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Assignment Questions
1. What is your evaluation of Michael Dell as CEO? How well has he performed the tasks
of strategic management discussed in Chapter 1?
2. What are the elements of Dell’s strategy? How well do the pieces fit together? Is the
strategy evolving?
3. Does Dell’s expansion into other IT products and services make good strategic sense?
Why or why not?
4. What does a SWOT analysis reveal about the attractiveness of Dell Computer’s
situation?
5. What does a competitive strength assessment reveal about Dell, as compared to IBM,
Hewlett-Packard, and Gateway? Among these competitors, who enjoys the strongest
competitive position? Who is in the weakest overall competitive position?
6. Has Dell’s strategy resulted in a substantial competitive advantage over its rivals? What
is the basis for whatever competitive advantage it has?
7. What is your assessment of the company’s financial performance the past five years?
8. Is Dell’s strategy potent enough to beat out Hewlett-Packard? What are Dell’s chances
for becoming the dominant leader in the global PC market?
Executing Strategy
Dell is active in pushing for better execution of just-in-time inventory management
and reduction in the number of days of parts inventories.
Dell’s strategy requires smooth execution—from customers all the back to the
operations of suppliers. And the evidence in the case is that the strategy is being
executed very, very well.
The company’s astute application of Internet technology is one of its keys to
effective strategy execution and squeezing out cost savings ($1 billion in costs were
eliminated in 2002 and more cost savings are on the horizon).
Leading Corrective Adjustments
He stays in close personal touch with customers.
Selling direct gives Dell firsthand intelligence about customer preferences and
needs, as well as immediate feedback on design problems and quality.
Dell has responded to changes in the PC marketplace by pursuing ever greater
market segmentation.
Michael Dell has led the evolving refinements in the company’s strategy.
The most recent refinement is the expansion into other IT products—data
storage products, Internet switches, printers and cartridges, handheld PCs, and
IT services.
On the whole, it should be clear to class members that Michael Dell is an effective CEO
and that the tasks of strategic management are being quite well performed.
We think the two most important competitive strength measures are relative cost
position and company capabilities to deliver what buyers view as good service. Relative
cost position is becoming increasingly important because of falling prices and mounting
price competition. Customer service capabilities are a big strength factor because many
buyers are looking for value-added services from PC suppliers who can meet their
particular needs for technical support and for after-the-sale service.
The competitive strength ratings in Table 1 indicate that Dell is the strongest player
overall, chiefly because of its low-cost leadership status in a marketplace where buyers
are increasingly price conscious and where products are becoming more like
commodities. We see this as entirely justifiable. Dell has the best overall strategy in the
PC industry. It has substantially lower costs than IBM and Hewlett-Packard/Compaq
who are currently losing money or barely breaking even on PC sales. Dell’s PC business
is, of course, quite profitable. And Dell’s value-added customer services and after-sale
customer service capabilities are pretty impressive and growing. Dell’s weaknesses are
in its smaller IT service and technical support capabilities (where it is no match against
IBM and Hewlett-Packard), in its narrower product line (especially as compared to
Hewlett-Packard), and in its somewhat weak access to first-time PC buyers (individuals
who are looking for PCs under $1000). Gateway perhaps has an edge over Dell in
appealing to the home and individual consumer segment in the U.S. (with both its sell
direct and its retail stores) and Hewlett-Packard/Compaq has a global distributor/dealer
network that is unmatched (its biggest strength, but also its biggest weakness because of
its higher costs compared to Dell’s direct sales business model). One suspects that Carly
Fiorina at Hewlett-Packard would disagree with our view that Dell will pull out in front
of HP in 2003, given the pitch she made that was quoted in the case.
But we think the evidence suggests that HP will have difficulties driving its costs far
enough down in its PC business to compete on even-footing with Dell’s supply chain-
efficiency and direct sales model. There is clear channel conflict for Hewlett-
Packard/Compaq to try to sell direct at the same time that it is relying on dealer-
distributors to push its PCs and interface with end-use customers. Hewlett-
Packard/Compaq’s dealers and distributors will be angered by any moves on HP’s part
to shift over to a direct sales model for some/all customers and could shift their
allegiance to competing brands. So, in some respects, HP is trapped into pursuing sales
through re-sellers; it really can’t risk alienating its global network of dealers and
distributors.
If time permits, we suggest asking the class several questions about their assessment of
HP’s prospects:
Has Carly Fiorina overestimated or exaggerated HP’s strengths and future prospects
(based on the lengthy quote of her views in the case)?
What will it take for HP to fend off Dell and retain its recent lead in the global PC
market?
Why would corporate and other large enterprise customers prefer HP over Dell?
Why would corporate and other large enterprise customers prefer Dell over HP?
