Even before entering his teens Michael Dell strove for greatness, and by the age of 18 he had dropped out of college and created the beginnings of what years later would become the US leader in PC sales, the Dell Computer Corporation. How did Dell reach the top? Was it Michael Dell’s tenacity and great entrepreneurial skills that made the climb possible, or were there other factors involved? Can the company sustain their position? What are the key strategic issues, both internal and external, that the company must evaluate in order to achieve a sustainable competitive advantage which will lead to above-average returns and therefore produce greater shareholder wealth?
Strengths: Dell Corporation needed more than luck, bumping into walls, and other less-effective strategies to achieve its position in the market. The company experienced growth in both revenue and net income between 1985 and 2000 (Exhibit 1) and has achieved an average of 6.4% net profit margin (Exhibit 2). Dell’s primary core competency and strength was the fact that Michael Dell pioneered the system of buying computers in a “Built-To-Order†system as opposed to that of inventory based systems. This provided the company with the ability to decrease its costs considerably by virtually eliminating the holding costs (Exhibit 3) associated with inventory, and the costs of discounting older, or less popular items. Dell’s just-in-time system also allows for faster response to changes in technology and computing innovations. It is first mover advantage in this new system of production that propelled the company forward and gave them their strongest competitive advantage.
Dell has also been able to develop other strategic advantages throughout the years. For example, Dell has an incredible relationship with its vendors. The company develops very strong relationships with a few key suppliers, and requires that these suppliers be and remain at the top of their game. Dell has “virtually integrated†the suppliers of its supply chain in such an effective and efficient manner that it seemed as though these vendors were just another extension of the Dell Corporation. Parts are provided just-in-time to the point that the exact number of items needed are delivered daily, and in a few cases even hourly. Also, Dell has also taken great strides in lowering, and in some cases eliminating, many of the costs associated with service of its products. The primary tools have been the development of internet based help databases, and systems that “self-heal†in cases of software problems. Another strength: Dell was exceedingly effective at communicating with its customers, and interpreting the results of that communication. Also, Dell has moved into the server market very aggressively and effectively. Finally Dell has strong management and a superior brand name awareness and recognition. Weaknesses: Fortunately the Dell Corporation isn’t hindered by too many internal weaknesses. Michael Dell has stated that the biggest challenge that he sees is the ability to obtain qualified individuals who will facilitate the development of a stronger hold in the international market.Threats: Though Mr. Dell isn’t concerned about his company’s ever increasing competition, he should be. Competitors will continue to see the decrease in the margins they receive from retail sales and costs associated with carrying inventories. These competitors, specifically the large companies such as Compaq, HP, and Gateway will continue to see the gold at the end of Dell’s rainbow and will pursue it. While Dell is ahead of the game in the U.S. their biggest competitor, Compaq, is not far behind and still has domination internationally (Exhibit 4). Competitors will continue to develop similar “Built-To-Order†systems and some may even find the secrets to Dell’s success. Another threat is the fact that the personal computer market is becoming mature and saturated in the U.S. In general the PC market has many of the characteristics of an industry to avoid, i.e.; Large number of small competitors, and a small number of large competitors, low costs for customers to switch brands, frequent new product introductions, entry barriers low, and weak margins!Opportunities: Dell has a few opportunities that will provide the means by which to continue its ability to create value for its shareholders. The international market has great potential for exploitation, specifically in China and South America. While PC growth in the U.S. has slowed, growth internationally is expected to continue at a high growth rate (Exhibit 5). There is also opportunity for diversification into other areas where Dell’s expertise and brand name will add value to the process. The prospects in the server market should also prove to show great growth potential.
Conclusions: Within the past few years Dell has continued to experience growth, but some markets where Dell is active have become mature and saturated. The following key strategic issues must be taken into account when devising a strategy for Dell to continue to achieve above average returns: Strong Competitive Advantages in: First mover advantage, brand recognition, market penetration, strong management and company culture, customer service, virtual integration of the supply chain and just-in-time inventories. Dell has received a great positive response to its line of servers. External Trends: As stated above, the PC market is becoming mature and saturated in the U.S, but there is a great amount of potential in the international PC market.
Alternatives:
Liquidation – Quit while they are ahead and sell off their assets.
Product Repositioning – Begin selling down-market products, i.e. cheaper brand items.
Alter Business Model – Sell items in retail stores, CompUSA, Best Buy, etc.
Status Quo – Continue to do what they are already doing.
Combinations – Merge, acquire, or venture jointly with other companies.
Expand Internationally – Continue to increase international market share.
Recommendations:
Dell’s management, organization and structure seem to be strong and efficient and should be maintained. International market share needs to be increased. While Dell has experienced growth within the U.S. it hasn’t been able to match the same growth outside of the U.S. (Exhibit 6). Dell should evaluate opportunities for joint ventures, mergers, or acquisitions of firms that presently have an established presence in these international countries.
Dell should continue to become more concentrically diversified by applying it’s strengths and resources into the sale of servers and development of new items outside of the PC scope. These strategic managerial decisions and actions will help the company to sustain their established competitive advantage which will result in above-average returns, leading to greater shareholder wealth.