MGMT 704

Dell’s Path to a Sustainable Competitive Advantage

Rudolph Ardon Bogantes, Aaron Blackburn, Matt Kincaid, John Nguyen, & Jia Zhang

March 12th, 2012

Overview

The beginnings of Dell Computer Company took place in 1984 in a dorm room

at the University of Texas at Austin. It was in this room where then pre-med freshman

Michael Dell began his business called PCs Unlimited, later to become the multi-billion

dollar Dell Computer Company1.

With its direct-to-consumer model and an emphasis on the large business

consumer, Dell experienced steady growth within the first two years of its inception.2

After only six years, Dell became part of the Fortune 5003. Despite its sudden growth

and success, Dell faced difficulties in 1994 when two of its major products were plagued

with quality issues, leading to decreased sales and a major cash deficit. The sudden

cash deficit forced executives to rethink the way they did business4. This setback

sparked a change at Dell that would reinvent they way companies worldwide manage

logistics.

A new business model was developed with goals of reducing inventory by 50%,

improving lead time by 50%, decreasing assembly costs by 30%, and reducing obsolete

inventory by 75%5. The model revolved around a “sell what you have” mindset and

emphasized control of inventory and consumer lead times. Dell was forcing itself from

1 Dell. Company Timeline. 8th March 2012. http://content.dell.com/us/en/copr/our-story-company-timeline.aspx.2 Thompson, Arthur and A.J. Strickland. Dell Computer Corporation: Company Background. 1999. http://www.mhhe.com/business/management/updates/thompson12e/case/dell3.html.3 Dell. Company Timeline. 8th March 2012. http://content.dell.com/us/en/copr/our-story-company-timeline.aspx.4 Byrnes, Jonathon. Dell Manages Profitability, Not Inventory. 3rd June 2003. http://hbswk.hbs.edu/archive/3497.html.5 Ibid.

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the typical reactionary firm, ordering inventory, then trying to sell it, to a proactive and

innovative company.

The process began with an information database to assist in the targeting of very

specific accounts and customers. Dell excelled in targeting customers with predictable

purchasing patterns and lower service costs. This specific account selection was tied

closely to Dell’s demand management and forecasting6.

Demand management at Dell was run with the “sell what you have” mindset in

the forefront. Sales commission plans were set to equal the production plan, insuring

that very little to no inventory was to be left on hand. When forecasts were askew, the

firm adjusted accordingly. When components inventories rose higher than forecast, the

sales department was incentivized to push those products. When components were

depleting faster than expected, customers were steered to other products, or secondary

suppliers were contacted to match the current demand7.

Dell’s genesis of just-in-time manufacturing became a capability that garnered it

much success. In just four years, Dell revenues went from $2 billion to $16 billion at a

50% annual growth rate. Over a span of eight years, Dell’s stock price increased by

17,000%8.

In a time of need, Dell was able to innovate and create a distinctive capability

that revolutionized the way firms view logistics. Despite this distinctive capability, Dell

has been unable to continue its growth and hold its footing as an industry leader.

6 Kraemer, Kenneth L., Jason Dedrick and Sandra Yamashiro. "Refining and Extending the Business Model with Information Technology: Dell Computer Corporation." 2000. http://www.indiana.edu/~tisj/readers/full-text/16-1%20kraemer.pdf.7 Byrnes, Jonathon. Dell Manages Profitability, Not Inventory. 3rd June 2003. http://hbswk.hbs.edu/archive/3497.html.8 Ibid.

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Problems

Over-Reliance on its Operationally Efficient Supply Chain

Dell was a booming and very successful company throughout the 1980s and

1990s. It did so in large part based on its superior logistics system that reduced prices

to a point no other company was able to match9. During Dell’s most successful period

during the late 1990s, it was only holding one week’s worth of inventory whereas the

competitors were holding between two- and three-months’ worth10. "So the focus shifted

from the 'outside in' [approach of] looking at its position in the market to thinking, 'How

can we maximize earnings out of our existing resources and capabilities'” at the

expense of, rather than in addition to, thinking about what its customers need”11. This

line of thinking has turned out to be damaging for Dell: “Being eclipsed by Apple and the

new iPad goes to the heart of Dell's struggle. Dell has never invented a notable

product. What it has done is deliver a basic product that someone else has invented but

get it to consumers much more efficiently”12.

Dell’s over-reliance on logistical superiority is cited by many. One source states:

“The core of Dell's problem is in the way they think about their business. Back when

Michael was selling cheap PCs out of his dorm room, he came up with strategy to make

computers as cheap as possible by squeezing all of the inefficiencies out of the supply

chain. Dell's efficient supply chain and the way they squeezed those costs out is what

9 Wharton Business School. (2010). Dell's Diversification Strategy: 'A Day Late and a Dollar Short?'. Available: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2584. Last accessed 1 March 2012.10 Ibid.11 Ibid.12 Ibid.

