The company was started by Michael Dell in 1984 as a part-time business of computer peripherals and repairs in the University of Texas, Austin. Its corporate headquarters are located in Round Rock, Texas, and it conducts operations worldwide through subsidiaries. In 1999, Dell Inc became the number one PC maker in the United States. According to Hill & Jones (2012) the company’s revenue grew from $546 million in 1991 to $32 billion in 2001 and $56 billion in 2005. Over the years Michael Dell earned many laurels from both analysts and investors.
The most important trend in PC market is the increasing of the share of consumer markets in the total market from 28% in 1994 to 38% in 2005. The demand for PCs has been on the increasing trend hence the company has capitalized on the increasing significance of individual consumers, commercial customers and governments. The industry has experienced a very important trend where PC demand has been steadily shifting towards smaller, more integrated and communication oriented products (Hill & Jones, 2012). Portable devices, such as laptops and notebooks, are the fastest growing form factor, totaling to an estimated 62% of unit demand in 2011 compared to just 10% in 1990 and are expected to overrun desktops.
The industry is experiencing trends that notebook purchases are driving consumers beyond one PC per household to one PC per person. In this context the major manufacturers, such as Dell, HP, Apple, Lenovo, Acer, Gateway and IBM, are reacting by focusing their attention on customization and personalization. The growth of computer usage in the last 10 years has been caused by completely different factors, as compared to the last two decades. The internet and the applications based on it have become the main driving force for the computer industry. During that period Dell Inc emerged as a global leader in PC selling, enjoying strong brand equity and high customer satisfaction ratings.
Brief history of the company
Dell Inc was founded in 1984 by Michael Dell while he was still a student at the University of Texas, Austin. Michael Dell set up PCs Limited as a part-time business in his dorm room to sell IBM compatible computers built from stock components. He started formatting hard disks for personal computers, added additional memory, disk drives and modems with IBM clones and sold them for 40% less than that of the IBM machines. Hill & Jones (2012) note that in 1985 the company moved up the value chain and began to assemble Dell branded PCs instead of upgrading the machines of other manufacturers. In the course of a year, the company posted revenue of $6 million. As a result of his success, Michael Dell dropped out of college in 1986 to run the business full time.
When Michael Dell founded the company as PCs Limited in 1984, the PC industry had vertically integrated companies such as IBM hardware and software developers, like Microsoft. Dell articulated that customization, fast delivery and low price would give his company a higher profit margin over IBM and HP (Hitt, Ireland & Hoskisson, 2009). In 1989 Dell was publicly listed through an IPO, while in 1992 Fortune 500 included Dell Computer Corporation among the world’s best 500 companies. This same year Michael Dell was named by Fortune 500 as the youngest CEO of the year (Hill & Jones, 2012).
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In 1993, Dell forayed into the United Kingdom, and then into Australia and Japan. Hill & Jones (2012) say that Dell Computers Corporation set up its own manufacturing facilities in Limerick, Ireland to serve European, Middle East and Africa, Penang, Malaysia (1996), Xiamen, China (1998), Eldorado do Sul, Brazil (1999) to serve Latin America. Hitt, Ireland & Hoskisson (2009) further say that in 1999 Dell Computer Corporation overtook Compaq and became the largest PC seller in the United States. Due to changes in the industry trends and consumers preferences, Dell in 1989 launched the notebook computer, followed by the network server (1996), workstation systems (1997), network switches (2001) and projectors and printers (2002). In 2003, Dell extended its product portfolio to the consumer electronics market by launching flat panel TVs, Dell Digital Jukebox, USB key drivers and Windows mobile powered PDAs (Hitt, Ireland & Hoskisson, 2009).
The Company’s Mission and Vision Statements
Dell's mission is to be the most successful computer company in the world at delivering the best customer experience in markets the company serves. The company’s vision statement entails that: “is to continue to grow responsibly through protecting the natural resources and practicing sustainability in all its forms”. The company’s focus is to improve the communities where they live and work through the financial and volunteer efforts. The vision statement of Dell is "It’s the way we do business. It's the way we interact with the community. It's the way we interpret the world around us-- our customers needs, the future of technology, and the global business climate”. The statement of key value of Dell Inc is “Whatever changes the future may bring our vision”. This implies that Dell’s vision is its guiding force.
