Dell in China

Sample Case Analysis Presentation

Professor Mike Davis

January 14, 2008

Agenda

Identification of Key Strategic Issues External Analysis Internal Analysis Summary SWOT Strategic Alternatives &

Recommendations Questions & Answers

Key Strategic Issues

Key Strategic Issues

Taking advantage of an international opportunity in a high growth market

Adjusting business-level strategy in light of a rivalry

Leveraging core competencies in a foreign market

About Dell Founded in 1984 World’s largest computer vendor Revenues of $41 billion in 2004 Operates in 13 Asia Pacific markets with sales of

$4.3B in 2004 Entered China in 1995 via export Started focusing on China in 1998 Operates in in 1998 established a local

manufacturing and distribution operation In 2004, Dell PCs captured 7% share in China

External Analysis

Industry Definition

Dell competes in the PC industry, selling enterprise systems, desktop computers and notebook computers.

External Analysis: Key Environmental Factors Demographic factors:

– Chinese population is 23% of world total– Main opportunities will be in the larger

cities where incomes are higher

Source: China Country Commercial Guide (CCG)

External Analysis: Key Environmental Factors Sociocultural:

– Purchasing expectations (try before they buy)– Chinese attitudes and culture becoming more similar in

purchasing patterns and work ethic to U.S. Economic:

– Chinese economy grew 9.8% in 2005– Total retail sales increased 13%– China’s PC market estimated to grow 19% in 2004-2005– Low per capita incomes and unevenly distributed

• Average US $1,583• Urban US $5,000• Middle class (200 million people) US $8,000

Source: China Country Commercial Guide (CCG)

External Analysis: Key Environmental Factors Political/Legal (new member of WTO but…)

– China’s political system controls unions and financial institutions

– Legal and regulatory systems can be inconsistent– Business based on relationships (guanxi)– Intellectual property at risk

Technology– Just 2.5% of urban Chinese own a computer– Access and use of the internet is increasing

Global – Sales opportunity (Asia/Pacific just 10% of Dell)– China’s attractive low-cost manufacturing capabilities

Source: China Country Commercial Guide (CCG)

External Analysis: Porter’s Five Forces Threat of New Entrants – High

– Foreign and local competitors– IBM, Compaq and HP also entered in 1990s– Less government policy barriers (China joined

WTO in 2002)– Potential barriers include:

• Access to distribution channels• Scale economies (Local production plants)

Bargaining Power of Suppliers – Low– Most competitors are vertically integrated

External Analysis: Porter’s Five Forces Bargaining Power of Customers – MODERATE

– Few buyers purchase a large portion of industry output• State-owned companies, MNCs and educational institutions

– Sales account for a large portion of Dell’s sales revenue• 50% from government, education, telecoms, power and finance.

– Brand reputation and product differentiation can mitigate Substitutes – None Competitive Rivalry – Intense

– High profit potential due to industry growth • Main buyers are institutions with more resources than individuals

– Price pressure from local competitors– High fixed costs of production capacity– High strategic stakes (focus on market share)– Aggressive competitive response

• Lenovo adopting Dell’s direct sales model in China• Lenovo’s joint venture with IBM to increase it’s share• Lenovo’s brand campaign to improve recognition

Competitors Future objectives:

– Build market share rapidly

Current strategy:– Cost leadership (Lenovo, Founder, Tongfang)– Differentiation (HP, IBM & Compaq)– Focused on consumer market– Lenovo positioning itself to challenge in high-end

Competitors

Key Strengths:– Chinese competitors: market knowledge

and low cost advantage. – American competitors: technology and

brand recognition Key Weaknesses:

– Chinese competitors: brand recognition– American competitors: higher costs

Customer High-end Customers

– State-owned companies– MNCs– Government– Educational institutions– Large Corporate Accounts (1,500+ employees in Telecoms, Power

and Finance Individual Consumers Behavior:

