Individual Situation Analysis and SWOT: Dell Computers - Case Study Example

Individual Situation Analysis and SWOT: Dell Computers Internal Analysis Customer Market Situation Dell Computers is a late entrant in the computer market. Founded in 1984, Dell is now the largest computer manufacturer and supplier in the world. It supplies both desktop and laptop computers to individual and corporate customers. Of late, it has also entered the printer and server market, mainly aimed at the corporate buyers, but its main product remains computers, desktop and laptop. In this paper, I will analyze the laptop market for Dell Computers as it is the fastest growing segment within the computer manufacturing industry. Over the recent years, the developing countries, especially those in Asia, have been the target markets for laptop manufacturers as the global economic recession has hit these economies less than the western world. As a result, almost all computer manufacturers are producing small-valued laptops, called notebooks, priced below $500. This trend is in evidence after Asus EEC PC became a huge success and Intel and Via began to produce computer chips that enabled low cost and low power consumption devices. The market for such notebook PCs was estimated at 3.6 million in 2008 (BBC News, 2008). Since its inception, Dell Computers has focused on the direct model of selling and build-to-order supply chain with which it has been able to gain advantage over other players in the computer industry. The company does not use the service of retail intermediaries at all, taking orders over phones and the Internet. At the same time, the assembling of computers is done through a build-to-order model (Achtmeyer, 2002). Over the years, Dell has grown sophisticated in streamlining the entire process of order-taking from customers, buying and assembling the components from its vendor network traversing the world, but with the final assembling done at the company’s factories that are close to the target market, and dispatching to the customer on time. However, the laptop market is essentially retailer-driven because of which HP and Acer has been able to overtake Dell in sales growth (Shah, 2008). Till a few years ago, laptops were sold mostly to companies whereas individuals bought mostly desktop computers. Over the last couple of years or so, laptop retail sales to individuals have overtaken that of sales to companies as laptop prices have fallen to less than $900. As a result, companies that have stronger retail networks are at an advantage. Retail sales have been stronger because laptop computers take smaller shelf space and transportation costs because of the smaller size than the bulky desktop computers. Customers also prefer to choose between the various models with different functions and performance that laptop computers provide. Since 1994, e-commerce has been the major sales instrument of Dell. About half of the company’s revenues are generated from its web site (Magure, 2003). The corporate clients are the ones who purchase online the most. About 15 percent of the e-commerce sales of computers are corporate clients and the rest are individual. For corporate clients, Dell offers the Premier Page where purchase managers can send in queries and put orders. However, corporate clients are not the major laptop customers any more. For about 20 years, Dell endeavored to manage lead-time management so that lead conversion into sales is efficient resulting in only a small inventory with the company while also not delaying dispatch of the product to customers. Once a customer places an order, the sales executive takes over to ensure that the product chain is activated and the product is delivered on time. The weekly Lead-Time meetings have had a very important impact on Dell’s performance as the product lead time status were posted for all to see. Its pricing is also tailored to its demand forecasts. The product price list is updated almost on a weekly basis, much faster than the competition. The forecasts were correct 70 to 75 percent time. The basic philosophy of Dell’s marketing was “selling what you have” rather than “selling what the market demands” (Byrnes, 2003). However, the market has changed significantly and the build-to-order model on the basis of customer requirements is not working any more. Since 2008, the company has been changing its strategy and it is increasingly getting into retail sales by which it maintains some amount of inventory, particularly in the laptop segment. The company now has included brick-and mortar selling, through 10 by 12 feet kiosks at shopping malls, in addition to direct selling. This retains the direct model by not using the retailer, as the kiosks are connected to the Dell website while also giving consumers the opportunity to take a direct look at the product. Thus, it is a combination of direct and retail selling that the company now aims at. However, typically it is women who visit malls the most and they are not the typical purchasers of computers (Magure, 2003). Marketing Mix Situation Over the years, Dell’s selling and advertising costs have been lowest in the industry. Second, most of the parts of PCs, like the monitor, keyboard, hard disk, motherboard, software had become standardized. This enabled Dell to venture into outsourcing parts manufacturing and become an assembler. As a result, Dell has been able to focus on design and inventory management while its inventory levels have been lowest in the industry (Achtmeyer. 