Upload
rohit-mehta
View
154
Download
3
Embed Size (px)
Citation preview
Erik HebertCristian MarcuMarshal Miller
Anna TsaiKai Xia
Joseph Zakzeski
26 September 2007
Dell and HP’s Value Chain
MBA290G 2007
Table of Contents
Executive Summary
Brief History of the PC Industry
Value Chain Introduction
Porter’s 5 Forces Analysis
Value Chain In Detail
Comparable Companies Analysis
Executive Summary• PC industry value chain very different from Mobile Handset industry…why?
• Wintel standard: basic PC largely commoditized with little opportunities for differentiation
• Mature: growth has slowed as new markets have been penetrated and existing markets saturated
• Oligopoly: need for economies of scale and scope drove massive consolidation leaving only the strongest handful of competitors remaining
• Margin compression: maintain/gain market share largely through price competition
• Results on the PC industry value chain?
• Completely fragmented: links separated to take advantage of absolute cost advantages and core competencies, both country and firm-specific
• Economies of scale the rule: with thin industry profit margins, scale is a requirement just to compete
• Wintel stranglehold: Microsoft and Intel able to leverage control over core IP and standards development enabling them to extract enormous economic rents
Personal Computer Industry HistoryComputers Military Research during WWII
1945 1975
Large mainframe computersIBMDEC
1981
Integrated, preassembled PC’sApple Computers MITS
Hobbyists and Educational InstitutionsIncreased popularity
IBM launches first PC
Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999
Where a calculator on the ENIAC is equipped with 18,000 vacuum tubes and weighs 30 tons, computers in the future may have only 1,000 vacuum tubes and weigh only 1 1/2 tons. ---Popular Mechanics, March 1949
Historical Growth of the Value Chain
1981
IBM mainframe and standard
Microsoft software
Intel microprocessor
Components commissioned
Large corporations-Bulk Discounts
Sales Force
Sears and ComputerlandValue-added Resellers
Individuals & small business
Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999
IBM opening up its standard is an industry turning point enabled the PC to proliferate very rapidly to a 95% market share in 10 years
The IBM Clone Wars
1982
Low-priced clones enter market-Compaq-Dell-Hewlett-Packard
Use Retailers and Resellers
1986
IBM declines to adopt 386
Compaq adopts 386 and leads clone makers to affirm existing industry standards
IBM market share falls from 37% to 16.9%
1990
Recession
Dell/CompaqPrice war
1983
IBM holds 42% of market
Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999
1998-Present
Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999
• Hardware components– Highly competitive global markets
• Microprocessors– Supplied by very few companies
• Intel dominated the market (80-90%)• Operating System
– Microsoft also dominated this market• Hardware and software in PC’s sold as integrated bundle by a few
major players
Value Chain Overview
IP
PC Hardware
Microprocessors
Software
Raw MaterialsSand, Quartz, Metals
LandSuitable for Fabs
Capital Equip.AMAT, Novellus, Lam
CapitalFrom Gov’t, Investors
Skilled LaborTechnical, Low Cost
Go To Market
CPUs
Displays
Mother-Boards
Chasis
Hard Drives
Optical Drives
DRAM/ Flash
Memory
Other Comp-onents
Manufacturing & Assembly
• Handful of highly sophisticated, mature competitors
• Combination of competitive variables determines success
Design, Branding, SC Coordination
EnterpriseCustomers
SMB
Consumer/ SOHO
Dis
trib
uti
on
Ing
ram
Mic
ro,
Tec
h D
ata
Re
tail
Bes
t B
uy,
Co
mp
US
A,
CD
W
Inputs Manufacturing & Assembly
Design, Branding, SC Coordination
Direct Sales
Enterprise Sales Force
Direct Sales
• Online (e.g. Dell Direct)
• Branded Retail (e.g. Apple Store)
– Branding– Go To Market– Procurement– Manufacturing– Outsourcing– R&D– Inventory
Management
Value Chain Feedback and Feedforward
Applying Porter’s Five Forces
• Extremely high!
• Wintel standard removes opportunities for product differentiation
• Excess capacity leads to severe price competition
• Economies of scale are key
• Operational efficiency, supply chain coordination, Q/A and service key determinants of competitive advantage
Intensity of Rivalry• Extremely high with respect to Wintel!