Dell’s Reason for Dell’s Existence
The company’s reason for existence is to provide the best possible customer experience by offering superior value, high-quality, relevant technology, customized systems and services, superior services and support and differentiated products and services that are easy to buy and use (Ignatiuk, 2009). Ignatiuk (2009) further says that Dell Inc is one of the few corporations which was able to remain at the top of the market but at the same time had a difficult time because of the inconsistency between its strategy and the changing environment. Ignatiuk (2009) also says that from the beginning Dell’s strategy was built around a number of fundamental concepts. These elements include build-to-order manufacturing, mass customization, partnership with suppliers, just-in-time components inventories, direct sales, market segmentation and customer service. The success of Dell Inc is highly attributed to extensive data and information sharing with both supply partners and customers (Ignatiuk, 2009).
Desired Future State of Dell
Dell Inc’s future desired state is to stress the need for customer-oriented rather than a product-oriented business definition. Hill & Jones (2012) indicate that the company should anticipate demand shift which revolves around customer oriented mission statement. This type of mission statement will assist Dell Inc in capitalizing on changes in their environment. Management at Dell Inc is obligated to manage the company in such a way that employees will have the opportunity to earn according to their productivity (Hill & Jones, 2012). At Dell Inc. values, emphasizing pay for performance, job security and fair treatment for employees, help to create an atmosphere within the company that leads to high employees’ productivity and customer satisfaction. The company strives to achieve values such as respect for the interests of key organizational stakeholders, such as customers, employees, suppliers, communities, governments and general public.
Measureable and Desired Future Goals
In 2013 Dell’s consumer business is expected to represent about 25% of revenue, while PCs overall will account for about 60%. In 2013 it is estimated that enterprise business will bring in 30% of revenue at record margin levels. The future goal is to ensure that the company will double its earnings overall, as the server storage business will average 21% growth in the financial year (Hill & Jones, 2012). Dell’s 2010 pulled them out of the recession with significant advances in margins, particularly in the final quarter. In 2012, Dell’s fourth quarter is expected to produce $.53 per share in earnings, against a consensus expectation of $.37, and gross margins of 21.5% versus a consensus of 18.7%. Hill & Jones (2012) indicate that sales to small, medium, and large businesses are expected to go up by around 13%, with the bulk of gains expected to be generated from storage and services. The rebound from recession is expected to continue in 2012-2013 with significant margin expansion as a result of the Dell Inc’s supply chain leadership. The future outlook of Dell Inc looks promising, with a seasonality revenue tailwind and lower operating costs that together will provide for a 25% per share earnings bump for the year overall (Hill & Jones, 2012).
The Computer Industry
For the last twenty years the market for computer industry has been dramatically increasing and the companies providing software, hardware and service have been challenging individually with their competitors to gain more market share (Shirani, 2012). In the hardware industry, studies indicate that Dell is the second largest player. However, there are some rivals with almost the same size as Dell which could always be a threat. Shirani (2012) notes that the biggest rival is HP which always has the newest innovative products which Dell usually is late in introducing, such as fingerprint recognition, swivel monitors and tablets. Other key rivals in PC and laptop computers include ASUS, Lenovo, IBM, Sony, Acer and Toshiba. In the server computers the biggest competitors are SUN Microsystems and IBM.
Compared to other industries, mergers and acquisitions have characterized the industry over the last few years, such as Lenovo group buying the PC part of IBM and HP acquisition of Compaq. Shirani (2012) says that the core competence of Dell Inc compared to other companies has always been its direct business model which has brought the company competitive advantage, such as cost efficiency as well as high customization capability. The success factors in the computer industry in which Dell is a major player include competitive prices, superior relationship with suppliers, quality customer service and excellent cost structure. Dell, thus, applies the above factors despite the need of working more on some of them.
Analysis of Porter’s Five Forces Model and Complementors
Porter`s five forces model entails the strength of the forces that may change overtime as industry conditions change. Hill & Jones (2012) note that managers at Dell face the task of recognizing how changes in the forces give rise to new opportunities and threats, and of formulating appropriate strategic responses. It is also possible for Dell, through its choice of strategy, to alter the strength of one or more of the forces to its advantage.
Risk of Entry by Potential Competitors
For Dell Inc entry of potential competitors poses a major challenge. Potential competitors are companies that are not currently competing in the computer industry but have that capability to do so if they want. Hill & Jones (2012) say that Acer and Samsung which have not fully entered into the storage and server technology are potential competitors. Established companies already operating in the computer industry, such as Dell, often attempt to discourage potential competitors from entering the industry. Hill & Jones (2012) say that this is because it becomes more difficult for established companies to protect their market share and generate profits. A high risk entry by potential competitors represents a threat to the profitability of established companies. For the last ten years the risk of potential entry into the computer industry has been high with entrants such as Lenovo, Gateway and Acer. Hill & Jones (2012) further say these entrants have helped drive down prices and profits in the industry.
