Presented by:

Patricio Becar
Hasnain Zaheer
Candong Wu
Puru Tiwari
“It’s amazing to me that our competitors think the

customer is the dealer.”

Michael Dell

Be Direct: DELL
 PRODUCT

• Two lines of products; choice within a broad menu of features.

• Support pages for self-help, 90% support tickets closed on phone, remaining
outsourced.
• High customer perception of quality of products, services and support
• Dell’s commitment to consumer value, to the team, to being direct, to operating
responsibly and, ultimately to winning continues to differentiate it from other
companies.

COMPETITION

• Compaq (no.1 – wide range)

• IBM (no. 3 – sales and service leader)
• HP (no.4 - quality leader, closely tied to channel)
• All above prisoners of channel and channel culture
• All started variants of direct model – AAP (IBM), ODM (Compaq), ESPP (HP) but
no major headway
• Gateway: Direct player, biggest threat but management weaknesses and
operational execution pushed it down
Background

• Time period of this case – 1984-1999. Alternative strategies and

recommendations for long term, 10 years out, from 1999 onwards.

DELL
• An entrepreneurial company started by Michael Dell who founded it in 1984 with
just $1,000, out of a dorm room.

• DIRECT MODEL: Build relationships directly with consumers - Cut out the
middleman. Outside sales process for relationship, inside sales for transaction
segments.

• Production processes to cut inventory, suppliers co-located, close collaboration

with suppliers for efficient logistics

• DELL eliminated the need for inventory or middlemen and gave itself a built-in
price advantage, which it in part keeps as profit and in part passes on to
customers.” Used customer funds received for 5 days before passing on to
suppliers.

• Global player, markets all over the world with manufacturing facilities in Ireland,
Malaysia and Austin, US.
Background

INDUSTRY

• Products: Based on well-defined, Wintel based standards first established by

IBM. Wide range of configurations, highly competitive global markets for
components except Wintel (processor and operating system)
• Evolution:
1975-81 start-up
1981-86 – Early explosive growth, high margins, IBM enters in 1981
1990-95 – Crest because of economy but prices keep falling
1995-99 – Growth recovery but industry at late-growth maturity stage
• Customers: Large / medium companies / government, small business,
consumer, education
• Channels: Retail, distributorssmall resellers, integrated resellers, direct
• Manufacturing: Assembly-line, low entry barrier, Asian manufacturers capacity
Problem statement

CONCERNS AND CHALLENGES

• Competitors are poised to copy and succeed in direct model
• Price and productivity advantage with competitors is narrowing.
• Maturing industry

PROBLEMS
• How to deploy a global strategy to manage sales in international markets?
• How to leverage growth in Internet usage that is promoting PC ownership?
• How to leverage growth in Asia?
• How to take advantage of growth in IT industry?
• What will drive growth in future? Are we betting on the right products by still
promoting Wintel laptops and PCs?

• In short:
Direct model and JIT/production and logistics have put Dell into an enviable
position. How to preserve gains while ensuring growth.
Market Analysis

- PC Market Size
PC Market Size (the U.S.), 1990-1998
40 80
35 70

Unit: Billion Dollars

Unit: Million Units

30 60
25 50
20 40
15 30
10 20
5 10
0 0
90 91 92 93 94 95 96 97 98
Units (mm)
Dollars (bn)

PC Market Size (Worldwide), 1990-1998

100 200

80

Unit: Billion Dollars

Unit: Million Units

150
60
100
40
50
20

0 0
90 91 92 93 94 95 96 97 98
Units (mm)
Dollars (bn)
Market Analysis

Share of the U.S. PC Market, 1990-1998

50%
40% 38% 40% 40% 39% 38% 39% 40%
40% 37%
Unit: Million Units

30%

20%

10%

0%
90 91 92 93 94 95 96 97 98
Share of the U.S. market(Units)
Market analysis

Segmentation analysis

PC Market Share by Cumsumer Category in the U.S.