• Wintel dominance enables them to extract enormous rents from PC value chain
• Customers demand compatibility, enabling Wintel standard to remain entrenched
• Other suppliers of commoditized components and services have little power
Bargaining Power of Suppliers
• Moderately high
• Asian competitors, especially China, using learning curve and local market expertise to move up the value chain
• Few opportunities for product differentiation or absolute cost advantage
Threat of New Entrants
• Extremely high in enterprise market, moderately high though increasing in SMB and Consumer/SOHO markets
• Low switching costs
• Role of distribution and inventory management (e.g. Ingram, Tech Data) and retail shelf space (e.g. Best Buy, CompUSA) very important in certain segments
Bargaining Power of Buyers
• Currently low but growing
• PDAs/smartphones increasing functionality
• Proprietary/alternative platforms (e.g. Apple, thin computing)
Threat of Substitutes
Key Themes and their Roles in the PC Industry
Theme Role in the PC Industry
Outsourcing • Labor-intensive links in the value chain (e.g. assembly, packaging)• Outsource activities to locations with absolute cost advantages• Risky to outsource links that transfer IP
Economies of Scale • Critical for high-volume enterprise segment• Enables buyer/supplier power within the value chain in consolidated
procurement and volume purchasing• Complicated by customization and need for flexibility, particularly in
consumer segment
Economies of Scope • Enables product bundling and family branding• Leverages strengths in distribution and retail presence to sell more
products• Halo effect (i.e. iPods driving sales of Macs, Apple software,
accessories)
Ecosystem Development • Growing and controlling the ecosystem can help competitors extract rents (e.g. software and applications developed on the Wintel standard)
• Extremely complex and diverse value chain; no single firm can dominate every link
PC Value Chain
SemiconductorsHardware
ComponentsPC Platform
DesignPC Platform Assembly
Software
Enterprise Consulting and
Integration Services
- microprocessor- graphics processor- memory- HDD controller- power management- WLAN radio- USB controller- display driver
- HDD- optical drive- motherboard- housing- modem- peripherals
- operating system- office productivity- enterprise workflow
Go To Market Strategy
Support and Maintenance
Support
Large Enterprise Customer
Medium Enterprise Customer
Consumer and Small Business
CustomersDistribution Retail
Direct Sales
Companies in the PC Value ChainSemiconductors
Hardware Components
PC Platform Design
PC Platform Assembly
Software
Enterprise Consulting and
Integration Services
Go To Market Strategy
Support and Maintenance
Support
Large Enterprise Customer
Medium Enterprise Customer
Consumer and Small Business
CustomersDistribution Retail
Direct Sales
- Ingram Micro- CDW- Tech Data
- Best Buy- Circuit City- Costco- CompUSA
- Geek Squad (BB)- Firedog (CC)- HP/Lenovo/Acer/ Dell/...
- IBM- HP
- IBM- HP/Lenovo/Acer/ Dell/...
- Intel- AMD- IBM- Texas Instruments- Broadcom- Infineon- Cypress- Samsung- Micron- Nvidia
- Western Digital- Creative Labs- ASUS- Intel (mobo)- Linksys- Logitech- HP- Apple- Viewsonic- LG.Philips LCD- Manufacturers in Taiwan and China
- HP- Dell- IBM- Sun- Lenovo- Apple
- Dell- Manufacturers in Taiwan and China
- Microsoft- Apple- Oracle- IBM- Red Hat- Novell
Lenovo/Acer
SemiconductorsHardware
ComponentsPC Platform
DesignPC Platform Assembly
Software
Enterprise Consulting and
Integration Services
Go To Market Strategy
Support and Maintenance
Support
Large Enterprise Customer
Medium Enterprise Customer
Consumer and Small Business
CustomersDistribution Retail
Direct Sales
HP
SemiconductorsHardware
ComponentsPC Platform
DesignPC Platform Assembly
Software
Enterprise Consulting and
Integration Services
Go To Market Strategy
Support and Maintenance
Support
Large Enterprise Customer
Medium Enterprise Customer
Consumer and Small Business
CustomersDistribution Retail
Direct Sales
Dell
SemiconductorsHardware
ComponentsPC Platform
DesignPC Platform Assembly
Software
Enterprise Consulting and
Integration Services
Go To Market Strategy
Support and Maintenance
Support
Large Enterprise Customer
Small and Medium
Enterprise Customer
Consumer
Enterprise Direct Sales
SME Direct Sales
Consumer Direct Sales
Support
Apple
SemiconductorsHardware
ComponentsPC Platform
DesignPC Platform Assembly
Software
Go To Market Strategy
Support
Medium Enterprise Customer
Consumer and Small Business
CustomersDistribution Retail
Direct Sales
Value Chain Economics
• Illustrative Division of $2,000 Notebook Economics
Microsoft40%
Intel10%
Other Components25%
PC Makers10%
Retail & Distribution15%
• Microsoft is a monopolist so no opportunity to get share of pie from them
• Intel/AMD lately have had to compete more on price though Intel still very powerful
• Retailers and distributors very large and powerful in their own right
• Leaves very little in the value chain for PC makers to work with!!!
