Dell: From a Low-Cost PC Maker to an Innovative Company

MGMT 451, Section 4

Group 2

Jonathan Buckley

Chanakarn Issadisai

Kyle McMahon

James Norris

Christine Short

Christina Tzinares

Caitlin Waldron

Word Count: (1,008)

Key Problems

During 2000 to 2004, Dell was dominated in the PC market. In the following year, it was

listed in top 10 most admired companies and earned 33 percent of the U.S. market share.

However, after the successful growth, Dell faced a downturn; their revenue dropped 51 percent

in the second quarter of FY 2006-2007 and its stock price was down 25 percent. The first key

problem that Dell is facing is the fact that they failed to meet their profit expectation in 2006 to

2007. Dell tried to increase their market share by cutting the cost. They failed to maintain the

projected growth due to the more concern on managing costs than managing services and

quality. After sale service, Dell overlooked customers, raising the amount of unsatisfied

customers and scoring a lower ranking in customer satisfaction rating survey. Another main

problem that Dell faces is that they did not have the core competency to provide an innovative

product design or to create a strong brand image. Dell’s method of low-cost and low-style was

outdated in this competitive PC market. Therefore, Dell’s direct business model, which had

worked for the past 10 years, will not work for this decade since the market has changed to more

of a focus on quality and style. Dell also tried to cut prices of their products in an attempt to

increase sales. While they still maintained a profit, they were unable to increase sales enough to

make up for the loss in profit due to the price cuts in their products. The last key problem facing

Dell are the challenges in the corporate market. Dell stuck with Intel’s processors, while others

competitors were using AMD, whose chips were made of better quality and cost less. Dell was

losing to the new technology; it failed to earn a market share in fastest-growing PC market in the

Asia-Pacific region.

Industry Analysis

Dell was started in a college dorm room with Michael Dell selling formatted hard disks

for personal computers at a fraction of the price that IBM was selling the same products. The

company grew rapidly and was soon one of the top companies in the PC market. In 2006, Dell

was on the list of top ten most admired companies in the U.S. and help 33% of the U.S. market

share. Dell did not follow the typical trend of vertically integrating hardware and software

developers. Dell differentiates itself by customization, fast delivery, and lower prices. This is

why they have a focused differentiation business level strategy. Dell’s direct distribution channel

includes suppliers, Dell, and then straight to the final customer. It leaves out distributors and

retailers, resellers, and integrators which are included in the PC Industry indirect distribution

channel. Their corporate level strategy is unrelated diversification. They are not competing

between other businesses because their distribution channel is direct. They also have low

transferring core competencies.

The threat of new entrants into the PC market is moderate. There is not much difference

between the products offered by competitors. Brand names are a possible barrier to entry if a

new competitor decides to enter the market they will have to compete against established and

well known brands. But with the decrease in profitability, it shows that there is a threat of new

entrants. Rivalry is high. There is high concentration in the market with decreasing profitability

and low differentiation. Dell is able to still gain market share from competitors, which shows that

their business strategies have been successful. The threat of substitutes for Dell computers is

high. Consumers have the ability to switch to Gateway or HP easily. Switching to an Apple

computer is less of a threat as a substitute due to the difference in software and systems. The

bargaining power of the buyer is high. The customers are highly price sensitive. They also expect

reliability and customer service and if they feel they aren’t getting that from Dell, they will not

hesitate to switch. The bargaining power of suppliers is also high due to the amount of suppliers

in the market. Two inputs are also monopolized. Microsoft has become a standard for PC’s and

Intel is also a standard for most PC’s. Overall, Dell is competing in an unattractive market.

Recommendations

We believe one strategy for Dell would be to focus on innovation. To create new product

development Dell needs to increase their spending on research and development. Dell spent less

than 1% of their revenue on R&D in comparison to HP and IBM, who spent 6% of their revenue.

Through their increase of the R&D budget, they positioned themselves to be a possible first

mover in new markets. This would enhance Dell’s brand and their core competencies. By having

a stronger brand name they would create barriers to entry because newer companies would have

to compete with their strong reputation.

Another recommendation we have would be to divest in services in which Dell is not a

top performer. They provide a plethora of services which include: servers, storage, printing and

imaging systems, workstations, notebook computers, desktop computers, networking products,

electronics and accessory products and managed services. Dell should evaluate each of these

services and divest in the bottom tier of products that are not performing well. This will enable

Dell to face challenges in the corporate market. Currently, Dell is only using Intel and limiting

their resources.

Our final recommendation would be to refocus on the differentiation strategy and make it

clearer. They started the company with the goal of low cost, fast delivery, and customer

satisfaction. Throughout their expansion, customer service ratings dropped. We feel that

customer service is a vital part of their differentiation strategy and they should develop that

service further. To regain their damaged reputation in the customer service area, Dell should

ensure all employees are properly trained to handle customers and their questions and problems.

By providing excellent customer service, Dell can become a top competitor and advance ahead

of IBM and HP.