Dell Case Study

Personal Computer Business

Low Margin

Decline in prices and components

Threat for substitution

Rapid change in software availability & technology

Substitution Threat by Mobile technology

Large no. of manufacturers

Product has become like a Commodity

Non branded white Box products (large % sell in Europe , Asia & China
ranging from 50 90%)

Industrial Rivalry - High

Price critical factor (e.g. Compaq low prices IBM clone) leading to lower margin
Standard already defined by IBM (WinTel) little scope for product differentiation
except Apple
Large number of competitors (top 5 competitors controlling 48% market while
remaining is with other manufacturers). Top Well known brands IBM, HP etc
Large number of smaller buyers (only ~ 38-40% are large/ mid size business
& government buyers)

Industrial Rivalry - High

Position

HP; 11.8; 7% Gateway; 7.1; 4%

IBM; 16.9; 10%
Others; 88.6; 52%
Dell; 17.7; 10%
Compaq; 27.9; 16%

High % of Direct
sales like Dell
But poor
execution from
1997 (Excess
inventory,
Acquisition
charge, Aborted
Customer info.
System)

Manufacturer

Mkt Share

Focus
Broad range of products (sub
$1,000 PC to fail safe servers)

Compaq

16%

IBM

10%

HP

7%

Focus on High Quality &

Performance

Gateway

4%

High Quality manufacturing,

Latest Intel microprocessors,

120.0%
100.0%

6.5%
0.0%
6.9%

4.0%
1.0%
4.7%

86.6%

90.3%

4.6%
18.4%

1.2%
23.2%

69.6%

75.1%

4.4%

7.5%

Compaq

IBM

0.6%
HP

4.4%
24.6%

80.0%

High Dependency
on Distributor /
Reseller
Attempted Direct
sale but no
breakthrough
success like Dell
(IBM AAP,
Compaq ODM &
HP ESPP)

60.0%
40.0%

66.6%

20.0%
0.0%
Dell

Gateway
Direct

Distributor/ Reseller

Retail

Other

AAP Authorized Assembly Program; ODM Optimized Distribution Model & ESPP Extended Solutions Partnership Program

Entry barriers High

Start up cost - High

Fixed assets: High (In case of dell it is ~ $ 200 Million)

Current asset: High (34% of the sale)

Inventory: High cost $ 273 Million in case of Dell (which has the lowest inventory days of 7)

Economies of scale

Buyer Power - High

Low switching cost (as standard configuration and low cost)
Large number of options available in the market
Range of buyers from single to bulk (Increased negotiation power for bulk purchases)

Dell approach:

Mass manufacturing (Broad menu that tailored to customer needs)

Build to order manufacturing (Manufacturing post placing order)
Focus on delivery speed
In transit merge (Sony monitor)
Daily management (matching production schedule with sales)
Use of electronic (bar code based) system
Cell manufacturing / Assembly
Customer segmentation in micro segments(Geographical, size of company etc)
Direct sale through Online portal www.dell.com:
Custom premier pages for large organization
Option for Customization of product as per customer needs

Impact:
Easy management of segment
Reduced inventory and economy of scale to reduce cost
Large number of transactions through portal ($ 10 million per day worth
orders)
Faster delivery of products (5 working days) leading to higher customer
satisfaction

Supplier Power - Low

Components supplier & service providers:
Operating System: Monopoly with Microsoft (MS software installed on >
90% PCs)
Microprocessor: Handful of suppliers (Intel, AMD etc) Monopoly with
Intel
Monitor: Sony
Other components: Large suppliers with competitive price
Assembly: in-house assembly
Third party shippers
Service through external service providers & Online platform
Supplier location:
Near the assembly plant (co-location)
Supplier Management
Integration of systems with suppliers with feedback on bad quality and
hourly replenishment
Impact:
Successful implementation Just in Time supply resulting in Inventory
reduction from 32 to 7 days

Threat of substitutes - High

Mobility is an issue with Personal computers (except notebooks)

Advancement in technology and availability of smart phones as substitute posing a

challenge for Personal computers

Price difference between Dell and other computers has narrowed to almost nil

Highly standard configuration across all suppliers

Thank You