Matching Dell Case (Part 1) PDF

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Matching Dell Case (Part 1) Discussion Questions 1. How did Dell manage to do so well despite the low average profitability in the PC industry? ● Direct Model (sold directly to customers; mainly corporate customers) ○ Dealing directly with customers - PCs were customized directly to buyer specifications and only assembled after the order was received (pg 6) ○ Knew their customers’ needs and addressed their questions by sending out insider/outsider sales representatives ○ Inside reps ■ Could be contacted through public phone line ■ Provided product info and encouraged customers to buy from Dell ● Educate the customer ○ Outside reps ■ figure out customer needs & help with customer’s implementation process, while promoting Dell’s products & services 1996: Created a Website that addressed customers’ needs, questions, concerns while promoting new products in a convenient way for customers → Led to $10mill worth of transactions through the site per day ● Dell’s perceived customer benefits ○ Dell’s website and phone number allowed customers to easily connect with Dell representatives for any questions/concerns ■ Also offered 50,000 pages of customer support information ■ After sales service: Phone line open 24/7 with 1,300 reps manning it at all times ■ Exhibit 8 shows how consumers favored Dell’s products/services over competing brands ● Ranked Dell 1st in Overall, system speed/reliability/compatibility/configurability/upgrades/hardware quantity/system mgmt, ownership costs, overall service/support ○ Relatively low prices compared to competitors for a PC ○ Installed & tested computers/networks at customer sites ○ Dell Financial Services (new venture) offered leasing, technology planning, and asset mgmt services ● Dell’s Product Cost *Production (start to finish) took about 1.5 days ○ Made customized PCs based on actual orders and had no finished goods inventory (did not mass manufacture) ■ Beneficial with PC industry being that it changes so fast ○ Worked closely with suppliers to coordinate just-in-time delivery of parts ■ Reduced number of suppliers from 204 to 47 in its Austin Facility ● This reduces the complexity of management ■ 1998: Reduced Days of Inventory down from 32 to 7

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Ensured that supplier warehouses located near production facilities to cut down on transportation cost and time 2. How big is the competitive advantage delivered by Dell? (MEASURABLE) We learnt the definition and implications of competitive advantage in session #1. Please use data and information provided in the case (including Exhibits) and analyze Dell’s competitive advantage. ● A firm has a competitive advantage when it is able to create more economic value than rival firms ○ Economic value = Perceived customer benefits (or willingness to pay) - product cost ○ Gain a competitive advantage by: lowering cost or increasing value ○ Based on price, Dell does not bring the most economic value. Price is not always a good metric to use ● See class handout for calculations ● ●

Created Value (See Exhibit 9) ○ Ranked #1 overall, highly ranked on speed, ease of upgrade, software clutter US average selling price highest out of competitors (Exhibit 11) ○ Dell avg selling price: $2,343 ○ Customers willing to pay more for Dell

3. How did PC industry, a dynamic, fast-growing business with compelling customer demand, come to suffer from low profitability? ● Price wars between companies ○ Dell advertised that price was lower than Compaq’s → Compaq slashed prices by 32% → price war followed ○ As growth for demand of PC’s increased, prices declined therefore leading to low profitability (page 3) ● Due to highly similar products

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Dell between ‘94-’98, 5,600% rise in stock price ○ Twice as fast growth than major rivals Pioneered the “direct model” within PC industry ○ Orders directly to customers (instead of via distributors, resellers, etc.) ○ By 1998, everyone started copying Dell after criticizing it

The Personal Computer Industry (History) ● Between ‘75-’81, the interest in PC’s for ordinary people grew ○ IBM Launched in ‘81 and had 42% of the market by ‘83 ○ IBM “set the standard” ■ The main market alternative, apple, held 20% of the market only

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IBM began using their own microprocessor to be less replicable, but fell from 37% to 16.9% in market share. Throughout ‘80s and ‘90s, PC performance was improving as prices fell ○ Sparking price wars between Dell and Compaq

Dell Computer Corporation ● Direct Model came early on, company dealt directly with end customers ● PCs customized to buyer specifications ○ Assembly starts after Dell receives each order ● Relationship buyer: Large companies and institutions that could be counted on to do repeat orders for multiple PCs ● Transaction buyer: Small to medium businesses and home computer users ● Late 1990’s moved from direct model to retail channel Customers ● 4 types of PC buyers ○ large/midsize businesses/governments ■ Purchased PCs in a centralized fashion ■ Highly knowledgable on PCs due to MIS staffing ○ Small businesses & offices ■ Lacked MIS staffing ○ Individual customers (home/office use) ■ Chose brands of PCs & microprocessors based off Consumer reports ■ 1998: Within US, 30% purchases were 1st time buyers ○ Educational institutions ● Another way to categorize customers ○ Apple ■ Customers were highly attached (emotionally) ■ Successful in selling to individuals & schools ○ Wintel ■ Less attached to brand Channel ● 4 Channels of Personal Computer Flow **Entire process took about 4-5 weeks ○ Retail stores - took PCs directly from manufacturers ■ Operated on very thin margins ● CompUSA net margin in 1998: 0.6% ■ Circuit City & CompUSA ○ Distributors (working as small resellers) ■ 93% end users trusted reseller computer recommendations ■ Ingram Micro & Tech Data ○ Integrated resellers ■ MicroAge & Vanstar

