Dell in China

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Dell in China

• Sample Case Analysis Presentation
• Professor Josh Philpot
• April 10, 2008

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Agenda

• Identification of Key Strategic Issues
• External Analysis
• Internal Analysis
• Summary SWOT
• Strategic Alternatives Recommendations
• Questions Answers

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Key Strategic Issues
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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

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About Dell

• Founded in 1984
• Worlds 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
• In 1998 established a local manufacturing and
  distribution operation
• In 2004, Dell PCs captured 7 share in China

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External Analysis
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Industry Definition

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

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General Environment
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External Analysis Key Environmental 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)
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External Analysis Key Environmental Factors

• Socio
• 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
• Chinas 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)
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External Analysis Key Environmental Factors

• (new member of WTO but)
• Chinas political system controls unions and
  financial institutions
• Legal and regulatory systems can be inconsistent
• Business based on relationships (guanxi)
• Intellectual property at risk
• Tech
• Just 2.5 of urban Chinese own a computer
• Access and use of the internet is increasing
• Global
• Sales opportunity (Asia/Pacific currently just
  10 of Dell)
• Chinas attractive low-cost manufacturing
  capabilities

Source China Country Commercial Guide (CCG)
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The Five Forces of Competition Model
HIGH
INTENSE
LOW
MODERATE
NONE
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External Analysis Porters 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)
• Substitutes NONE
• Bargaining Power of Suppliers LOW
• Dell and most competitors are vertically
  integrated

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External Analysis Porters Five Forces

• Bargaining Power of Buyers MODERATE
• Few buyers purchase a large portion of industry
  output
• State-owned companies, MNCs and educational
  institutions
• Sales account for a large portion of Dells sales
  revenue
• 50 from government, education, telecoms, power
  and finance.
• Brand reputation and product differentiation can
  mitigate
• 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 Dells direct sales model in
  China
• Lenovos joint venture with IBM to increase its
  share
• Lenovos brand campaign to improve recognition

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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

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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

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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

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Internal Analysis
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Key Financial Ratios
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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/cor
p/en/home?cuslenscorp
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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.
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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

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Summary SWOT
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SWOT Analysis
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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

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Opportunities

• Large population in China and economic growth
  potential (Dells 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

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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
• Lenovos copying of Dells direct sales model
• Lenovos attempts to boost brand recognition

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Strategic Alternatives and Recommendations
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General Problem Statement

• Dell faces a rivalry from Chinese PC firms, in
  particular Lenovos (Legend) attempts to copy
  Dells direct sales approach and build brand
  recognition. (At risk is Dells 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)

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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

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Strategic Recommendation

• Expand and defend the high-end of the market
• Implementation
• Continue Dells 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 Lenovos
  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

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Questions Answers
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Dell to build second factory in China New
facility will double Dell's current production
capacity in China By Sumner Lemon, IDG News
Service March 25, 2005 Dell announced on
Thursday plans to build a second manufacturing
plant in southeastern China. The new plant
will be constructed in Xiamen, Fujian province,
where Dell already has one factory, according to
the company. The new manufacturing plant will
produce PCs for Dell customers in northern Asia,
including China and Japan, the company said,
adding that the new facility will double the
company's current production capacity in China.
The company did not disclose what that capacity
is. China is the world's second-largest PC
market, after the U.S., and continues to grow at
a healthy clip. According to Gartner, 14.9
million PCs were sold in China last year and
shipments grew by 14.9 percent. Dell has the
largest market share of any foreign PC maker in
China, but rivals IBM and Hewlett-Packard closed
the gap last year by growing faster than their
rival from Round Rock, Texas, according to market
analysts Gartner and IDC. Despite the best
efforts of foreign PC makers, the Chinese PC
market continues to be dominated by local
players, with Lenovo Group holding the largest
share of the market.
http//www.infoworld.com/archives/emailPrint.jsp?R
printThisA/article/05/03/25/HNdellchina_1.html
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From April 3 08 Analyst Meeting
2008 27 revenue groth in BRIC