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people began referring to as Dell's unique business model”13. The same source goes

on to say why the once innovative supply chain is not a source of sustainable

competitive advantage. “That's [the efficient supply chain] not a model, any more than

Henry Ford's creative application of the assembly line approach to the manufacture of

the motor car was a model. The efficient supply chain was a competitive advantage

that was non-proprietary, replicatable, and therefore was doomed to be copied”14. In

effect, the supply chain is a product of operational efficiency. Dell fine-tuned it before

others did. It was only a matter of time before its competitors caught up. According to

the resource-based view, a firm’s key resources or capabilities must meet four criteria:

they must be valuable, rare, inimitable, and nonsubstitutable. There is a fifth factor that

is often added, immobile. Dell’s supply chain doesn’t fare well against the “VRINI”

requirements for a sustainable competitive advantage. It is valuable. This is a given

considering how well Dell was able to perform with it in place. It was rare. At the time

of its initiation, Dell was its pioneer in the computer industry; however, it is not rare

anymore. Others have followed suit. Accordingly, it is not inimitable. It was

nonproprietary and able to be replicated by any company that found it to be worthwhile.

It also isn’t nonsubstitutable. Other methods can be used to efficiently get computer

technology to their end users. Lastly, it is not immobile. It is a system that can be

understood and applied worldwide. Consequently, Dell’s efficient supply chain gave it

merely a temporary competitive advantage that has been largely eroded today.

Robust Competition13 Seeking Alpha. (2007). Dell: The Problems Began In China . Available: http://seekingalpha.com/article/25861-dell-the-problems-began-in-china. Last accessed 1 March 2012.14 Ibid.

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Dell faces competition worldwide, but its target market and market share in the

United States is being stripped away by Hewlett-Packard, Dell’s biggest rival. “The

reason why is simple: HP is a U.S.-based firm with the goal of targeting the same

companies as Dell. So far, HP has been far more successful”15. In addition to HP, Dell

is facing an extremely difficult competitor in Apple Inc. which is unquestionably

dominating the consumer electronics industry.

Over-diversification and the Need to Focus

Dell has entered several information technology markets. In many of these

markets, however, Dell is struggling to compete. Dell needs to consider downscoping,

or reducing its business to its core competencies – what it does best. Eliminating the

product categories and segments in which Dell is struggling to compete will allow it to

focus its efforts on computers. “After all, computers were how Dell became the

company that it is today. And it's arguably the product that it understands best. By

focusing its efforts there, Dell can go back to its roots, deliver a best-in-class product,

and then worry about other markets”16.

Michael Porter proposed that there are four different successful generic

strategies that a company can utilize to achieve competitive advantage. They are broad

differentiation, narrow differentiation, broad cost leadership, and narrow cost leadership.

He believed that a firm needed to choose one of these four strategies and not pursue

multiple, emphasizing that a firm would be “stuck in the middle” if it attempted to mix

15 Reisinger, Don. (2010). Dell`s Strategy Challenge: 10 Things We Don`t Get About Dell. Available: http://www.channelinsider.com/c/a/Dell/Dells-Strategy-Challenge-10-Things-We-Dont-Get-About-Dell-17673/. Last accessed 1 March 2012.16 Ibid.

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strategies such that it would not achieve competitive advantage. While this “stuck in the

middle” theory of Porter’s has been proven to not apply in all cases, it does appear to

have some merit with Dell. One article notes: “Dell needs to decide if it wants to

compete on price or on value. In the tech industry, there are two types of companies:

those who are capable of beating the competition with cheaper prices and those that

deliver a superior product for a premium price. Dell is neither. Currently, its computers

and accessories are not premium products offered at a premium price. And although it

still makes fine products, it's not beating the competition on price. Dell is decidedly

middle-of-the-road. That's not a good place to be for Dell”17.

Ineffective and Unethical Leadership

The Securities and Exchange Commission (SEC) settled with Michael Dell on

July 22, 2010 on charges of repeatedly "failing to disclose material information to

investors and using fraudulent accounting to make it appear falsely that the company

was consistently meeting Wall Street earnings targets and reducing its operating

expenses"18. Dell agreed to pay $104 million in total, $100 million of which would come

from the company and $4 million from Michael Dell personally; however, six other Dell

employees, including the former chief executive officer and chief financial officer, were

either part of the settlement or have been sued by the SEC19.