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Direct Distribution (Manufacturer → Customer) ■ Used third parties (like UPS) to ship & deliver PCs ■ Manufacturers usually agreed to buy back inventory that didn’t sell & provided price protection (reimburse if price of computer fell) ● 2.5 cents per dollar of revenue Manufacturing ● Basic assembly lines used to make PCs in 4 parts ● Contract Manufacturers found in Asia ● 1990s: manufacturers could buy & implement equipment for an efficient PC assembly line → 250,000 PCs per year for about $1 million (cost) ○ With each passing year, costs for equipment dropped 25-30%, then in 1998 prices dropped 1% per week Marketing & Sales ● Apple, HP, IBM spent 2-3% on advertising ● Others made unbranded “whitebox” PCs & did no advertising ○ Made up 23% of market in North America, 50% Europe/Asia, 90% China ● Beginning of Dell ○ Michael Dell started this company in dorm room at 18 at University of Texas ○ Sold hard disks, extra memory, disk drives, and modems similar to IBM for 40% less than IBM prices ○ 1984: dropped out and founded Dell Computer Corporation ■ Made 80k per month from his side business ○ Dell Corp directly dealt with end customers ■ primarily corporate customers who bought high-performance computers for low prices Sales & Marketing ● 77% of Dell’s sales were by businesses and governments, 18% home & small office users, 5% schools ○ Big customers bought over $1mill worth of Dell’s PCs which was 70% of the company’s revenue ○ No single customer made up more than 2% of firm’s sales ● Dell Customers ○ Relationship Buyers (Large companies/Institutions) ■ Dell’s outside sales reps were to figure out customer needs & help with customer’s implementation process, while promoting Dell’s products & services ■ Inside sales reps stayed in call centers for customer support ■ Typically specified in various PC configurations ■ Produced highest gross margins for Dell (Pg. 7) ■ Premier Pages

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Secured page where customers can find pager numbers of Dell reps & lists of computer configurations ○ Transactional Buyers (Small-to-medium businesses & home computer users) ■ Used Trade journals, business publications, catalogs, direct MKTG to reach customers ■ Inside sales reps could be contacted through public phone line ● Provided product info and encouraged customers to buy from Dell ○ Educate the customer Late 1990: Dell shifted from Direct Model to Retail Channel ○ Wanted to expand/enter new markets and allow customers to “touch and feel” their products ○ 2 lines of Standard PCs ○ Ended up losing money by selling through retail channels As Dell grows, they subdivided their customers into more specific categories 1996: launched Dell website ○ Many customers used this to learn about products, configure a computer system, check pricing, place an order, & track orders ■ 1998: $10mill in transactions per day through site ■ Sometimes sold to resellers (5% of total products went to resellers)

Production, logistics, & Procurement ● Dell created products tailored to customer needs ● Made customized PCs based on actual orders and had no finished goods inventory ○ Operated in Austin, Limerick, Ireland, Penang, Malaysia, Xiamen, China, Brazil ● Assembly-line → software loading zone ○ Entire production process took about a day and a half ● Worked closely with suppliers to coordinate just-in-time delivery of parts Firm Infrastructure ● Exhibits: ● Exhibit 1 & 2: Market Size and Share Data ● Exhibit 3: Portion of PC units and sales rev accounted for by each set of customers (large and midsized businesses/gov’t, small businesses and offices, individual consumers, educational institutions ● Exhibit 4: Portion of PCs passing through each of the 4 channels (retail stores, distributors, integrated resellers, direct distribution) throughout the world ● Exhibit 5: Structure of costs to assemble a PC ● Exhibit 6: Dell financial results ● Exhibit 7: Compares Dell’s margins in direct and retail channels ● Exhibit 8 & 9: Dell survey results of corporate PC buyers

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Exhibit 10a & b: Prices of Dell’s PC compared to competitors Exhibit 11: Dell’s growth rate, profitability, other characteristics compared to competitors Exhibit 12: IBM financial results Exhibit 13: Compaq financial info Exhibit 14: HP financial info Exhibit 15: Gateway financial info...