Dell Strategic Analysis: SWOT, Life Cycle & Competitiveness

Situational Analysis

Dell is in a strong position. Industry conditions are generally favorable, and Dell's business model is well suited to taking advantage of them. As a result, the company is on a high-growth path, earns healthy margins, and maintains a strong balance sheet.

Dell has many strengths and only a few weaknesses. There are numerous opportunities available should Dell choose to pursue them, but the company is exposed to threats it helped create by reducing 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 building its margins. The industry as a whole is slightly further along the life cycle but will remain in the growth stage for some time. With high market share and high growth, Dell's computers qualify as stars under the Boston Matrix framework. 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 continued high performance.

Since the case was written, Dell entered the consumer market in a significant way. The industry shifted, however, due to changes in consumer tastes and strong competition from overseas. This marked the beginning of Dell's market share decline in the consumer segment. The result is that while Dell remains a very large, financially healthy 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.

Dell entered the computer industry in the mid-1980s and essentially changed the way the industry did business. When Dell entered, the environment was relatively unfavorable. The major manufacturers all held significant market share. Moreover, each was a vertically integrated operation. Startup costs were high, creating 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 toward commoditized inputs, negating the need for vertical integration.

The social environment was very positive in the late 1980s and early 1990s. Personal computers were becoming mainstream in businesses, institutions, and 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 their 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 deep war chests, large customer bases, and established distribution channels. A newcomer to the market would have difficulty chipping away at the market share of these giants.

Main Problem

Today, Dell has overcome many of these challenges to put itself in a favorable competitive position. The company has been able to capture, through a combination of cost leadership and differentiation, a healthy and rapidly growing portion of the institutional market. Dell has built the economies of scale needed to succeed in the computer business, developed strong supplier networks, and established a powerful 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, increasing the threat of new entrants.

Financially, Dell is in a strong position. Revenues and profits are rapidly growing. The company has successfully executed on its plan for scalability — sales, general, and administrative expenses as a percentage of revenues have shrunk steadily as revenues have increased. Their margins are comparable to other firms in the industry; they seek to control costs while still extracting higher prices from customers.

Dell also has a healthy balance sheet, with a low debt level and steadily increasing equity. Liquidity ratios are improving as well. Despite a setback in profits in 1993, Dell is on a strong upward trajectory.

For Dell, the main challenge at this point is finding ways to continue to grow. This may seem self-evident given that the company's current strategy has led to its present success, but Dell has also transformed the industry in the process. Dell succeeded in no small part because it caught the industry off guard with an entirely new business model that was superior to the one already in operation. The industry has had a few years to observe Dell building market share and can be expected to respond. Large firms like HP and IBM may have trouble adapting their business models to match Dell — they suffer from much the same corporate inertia that affects large legacy manufacturers. 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 more effective.

SWOT Analysis

The threat of new competitors is real, but Dell must also position itself for the next phase of its growth. To this point, Dell has grown rapidly on the strength of its competitive advantages. As competitors act to reduce those advantages, Dell must find new ones. In particular, Dell must scale its operations to meet rapidly increasing sales without compromising the quality and efficiency that have driven its success. If Dell succeeds, it can continue on a growth trajectory for many more years. If it fails, the company will enter a mature phase and be overtaken in the same way it eclipsed the large, old-line computer makers.

Dell has been so successful because it has leveraged multiple strengths. The first is the firm's efficiency. A high degree of operational efficiency allows Dell to meet consumer needs more effectively, compete on price while simultaneously offering high quality, and lower costs in areas such as inventory — thereby reducing organizational risk. The company has strong efficiency competencies in manufacturing, shipping, order-taking, and 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 substantially in stature. Dell's unique business model makes it attractive both as a supplier and as a buyer. The computers themselves have a strong reputation, but so does the company overall. This reputation allows Dell to secure large institutional and corporate accounts. A key component of the brand is the customer service experience. Dell has several initiatives to manage relations with its biggest customers, giving the brand a strong connotation for customer service and a further competitive advantage.

Dell is also financially strong. The company's margins are decent, and it has grown revenues and profits rapidly over the past five years. As a result, Dell has been able to reinvest earnings back into the firm, leaving it with a strong balance sheet. This financial strength enables Dell to grow through acquisition, engage in price wars, and make significant investments in marketing or research and development if necessary.

Dell has few weaknesses, as its performance demonstrates. However, it relies on a business model that is relatively easy to replicate. At this point, Dell executes its model much better than other firms, but this cannot be expected to last forever. Competitors can model their processes after Dell and perhaps even undercut it. Many of Dell's current competitive advantages are therefore not necessarily sustainable.

As a rapidly growing and operationally sound company, Dell has many opportunities. The first is expanding overseas sales. In 1990, Dell sold just over 50% of its computers domestically; today, over two-thirds are sold internationally. Yet many markets remain relatively unsaturated. Markets in Asia, for example, are growing rapidly, and markets in Europe are sophisticated and receptive to Dell's products. Significant growth opportunity remains.

The consumer market represents another opportunity. Thus far, Dell has largely bypassed the consumer market, viewing margins in that segment as insufficient. Yet if Dell can develop an effective route to market for consumers and streamline its ordering process, it can expand its customer base substantially. Consumers are already seeking out Dell computers after purchasing their first machine elsewhere, indicating market readiness.

A third potential market is mobile devices. Personal digital assistants are becoming popular, and as chips shrink or grow more powerful, the potential functionality of these devices is likely to increase. If Dell were to enter this market, it could build share while the market remains young and competition relatively weak.

Despite its strong market position, Dell faces significant threats. The computer business is in its growth stage and, as such, is highly volatile. Disruptive changes can emerge seemingly from nowhere and render a company's computer business unviable — precisely what Dell has proposed to do to the large, established PC manufacturers. The same could happen to Dell, particularly as barriers to entry for computer manufacturing continue to decrease.

Rapid technology change also threatens Dell. The business is subject to constant innovation, and every so often a company develops a game-changing product or process. Dell has done this in recent years, but it is also at risk of having this done to it. This is partly because Dell is not vertically integrated. Its concept of virtual integration is effective, but a vertically integrated firm such as Apple can develop a proprietary product or technology that renders previous technologies obsolete — putting makers of those products on the defensive. Dell must remain on the cutting edge despite its limited manufacturing and research capabilities.