Matching Dell

1
Matching Dell

• Take Aways
• Jonathan Leonard

2
Methods

• Corporate Financial Comparisons Clouded by
  Differences in Business Organization, Products,
  Cost Allocation
• Product level Comparison Apples to
  Apples

3
Five Forces Analysis

• Bargaining Power of Suppliers (very high)
• Proprietary standards customer desire for
  compatibility ? Microsoft and Intel positioned to
  extract profits from industry
• Other inputs are commodities
• Bargaining Power of Customers (Low)
• Resellers and retailers have some grip on
  end-user relationships, giving them ability to
  extract price protection, but
• End users more sophisticated (and less in need of
  assistance) over time

4
Five Forces Analysis

• Intensity of Rivalry (very high)
• Wintel standards ? little distinguish among
  machines of leading companies except price ?
  vigorous price competition
• Growth of processing power outstrips growth in
  need for processing ? intense excess capacity and
  saturation ? fight for market share
• Threat of new entry (moderate)
• Capital costs of mfg facility low
• Stream of low cost entrants (white-box makers)
  and contract manufacturers
• Absolute cost advantage difficult to maintain
  since inputs are available at fixed prices
• Threat of substitutes (growing)
• PDAs, etc.
• Alternative sales methods (online)

5
How to Compete in a Competitive Industry

• Find attractive growing segment of the market
• Provide quality of service leading to WTP
  comparable or above others in the industry
• Outperform industry on costs
• Interlinked strategies

6
Value Creation Approach
Dell
Compaq
WTP
Cost
7
Dells Approach

• Attractive segment
• Educated business consumers
• Raise (or equalize) WTP
• Speed of delivery
• Reliability
• After sales service
• Lower costs
• Direct channel
• Build to order
• Speed of delivery

8
Crowns Approach

• Attractive segment
• Hard to hold
• International
• Raise (or equalize) WTP
• Sale engineers
• Co-location
• Rapid delivery (30 days inventory)
• Lower costs
• Co-location
• Owner-operator mentality
• Lean and mean SGA

9
Barriers to Imitation

• What Kept Rivals from Duplicating Dell?

10
QA with Kevin Rollins, Dell Vice Chairman
Q What is it about the direct sales model and
mass customization that has been difficult for
competitors to imitate? A Its not as simple
as having a direct sales force. Its not as
simple as just having mass customization in plant
or manufacturing methodology. Its a whole
series of things in the value chain from the way
we procure, the way we develop product, the way
we order and have inventory levels, and
manufacturer service and support. The entire
value chain has to work together to make it
efficient and effective. Q What is the
competition looking for? A So many of our
competitors are really looking at our business
and saying, Oh its an asset management
modelseven days of inventory. Thats what were
going to do, rather than looking at every one of
10 things and replicatingthose.
11
Not Matching Dell
I would have expected by now that somebody would
have copied our business model. Actually, I am
quite surprised that it hasnt happened,
particularly given that our competitors have
been trying for at least ten years. If you look
at the economics, Dells operating expense ratio
to sales is less than 10 percent, whereas most of
our competitors is over 20 percent. I think
what were coming to believe is that its just
very, very hard to make these changes and Dell is
a company thatfrom the ground up, from the
design, from the manufacturing, from the sales,
from the supportstarted with a very distinctive
and different way of doing business. Michael
Dell, remarks at MIT Sloan School of Management,
September 2002.
12
Why was it so hard to match Dell?

• Tradeoffs.
• Occupying two distinct positions at once
  (straddle) is difficult.
• Hybrids (e.g., indirect sales with channel
  assembly) inflexible and inefficient
• Complexity / fit
• Intimate connections among the pieces of Dells
  strategy make it difficult for rivals to master
  all parts simultaneously and penalize those who
  only go half-way

13
Why was it so hard to match Dell?

• Preemption
• May have prevented Gateway from getting into the
  corporate segment
• Organizational resistance to choice
• Compaq, Gateway, HP strategies had been
  successful
• Why change?
• Compaq CEO, We want to do it all, we want to do
  it now.

14
Dells Recent Performance