WIP goods and had no finished goods inventory. Dell optimized WIP inventory by encouraging suppliers to co-locate near Dell manufacturing sites and by developing electronic links with its suppliers to get components only when needed (just in time delivery post built-to-order). Additionally, it streamlined operations towards fewer, reliable suppliers that would deliver consistent products without the need for additional component testing at Dell facilities (e.g. Sony). A business model based on direct contact with clients and suppliers and a built-to-order value chain enabled a highly flexible operation that quickly delivered customized solutions (e.g. the NASDAQ stock exchange order). This was a competitive advantage and contrasted with the vertical integration model of the competitors which were slow to react to specific customer needs and had significant inventory both on manufacturing sites and in the distribution channels. With the direct sales and built-to-order model, Dell also avoided the costs of insuring channel inventory that other manufacturers faced while reaping the benefits of maintaining a negative working capital between accounts receivable and payables. 2. Primarily address the Business segment Since this segment is brand insensitive, Dell did not have any advertising spends versus other PC manufacturers. Instead, it invested in a sizable sales force to understand consumer needs and provide customized solutions which were built-to-order. Additionally, it also bundled after-sales support and maintenance with the initial sale. Consequently, Dell quickly became client’s defacto “IT department” with access to an extensive database of customer purchases - valuable information that Dell could feedback to the client each time a problem aroused. As Michael Dell puts it, the suppliers and customers become their business partners. The capability to distinctively and quickly understand each client’s specific needs and issues was a consequence of Dell’s direct sales model and commitment to after-sales support. This was a competitive advantage for the business segment and enabled Dell to build strong profitable market share in this segment with healthy average selling prices in the top percentile of the industry. 3. Virtual integration Efficient and real-time information exchange between Dell, clients and suppliers enabled it to steer customer demand towards specific products, manage supplier pipeline inventory, provide effective after-sales services to clients and feedback component improvements to suppliers. This led to constant improvement in the operations and higher customer and supplier satisfaction. Based on the above three pillars, Dell established a competitive advantage that was both 1) differentiated behind its focus to provide customized solutions and after-sales support through direct sales and built-to-order model and 2) low cost behind its focus on low inventory in its value chain. Importantly, as low inventory levels are possible primarily through a demand forecast contingent on built-to-order, Dell’s differentiation strategy enables its low-cost model. Question 3: How effective have competitors been in reacting' Why has it proven so difficult to imitate Dell' In the 90’s, competitors attempted to address some of Dell’s key success factors by imitation. 1. Direct sales model In order to reduce inventory, competitors began creating partnerships with distributors/resellers who would complete configuration of machines to customer specifications and forward it on to the end customer. IBM did this with their Authorized Assembly Program, Compaq with Optimized Distribution Model, and HP with the ESPP. Competitors were able to reduce inventories to roughly 25 days versus Dell’s 7 days. By the late 90’s, price differentials were non-existent amongst competitors through implementation of partnerships. 2. Addressing the business segment All competitors began implementing programs to address the larger enterprises. IBM created the Netfinity Direct program in order to allow large companies to purchase a particular line of IBM servers without going through resellers. Compaq acquired DEC and used DEC customer relationships to sell directly to corporate accounts. HP implemented an Extended Solutions Partnership Program (ESPP) which allowed them to build large corporate orders to customer specifications in its factories. Gateway acquired Advanced Logic Research to ease into the PC server business and also set up a specific company to service large corporate, government and educational accounts. 