Research Proposal on "Dell Is in a Strong Situation"

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Dell came into the computer industry in the mid 1980s and essentially changed the way the industry did business. When Dell entered the industry, the environment was relatively unfavorable. The major manufacturers all had significant market share. Worse, each of the major computer manufacturers was a vertically integrated operation. Startup costs were high, providing substantial barriers to entry. The consumer market was relatively difficult to penetrate because consumers wanted lower price points and higher performance, both of which could be delivered but only with economies of scale.

The technological environment was relatively favorable, however. While the major PC makers were vertically integrated, many of the components that went into computers were becoming standardized. Performance levels were improving, but the pace of technological innovation was beginning to slow. This allowed for a shift towards commoditized inputs, negating the need to vertically integrate.

The social environment was very positive in the late 1980s and early 1990s. Personal computers were becoming mainstream at businesses, institutions and in the home market. The number of applications was increasing. Moreover, companies such as Intel and Microsoft were emerging as the dominant providers of their respective goods, and those products were beginning to drive demand in the industry even higher.

The competitive environment was, however, somewhat difficult. The firms with which Dell was competing such as HP and IBM were very large, multinational companies. They had war chests, large customer bases and distribution channels. A newcomer to the market would have difficulty chipping away at the market share of these giants.

Today, Dell has overcome many of these challenges to put itself in a favorable competitive situation. The company has been able to capture through a combination of both cost leadership and differentiation a healthy, rapidly growing portion of the institutional market. Dell has built the economies of scale needed to succeed in the computer business. They have strong supplier networks and have built a strong brand.

Dell's position, however, is not unassailable. Michael Dell admitted that people buy Dell computers primarily to access Microsoft and Intel products. While this has provided Dell with significant growth, it also represents a major competitive threat. Dell has commoditized personal computing to such an extent that the barriers to entry have become much lower. As a result, there is greater threat of new entrants into the business.

Financially, Dell has a strong situation. Their revenues and profits are rapidly growing. They have successfully executed on their plan for scalability, given that sales, general and administrative expenses as a percentage of revenues has shrunk steadily as revenues have increased. Their margins are comparable with other firms in industry -- they seek to control costs but have been able to extract higher prices from their customers.

Dell has a healthy balance sheet as well. Dell has a low debt level and steadily increasing equity. They are improving their liquidity ratios as well. Despite a blip in their profits in 1993, Dell is on a strong upward trajectory in their business.

Main Problem

For Dell, the main problem at this point is that they need to find ways to continue to grow. This seems self-evident in that their current strategy has led them to the success that they enjoy, but they have also changed the industry. Dell has succeeded in no small part because they caught the industry off guard with an entirely new business model that was superior to the one in operation at the time. They industry has had a few years to watch Dell build market share and can be expected to respond soon. The big firms like HP and IBM may have troubled adapting their business model to match Dell. They suffer from much the same corporate inertia that Big Auto suffers from and is as likely to beat Dell as Chrysler is to beat Toyota. What Dell has done, however, is open the door to new competitors that can emulate the Dell business model, or even adapt it to be even more effective.

The threat of new competitors is strong, but Dell must also position itself for the next phase of its growth. To this point, Dell has been able to grow rapidly on the strength of its competitive advantages. As competitors act to remove or reduce those advantages, Dell must find new ones. In particular, Dell must be able to scale its operations to meet the rapidly increasing sales without compromising the quality and efficiency that has allowed it to reach its current point. If Dell does this successfully, it can continue on a growth trajectory for many more years; if Dell fails, they will enter a mature phase and be overtaken in the same way that they have eclipsed the large old-line computer makers.

SWOT

Dell has been so successful because it has leveraged multiple strengths. The first such strength is the firm's efficiency. The high degree of efficiency in Dell's operation allows it to meet consumer needs more effectively. It allows Dell to compete on price while simultaneously offering high quality. Efficiency allows Dell to lower costs in other areas -- such as inventory costs. This lowers the risk to the organization. The company has strong efficiency competencies in manufacturing, in shipping, in order taking and in procurement, each of which contributes to high overall organizational efficiency.

The second strength is the Dell brand. In a very short time, the Dell brand has grown in statute rapidly. Dell's unique business model makes it attractive as both a supplier and a buyer. The computers themselves have a high reputation, but the company in general does as well. Dell has been able to build this reputation, which allows it to get into large institutional and corporate accounts. Part of the brand is the customer service experience. Dell has several initiatives to manager relations with its biggest customers. As a result of this, the company's brand has a strong connotation for strong customer service, giving it a further competitive advantage.

Lastly, Dell is strong financially. The company's margins are decent, but they have been able to increase revenues and profits rapidly over the past five years. As a result, Dell has been able to plow earnings back into the firm. This in turn has left Dell with a strong balance sheet. This financial strength allows Dell to grow through acquisition, to engage in price wars and to make massive investments in either marketing or research and development, if need be.

Dell has few weaknesses, as evidenced by its performance. However, it relies on a business model that is relatively easy to replicate. At this point, Dell does what it does much better than other firms. This cannot be expected to last forever, though. Firms can model their processes after Dell and perhaps even undercut Dell. What this means is that many of Dell's current competitive advantages are not necessarily sustainable.

As a rapidly growing and operationally sound company, Dell has many opportunities. The first is increasing overseas sales. Dell in 1990 sold just over 50% of its computers on the domestic market. Today, over two-thirds of computers are sold worldwide. Yet, there are many relatively unsaturated markets. Many markets in Asia, for example, are rapidly growing. Markets in Europe are sophisticated and receptive to Dell's products. As rapidly as the company has grown internationally, there remains significant growth opportunity.… READ MORE