Dell Is in a Strong

Dell is in a strong situation. The industry conditions are generally favorable and Dell's business model is well suited to taking advantage of those conditions. As a result, the company is on a high growth path, earns healthy margins, and has a great balance sheet.

Dell has many strengths and only a few weaknesses. There are numerous opportunities available if Dell chooses to pursue them, but the company is exposed to threats that it helped create by removing the barriers to entry in the industry. Dell remains, however, a strong competitor. It meets the needs of consumers well, a function of its close relationships with its customers.

Dell is at the growth stage of its life cycle. It is experiencing rapid revenue growth and is building its margins. The industry as a whole is slightly further along the life cycle, but will remain in the growth cycle for some time. With high market share and high growth, Dell's computers are stars. If Dell can maintain its market share, it will have cash cows on its hands. It needs to develop future stars, however, in order to ensure a continued high level of performance.

Since the case Dell entered the consumer market in a big way. The industry turned, however, due to shifts in consumer tastes and strong competition from overseas. This marked the beginning of Dell's market share decline in the consumer business. The result is that while Dell remains a very large, financially health company with a cash cow corporate business, it is struggling in its consumer line. Worse, it has very few growth prospects because it failed to take a leadership position in emerging technologies.

Situational Analysis

Dell came into the computer industry in the mid 1980s and essentially changed the way the industry did business. When Dell entered the industry, the environment was relatively unfavorable. The major manufacturers all had significant market share. Worse, each of the major computer manufacturers was a vertically integrated operation. Startup costs were high, providing substantial barriers to entry. The consumer market was relatively difficult to penetrate because consumers wanted lower price points and higher performance, both of which could be delivered but only with economies of scale.

The technological environment was relatively favorable, however. While the major PC makers were vertically integrated, many of the components that went into computers were becoming standardized. Performance levels were improving, but the pace of technological innovation was beginning to slow. This allowed for a shift towards commoditized inputs, negating the need to vertically integrate.

The social environment was very positive in the late 1980s and early 1990s. Personal computers were becoming mainstream at businesses, institutions and in the home market. The number of applications was increasing. Moreover, companies such as Intel and Microsoft were emerging as the dominant providers of their respective goods, and those products were beginning to drive demand in the industry even higher.

The competitive environment was, however, somewhat difficult. The firms with which Dell was competing such as HP and IBM were very large, multinational companies. They had war chests, large customer bases and distribution channels. A newcomer to the market would have difficulty chipping away at the market share of these giants.

Today, Dell has overcome many of these challenges to put itself in a favorable competitive situation. The company has been able to capture through a combination of both cost leadership and differentiation a healthy, rapidly growing portion of the institutional market. Dell has built the economies of scale needed to succeed in the computer business. They have strong supplier networks and have built a strong brand.

Dell's position, however, is not unassailable. Michael Dell admitted that people buy Dell computers primarily to access Microsoft and Intel products. While this has provided Dell with significant growth, it also represents a major competitive threat. Dell has commoditized personal computing to such an extent that the barriers to entry have become much lower. As a result, there is greater threat of new entrants into the business.

Financially, Dell has a strong situation. Their revenues and profits are rapidly growing. They have successfully executed on their plan for scalability, given that sales, general and administrative expenses as a percentage of revenues has shrunk steadily as revenues have increased. Their margins are comparable with other firms in industry -- they seek to control costs but have been able to extract higher prices from their customers.

Dell has a healthy balance sheet as well. Dell has a low debt level and steadily increasing equity. They are improving their liquidity ratios as well. Despite a blip in their profits in 1993, Dell is on a strong upward trajectory in their business.

Main Problem

For Dell, the main problem at this point is that they need to find ways to continue to grow. This seems self-evident in that their current strategy has led them to the success that they enjoy, but they have also changed the industry. Dell has succeeded in no small part because they caught the industry off guard with an entirely new business model that was superior to the one in operation at the time. They industry has had a few years to watch Dell build market share and can be expected to respond soon. The big firms like HP and IBM may have troubled adapting their business model to match Dell. They suffer from much the same corporate inertia that Big Auto suffers from and is as likely to beat Dell as Chrysler is to beat Toyota. What Dell has done, however, is open the door to new competitors that can emulate the Dell business model, or even adapt it to be even more effective.

The threat of new competitors is strong, but Dell must also position itself for the next phase of its growth. To this point, Dell has been able to grow rapidly on the strength of its competitive advantages. As competitors act to remove or reduce those advantages, Dell must find new ones. In particular, Dell must be able to scale its operations to meet the rapidly increasing sales without compromising the quality and efficiency that has allowed it to reach its current point. If Dell does this successfully, it can continue on a growth trajectory for many more years; if Dell fails, they will enter a mature phase and be overtaken in the same way that they have eclipsed the large old-line computer makers.