Bargaining Power of Buyers
The bargaining power of buyers refers to the ability of buyers to bargain down prices charged by Dell or to raise the costs of companies in the industry by demanding better product quality and service. Hill & Jones (2012) say that by lowering prices and raising costs, powerful buyers can squeeze profits of Dell. It is important to note that powerful buyers should be viewed as a threat. On the other hand, when buyers are in a weak bargaining position, Dell can raise prices and perhaps reduce the costs by lowering product quality and service, thus increasing the level of industry profits.
Buyers are most powerful when they purchase in large quantities. In such situations buyers can use their purchasing power as leverage to bargain for price reductions. Hill & Jones (2012) note when it is economically feasible for buyers to purchase an input from several companies at once the buyers can pit one company in the industry against another. Dell should realize that when buyers threaten to enter the industry and solely produce the product, thus supplying their own needs, can force down the prices (Hill & Jones, 2012).
Bargaining Power of Suppliers
The suppliers` bargaining power plays an important role to organizations that provide inputs to Dell, such as materials, services and labor. Hill & Jones (2012) say that suppliers` bargaining power refers to the ability of suppliers to raise input prices or to raise the costs of the industry. Hill & Jones (2012) note that powerful suppliers squeeze profits out of an industry by raising the costs of the company. If the suppliers are powerful they act as a threat and if they are weak, Dell has the opportunity to force down input prices and demand higher quality inputs (Hill & Jones, 2012). The profitability of suppliers is not basically affected by the companies` purchases in a particular industry. Hill & Jones (2012) further say that suppliers can threaten to enter their customers` industry and use their inputs to produce products that would compete directly with those of companies already in the industry.
For example, Dell is dependent on Intel, the world’s largest supplier of microprocessor for PCs. Intel microprocessor is the industry standard of personal computers. Intel competitors must develop and supply chips that are compatible with Intel’s standards. Hill & Jones (2012) note that Dell can purchase some microprocessors from Intel’s rivals, most likely AMD, but the company must turn to Intel for the bulk supply. Since Intel is in a powerful bargaining position, it can charge higher prices for its microprocessors than if its competitors were stronger and more numerous.
Threat of Substitute Products
Substitute products of different companies can satisfy similar customer needs. The existence of close substitutes is a strong competitive threat for Dell because it limits the price that Dell can charge. Hill & Jones (2012) note that substitute products limit industry profitability. For example, if laptops prices rise too high relative to those of iPhones, laptop users may switch to this substitute. Hill & Jones (2012) indicate that if the industry’s products have few substitutes, thus making substitutes a weak competitive force, then Dell will have the opportunity to raise prices and earn additional profits.
Rivalry from Established Companies
Intense rivalry from established companies, such HP, IBM and Dell, is set to bring a competitive struggle between companies within the computer industry. Hill & Jones (2012) say that the competitive struggle can be fought using price, product design, advertising and promotional spending. Intensive rivalry between established companies and Dell implies lower prices or more spending on non-price competitive strategies. Since intense rivalry lowers prices, it squeezes profits out of the industry. Hill & Jones (2012) say that this type of rivalry brings a threat to Dell`s profitability. If, on the other hand, rivalry is less intense, Dell may have the opportunity to raise prices and reduce spending, leading to high level of profits.
Complementors are companies that sell products that add value to the Dell`s products. Hill & Jones (2012) note that complementors to the personal computer industry are the companies that make software applications, run on Dell computers. The greater the supply of high quality software applications running on Dell machines, the greater the value of PCs to customers, the greater the demand for PCs and the greater the profitability of Dell Inc. Hill & Jones (2012) indicate that when complements are an important determinant of demand for the industry’s products, industry profits critically depend upon an adequate supply of complementary product.
List the Main Threats and Opportunities in the External Environment.
One of the major threats that Dell faces iscustomer switching costs. Hill & Jones (2012) note that switching costs can arise when customers invest time, energy and money switching from Dell products to products offered by other established companies, such as HP, Lenovo and Acer.
Government regulations are another threat that Dell is likely to face. Hill & Jones (2012) say that this threat has constituted a major entry barrier into other countries. At the same time, falling entry barriers, as a result of government deregulation, will result in significant new entry, hence increase the intensity of industry competition for Dell Inc.
