Case 5: "Dell Inc. in 2008: Can it Overtake Hewlett Packard as the World Leader in Personal Computers?

"1
Question 1: a. 1992: Michael Dell becomes the youngest CEO of a Fortune 500 company at age 27 b. Michael Dell has been the key factor for Dell, Inc. growing into the corporation it is today. In my oppinion, his top 5 key strengths that helped Dell, Inc. grow include: i. Competitive nature ii. Foresight & Vision iii. Willingness to take risks iv. Aggressiveness v. Ability to execute c. 5 Tasks of Crafting and Executing Strategy: i. Developing a Strategic Vision: Dell's vision was to be the low cost provider. This is arguably the most important key to Dell's success. He decided this was the direction the company was going to go and stuck with it, and his ability to reduce overhead allowed him to achieve it. ii. Setting Objectives: Dell's objective was focused on increasing margins, while keeping the end price low. He was able to achieve this by cutting out the middle-men and selling directly to the end user. iii. Crafting a Strategy: All of Dell's strategies were geared towards increasing the bottom line. If it didn't align with the overall goals, the idea was rejected. iv. Implementing and Executing: Dell's ability to stay ahead of the curve by offering completely customizable PCs build to the customers specification allowed the company to maintain the explosive growth it saw in the early years of the company. Strategic acquisitions allowed the company to augment and expand its offering to target additional markets. v. Evaluating Performance and Initiating Corrective Adjustments: Dell's early adoption of the newest technology has allowed the company to gain full visibility into the profitability of each piece of hardware it sells and helped predict future trends in consumer demand. Question 2: d. Dell's strategy includes the following: i. Sell customizable PCs directly to the customer ii. Add customer value iii. Streamline manufacturing and supply chain e. The core elements of this strategy include: i. Decreased overhead by decreasing costs associated with built to order manufacturing 1. Part of this required reduction of materials through partnership with suppliers ii. Targeting end users directly through sales efforts iii. Expand offering to enter additional markets and niches through acquisitions iv. Standardize company processes
1

From Essentials of Strategic Management - The Quest for Competitive Advantage, Second Edition, by Gamble & Thompson and published by McGraw-Hill.

v. Predict the future needs of the consumer and be prepared to meet them with R&D vi. Provide value add services to consumers f. Dell is employing the low cost strategy g. Everything Dell works on fits the company objective, to produce the best possible computer for the lowest price h. Dell's strategy is constantly evolving to meet customer demands. Dell has adopted Social Media channels for customer feedback, expanded their offering countless ways, and become established as the industry leader for best practices through the supply chain and manufacturing. Question 3: i. Dell's expansion into different technology is typically very strategic and generally follows these guidelines: i. The technology is something many customers have already asked for from Dell ii. The technology is gaining popular acceptance iii. The technology has the potential to last many years without going obsolete

Question 4: j. There is no doubt that Dell's strategy is working, even though their profit margins are shrinking yearly. However, just because their margins are decreasing, it does not mean the company is doing poorly. The shrinking margins are instead an indication of the industry as a whole, where the market could hold higher margins a decade ago it will not anymore. See the numbers below. i. Gross Profit Margin: 1. 2008: 19.1% 2. 2007: 16.6% 3. 2006: 22.1% 4. 2005: 18.4% 5. 2004: 18.3% 6. 2002: 17.7% 7. 2000: 20.7% It would be ideal if this number was continuing to rise, but the numbers shown are still fantastic, even though they have dropped in recent years from the past. ii. Operating Profit Margin: 1. 2008: 5.6% 2. 2007: 5.3% 3. 2006: 7.9% 4. 2005: 8.6% 5. 2004: 8.5% 6. 2002: 5.7% 7. 2000: 9.0% It is disappointing that this is trending downward, but as the price of PCs has dropped significantly, so have the profit margins. iii. Net Profit Margin: 1. 2008: 4.8% 2. 2007: 5.8%

3. 4. 5. 6. 7.

2006: 6.5% 2005: 6.1% 2004: 6.4% 2002: 4.0% 2000: 6.6%

Same story as Gross and Operating Profit Margins, the market simply will not handle the margins it once would. iv. Return on Stockholder's Equity: 1. 2008: 78.9% 2. 2007: 59.7% 3. 2006: 89.0% 4. 2005: 46.5% 5. 2004: 41.8% 6. 2002: 26.5% 7. 2000: 31.4% To give you an example of how great these look, the average ROE is somewhere in the low teens. v. Earnings per Share: 1. 2008: $1.33 2. 2007: $1.15 3. 2006: $1.50 4. 2005: $1.20 5. 2004: $1.02 6. 2002: $0.48 7. 2000: $0.66 The fact that this is increasing year over year is a key indicator that the company is doing well. vi. Long-Term Debt-to-Equity Ratio: 1. 2008: 9.7% 2. 2007: 13.1% 3. 2006: 15.4% 4. 2005: 7.8% 5. 2004: 8.0% 6. 2002: 11.1% 7. 2000: 9.6% This simply demonstrates the company's ability to retain additional capital, if necessary. It is good that it is currently as low as it is. Question 5: k. Strengths: i. Direct sales (eliminating the need for wholesalers and retailers) ii. Diversity of IT product lines iii. Dell brand iv. Manufacturing & supply chain management l. Weaknesses: i. Dell seems to be 1-2 steps behind Apple for everything but PCs. They seem