SWOT

Dell has been so successful because it has leveraged multiple strengths. The first such strength is the firm's efficiency. The high degree of efficiency in Dell's operation allows it to meet consumer needs more effectively. It allows Dell to compete on price while simultaneously offering high quality. Efficiency allows Dell to lower costs in other areas -- such as inventory costs. This lowers the risk to the organization. The company has strong efficiency competencies in manufacturing, in shipping, in order taking and in procurement, each of which contributes to high overall organizational efficiency.

The second strength is the Dell brand. In a very short time, the Dell brand has grown in statute rapidly. Dell's unique business model makes it attractive as both a supplier and a buyer. The computers themselves have a high reputation, but the company in general does as well. Dell has been able to build this reputation, which allows it to get into large institutional and corporate accounts. Part of the brand is the customer service experience. Dell has several initiatives to manager relations with its biggest customers. As a result of this, the company's brand has a strong connotation for strong customer service, giving it a further competitive advantage.

Lastly, Dell is strong financially. The company's margins are decent, but they have been able to increase revenues and profits rapidly over the past five years. As a result, Dell has been able to plow earnings back into the firm. This in turn has left Dell with a strong balance sheet. This financial strength allows Dell to grow through acquisition, to engage in price wars and to make massive investments in either marketing or research and development, if need be.

Dell has few weaknesses, as evidenced by its performance. However, it relies on a business model that is relatively easy to replicate. At this point, Dell does what it does much better than other firms. This cannot be expected to last forever, though. Firms can model their processes after Dell and perhaps even undercut Dell. What this means is that many of Dell's current competitive advantages are not necessarily sustainable.

As a rapidly growing and operationally sound company, Dell has many opportunities. The first is increasing overseas sales. Dell in 1990 sold just over 50% of its computers on the domestic market. Today, over two-thirds of computers are sold worldwide. Yet, there are many relatively unsaturated markets. Many markets in Asia, for example, are rapidly growing. Markets in Europe are sophisticated and receptive to Dell's products. As rapidly as the company has grown internationally, there remains significant growth opportunity.

The consumer market represents another opportunity. Thus far, Dell has largely ignored the consumer market since the company views the margins in this market to be insufficient. Yet, if Dell can develop an effective route to market for consumers and/or streamlines its ordering process, Dell can expand its customer base substantially. It is already finding that consumers are coming to it after buying their first computer elsewhere, so the market is clearly ready for Dell computers.

The third potential market is in mobile devices. Personal digital assistants are becoming popular at this point. They have fairly limited computing ability but as chips shrink or become more powerful, the potential functionality of these devices is likely to increase. If Dell wishes to enter this market, it could build market share while the market remains relatively young and the majority of competitors are fairly weak.

As strong as Dell's market position is, they still have significant threats. The computer business is in its growth stage. As such, it is highly volatile. Changes can come seemingly from nowhere and rule a company's computer business untenable. This is essentially what Dell proposes to do to the big, established PC manufacturers. Somebody could, however, do that to Dell as well, should the company stray from the cutting edge. As the barriers to entry for computer manufacturing decrease, this threat increases.

Rapid technology change also threatens Dell. The business is subject to constant innovation. While many of these innovations go nowhere, every once in a while a company develops a game-changing product or process. Dell has done this in the past few years. However, they are at a high level of risk for having this done to them. This is in part because Dell is not vertically integrated. Its concept of virtual integration is strong, but a vertically integrated firm such as Apple can develop a proprietary product or technology that can render all previous technologies obsolete, putting makers of those products on the defensive. Dell must remain on the cutting edge, despite its lack of manufacturing and research capabilities, in order to guard against this threat.

Competitiveness Profile

The first step in developing a competitive profile is to review the business. Dell designs computers, but it does not make them. It merely assembles parts in three facilities and then ships them to customers. Dell makes their computers to order. The main customer groups - 90% - are institutions and businesses. Dell forges strong relationships with these customers. Dell often has service agents on site and can link its ordering-taking system to their purchasing departments for faster processing of orders. Dell is equally linked to its suppliers. The smaller component of Dell's market is the consumer market. Dell sells direct to this market as well, having abandoned retail channels as being unviable for its business model, in particular with respect to the buildup of inventory.

The second step in competitiveness profiling is to identify the market requirements for performance within these groups. The majority of Dell's business is selling computers to large business and institutional customers. The company tracks the needs and tendencies of each of these customers independently. Dell does not treat them all as one or two segments, but hundreds of small segments. The characteristics of each therefore will differ. Where it is possible to generalize, Dell knows that stability is important to businesses, as for them the costs associated with computer downtime are higher than the costs associated with slightly inferior performance. The consumer market, by contrast, is more oriented to performance measures. For each, strong service is important as is the customizability of Dell computers and their relatively low price compared to the major manufacturers.