– Consumer market is price sensitive– Prefer a trial use of PCs before purchase– Internet purchases were uncommon but internet users increasing– Best way to reach is through retailing (Kiosks)– Value product quality, especially high-end customers– Brand loyal

Internal Analysis

Key Resources Key tangible resources:

– WW market leadership & financial resources ($8B in China)– Direct sales system and customer service– Local production plant in China– Alliance with Oracle– Manufacturing (“Build-to-order) and low inventory” strategy– “Just-in-time” model (6 days vs. 40 days of supply)– Portfolio of award-winning products

Key intangible resources:– Strong brand– Reputation (“Dell experience” of high-quality products,

support and service)– Innovative in its technology, business practices and

customer service

http://www.dell.com/content/topics/global.aspx/corp/en/home?c=us&l=en&s=corp

Core Competencies Ability to simplify PCs and the supply chain

since their beginning Ability to understand customer needs and

deliver innovative technology and services Ability to use technology to simultaneously

improve customer experience and contain costs

Ability to operate a direct business model

All are valuable, rare, costly to imitate and nonsubstitutable.

Value Chain Analysis Primary activities of value:

– Operations: Manufacturing processes contain costs well

– Outbound logistics: Direct sales model– Service: High responsiveness to customer needs

Support activities of value:– Technological development: Innovative web site

and IT infrastructure – Firm infrastructure: Visionary founder and

management team

Summary SWOT

Strengths & Weaknesses Strengths:

– Reputation– Manufacturing plant (build-to-order capability, JIT)– Direct sales model (on line and phone order

capability)– Strong sales revenue in 2003 ($8 Billion)– Strategic alliance with Oracle– Product performance (Best Overseas PC

Corporation Award) Weaknesses

– No low cost advantage that will allow them to compete in the consumer segment

– Possible cost advantages not realized from their China plant

Opportunities Large population in China and economic

growth potential (Dell’s fourth largest market)– PC market expected to grow by 19%– Only 2.5% of urban Chinese own PCs

Sales potential in larger cities Reduction in tariffs on IT products makes it

less costly to export to China Expansion into Japan, Korea and Taiwan

Risks Low GDP per capita in China Weak government protection of IP Moderately high threat of entry of new

competitors Intense rivalry among competitors Lenovo-IBM joint venture Lenovo’s copying of Dell’s direct sales model Lenovo’s attempts to boost brand recognition

Strategic Alternativesand Recommendations

General Problem Statement

Dell faces a rivalry from Chinese PC firms, in particular Lenovo (Legend)

Need to overcome Lenovo’s attempts to copy Dell’s direct sales approach and build brand recognition. (At risk is Dell’s dominance of the high end market)

Will require a cost advantage to re-enter the low-cost segment. (At risk is the Dell customer experience of product quality and service levels or accepting declining profits)

Strategic Alternatives

Lower costs to be viable and establish a presence in the low-end (consumer market) before competitors

Abandon the low-end and put all resources on defending the high-end (corporate market) where Dell currently has an advantage

Challenge Lenovo in other Asian markets that are important to it while increasing product quality and services in China

Strategic Recommendation:

Expand and defend the high-end of the market

Implementation Continue Dell’s business level strategy of differentiation

– Based on product quality, build-to-own capability and direct sales method Continue to innovate and outpace the Lenovo-IBM partnership Build brand recognition in China as Lenovo’s doing worldwide Grow direct ordering via the internet (increasing Chinese web usage) Leverage penetration in LCAs (>1,500 emp.) for increased “share of wallet” Challenge Lenovo in other important Asian markets while increasing product

quality and services in China Prepare for wireless/mobility trend and strengthen notebook offering Eventually broaden reach to penetrate low-end and rural areas

– Develop the infrastructure to service, support and sell (different than urban areas)– Requires a low-cost, differentiated product line (e.g. AMD, no Windows OS)– Learn the Chinese market to overcome “foreignness” and local rivals– Explore alternative sales channels (besides direct) to reach small cities

Questions & Answers