Source: Based on Merrill Lynch estimates as of May 2007
Geographic Breakdown
38%
28%
21%
13%
China
Americas
EMEA
Asia-Pac
53%
14%
21%
12%
Americas Business
Americas Consumers
EMEA
Asia-Pac-Japan
49%
21%
6%
17%
7%
Americas
Europe
Japan
Retail
Other
44%
16%
40% Americas
Asia-Pacif ic
EMEA
Dell
HP
Lenovo
Apple
YOY Growth per Geographic Region
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Dell Lenovo Apple HP
Pe
rce
nta
ge
Gro
wth
Americas Asia-Pacific EMEA Europe China Retail Other0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Dell Lenovo Apple HP
Rev
enu
es (
Bil
lio
ns)
Americas Asia-Pacific EMEA Europe China Retail Other
• Growth in Asia-Pacific region and China among the highest for all companies– Apple’s “Other” column may
be hiding growth in China
• HP is a mature company with large revenues and slow growth across all segments
• Lenovo is “new” and is showing good growth everywhere but in the Americas
($ in millions, except per share data) (1)
Market Enterprise EV/Revenue EV/EBITDA P/E PEG Rev EBITDA
Company Value Value 2007 2008 2007 2008 2007 2008 2007 2008 Growth(2) Margin(3)
Microsoft 272,640 251,580 4.6x 4.2x 11.5x 9.9x 18.5x 15.7x 1.5x 1.2x 10% 42%
Intel 151,720 143,130 3.8x 3.5x 11.0x 8.9x 22.8x 18.4x 1.3x 1.1x 8% 39%
Apple 128,950 115,180 4.6x 3.7x 23.5x 19.0x 38.0x 31.9x 1.6x 1.4x 23% 20%
US PC Manufacturers
HP 129,520 125,640 1.2x 1.1x 10.3x 9.5x 17.1x 15.1x 1.3x 1.1x 5% 12%
Dell 62,320 62,320 1.0x 1.0x 14.5x 12.5x 20.5x 17.1x 1.7x 1.4x 5% 8%
Gateway 699 743 0.2x 0.2x 11.5x 7.8x NM NM NM NM 2% 2%
Mean 0.8x 0.8x 12.1x 9.9x 18.8x 16.1x 1.5x 1.3x 4% 7%
Median 1.0x 1.0x 11.5x 9.5x 18.8x 16.1x 1.5x 1.3x 5% 8%
Notes:(1) Market information as of 09/24/07. Estimates as of 09/24/07.
(2) Projected 2007 through 2008 Revenue CAGR.
(3) 2008 projected EBITDA margin.
Sources: Capital IQ for stock prices, company filings for financials, Reuters for estimates.
Comparable Companies Analysis – Trading Metrics
• Comparable companies analysis reveals the enormous rents Microsoft and Intel are able to extract from the value chain as shown by huge profit margins (i.e. EBITDA Margin)
• Apple, through tremendous growth prospects and innovation (outside the Wintel standard) enabling it to maintain relatively high margins, is rewarded with a higher valuation
• The PC clone makers struggle with relatively thin profit margins and their valuations are much more modest (compare EV/Revenue multiples)
Comps Analysis for PC Industry
• Effects of value chain on financial ratios• Financial ratios indicate: Margins, Debt, Capital Intensity, Power
Dell HP Lenovo AppleProfitability
Revenue Growth 2.08% 5.41% 9.10% 27.87%Gross Margin 16.78% 24.53% 13.96% 28.98%EBITDA Margin 12.30% 9.72% 1.33% 13.86%Net Income Margin 4.63% 6.76% 1.10% 10.30%
Liquidity RatiosQuick Ratio 1.11 1.35 0.87 2.24Debt/Value Ratio 0.01 0.02 0.07 0.00
Management Return on Assets (ROA) 0.11 0.08 0.03 0.12
PowerAccounts Payable Days 75.59 63.85 57.49 90.21Accounts Receivable Days 26.14 53.01 16.05 23.66
InventoryInventory Turnover Days 4.42 40.89 10.40 7.18
EquityEnterprise Value/Revenue 1.02 1.26 0.39 6.35Enterprise Value/EBITDA 8.31 12.98 29.01 45.76Price/Earnings 24.55 20.91 39.05 64.83Price/Earnings to Growth 11.81 3.86 4.29 2.33E arnings per S hare 1.14 2.40 0.36 2.29
Highlights
• Apple higher margins
• International lower margins
• In general very capital intensive industry
• Dell high ROA and low inventory turnover days
• Apple high A/P days, low A/R days