Managing Digital Organizations

Case Study: DELL & Cisco

Team 6 04/25/05

Arsalan A. Lodhi
Pankaj Luthra
Daniel M. Li
 Managing Digital Organization

DELL Inc – Company Profile

 52wk range: 32.71 – 42.57
 Historical Perspective: established - 1984

Year Stock Price Range

1990-1991 12.00 – 33.50

1995-1996 77.37 – 61.88 (2:1 stock split on 10/95)

2000-2001 44.06 – 28.50

2004-2005 35.50 – 39.16

 Total Employees: 55,200 Splits:10-Apr-92 [3:2], 30-Oct-95 [2:1], 09-Dec-96 [2:1],

28-Jul-97 [2:1], 09-Mar-98 [2:1], 08-Sep-98 [2:1], 08-Mar-
99 [2:1]

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 Managing Digital Organization

DELL Inc - TIMELINE

1983-- Michael Dell starts business of pre-formatting IBM PC HD’s on
weekends

1985-- $6 million sales, upgrading IBM compatibles for local businesses

1986-- $70 million sales; focus on assembling own line of PC’s

1990-- $500 million sales; with an extensive line of products

1996-- Dell goes online; $1 million per day in online sales; $5.3B in annual sales
1997-- Dell online sales at $3 million per day; 50% growth rate for 3 rd
consecutive year, $7.8B in total annual sales.

2005-- $49.2B in sales

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 Managing Digital Organization

DELL Inc – Company Comparison

DIRECT COMPETITOR COMPARISON

DELL HPQ IBM SUNW Industry

Market Cap: 89.29B 60.17B 121.16B 11.79B 112.93M
Employees: 55,200 151,000 329,001 32,600 341
Rev. Growth (ttm): 18.70% 9.40% 8.00% -2.20% 6.20%
Revenue (ttm): 49.21B 81.85B 96.95B 11.20B 116.36M
Gross Margins (ttm): 18.32% 23.87% 37.42% 40.88% 23.94%

Net Income (ttm): 3.04B 3.50B 8.25B 645.00M -153.00K

Above Data shows DELL is a perfect example of a Lean Machine

 Enterprise System: servers, workstations, storage, network products
 Client Systems: notebooks, PC, printing, imaging systems, software and peripherals
 Dell Financial Services (DFS) – joint venture with Citi group

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 Managing Digital Organization

DELL Inc – The Success Secret

 Internet coupled with Direct Business Model
- sell directly to end customers instead of intermediate distributors, resellers.
 Virtual Integration
- using sophisticated CRM, SCM systems at respective ends as well their integration
- already integrated with 38 procurement and ERP systems across all its clients
- vendors – Ariba, SAP, PeopleSoft, J.D. Edwards – Dell integrated with their ERP
(Source: Rob Rosenthal, Dell’s B2B web site strategy, October 2003, IDC #30202)

 Selling Points
- Internet, B2B (Premier Pages), Phone-calls, Mass catalog mailings
 Do not Just sell Products – sell Values
- client asked to put tags on their computers
- proactive in solving clients pain points – preloaded software
 Dell was much less mature compare to IBM and HP at time when Internet took off –
required much less effort to adapt its systems to Internet technologies.
 IBM and HP’s core competency was product innovation and development, Dell’s
expertise was in assembling and catering to business needs.

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 Managing Digital Organization

Dell Inc – The Success Secret

 Web Penetration rate
- What percentage of users contacted Dell based on information on given pages

 Web failure rate

- What percentage of users contacted Dell because users failed to find their information on web
pages

 Outstanding Question: what will matter most to customers moving forward ?

In IDC opinion:
Introduce solution packages that focus on overall business goals instead of individual products
Introduce configurators for high-end server and storage products

Source: Rob Rosenthal, Dell’s B2B web site strategy, October 2003, IDC #30202

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 Managing Digital Organization

DELL INC – Same Business Model applicable to other Industries?

 Other Industries for example IT Services – is not yet mature enough to provide this
kind of capabilities – i.e. built-to-order by direct customer

 IBM OnDemand initiative is a step towards that kind of mentality – build-to-Order

- rest of IT Services industry would take few years to provide this capability
- IBM is the only one in position of providing such built-to-order services

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 Managing Digital Organization

Dell Inc – Key Questions

 Is the Direct Business Model a new model ?

No, its not ! – all the primitive businesses used to trade like this – today hotdog stands
all over Manhattan is an example of that model on small scale

 What new emerging technologies will push this further ?

- SOA will help refine and innovate these and perhaps new similar kind of business
models by reducing operational and transaction cost.