The SEC made the following charges against Dell: for 20 straight quarters Dell

would have missed consensus quarterly earnings estimates if it were not for payments

17 Ibid.18 Hess, Edward. (2010). Stark Lessons From The Dell Fraud Case. Available: http://www.forbes.com/2010/10/13/michael-dell-fraud-leadership-governance-sec.html. Last accessed 1 March 2012.19 Ibid.

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from Intel, which Dell had specifically asked for; between the fiscal years of 2003 and

2007, Intel paid Dell over $4 billion in total; Dell’s chairman was asking for and receiving

the money from Intel so it could not only make its quarterly earnings estimates but also

keep its stock price high; and “Dell consistently misrepresented how it has generated

consistent growth numbers resulting in illusory stock values that made possible Michael

Dell's astronomical stock option gains”20.

The above charges levied by the SEC were not inconsequential. They made an

impact beyond just the $104 million dollars Dell needed to pay as a result being that

they were indicative of a profound level of dishonesty and deceit. The board of directors

didn’t handle it well either. The board did not take back Michael Dell’s stock option

profits attributable to the fraudulent accounting, and the board did not elect an

independent chairman for management oversight purposes21. A month after the date of

the settlement, one quarter of Dell’s shareholders refused to reelect Michael Dell as

chairman of the board22. If a significant amount of shareholders don’t want to reelect

Michael Dell as chairman of the board, then it is pretty clear there is some sort of

underlying problem. Shareholders are innately selfish – they want what is best for

them. What’s best for them is what’s best for the company: if the stock price goes up,

they are happy; if the stock price goes up, it is good for Dell. Even if Michael Dell

actually has the skills to be an effective leader, it is difficult for him succeed, and

ultimately for his company to succeed, if the shareholders don’t perceive his

effectiveness.

20 Ibid.21 Ibid.22 Wharton Business School. (2010). Dell's Diversification Strategy: 'A Day Late and a Dollar Short?'. Available: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2584. Last accessed 1 March 2012.

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Analysis

Five Forces and the Personal Computer Industry

The truth of the matter is that, as it has been covered up to this point, Dell does

not operate in a vacuum: having a clear understanding of the industry dynamics in

which the firm develops its activities is crucial to the construction of an effective strategy

for its future23. With this task in mind, this section attempts to determine how much

bargaining power each of the so-called Five Forces have on the Dell Corporation. It is

important to indicate that the relevant market for this introspection is that for which Dell’s

products provide a service solution; in other words, there is no intent at limiting the

discussion to computers alone, but to expand it to goods that are perceived as relevant

to the comprehension of the strategic dynamic present at the moment.

Entry

When it comes to determining the threat that new participants represent to the

market, two factors immediately come to the forefront. The first one is that in reality,

setting up a small firm that deals with building computers in a customized way is not that

hard; in fact, Dell was founded in a similar context, and that hasn’t changed much. Any

individual can go out there and build a PC given the adequate technical knowledge that

is so easy to come by at this time. However, this type of small operation is not where

Dell is situated. Size and scale are the two keywords that present the second factor of

relevance.

23 Hitt, Michael A. and R. Duane: Hoskisson, Robert E. Ireland. Strategic Management: Competitiveness and Globalization - Concepts & Cases. Mason, OH: South-Western Cengage Learning, 2008.

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For an entrant to become a threat to the incumbent firms (not only Dell), it would

require a game plan that allows it to achieve a large size and production capability very

quickly. Also, firsthand knowledge of how to set up a logistics channel that allows

lowering manufacturing costs is not a trivial matter. It seems rather unlikely that a new

entrant would be able to threaten the establishment in this market in any sizable way

anytime soon. It would require a groundbreaking innovation to make it feasible. For

these reasons, we believe that Dell has a big bargaining advantage in relation to

potential entrants to the market; the barriers of entry to overcome are just too high.

Suppliers

As a general rule, the bigger a company is, the better bargaining position it holds

when it comes to the suppliers for its inputs24. Dell is not a special case: it is a large

firm that, with the exception of a few components of its end products, has many viable

suppliers attempting to score a big deal by partnering with it. Dell should enjoy a

considerable bargaining power with its suppliers.

Customers

The firms in this industry have to face the fact that customers have many choices

to buy from when it comes to this type of good. Whether it be due to price or to a

24 Hill, Charles & Jones Gareth. 2009. Strategic Management Theory: An Integrated Approach. South

Western College

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particular niche specification, customers hold the upper hand. Customers, therefore,

possess a large bargaining power against Dell and its competitors, putting these firms in

a weak position to dictate terms.