Thus, price can be seen as a 4 for importance, since most customers are ordering high volumes, where small per computer savings will be noticed. Quality, as measured by product stability, is a 5 for most of Dell's customers, save perhaps the home user where it would be a 3 or a 4. Fast delivery is only somewhat important for Dell. The company strives to have low lead times, but is inherently slower than walking out of a store with a computer. Thus, fast delivery is likely a 3. Delivery reliability is probably a 4, as businesses do have deadlines by which they need their machines. Small lots and customization are important for consumers. This is evidenced by the popularity of the asset tags, which were once a custom feature. Thus, customization is probably a 4. Design is less important for the bulk of Dell's customers, perhaps a 2. Frequent products changes in the computer industry are important. However, they take a backseat to stability so would also be a four, except for home users when frequent product changes would be a 5.

The next step is to measure the performance of the firm vs. The performance expected by the market. Dell is a 4 on price; a 5 on quality. Fast delivery Dell may be a 3, but scores a 5 for delivery reliability by using couriers. Dell is a 5 for customization, maybe a 2 for design. Frequent product changes, Dell would be a 3 or 4, since they generally screen changes and new products in the industry in order to determine whether or not those changes are worth incorporating. For the most part, these performance scores measure up well with market expectations. This is evident in Dell's financial performance, but it derives from the close relationships that Dell has with its key customers and its willingness to listen to their concerns and act on those concerns.

Overall, then, Dell is very competitive. It is able to meet the expectations of its customers. Dell may not be able to meet at present the customer's expectations for fast delivery. The customers understand Dell's business model and are therefore forgiving. The fast delivery aspect is a disadvantage, though, for Dell in the home computing market. Online shopping is in its infancy, and consumers are wary of spending a couple of thousand dollars on a computer that they cannot test out first. Dell's route to market reveals this disadvantage in getting to the consumer market. Moreover, Dell needs to address the unique needs of this market, but thankfully through its customizability it is able to do that.

Product Life Cycle Analysis

Dell's computers are in the growth cycle of the market. There is reason to believe that Dell is lagging the industry in the life cycle. Dell's revenues are on a growth trajectory, and it has improving margins. The computer industry in general is seeing increased sales, but margins are beginning to tighten. Per computer revenue is declining for most computer makers, but for Dell this figure is still increasing.

The ramification of this is that Dell can observe the computer industry in general to gauge its next move through the life cycle. The industry is not likely at maturity yet, or any time soon. This holds true for Dell as well, as the company has really only been in the major growth phase of the life cycle for a handful of years and the market for personal computers is far from saturated.

Boston Matrix Analysis

The Boston matrix can help the firm to assess its position relative to other companies in the same industry. The two axes on the matrix are market share and market growth. Dell's PCs have fairly strong market growth, as evidenced by total revenue improvements over the past several years. The market itself is also growing fairly rapidly. This means that Dell's computers are stars. The company can expect that as long as its products continue to build market share, Dell will improve profitability rapidly and grow quickly. Dell needs to be wary of a slowdown in either market growth or market share growth. If the company's market share growth slows, this could indicate that their products have become problem children. In that scenario, the market is still growing but the product is losing ground. If the market growth stops, but Dell still has a high market share, the products will become cash cows. Dell should work to position itself to either remain a star or transition to cash cow status should the computer market begin to mature.

Additional Information

When the case was written, Dell had revenues of $5.2 billion. Fourteen years later, Dell's sales sit at $61 billion. The company has seen a slowdown in sales growth over the past year or two, but the five-year growth figures are strong. Dell remains a firm with healthy financials. Its balance sheet is almost as strong as it was at the time of the case. The liquidity ratios are less strong, but the debt level is lower (MSN Moneycentral, 2009).

Dell has wavered on its commitment to the consumer market. The company made a significant entry into the consumer market in the late 1990s and by 2005 was the world's largest seller of PCs (Kathawala & Aich, 2006). By that point, however, the consumer industry's model had shifted. Lenovo had famously purchased IBM's PC division in 2004. This signaled the exit of IBM from the business, although the market leaders were still Dell and HP (Spooner & Kanellos, 2004). The move, however, signaled a new era dominated by low cost production and increased standardization, two factors that by this point Dell did not have a competitive advantage in (Hamm, 2005). In 2006, Dell reiterated its commitment to the industry, even though it was beginning to suffer from the impacts of technology and route to market shift in the business (Cantrell, 2006). Dell was forced to make shifts including the development of a physical retail presence, which has now been expanded to some 30,000 outlets (Dell, 2009). Dell's commitment to consumer PCs, however, remains less than total, and the firm seems unsure of what direction to approach the issue (Poletti, 2009). The market has reached maturity, particularly in North America. As a result, margins are decreasing along with growth. This has driven most production offshore and commoditized even more of the business.