Matching DELL

Group: 2
Abrarul haque
Aastha Jaiswal
Saddam Mansuri
Ishan Srivastva
Manikandan Nair
Roshen Charles

1.How structurally attractive was

the PC industry in the late 1990s?
The industry become attractive as:The uniformity and availability of
technology and hence there is a lot of imitation and no product
differentiation. This results in little switching costs. Hence the
attractiveness to enter is high.
Intel new x86 microprocessor with high computing speed
Range of software available for pc expended dramatically.
Microsoft new OS 3.0 user friendly
Windows and Intel (WINTEL) slandered 85-90% Pc.
Due to recession the sales were declined in 1990 but companies used low
price strategy to gain sales.
WWW, proliferation of Email gave new reason to purchase for individual
customer
Price continues to decline
New segment ( individual customer) as price falls as 1000$.
Late 90s 45.58% the house hold of US owned computer.
Emerging market in Asia pacific and in Europe.

2.Could you analyse the five forces

of the industry during that period?

Intensity of Rivalry.
Rivalry is very high due to:
Lack of differentiation.
Reliability and Service are only diffs.

Price is similar for all competitors

If prices are similar, this is a signal of
rivalry.

Do prices go down or up?

Tend to fall.
2-3

Bargaining Power
of Customers
Standardized product
means its easy to
switch brands
(Switching cost low)
Resellers and retailers
have grip on channels.
Corp. users buy direct
based on price since
little differentiation
Over BP of customers
is high and rising.
2-4

Bargaining
Power of
Suppliers
Proprietary
Standards from
Microsoft and Intel
- Extract profits
Other inputs are
commodities
Thus Bargaining
Power of Suppliers
is Very High

Threat of new
entrant.
Increasing with rise
of internet and
direct channel.
Main barrier is
capital needed for
manuf. facility.
Only real barrier
are economies of
scale.
Threat is Moderate.
2-5

Threat of
substitutes.
Within product
category, few
direct substitutes.
OS: Apple
Microprocessors:
AMD, Cyrix
Handheld devices:
PDA

3.Why was the profitability like

this in the late 90s?
Refer cost structure in excel
..\..\Documents\DELL GRAPHSSSSSSS.xlsx
Range of software available for the personal computer expanded
dramatically.
strong economic growth and the emergence of new, popular
services involving computer networks.
E-mail, WWW
PC margin were typically highest during the early days of
microprocessor generation.
Among individual consumers in the U.S. 30% of purchase were 1 st
time buyer in 1998. this figure was expected to decline to 16% by
2000
The prices of components used to make PC had typically declined
25-30% per year.in 1998, prices declined even faster, at a rate of
roughly 1% per week.

Example of Unit Price

and Cost Analysis
1998 numbers

Dell

Compaq

Unit Price

1996

1932

Unit COGS

1555

1325

135

195

309

44

124

1794

1893

202

39

12327

31169

Channel Markup/Unit
Unit SGA
Inv. Carry Costs
Cost of unit
Profit

Rev

Notes

1-Gross Margin

2-7

For all firms

1998 numbers

Dell

Compaq

IBM

HP

Gateway

Unit Price

1996

1932

1959

2129

1762

Unit COGS

1555

1325

921

1451

1406

135

149

195

309

400

353

242

44

124

125

284

39

1794

1893

1445

2237

1687

202

39

514

-108

75

12327

31169

81667

47061

7648

2722

9786

43282

14989

1546

22.1%

31.4%

53.0%

31.9%

20.2%

Channel Markup

0.0%

7.0%

0.0%

7.0%

0.0%

SGA

1202

4978

16662

7793

1052

SGA % Rev

9.8%

16.0%

20.4%

16.6%

13.8%

2,005

5,200

6,284

Channel Markup/Unit
Unit SGA
Inv. Carry Costs
Cost of unit
Profit

Rev
Gross Margin
Margin % Rev

Cost of inventory

2
7
3

168

Note: IBM numbers are likely inflated by Mainframe and service being included.
Days of Inventory

34

49

2-8
72

10

What was the secret of Dells success?

Dell relies on a unique supply chain
strategy(Direct supply chain)

Close relation with customers and suppliers

allow them to know what must be able to supply
in real time
Their low days of inventory ratio correlates to a
very high return on invested capital and return
on equity.
JIT delivery with its suppliers
Suppliers warehouse facilities close to Dells
assembly shop

DELLS DIRECT SUPPLY CHAIN MODEL

Manufacturing Process
No warehouse space
No inventory other than work in process(WIP)
Components arrive from suppliers just in time for
manufacturing through the factorys cargo doors
Manufacturing is synchronized to avoid storing parts or
finished system
This needs close relationship with suppliers
Dell has small number of suppliers
Trust Manufacturers like Sony, Logistics like UPS

focus

II

on key market segments

s ince

competing on price is no longer viable ,

Dell must find other areas of Diff erentiation .

Business PCs generate higher

margins than consumer PCs
Government and Business is the
largest market segment
Dell is ideally situated to
serve these markets

focus

on key market segments

b usiness

pc's retail f o r an average of

19%

more than consumer pc's, but c o s t about the

same to make
Consumer PC

Business PC

Processor

Pentium II 400 MHz

Pentium II 400 MHz

Memory

64 MB

64 MB

Hard Drive

8+ GB

8+ GB

Monitor size

17

17

Bundled Software?

LAN card?

CD-ROM

32x+

32x+

Modem?

Speakers?

a verage p rice

$1,650

$1,960

Critical components are

the same in business
and consumer models.
The cost of bundled
software, speakers, and a
modem offset the cost of
the
LAN cardboth classes
of machines cost about
the same to make.
Dells business PCs are
priced 24.3% higher
than consumer models.

Key Takeaways
Customization and speed of delivery have
been and should continue to be
successful differentiators for Dell
Expanding products and services offered
to current corporate customers is a
possible growth opportunity
Expansion of current products and services
into international markets is an attractive
growth opportunity
Dell has a sustainable advantage in
inventory cost management