STRATEGIC MANAGEMENT

DELL CASE STUDY

0475498 (3)
Rahman Olanrewaju
101733881
1/29/2010

[Type the abstract of the document here. The abstract is typically a short
summary of the contents of the document. Type the abstract of the
document here. The abstract is typically a short summary of the contents of
the document.]

Dell Inc. since its inception in 1983 has been one of the leaders in the supply of computer
systems around the world. Its initial strategy was based on two (2) primary principles:
1. Dealing directly with customers. This allowed them to cater to specific customer
needs (customization) and also avoid third-party involvement which reduced the price
of the commodity
2. Securing the lowest cost for production and passing these onto customers in the form
of reduced price.
It is also important to note that Dell has been recognized as a leader in its industry for its
quality, service and customer satisfaction even though it had a low-cost strategy.
In recent years however Dell has experienced some difficulties and has not
performed up to expectations. This is as a result of issues within the company but also
due to external events affecting the industry. These issues are listed below:
1. The loss of market share to its competitors. This is highlighted by the fact that is has
lost its place as the market share leader to HP.
2. The competitive advantage it had as the industrys lowest-cost leader is not as strong
as it was. Competitors are just as efficient and also offer lower prices.
3. Its failure to capitalize on the growth in the amount of computer systems sold through
retailing because of its absence from the sector. While it is now offered in retail stores
it is behind its competitors who have already established a foothold in that sector.
4. The most important issue is the fact that its strategy is not as effective as it used to be.
The change in the consumer market coupled with advancements in technology and
reduced costs means that Dell competitive advantage initially gained from its
customization and low-costs are now lost. The fact that it did not realize the change in
the external environment is what has led to a lot of these issues.
Now that some of these issues have been identified the next step will be to analyze Dells
current state and from there gain an idea on how they can rectify the issues it faces. In
order to do this it is necessary to analyze:
Its Internal Environment
Its External Environment
1. Internal environment
Dell primarily is a supplier of computer systems. Over the years they branched
into other sectors which they believed would complement their primary focus and enable
them to apply their core competencies. This ensured their resources were somewhat
homogenous and in fact similar to those of its competitors, what made Dell particularly
successful however were its capabilities i.e. its ability to use its resources more efficiently
than its competitors in the creation of its product. This relationship also works backwards
in that because of its capabilities it produces excellent products and services which in turn
create brand equity which in itself is also a very important resource. However, with its
competitors gaining capabilities of their own it is important to examine whether or not the
competitive advantage possessed by Dell still exist and what areas it can use its resources
and capabilities to create new competitive advantages.
This will be done using the VRINE model. This is done below:
Value: Does Dells capabilities in using its resources have any value?
Yes. Dell is a leader in operational efficiency in the industry. This has resulted in
cost-savings and customer satisfaction, the former ensuring reduced costs and thus higher

profit margin.
Rarity: Are these resources and capabilities rare?
No. In the past competitors were not as efficient as Dell and this gave it an
advantage albeit a temporary one. These capabilities are no longer rare and are possessed
by almost all Dells leading competitors.

Nonsubstitutability: Can these resources and capabilities be imitated?

Yes. As stated earlier on Dells competitors have imitated its process and this has
yielded similar benefits to them.

Exploitability: Are these resources and capabilities exploitable?

Yes. Its capabilities have led to fast customer response and operational efficiency.
These pay dividends in the form of reduced cost and quality which in turn result in
customer satisfaction.

Verdict: Even though Dells resources and capabilities have value, value that can be
exploited, this does not represent competitive advantage. It will contribute to profits
because of low costs but the fact that competitors have access to the same capabilities
mean that no competitive advantage is gained by resources or capabilities.
2. The External Environment
A number of events in the external environment have had an impact on Dell, from
its competitors to global economic weakness to changing customer trends. An analysis of
the external environment is therefore imperative in looking for threats, weaknesses,
strengths and opportunities. This is done using the five-forces of industry model below:
Rivalry
The intensity of competition in the industry is very high. Most of the firms are of
about the same size and power with similarities in resources, capabilities and products.
This leads to cost curves that almost the same and lower prices which also lower profit
margin. In order to secure brand loyalty a lot is spent on advertising and this also reduces
profits. The fact that high exit barriers also exist means firms most compete aggressively
and this increases competition and price wars.

Threat of New Entrants

Overall it is difficult for new entrants to enter the industry without acquiring an
already existing firm due to a number of barriers to entry. These include economies of
scale, economies of scope, capital requirements, lack of brand awareness and access to
distribution.

Supplier Power
Supplier power in the industry is mixed depending on what is being supplied.
Items such as microprocessors can be purchased from a number of suppliers so the
presence of substitutes reduces supplier power. In another example most firms in the

industry use Microsoft operating system; while there are other options and some firms
such as Apple and Acer use other systems Microsoft has some leverage as a supplier.
Buyer Power
A distinction must be made between retailers and consumers here. Retailers
represent indirect distribution and consumers represent direct distribution. The similarity
of products and services supplied means that buyers have considerable power in the
industry. The competition among firms which usually results in lower prices is also in
favor of the buyer.

