Dell Case Key Issues Matching Dell

Dell Case Key Issues

Matching Dell • Industry Dynamics – How to attain advantage – How to protect advantage 2

Industry Dynamics • 5 Forces Model – Gauges the degree of competitive rivalry in industry. – Bargaining Power of Suppliers. – Bargaining Power of Customer. – Threat of new entry. – Threat of substitutes. – Intensity of Rivalry. 3

Bargaining Power of Suppliers • Proprietary Standards from Microsoft and Intel - Extract profits • Other inputs are commodities • Thus Bargaining Power of Suppliers is Very High 4

Bargaining Power of Customers • Standardized product means its easy to switch brands • Resellers and retailers have grip on channels. • Corp. users buy direct based on price since little differentiation • Over BP of customers is high and rising. 5

Threat of new entry. • Increasing with rise of internet and direct channel. • Main barrier is capital needed for manuf. facility. • Only real barrier are economies of scale. • Threat is fairly high. 6

Threat of substitutes. • Within product category, few direct substitutes. 7

Intensity of Rivalry. • Rivalry is very high due to: • Lack of differentiation. – Reliability and Service are only diff’s. • Price is similar for all competitors – If prices are similar, this is a signal of rivalry. • Do prices go down or up? – Tend to fall. 8

Dell’s Advantages/Disadv. • Direct to order – Efficient (best cost position) – Effective (for some customers - best) • Focus! – Not distracted by other channels – Maybe not competent in other channels? • Service – By from Dell, deal w/ Dell. 9

IBM’s Advantages/Disadv. • • Direct Salesforce. Well regarded laptop. Costs are higher Few non-corporate customers 10

Compaq Adv/Disadv. • Cost position is good • Retail relationships • Poor quality • Poor reputation 11

HP Adv/Disadv. • Quality reputation • Higher cost • Resellers 12

Gateway Adv/Disadv. • Price – lower • Service • Image? 13

Example of Unit Price and Cost Analysis 1998 numbers Dell Compaq Unit Price 1996 1932 Unit COGS 1555 1325 0 135 195 309 44 124 1794 1893 202 39 12327 31169 Gross Margin 2722 9786 Margin % Rev 22. 1% 31. 4% Channel Markup 0. 0% 7. 0% SGA 1202 4978 SGA % Rev 9. 8% 16. 0% Cost of inventory 273 2, 005 Days of Inventory 10 34 2% 6% Channel Markup/Unit SGA Inv. Carry Costs Cost of unit Profit Rev Cost of Inv % of Rev Notes 1 -Gross Margin Inv / (Rev-Gross Marg)*365 14

For all firms 1998 numbers Unit Price Unit COGS Channel Markup/Unit SGA Inv. Carry Costs Cost of unit Profit Rev Gross Margin % Rev Channel Markup SGA % Rev Cost of inventory Days of Inventory Cost of Inv % of Rev Dell 1996 1555 0 195 44 1794 202 Compaq 1932 1325 135 309 124 1893 39 IBM 1959 921 0 400 125 1445 514 HP 2129 1451 149 353 284 2237 -108 Gateway 1762 1406 0 242 39 1687 75 12327 2722 22. 1% 0. 0% 1202 9. 8% 273 31169 9786 31. 4% 7. 0% 4978 16. 0% 2, 005 81667 43282 53. 0% 0. 0% 16662 20. 4% 5, 200 47061 14989 31. 9% 7. 0% 7793 16. 6% 6, 284 7648 1546 20. 2% 0. 0% 1052 13. 8% 168 10 2% 34 6% 49 6% 72 13% 10 2% Note: IBM numbers are likely inflated by Mainframe and service being included. 15

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