50.0%
market(by dollar value)
Large/midsize
40.0% business &
government
30.0% Small business
& office
20.0%
Consumers(home)
10.0%

0.0% Education
94 95 96 97 98

PC Market Share by Cumsumer Category in the U.S.

45.0%
market(by units)
40.0% Large/midsize
35.0% business &
government
30.0%
Small business
25.0% & office
20.0%
15.0% Consumers(home)
10.0%
5.0%
0.0% Education
94 95 96 97 98
Market Analysis

PC Market Price Index by Cumsumer Category in

the U.S. market
Large/midsize
business &
1.6 government
1.5 Small business
1.4 & office
1.3
1.2 Consumers(home)
1.1
1.0
0.9 Education
0.8
0.7
0.6
94 95 96 97 98

* Price Index = Market Share (by value) / Market Share (by units)
 Porter’s five-factor model of market profitability

Threat of potential entrants:

New PC manufacturers from

developing countries, like
China, Taiwan, etc.

Bargaining power of Competition among Bargaining power of

customers:
suppliers: existing firms
Less bargaining power More bargaining power
Compaq, IBM, HP, Apple,
because many suppliers because a lot of brands for
Gateway, etc.
compete heavily. their choice.

Threat of substitute
products:

PDA, notebook, net book, etc.

Asker. A. D. (2005)
Competitive Analysis
Understanding Competitors
Competitive Analysis
Understanding Competitors
Competitive Analysis
Understanding Competitors
C o m p e t it iv e A n a ly s is

U n d e r s t a n d in g C o m p e t it o r s
C o m p e t it iv e A n a ly s is

U n d e r s t a n d in g C o m p e t it o r s
Competitive Analysis
Understanding Competitors
Competitive Analysis
Understanding Competitors
Competitive Analysis
Understanding Competitors
Competitive Analysis
Understanding Competitors
Competitive Analysis
Understanding Competitors
Competitive Analysis
Understanding Competitors
 Competitive Strength Grid
               

 
DELL Compaq IBM Gateway HP  

  User Satisfaction   

 
Overall            

   

  Raw Technology            
  Sys. Speed, Reliability, Compability, Configurability, Upgrades, Hardware quality and Sys. Manag.
   

 
Pricing            

   

  Service & Support            
   Warranties, Support Staff, Repair times, Channel & Web based Support, Overall service/support

   

  Customer Relationship            
   

  Point Scale  

  Very Good  

   

  Good  
   

  Fair  

   
  Bad
   

  Worst  
Competitive Analysis
Synthesis: Competitive Strength Grid

Weakness IBM Compaq HP Gateway DELL Strength

Performance: Cost Structure

Low IBM HP Compaq Gateway DELL High
Performance 28.70% 26.30% 21.40% 13.80% 12.40% Performance
C o m p e t it iv e a n a ly s is - N o t e s

• Competitors struggled to follow and replicate the Direct Model of DELL

• Gateway is a serious challenge in 1999.
• DELL challenged Compaq market share. However, DELL is followed closely by
both HP and Gateway.
• All big players tried to move partial sales to model similar to Direct.
• Competitors had similar organization, culture and values (all from US)
• New industry where no clear barrier (customers segment overlapping)
• Reliance and degree of affiliation with channel can act as a strength as a well as
a weakness, mainly a weakness.
• Use of technology to achieve operational growth may vary.
• Level of investment in overseas markets determined the growth of Dell as
compared to gateway which remained formidable in US but failed to become a
major global company.
• Overseas investment in manufacturing as well as sales was a great decision of
Dell.
• Remaining steadfast to direct is a major focus point kept its differentiation in
place and proved to be a SCA.
Environmental analysis

Source: D. Aaker
Environmental analysis

• Technological .The computer market was influenced technologically by:

• Better performance of products  increase both storage and HD, faster speed
both microprocessor and CD-ROM, enhance monitor resolution etc.
• Miniaturization of devices  less space and weight > cheaper freight
• Moore’s Law  Better performance and cheaper price