2002). Supplier Situation The direct-selling model worked for Dell primarily because it was able to align the supply chain intricately with its selling mechanism. The company, which assembles 80,000 PCs a day, does not yet have any warehouse. The inventory turnover at its factories is a maximum of two days while that of the entire operation is a maximum of 72 hours (Breen, 2004). The company has a financial advantage because of its low inventories. The customer places the order and pays online through the credit card. Immediately, the marketing department places order on the component vendors and activates the assembly chain. But, the suppliers are paid only 36 days after the product is delivered. Hence, Dell has a cash-conversion ratio of negative 36. In contrast, other PC makers procure components on payment to suppliers, assemble and deliver the product and receive payment only on delivery, which takes about 30 days. So, the cash-conversion ratio is typically 30 days for Dell’s competitors. The challenge in the entire process is that the Dell assemblers as well as the suppliers have to be inordinately efficient in delivering on time. Along with inventory-management, Dell has also strove to make its marketing network sophisticated. It keeps detailed databases on the customer profiles so that it can predict a repeat purchase and be ready to deliver before the customer actually places the order. In general, Dell has avoided outsourcing the final assembly like the competition does. It outsources sub-assemblies like motherboards. Dell outsources the production of laptops except the final configuration but keeps track of the entire supply chain. The main reason of this rigid control is the fear of losing out by creating competition from the assemblers that might slowly build capabilities for final assembly, like Dell itself has done. Most sourcing of parts and components are global but regulated by the procurement center at Austin. Dell hunts around the globe for the cheapest parts and components. For example, the EMEA locations source monitors from Sony, Samsung and Acer and ship them from Asia and also buy the same products locally from Phillips and Nokia. For major components, Dell works with a handful of global leaders, like Intel, SCI, IBM, Toshiba, Samsung, Seagate, etc. Consumables like shipping material, packing boxes, printing of keybords are, however, sourced locally by the production centers. Since its inception, Dell has selected its suppliers carefully, with only about 50 to 100 suppliers contributing 80 percent of the components and parts. The company chooses suppliers on the basis of various factors, only 30 percent of which is contributed by the cost structure and the remaninig factors are quality, service, delivery scheduling and flexibility (Byrnes, 2003). However, Dell’s sourcing pattern is changing. While it began by primarily sourcing parts and components from Asia, regional components manufacturers are increasingly supplying to Dell. The regional networks, too, however, are a combination of Asian, European and American suppliers. Resources Dell created its production capabilities in the early-1980s by supplying PC parts and components to IBM when the latter began outsourcing to cut costs (Dedrick & Kraemer, 1998). Thereafter, Dell expanded its network by also supplying to HP and DEC and newer computer manufacturers like Compaq, Gateway and Acer. The company has production centers in Austin, Texas (set up in 1985), Ireland (1990), Malaysia (1996), China (1998) and Tennesse and Brazil (1999). By 2001, the Americas contributed 72 percent of Dell’s revenues and 68 percent of its employment; Europe, Middle East and Africa (EMEA) 20 percent of sales and 20 of employment and Asia Pacific 8 percent of sales and 10 percent of employment (Kraemer & Dedrick, 2001). Dell spends much less on research and development than its competitors, at $400 million in 2003 compared to HP’s $4 billion (Maney, 2003). Its main innovation is in the supply chain so that its production process is near perfect, followed by the efficient assembly operations so that any defect can be traced down to the particular worker who was responsible for it. External Analysis Competitive Situation including Industry Situation Despite being a leader in the overall computer market, particularly that of desktops, Dell is in the third position in the laptop market. New players like Acer from Asia have overtaken Dell in the laptop market, which is dominated by HP (Furfie, 2008). Traditionally, the main competitors for Dell have been are HP-Compaq, IBM and Apple. Of late, there have been many new players, particularly from Asia. Examples of such late entrants in the laptop computer market are Acer, Lenovo and Sony. According to the Five-Forces model proposed by Porter (1980) theory, the level of competition in an industry can be gauged by the threat of entry of new entrants, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers and the degree of rivalry between existing competitors. By these parameters, it can be said that the laptop market is highly competitive because the technology is uniform and available to all competitors with little scope of product differentiation. Customers can switch between sellers at ease. Hence, new manufacturers can enter the industry quite easily. Dell has no advantage from economies of scale as the process of assembling laptop computers does not require huge capital investments. The products from Dell and from the competitors like HP, Compaq, Acer, Sony and Gateway are similar. So there is a high degree of threat of substitutes of Dell computers. Dell’s suppliers now have a higher bargaining power than earlier since there are many laptop manufacturers and the suppliers can enter into contracts with any of them. The buyers of laptop computers, too, have a high bargaining power since computers are now highly commoditized and all competitors offer similar products at competitive prices. Macro-environment The industry has reached a stage where customers are not looking at increasing performance of laptops any more as most of them are provided with Intel chips that ensure high speed and performance. Rather, individual customers are more concerned with the