- Web Services will remove human interaction further – reducing cost

for example:
- SLA will be negotiated by software agents
- Vendors selection based on their expertise will be automated

- Long life Lithium ion batteries increased sales

- RFID tags can further streamline the supply chain, inventory and shipment tracking
process

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 Managing Digital Organization

Dell Inc – Boundaries of Direct Business Model ?

 Have other manufacturers been able to do this?  Why or why not?  Is this model
bounded in the PC industry?
- Presently HP is using the Direct Model. Supposedly Compaq’s strong direct sales model
helped HP after the merger. Prices are in comparison to Dell.
- Source - www.ecommercetimes.com/story/19385.html

- Compaq emulated the model before merger with HP.

• Dell had better profitability management.
- Source - http://www.findarticles.com/p/articles/mi_m0DTI/is_12_31/ai_111163644

- Local computer vendors

- B2B markets – common meeting point for manufacturers and institutional consumers.
- Classical example – Farmer’s market

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 Managing Digital Organization

DELL Inc – Information Orientation

 Strong commitment to IT Practices
- Pre-installing software for Eastman Chemical, maintaining a corporate asset database for
innovational support.
- Integrating supply chain vendors with more precise demand forecast for business process
support.
- Premier Pages – customize, buy and track systems, resolve tech issues for operations support.
 Strong Information Management practices
- Restructuring delegates information resources management
- Central source of information for sales force, tech support and executive management
 Promoting Information Behavior and Values
- Internal evangelism campaign – promote and increase awareness of Dell online
- Educating the sales force

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 Managing Digital Organization

Cisco Systems, Inc – Company Profile

 52wk range: 17.22 – 24.20
 Historical Perspective: established - 1984

Year Stock Price Range

1990-1991 23.75 – 68.00

1997-1998 63.63 – 92.87

2000-2001 109.94 – 18.45

2004-2005 24.36 – 17.50

Splits:18-Mar-91 [2:1], 23-Mar-92 [2:1], 22-Mar-93 [2:1],

 Total Employees: 34,000 21-Mar-94 [2:1], 20-Feb-96 [2:1], 17-Dec-97 [3:2], 16-Sep-
98 [3:2], 22-Jun-99 [2:1], 23-Mar-00 [2:1]

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 Managing Digital Organization

Cisco Systems, Inc - Timeline

1984-- Founded by Len Bosack & Sandy Lerner (computer scientists from Stanford)

1989-- $27M sales with only 3 products and 111 employees

1990-- $69M sales; goes public with market cap of $224M

1994-- $1.13B sales; Cisco goes online with its Cisco Connection Online and
becomes the first major supplier of Multiprotocol internetworking products to be
awarded ISO 9001 certification

1997-- Cisco reorganizes/aligns products and solutions into 3 customer

segments: enterprise, small/medium business, and service provider.
1998-- Cisco becomes the first company in history to achieve a market capitalization of
$100B in 14 years. $8.5B in total annual sales.

2000-- $18.9B in sales

2001-- $22.3B in sales

2005-- $23.6B in sales

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Cisco Systems, Inc

Cisco Performance

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Year 20

Revenue

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Cisco Systems, Inc – Company Comparison

DIRECT COMPETITOR COMPARISON

CSCO COMS JNPR NT Industry

Market Cap: 112.67B 1.20B 12.30B 11.44B 101.10M
Employees: 34,000 1,925 2,948 35,160 248
Rev. Growth (ttm): 16.80% -25.10% 90.50% -3.60% 12.90%
Revenue (ttm): 23.58B 657.95M 1.56B 10.48B 61.74M
Gross Margins (ttm): 67.82% 37.70% 69.27% 41.30% 39.69%

Net Income (ttm): 5.39B -156.22M 177.64M 305.00M -690.00K

Cisco is the Undisputed Market Leader

 Master of Network Infrastructure
-The company on which Internet runs
-Supplies network equipment to wide-range of industries
-85% market share in the Internet switching market

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 Managing Digital Organization

Cisco Systems, Inc – Success?

 Growth Strategy
- Outsource majority of production
- Strategic acquisitions and investments in other companies

 “Cisco uses the web more effectively than any other big company in the world”
- Internet sales (1995)
- Cisco Connection Online – configure, price, & order
- Customer support ($600M in savings)
- Cisco Manufacturing Connection Online (B2B supply chain extranet)
- Cisco Employee Connection

 Supply Chain Management

- Remediation
- Misled by the system? (2001)

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 Managing Digital Organization

Cisco Systems, Inc – Information Orientation

 “The Digital Firm”
- Extensive Internet integration
- Close supply chain integration with suppliers
- Precise sales forecast system

 Strong Information Management practices

- Reorganization along technology groups
- Centralized engineering and marketing

 Future Strategies
- Growth through hot startup acquisitions
- New markets
- Expanded offerings in consulting and software