The third threat is the high competitive structure of the computer industry. Hill & Jones (2012) indicate that the industry is characterized by high number and large size of distribution companies. This structure presents a threat rather than an opportunity.
The fourth threat is cost condition. Hill & Jones (2012) say that in the computer industry, the fixed costs are high. In this context, the profitability is highly leveraged to sales volumes. The threat arises because of the desire to grow volume which sparks intense rivalry (Hill & Jones, 2012).
The external threats that Dell Inc is set to face include entry of foreign competitors, introduction of new substitute products, changing customer needs and declining consumer confidence. Foreign trade barriers from China and other Asian countries and weakening currency exchange rates are set to be potential external threats (Hill & Jones, 2012). After defining the threats and opportunities, the manager should develop strategies to take advantage of opportunities and minimize or overcome the Dell’s threats.
Dell has the opportunity of benefiting from brand loyalty. Hill & Jones (2012) say that customers prefer to buy the products of established companies such as Dell. Over the years Dell has created brand loyalty by continuously advertising its brand name and products. The brand loyalty opportunity enables Dell to reduce the threat of entry of potential competitors.
Economies of scale act as the opportunity for Dell. Hill & Jones (2012) say that economies of scale enable cost reductions gained through mass production, discounts on bulk purchases of inputs and component parts. Economies of scale enable Dell to spread fixed production costs over a large production volume.
Dell enjoys absolute cost advantages relative to potential entrants. Hill & Jones (2012) say that Dell enjoys superior production operations and processes due to accumulated experience, patents and trade secrets. Dell can also enjoy access to cheaper funds for expansion as compared to new entrants, which is an opportunity.
Internal Analysis of Reviewing the Resources, Capabilities and Competencies of Dell
Dell’s internal strengths reflect its core competencies. Hill & Jones (2012) note that core competencies are capabilities that customers value and competitors find difficult to duplicate. Matching an internal strength and an external opportunity produces a situation known as leverage. Marketers face a major problem when environmental threats attack their organization’s weakness. The major strengths of Dell Inc include its cost advantages associated with its products, the availability of financial resources to foster innovation, customer loyalty to Dell brands and products and modern production facilities (Hill & Jones, 2012).
Another major strength of Dell Inc is the availability of patents for its products. Dell Inc enjoys superior research and development, expert technological know-how, process efficiency and exceptional customer services. Hitt, Ireland & Hoskisson (2010) say that Dell Inc garnered major success of servers and storage due to strategic partnerships with other well-known brands. By affiliating itself with different brands, Dell gained consumer confidence as well as exposure through marketing partner advertisements (Hill & Jones, 2012).
The internal weaknesses faced by Dell Inc may include weak spending on product research and development, limited distribution globally and higher costs of raw materials or processes. Hill & Jones (2012) note that the emergence of counterfeit computers from China at reduced costs has changed the way Dell customers look at their products. In this context, today many users of computer based products see PCs, laptops and the related products as a readily available product with price being the only real distinguishing feature among competing brands. Samsung, Acer and HP have been a major threat because of the introduction of low cost products whose functionalities rival Dell’s products. Hill & Jones (2012) thus say that the internal weaknesses of Dell’s major products will lead to additional competition in the market.
The internal strengths that Dell can benefit from include rapid market growth, complacent rival firms, changing customers’ needs, such as the need for new tablets and opening of foreign markets such as China and Africa. Ferrell & Hartline (2010) indicate that Dell Inc is set to benefit from new product discoveries, economic boom arising from the recent recession, demographic shifts of Dell product users and sales decline for substitute products.
The management of Dell Inc should realize that stressing internal strengths while ignoring external issues can lead to the situation when the company, although it is successful, cannot adopt to external changes either enhance or impede its ability to serve the needs of its customers. Hitt, Ireland & Hoskisson (2010) note that Dell will continue to dominate the tablet market through 2015. They also noted that much of Dell’s continued success and dominance over the competition have been due to the ingenuity of its marketing efforts. Marketing has over the time been one of Dell’s strengths, but staying on the top of the game has become more difficult as Dell develops a broader range of products for the mainstream customer rather than just normal users in the fields of education and design.
Evaluate Dell’s Building Blocks of Competitive Advantage.