Threat of Substitutes
The advancements in technology have created a number of substitutes. Cellular
phones, gaming systems and PDAs are just some of the examples of substitutes that are
available. It is important to note however that even though these are substitutes they also
have the potential to be complementors as well.

Verdict : Even though competition is intense usually leading to lower prices and profit
margins the fact that there are entry barriers, similar cost curves, similar products,
demand for these products and competition on a large scale means that this industry is
profitable for firms already in it.
We have now looked at the issues facing Dell and also examined its internal and external
environments. Now it is time to use these to formulate a strategy and a course of action
that will solve Dells problems.
Recommendations
Dell Inc. is still very much a profitable organization. The issue is its
underperformance compared to past standards. It is therefore important to set markers
that highlight Dells progress towards returning to the power it was in the industry. Two
measures have been chosen for this:
1. Dells market share
2. Dells cost structure and more importantly the competitive advantage it can gain from
it
In order to increase profits and sustain long-term growth Dell must do at least one of the
following: increase its market share or reduce its costs structure. The recommendations
listed below attempt to accomplish both. It is important for Dell to not just reclaim its
place as market share leader but also to ensure that it also uses its cost structure as a
competitive advantage as it done in the past. The recommendations are listed in line with
the objective they fall under:
Reduction of Cost structure
1. The outsourcing of manufacturing to low-cost countries (Exhibit 1)
2. The sale of manufacturing plants three (3) manufacturing plants in Europe and North
America namely Florida, North Carolina, and Ohio (Exhibit 2)
3. Turning the manufacturing plant in Athlone to an independent contract manufacturer

that can accept jobs from other firms (Exhibit 3)

4. Reconfiguration of supply chain to improve productivity and increase efficiency
5. The reduction of the workforce. The employment of temporary workers in unskilled
positions and the elimination of benefits (Exhibit 5)
6. The sale of following product lines namely inkjet printers, digital music players, LCD
television and digital projectors. (Exhibit 4)
7. A commitment to focus on new product that are aligned with core competencies that
can provide economies of scope and synergies that cut costs and improve supply
(Check Appendix A for cost-savings from new cost structure)
Increase in Market share
As we have seen in the analysis the Dell is in an industry in which its cost curve,
product and price are somewhat similar to those of its competitors. The consumer market
has changed and in order to re-capture its market share leadership it s important for Dell
to reposition itself in the minds of consumers. Because products between competitors are
fairly homogenous Dell must strive to differentiate itself from its competitors if it is
going to assert itself as the industry leader. These are the recommendations:

1. Conduct consumer survey to find out their needs

2. Enhance brand image
Dell possesses brand equity but so does its competitors. It is hard establishing
brand loyalty. This however can be done in a number of steps
Creating a new slogan. An example is Your PC is U
Running commercials emphasizing the advantage dell offer through customization,
enabling the PC to be a reflection of their personality
Giving consumers a wide range of option as to what they can customize. An example
is the color they want their systems to be.
Using the results of the survey in recommendation 1 adding product features that are
not already available
Emphasize quality. Dell has won numerous awards for quality and customer
satisfaction and these should be highlighted
Using these steps Dell can differentiate itself enough from its competitors to make
a difference
3. Aggressive adoption of indirect distribution and expansion into the retail sector
Dells failure to establish a presence in the retail industry meant that it failed to
capitalize on the growth of units sold through retail.
Appendix A
Exhibit 1
Cost Savings from Outsourcing to low cost countries
Typical Cost StructureSavings from Manufacturers

Total Cost

Materials
Labor
Overhead
Other
Total

For PC Manufacturers
75%
12%
7%
6%
100%

in low cost countries

15%
70%
35%
10%

Savings
11.3%
8.4%
2.5%
0.6%
22.8%

Exhibit 2
Revenue gained from sale of Manufacturing and Distribution plans
Location
Owned (Square feet)
Value (in $)
Florida - Miami
570,000
70 million
North Carolina - Winston
450,000
39 million
Ohio - West Chester
320,000
32 million
Total
1,340,000
141 million
Exhibit 3
Cost Saving as a result of economies of scale gained by turning manufacturing
Plant in Athlone into an independent contract manufacturer

Materials
Labor
Overhead
Other
Total

Typical Cost StructureSavings from Economies

For PC Manufacturers
of Scale
75%
10%
12%
10%
7%
15%
6%
7%
100%

Total Cost
Saving
7.5%
1.2%
1.05%
0.42%
10.17%

Exhibit 4
Revenue from the sale of inkjet printers, digital music players, LCD television and digital
projectors product lines
Product Line
Value (in $)
Inkjet printers
7 million
Digital music players
3 million
LCD television
15 million
Digital projectors
11 million
Total
36million
Exhibit 5
Expected reduction in workforce and use of temporary workers operational expense
savings (in $)
Typical personnel annual salary
With Reduction
Total Savings
560 million

440 million 120 million