3. Integration of value chain Competitors tried to integrate their value chain by vertical integration and partnerships with authorized distributors/resellers. Most were still unable to implement production based upon actual orders, but would complete lightly configured PCs based upon forecasts which would then be customized downstream. Competitors could not imitate the virtual integration of Dell because they had existing structures in place that were not as flexible to change. Also, they were focused in integrating/imitating/adapting only parts of the business model, instead of the business model as a whole, and here they failed in understanding that Dell’s model and associated competitive advantage only worked as an integrated structure. However, and despite these difficulties in completely achieving Dell’s efficiencies in the value chain, competitors were aware to market changes and were flexible in partially adapting their business models to this new paradigm introduced by Dell. Question 4: Why has Dell lost it’s leadership since 2006' Although more evident from 2006 on, Dell’s problems started earlier. The major driver was the overall market changing to one increasingly driven by home consumers, a segment in which Dell couldn’t leverage its competitive advantage of virtual integration and inventory. Also, B2C market is increasingly more demanding in terms of innovative products, and Dell had never made a real effort to address these innovation needs. At the same time, not only did the number of competitors increase, but they were also able to develop more efficient solutions for their distribution channels, thus squeezing Dell’s margins on the B2B segment. Concurrently, constant decrease in PC prices also led to significant decreases in Dell’s profit margins. In the face of all these changes, Dell was too centred in its proven model, predominantly inward-looking and isolated from changing market segments and hence was unable to adapt to the changing market needs. Another important issue is that in late 2000’s Dell was profiting greatly from financial investments (put options), based on their strong brand. However, with the decrease in their brand value, these financial investments were no longer profitable. Question 5: What should Michael Dell do' In order to regain its leadership, Dell should focus more on its core business, which is the B2B market. It should probably increase investments in services and cloud computing in order to leverage its competitive advantage and develop innovative and reliable solutions for the B2B market (Kaizen computer). Exhibit 1 – Porter’s Five Forces for the PC industry on the 90´s. | |End Consumer Power | | | |Large / Midsize Business & Govt.: Bulk orders; | | | |strong negotiating power w/ dedicated MIS staff; | | | |customized PC needs w/ emphasis on | | | |high-performance while controlling costs; PC brand| | | |indifferent | | | |Home Consumers: Price & PC brand sensitive; | | | |conscious of microprocessor brand; PC choice | | | |driven by independent organization evaluations & | | | |retailers | | | |Small Business: Value for Money conscious; PC | | | |choice driven by channel recommendations | | | |(distributors & resellers) who provide additional | | | |value added services such as installation, | | | |software configuration, network servicing | | | |Distribution Channel Power | | | |Distributor / Reseller: Served Large / Midsize | | | |Business & Govt. & Small Business consumers | | | |through value added services | | | |Direct: Eliminated distribution channel between | | | |all end consumers and PC manufacturer | | | |Retailer: Distributed PCs at low margins; | | | |instrumental in driving brands towards Home | | | |Consumers and Small Business | | | | |Threat of New Entrants | |Rivalry Between Established Competitors | |Threat of Substitutes | |Low entry capital | |Fragmented market share with large branded & | |Apple PCs niche alternative | |Commoditized or dominant suppliers| |white-box manufacturers drive industry | |constrained to individuals &| |– no absolute cost advantages | |commoditization and low brand differentiation – | |educational institutions | |No brand differentiation advantage| |difficult to differentiate offerings and potential| |with no traction in business| |– no upfront advertising expenses | |price-wars. | |segment. | |Easy access to distribution | |Paradox of brand importance to home consumers & | | | |channels – no investment in sales | |non-importance to business consumers causes | | | |force | |tension in establishing business model of | | | |Mature market; many competitors; | |differentiation or low cost | | | |low margins - unattractive | |Business consumers (largest segment) is brand | | | | | |insensitive and has resulted in disproportionate | | | | | |power with intermediate distribution channels | | | | | | | | | | | |Supplier Power | | | | | |Significant monopoly power with microprocessors | | | | | |(Intel) and OS suppliers (Microsoft) who have | | | | | |direct impact on PC performance and brand equity. | | | | | |All other PC components suppliers commoditized | | | | | |Hardware components subject to Moore’s law leading| | | | | |to dramatic reduction in PC unit costs. Savings | | | | | |passed onto end consumers in reduced pricing. | | | [pic] ----------------------- 2