appearance, style, size and battery life of laptops. Standardization of products has meant that assemblers can put together a laptop by sourcing 90 percent of the components. Hence, the laptop market is fast becoming a commodity market like the television or the refrigerator that has the target market as the individual cost-conscious customers. As a result, there is the threat of other low cost, low brand suppliers capturing the market, like what Dell did two decades ago. Dell’s business model, which has been its key to success for so long, has therefore become its disadvantage. First, Dell has lost its edge from sourcing benefits since its assembly costs have become higher than the competition because of its intricate supply chain. Second, Dell has lost the low cost advantage that it derived from low inventories and absence of retailers since the cheaper brands are offered at even lower prices or at least the same price as Dell. Third, the just-in-time component requirements have become more expensive than bulk procurements by producers of commodity laptops. Thirdly, the assembly locations near the end-use markets have become more expensive than low cost production centers elsewhere (Ottink, 2004). This is why Dell has shut down the Texas factory and is entering into closer associations with vendors worldwide (Gilmore, 2008). Besides, selling at discounters, shopping malls, grocers by low-priced competitors have outbeaten the low costs of direct selling. Besides, Dell’s direct selling strategy for desktops meant that the company never engaged in high-pitched marketing activities like advertisements as a result of which it has lost the laptop market share to high marketers like Apple and HP in the retail market. The chance of obsolescence and replacement purchases, which make up the bulk of Dell’s sales, has also diminished with commoditization. The lower prices of products, hence of components, have also reduced the cost of inventory, wiping out Dell’s edge over the competition. SWOT Strength: Legacy customer tie-ups with corporate buyers Low inventory costs Low marketing costs Efficient supply chain Weakness: Low level of tie-ups with retailers Insufficient focus on the individual customers, which is the growing laptop market Low research and development Low level of advertising and marketing affecting the individual customer base Opportunities: Expansion of the corporate market with synergic products Inroad into the developing economies which have a faster growing laptop market Threat: Commoditization of the market leading to greater competition New players from Asia Conclusion Even though Dell had been a leader in the computer market till about a couple of years ago, it is losing out to competition, particularly in the laptop computer market, in which Acer, a new entrant has overtaken it. Dell’s direct selling business model has reached bottlenecks as the laptop market, which has a higher demand from the individual rather than corporate customers, sells better through retailers rather than direct selling. Besides, the commoditization of the computer manufacturing process, with little product differentiation among competitors, has meant that there is not added advantage in the build-to-order model and costs can be reduced in a variety of ways rather than inventory controls. Therefore, Dell would be better off to shift away from its original business strategy and focus more on research and development and product development. Works Cited Achtmeyer, William, F., Dell Computer Corporation, Center for Global Leadership, Tuck School of Business, Dartmouth, 2002, available at http://mba.tuck.dartmouth.edu/pdf/2002-2-0014.pdf Byrnes, Jonathan, Dell Manages Profitability, Not Inventory, Harvard Business School Working Knowledge of Leaders, available at http://hbswk.hbs.edu/item.jhtml?id=3497&t=dispatch Dedrick, Jason and Kraemer, Kenneth, L, Asia’s Computer Challenge: Threat or Opportunity for the United States and the World? New York: Oxford University Press, 1998 Kraemer, Kenneth, L and Dedrick, Jason, Dell Computer: Organization of a Global Production Network, Center for Research on Information Technology and Organizations, available at http://www.crito.uci.edu/GIT/publications/pdf/dell.pdf Maguire, James, Case Study: Dell.com, March 3, 2003, e-commerce guide.com, available at http://www.ecommerce-guide.com/news/trends/article.php/10417_2013731 Maney, Kevin, Dell Business Model Turns to Muscle as Rivals Struggle, USA Today, available at http://www.usatoday.com/money/industries/technology/2003-01-19dell-cover_x.htm Melenovsky, Mark, Dell Supports Customer Demand for Scale-out Industry-Standard Server Computing, White Paper, IDC, available at http://www.dell.com/downloads/global/corporate/iar/20040501_idc.pdf Nagle, Thomas T and Hogan, John, Managing Pricing Through Competition Thoughtfully, available at http://www.imakenews.com/strategicpricing/e_article000533685.cfm?x=b11,0,w Ottink, Frank, Dell’s Biggest Enemy: Commoditization, The Interactive Investor Journal, 28 April 2004 available at http://www.yeald.com/Yeald/a/29821/dell_s_biggest_enemy___commoditization.html Wang, Jake, Dell’s New Printers: A Threat To HP without IP? Available at http://www.dell.com/downloads/global/corporate/iar/20040524_ars.pdf BBC News, Dell joins cut-down laptop market, May 29, 2008, http://news.bbc.co.uk/2/hi/technology/7425099.stm Furfie, Ben, Acer displaces Dell in laptop market March, 5, 2008, http://www.pcr-online.biz/news/29503/Acer-displaces-Dell-in-laptop-market Shah, Agam, Retail sales boost laptop computer market, Computer Hardware, March 5, 2008, http://www.computerworld.com/s/article/9066821/Retail_sales_boost_laptop_makers_market_share Gilmore, Dan, The New Supply Chain Lessons from Dell, Supply Chain Digest, April 10, 2008, http://www.scdigest.com/assets/FirstThoughts/08-04-10.php?cid=1609&ctype=content Read More