One of the Dell’s building blocks of its competitive advantage is its cost leadership strategy. Hill & Jones (2012) say that Dell’s goal in pursuing cost leadership strategy is to outperform competitors by producing goods and services at lower costs than those of its competitors such as HP and IBM. This implies that if companies in the industry charge same prices as Dell, the company still makes a higher profit than its competitors because of its lower costs. Hill & Jones (2012) indicate that another importance of Dell`s cost leadership in its competitive advantage is that if the rivalry within the industry increases and companies start to compete on price, Dell will be able to withstand competition better than the other companies because of its lower costs.
The second building block of Dell’s competitive advantage is its differentiation strategy. Hill & Jones (2012) say that Dell’s differentiation strategy objective is to achieve a competitive advantage by creating a product that is perceived by customers to be unique in some important way. Dell’s differentiated ability to satisfy customers` needs, in a way that its competitors are not able to, means that it can charge a premium price. Dell’s ability to increase revenues by charging premium prices rather than by reducing costs as the cost leader allows the company to outperform its competitors and gain above-average profits.
Differentiation safeguards Dell against its competitors to the degree that customers develop brand loyalty for its products. Dell’s differentiation is based on innovation and technological competency which is highly dependent on its research and development function (Hill & Jones, 2012). Dell has been able to control all the prices that do not contribute to competitive advantage. Since as the differentiator Dell has higher costs that the cost leader, the company is able to control all costs that do not contribute to its competitive advantage, hence the price of its products does not exceed what its customers are willing to pay. It is important to note that since bigger profits are earned by controlling costs and by maximizing revenues, it pays to control costs but not to minimize them to the point of losing the source of competitive advantage (Hill & Jones, 2012).
The Strengths and Weaknesses of Each Item Above
Innovation is very important for high tech products, since new features are source of differentiation. Hill & Jones (2012) say that many people pay a premium price for new and innovative computer products with high processing speeds, videogame console and good visual displays. Innovation has transformed the nature of the industry competition.
Dell’s strength is based on responsiveness to customers. This is because the company offers comprehensive after-sales service and product repair. Hill & Jones (2012) say that this is an important consideration for complex products, such as laptops, which are likely to break down periodically. Dell offers service quality attributes which are very important.
Dell offers fundamental competencies compared to its competitors, which act as its strength. Dells distinctive competency has enabled the company to pursue a differentiated strategy. Hill & Jones (2012) say that differentiation on the basis of innovation and technological competency depends largely on Dell’s R&D function.
Dells competency in innovation tries to reduce its expenditures on research and development. Hill & Jones (2012) say that the company`s competency in responsiveness to customers through after-sales service seeks to economize on its sales force to decrease costs. The company’s efficiency in its just-in-time inventory (JIT) ensures that the company delivers its products to its customers without delays. Dell’s efficiency has increased its movement towards flexible manufacturing systems.
The strength of Dell is its adequate resources which enable the company to carry out the marketing and advertising programs. As a result, the company has been able to increase its efficiency and lower its costs compared to its rivals (Hill & Jones, 2012). The weakness associated with its competency is that through pursuing a low cost strategy Dell may attempt to ride down the experience and quality curve so that they can lower their manufacturing costs (Hill & Jones, 2012).
In conclusion, Dell’s future goal should be to increase its research and development investment in Red Rock, Texas, where new tablets and several Notebook models are developed. Shirani (2012) says that the company will seek to acquire more companies on top of the fourteen companies they acquired in 2009. By so doing the company will expand its product portfolio. The desired future goal is to strive to deliver system solutions to the customers. Shirani (2012) says that the company will center its acquisition in areas such as software, storage, information technology, networking and IT service. In addition, Dell strives for having a widespread and flat hierarchy in the company to facilitate the decision making process. The goal of this structure will be to ensure that lower level managers and employees are encouraged to take more responsibility.
Dell`s business strategy should be quite different from its competitors such as HP, Sony, Fujistu and Samsung. In the future the company should let its customers choose a wide range of products including smart phones. These products should be ordered online, via phone or in the company`s own show rooms. The company’s future desired strategy should be to reduce the costs of holding inventory. The company should use the internet to feed real time information about order flow to its suppliers, who then have updated information about demand trends for the components they produce and volume expectations (Hill & Jones, 2012).
While carrying out the strategic planning process, Dell should monitor future regulatory political climates or global economic conditions, despite the fact that we live in a global marketplace and economy. The differentiation and cost leadership strategy will ensure that the Dell Inc incorporates innovations and more importantly moves the relationship from product point of view to a fully integrated chain, which revolves around customer satisfaction. Adopting these strategies will ensure that the company moves to a competitive edge with its competitors; moreover it will ensure the wider global scope market for the company.