Essay on "Dell (2008) for Its Entire Existence"

Essay 6 pages (1886 words) Sources: 6

[EXCERPT] . . . .

Dell (2008)

For its entire existence, Dell has operated with the same strategy. The company is a differentiated producer of personal computers. The focal point of Dell's differentiation is that it custom-builds the computers to order. This gives the customer an enhanced sense of importance and a sense that the computer ordered is precisely what was wanted. This strategy also allows Dell to maintain very low levels of inventory. Finished goods inventory is negligible, and parts can be ordered on a just-in-time basis. The inventory management allows Dell to save money, with some of those savings being passed onto the consumer. This strategy should in theory allow Dell to undercut other differentiated producers for relatively similar products, creating a strong value proposition for the company. This was the original Dell business model, to match the quality level of the differentiated producers at a lower price to consumers, creating what in theory should be a compelled value proposition.

Dell's market share in the U.S. peaked in 2004 and globally it peaked in 2005. The company was the worldwide industry leader in each of these years, with Hewlett Packard finishing second. HP markets both under the HP and Compaq brands. Apple, another differentiated producer, held the number three market share in the U.S. But was invisible in the global market. The remainder of the industry was characterized by heavy fragmentation, and a number of the stronger competitors were low-cost producers from Asia such as Acer (Taiwan), Lenovo (China) and Toshiba (Japan). These new companies were challenging Dell as the lowest-cost producers in the industry. As with most competitors, Dell markets computers with a Windows operating system. Both Dell and HP sell to consumers and business customers, as well as government customers.

By 2008, Dell had diversified its business line in order to insulate against increasing competition in the personal computer business. In addition to servers, Dell competed in data storage devices, where it competed as a cost leader against dominate industry player Cisco. The company sold printers, LCD TVs, retail store systems, an mp3 player, DVD drives and plasma TVs, digital cameras, memory cards and speakers. Unlike PCs, many of these products were not produced at Dell. The company demonstrated a willingness to exit any business that was not profitable.

A firm competing as a cost-leader typically takes low margins on its products, and therefore requires a high throughput in order to turn a profit. As of 2008, Dell's revenues had been steadily rising for years, but the company's net income had passed its peak and its net margin was on the decline. Operating expenses as a percentage of net revenues was at 13.5%, much higher than the historical level. Since 2005, the selling, general and administrative expense had increased 73.2% while revenues had increased 24.5% over the same period. In order for the firm to maintain its status as a low-cost producer, it needs to have tight cost controls. Over the past two years, Dell has lost control of its costs, and as a result its profits have eroded. It has improved manufacturing efficiency significantly over this period, so the cost issues are more likely to stem from the marketing side. Dell has split its target markets more finely, increasing the size of its marketing infrastructure as a result. The company also added Dell kiosks in stores to boost its marketing program. The company began marketing in retail stores, adding a new distribution channels, increasing its inventory. The multitude of new product offerings also required their own marketing and customer service infrastructure.

While most of Dell's geographic consumer groups were still seeing an increase in sales, Dell was losing consumer business. Sales to U.S. consumers were down 21.5% in just two years. The American consumer has the greatest selection of PCs available, compared with U.S. business customers and overseas customers. Therefore, it is reasonable to extrapolate that Dell's struggles in this market signal a change in the company's fortunes over all. U.S. consumer sales should be taken as a leading indicator of Dell's overall performance and the company lost money in this segment for the first time in this decade in 2008.

On the surface, Dell's actions support its strategy to be a high-quality cost leader. In practice, Dell has struggled to maintain control of its costs, and this appears to be showing in its inability to hold the U.S. consumer market in the face of even lower-cost competitors. Dell's gross margin has been improving for several years, so the problem is not with the firm's pricing power over its suppliers. Dell's strategy is coming undone because new competitors are eroding its pricing power over consumers.

Dell appears to have reduced the degree of congruence between its strategy (cost leadership) and its actions. In diversifying product lines, distribution channels and customer segments, Dell has significantly increased its sales and administrative cost structure. This has made it increasingly difficult for Dell to respond to competitive challenges from HP and other PC-makers that are beginning to undercut Dell. Dell was effectively trying to mirror HP's strategy of using profits in other business lines to subsidize the PC business, but Dell's small share of these new businesses meant that this situation never truly came to pass -- if anything the PC business was subsidizing these other lines. The company's recent acquisitions have also increased its costs. Thus, the most recent strategies undertaken by Dell do not directly support providing low cost computers, and this has left Dell vulnerable to competitors undercutting them. Dell's strategy in recent years, therefore, can be characterized as being somewhat distracted from the company's overarching competitive position.

4. Dell has a number of core competencies from which it derives competitive advantage. The company has utilized a consistent strategy of cost leadership and for most of its existence has supported this strategy well. Dell has long realized that in order for the company to provide computers at a low cost to its customers, it must be able to produce them at a low cost. Dell therefore has strong relationships with its suppliers and over the years has worked constantly to develop production systems that can drive prices lower. Both tactics have been successful over the long run, and Dell has been able to maintain its cost leadership position in the market in part because of its ability to out-innovate rivals with respect to production costs.

It should be noted that Dell has no choice but to be an innovative leader with respect to production. Its main rival, Hewlett Packard, is a much larger firm and is able to subsidize its personal computer business. Dell, on the other hand, does not have the same ability. Thus, it must be able to produce at a lower price than HP in order to sell at the same price as HP. This presents a long-run challenge for Dell, however, in that its low cost of production is only partially supported by sustainable competitive advantages, if at all. Any firm can replicate Dell's production techniques, or its entire business model. Although Dell may have sustainable competitive advantage with respect to its relationship with its suppliers, a firm the size of HP that is much larger than Dell can achieve the same bargaining power with supplier in other ways.

Dell has also historically controlled its market costs. This strategy worked well for the company in the 1990s, when the PC market was relatively small and most users were relatively unsavvy. Such users did not have specific needs, or did not understand their own needs well. The market for computers has changed in the past eight or nine years. Not only has it grown rapidly, but it has become increasingly fragmented. Different users have different needs, and demand that computer-makers meet these needs. This leaves the market with a higher degree of fragmentation. For Dell, this leads to a larger marketing infrastructure. The company does not have the same ability as HP to spread that marketing expense around. HP can subsidize some of that marketing expense by using the same marketing infrastructure that sells printers or other office products to sell its PCs. Dell, aside from its server business, does not have this capability.

While the development and management of its supply chain and production methods has generally been positive for Dell and supported its core mission, the development of its marketing infrastructure has not been. Increased expenses and complexity on the marketing -- much of it driven by changes in the market itself -- has reduced Dell's ability to offer low prices to consumers. Combined with other firms being creative in finding ways to match Dell's prices (subsidization, production in low-cost-labor nations), Dell has lost some of its pricing power. A low cost producer than does not sell at the lower cost will struggle to maintain market share, and this has been the case with Dell as its core marketing competency has become less efficient and effective than it was when the company was at its peak.… READ MORE

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