We see IBM’s position as steadily eroding and almost certainly likely to continue to
erode. Its strengths are its image/reputation (a holdover from times past) and its
extensive systems support capabilities (unmatched by anyone else in the world). But it
is clearly a high-cost producer and its “premium price” policy is costing it sales and
market share in a market where price competition is growing ever more vigorous. We
predict that IBM will be a non-factor in PCs by 2005 or sooner, but it likely to be a very
strong contender in medium and high-end servers for the foreseeable future.
Gateway, though rated weakest and currently trying to turn its operations around, might
move back into stronger contention, but students should be skeptical whether Gateway
can do much better. It appears to be struggling, despite the turnaround.
If time permits, you can ask class members what they think of Gateway’s
turnaround strategy and whether it will get Gateway back in the ballgame.
Gateway’s strengths, historically, have been in the education and individual
consumer segments, but we see Dell growing in strength here and Gateway as not
being in a particularly strong position to defend against Dell’s inroads.
Gateway is unlikely to make much headway with large corporate customers and its
ability to compete globally is almost nonexistent.
Epilogue
Dell was the global market leader in PCs in the first quarter of 2003.
In May 2003, Dell reported its best-ever fiscal first-quarter operating results, recording
exceptional growth and profitability in all product and regional markets. Dell’s worldwide
shipments in the first quarter of fiscal 2004 ended May 2, 2003 were up 29 percent from the
same quarter in the prior year; volumes for the rest of the industry declined an average 1
percent. Dell’s growth was robust outside the United States—40% in Asia-Pacific and
Japan, and 29% in Europe, the Middle East and Africa; Dell’s operating income in both
these regions nearly doubled to record levels. The company’s 40% increase in server
shipments was more than four times the average of other suppliers. Dell accounted for
almost one-third of U.S. server volumes, and had led the category for more than two years.
Dell continued to extend its lead over Hewlett-Packard in all of the remaining quarters of
the year. Dell’s fiscal fourth-quarter 2004 was its best operating period ever. The company
achieved record product shipments, revenue, operating and net income, and earnings per
share. Dell continued its leading growth in enterprise computing. Shipments of PowerEdge
servers jumped 40 percent from the year-ago quarter, more than double the rate for the rest
of the industry. Storage revenue was 47 percent higher. And company strength was global:
product shipments were up more than 30 percent in Europe, the Middle East and Africa and
in Asia-Pacific and Japan, and exceeded 20 percent in the Americas.
Dell’s full-year sales for fiscal year 2004 were $41.4 billion (versus $35.4 billion in fiscal
2003), operating income was $3.5 billion (versus $2.8 billion in FY 2003) and per-share
earnings were $1.01 (versus $0.80 in FY2003).
Dell’s full-year product shipments, revenue, operating profit and earnings per share were all
company records. Dell was the world’s leading supplier of computer systems in 2002 and
2003, and its business in FY 2004 was profitable in every geographic market, customer
segment and product category. Dell product shipments grew 26 percent, nearly three times
the average of other companies. Whereas Dell’s revenue increased 17 percent, to $41.4
billion; total sales by the rest of the industry declined. Dell’s operating expenses accounted
for just 9.7 percent of revenue, the lowest full-year rate in our history, and were 9.6 percent
for the last three quarters. Earnings per share were up 26 percent, to $1.01; competitors lost
money in their computer-systems businesses.
Going into 2004, Dell had been the market leader in the U.S. for five full years; its 22-
percent growth in unit shipments in 2003 was nearly four times the rate of the rest of the
industry. Dell was the most preferred supplier by every segment of U.S. customers:
businesses of all sizes, government agencies, educational institutions and consumers. The
company’s distinctiveness is similarly profound in other regional markets. Dell shipments in
Europe, the Middle East and Africa were up 30 percent, twice the average for other
companies. In Asia-Pacific and Japan, the increase was 38 percent, versus 8 percent for the
industry without Dell.
Effective July 16, 2004, Kevin Rollins took on the title of president and CEO of Dell
Computer, with Michael Dell retaining the title of Chairman of the Board. Rollins had
previously been president and COO. Rollins was also appointed as a member of the board of
directors of the company. Michael Dell was to remain deeply involved in the company’s
day-to-day business as chairman of the board, leaving intact a unique, successful “two-in-a-
box” senior-management structure. The company said the title change was consistent with
current primary roles, with Michael Dell emphasizing trends in technology and customer
preference, including research and development and Kevin Rollins leading company
strategy and operations.
For further updates, you can go directly to www.dell.com and peruse the latest press
releases and the investor information or you can check our periodically updated case
epilogues at the password-protected Instructor Center (www.mhhe.com/thompson) for the
latest information. The online epilogues are updated quarterly.