• Customer Trends: In the mid 1990’s demand growth due to :

• Strong economic growth
• Emergence of new, popular services involving computer networks
• Proliferation of electronic mail and WWW

• Governmental/Economic Trends: US market was characterized by stable both

economic and legal system.
Internal Analysis
- Market share by brands

18.0% PC Market Share (the U.S.), 1990-1998

16.0%
14.0%
13.2%
12.0%
10.0%
9.3% Apple
8.0% Compaq
6.8%
6.0% Dell
4.8% 4.9% Gateway
4.0% 3.7% 4.2%
HP
2.0% 1.6%
1.0% IBM
0.0%
90 91 92 93 94 95 96 97 98

16.0% PC Market Share (Worldwide.), 1990-1998

14.0%
12.0%

10.0%
8.6%
8.0%
6.0% 5.9% Apple
4.3% Compaq
4.0%
3.0% 2.8% 3.2% Dell
2.0% 2.3% Gateway
0.0% 0.0% 0.0% HP
IBM
90 91 92 93 94 95 96 97 98
Profitability

Revenue of Dell ($ million)

20000

15000

10000 Revenue

5000

0
92 93 94 95 96 97 98 99

Profit of Dell ($ million)

5000

4000

3000 Gross
margin
2000 Net
income
1000

0
92 93 94 95 96 97 98 99
-1000
Internal Analysis

Days of Inventory of Dell

90.0
80.0 76.2
70.0 70.7
60.0 Days of
50.0 inventor
y (Day)
40.0 39.1 37.0
30.0 32.9
20.0
15.0
10.0 8.9 7.0
0.0
92 93 94 95 96 97 98 99

Days of inventory = 365days / (Revenue - Gross margin) / Inventory

Factors affecting current performance and long
term profit

In commercial market, Dell won a very high reputation on their PC.

 Customer satisfaction / brand loyalty

●
User satisfaction - Ranked 1st overall in 1998, and ranked evenly 2nd in
from high to low price point. HP ranked 1st in high price point, and
Gateway ranked 1st in midrange and low price points.
●
Customer relationship – All ranked 2nd. HP ranked 1st.

 Product / service quality

●
Raw technology – Ranked all aspects 1st.
●
Pricing – Mostly ranked 2nd and ownership costs ranked 1st. Gateway
ranked 1st.
●
Service and support – Mostly ranked 1st and 2nd except the item ‘channel-
based support’ ranked 3rd.
A lt e r n a t iv e
S t r a t e g ie s

&
 A lt e r n a t e S t r a t e g ie s

Market Development
• Expand Geographically
• Target New Segments

Diversification new product and new market

• Brand name (advertising)
• Marketing skills
• Sales and distribution capacity
• Manufacturing skills
• R&D and new product Capacity
A lt e r n a t e S t r a t e g ie s

Strategic alliances
• scale economies and strategic markets
• Fill out product line to serve market niches
• Gain access to technology & low cast mfg capabilities
• Access a name or customer relationship

Product development
Add product features & refinement
New Generation products, new form factors
Recommendation

Product Expansion Strategies

New product design and portfolio
• According to user ( kids , students , employers , elders )
• Organic shape , colors , trend , age , gender

Diversification Strategies
Advertising to establish strong brand positioning
• On needs and wants of consumer
• Based on emotions
• Adv for “direct sale” build the brand by service, support and warranty

Offering solutions
• Lack of portfolio of offering in certain segments (E.g.. IBM has high margins
business solutions, HP expanded its technology service business)
Recommendation

Product and Market Diversifications

• Laptop, server, PlayStation, Smart phone
• Printers, Servers, Projectors, TV’s, Handhelds, Software,
Peripherals, Storage, Networking, Workstations and more.
• Asia , Middle east…
• Defense, Media, hotel, universities, schools…

Growth Strategies
Acquisitions, Strategic partnership
• E-Business, Storage, Security, Network …
Thank you !!