to wait until a market is established before entering it, which means they lose on a great deal of the huge margins that come with an emerging technology. 1. A perfect example of this is Dell's tablet released on the Android platform well after the iPad had become a household name. m. Opportunities: i. Greater demand for PCs and IT hardware for both business and consumers ii. Development of new technology n. Threats: i. Industry wide decrease in the price of PCs ii. Cheap, knock-off hardware made in China becoming much more accessible to the average consumer Question 6: o. Quality/Product Performance (Importance Weight: 0.15) i. Dell: 9.5 (1.425 weighted) ii. HP: 9 (1.35) p. Reputation/Image (Importance Weight: 0.15) i. Dell: 10 (1.5) ii. HP: 9 (13.5) q. Manufacturing Capability (Importance Weight: 0.05) i. Dell: 10 (0.5) ii. HP: 10 (0.5) r. Technological Skills (Importance Weight: 0.15) i. Dell: 9 (1.35) ii. HP: 10 (1.5) s. Dealer Network/Distribution Capability (Importance Weight: 0.05) i. Dell: 7 (0.35) ii. HP: 10 (0.5) t. New Product Innovation Capability (Importance Weight: 0.1) i. Dell: 10 (1) ii. HP: 9 (0.9) u. Financial Resources (Importance Weight: 0.1) i. Dell: 10 (1) ii. HP: 10 (1) v. Relative Cost Position (Importance Weight: 0.15) i. Dell: 10 (1.5) ii. HP:9 (1.35) w. Customer Services Capabilities (Importance Weight: 0.1) i. Dell: 10 (1) ii. HP: 8 (.8) x. Weighted Overall Strength Rating (Importance Weight: 1.0) i. Dell: 85.5 (9.625) ii. HP: 84 (9.25) Dell is stronger competitively because of their strengths in key areas like Quality/Performance and Reputation/Image. These two things are extremely important in the PC industry and go hand in hand. Although both of these companies are extremely close in terms of their competitive strength, Dell is slightly stronger beating out HP in those critical areas. Question 7: HP has almost as strong of a brand recognition as Dell, and for consumers looking to shop retail for a

PC at a store like Best Buy, HP is a good way to go. When you order a Dell, it typically takes a couple of weeks to a month to actually receive the computer. If you purchase a HP from Best Buy, you will walk out of the store that day with the computer. This is a very appealing benefit to many consumers. Additionally, HP strives to develop new functionality or technology ahead of Dell to force them to play catch-up. When Dell beats HP to the market with something, they will attempt to copy the technology and offer it at a similar or lower price. It's this type of rivalry that has been the primary driver for a significant decrease in the cost of PCs over the past decade. y. Michael Dell needs to address the following: i. Industry - wide decrease in the cost of PCs - Continuing to remain on the cutting edge of new technology is critical to maintaining a margin worth presenting to your stockholders. Simply selling PCs isn't going to cut it as the performance has increased by so much, while the price has dropped exponentially. ii. Quality control - There should be no excuse for any type of recall when you build each PC individually to order. Additionally, each machine should have minimal variance when it comes to shelf life of the hardware, which is definitely not the case for Dell today. iii. Price of peripherals - Although Dell may be one of the price leaders for PCs, they are one of the most expensive manufacturers of peripherals such as monitors (ie. ViewSonic) and printers (ie. HP). It's critical they determine a way to lower their price on these products so they will stand a chance in competing in the future. This would allow them to become the one-stop shop for all PC hardware, where today many of their customers will purchase their monitor and printer separately from their Dell PC. iv. Continued expansion - Expanding into additional IT hardware markets will allow Dell to continue to act as the primary supplier of computer hardware for business and government. Allowing any of their competitors to grab a new hardware market would be tantamount to throwing money out the window. Question 7: z. In order to overtake HP, Dell should strive to be the standard computer for businesses globally, which they already have a pretty good start with. Some things that would help them reach this goal include: i. Further development of their business lined of PCs, Latitude, Vostro, and Precision, even potentially combining them into a single line. ii. Decrease the cost of computers purchased by businesses iii. Target large, enterprise accounts, while allowing small businesses to come to you through discounts and special offers aa. Rather than spending huge sums of money on marketing campaigns, offer sales with steep discounts for short periods of time. Offering more "warehouse" deals consistently would also help. Talk to your suppliers and try to get them to offer you special deals from time to time so you can pre-build the PCs for these deals, allowing for lower prices. *I got a B- on this. I have no idea what's right or wrong because most of it's opinion anyway.