Rivalry

As it has been hinted at thus far, this market already has a large penetration,

making it vital for the different players to attempt to steal market share from their

competitors in order to grow. Dell has not been able to competitively play this game for

some time now, consistently losing market share. It is neither competing well on price

nor is it competing well on quality. It seems appropriate to conclude that due to the

extremely competitive focus of the industry and Dell’s lack of progress at gaining ground

in relation to its rivals, the firm’s bargaining power when it comes to its competitors is

low.

Substitutes

This is where the clear definition of the target market pays off for the analysis.

For many years, computers, whether this meant laptops or desktop computers,

constituted the only realistic alternative for businesses and individuals to considerably

increase their productivity. However, with the inception of the smartphone, some

functions that were up to that point exclusive to the realm of computers were now

accessible through these devices. Nonetheless the dramatic challenge to the status

quo takes place with the successful introduction of Apple’s iPad in April of 2010. The

rapid adoption of the device, especially in the business environment, has thrown the

industry in which Dell finds itself into chaos. Computer sales have plunged considerably

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in deference to rapid tablet sales, which could be considered as a major schism and a

coming of a critical shift in the industry of Schumpeterian creative destruction

magnitude.25 The reality is that it is too soon to know for sure if tablets will rise to

eventual supremacy, however there is certainty regarding the standing of the battle for

the tablet crown. Apple managed to exercise its first mover advantage with astonishing

results, essentially shell shocking its would-be competitors. Its mobile operating

system, exclusive to their iPads, command the market share of that industry segment as

it can be observed by the following figure:

26

Android based tablets have been ineffective so far in denting Apple’s lead in any

significant way; to make matters worse, there are a multitude of offerings within the

25 Diamond, Arthur. Schumpeter’s Creative Destruction: A Review of the Evidence. University of Nebraska Omaha. http://cba.unomaha.edu/faculty/adiamond/web/diamondpdfs/schumpevidence06.pdf.26 IDC. http://www.idc.com/

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Android environment, out of which Dell has three offerings, none of which have done

very well. To summarize, when it comes to substitutes, it seems that Dell’s industry at

large is going through a major shift that represents a significant loss of bargaining power

to potential substitutes, in which the firm’s main line of business is located. This is a

significant negative force for Dell’s aspirations.

Business-Level Strategies Within the Personal Computer Industry

Dell became the market leader in the 1990’s pursuing a “low-cost strategy while

simultaneously satisfying customer needs”27. This was a broad-based, integrated

business level strategy. Other competitors had different approaches. Most, such as

HP28 and Acer29, followed a broad, cost leadership strategy. Apple pursued a

differentiation strategy30. Throughout the 1980’s and early 1990’s, Apple appealed

27 Hitt, Michael A. and R. Duane: Hoskisson, Robert E. Ireland. Strategic Management: Competitiveness and Globalization - Concepts & Cases. Mason, OH: South-Western Cengage Learning, 2008.28 Seth, Rorik. http://rorikseth.blogspot.com/2010/04/chapter-4-business-level-strategy.html. 6 April 2010.29 Hitt, Michael A., Duane R. Hoskisson and Robert E. Ireland. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 4: Business-Level Strategy. San Jose, CA: San Jose State University College of Business, 2011. PowerPoint presentation.30 Iliev, Valentin, Andreas Lindinger and Guenther Poettler. Apple Computer Inc. Strategic Audit. Class Report. Dublin, Ireland: Dublin Institue of Technology, 2004. PDF.

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mostly to techies and artists, but starting in the late 1990’s it started moving towards a

broader market by advertising more to college students. Sony had a more broad cost

leadership strategy, but has been “now targeting business customers”31. This was

perhaps a reaction to the presence of so many competitors in the broad, cost-leadership

sphere and the need to find a niche that they could dominate. So while Apple moves

from a focused to a broad strategy, Sony has taken an opposite approach. What has

emerged over time is a business level strategy matrix where competitors have been

moving relative to each other in an attempt to establish their markets. Dell’s

movements have been part of its decline in performance.

Eventually Dell focused more on “cost reduction through its supply chain”32. The

objective was to increase operational effectiveness in an area they had already

dominated. However, HP increased market share because it had “learned how to

manage its supply chain to lower costs…But it also provided a broader portfolio of

goods and services that better satisfied customer needs”33. Because HP had already

improved the operational effectiveness in its supply-chain, it was able to concentrate on

increasing differentiation that appealed to customers. Dell’s shift of focus prevented it

from taking steps to protect the differentiation side of its strategy. Firms earn above

average returns when they create value for their customers. Dell’s supply-chain cost

reduction lead to lower prices, but this was less visible when HP already had exceeded

in its low cost strategy. What was more visible to customers was HP’s product

diversification, which would explain why HP gained market-share over Dell.

31 Billups, Scott, et al. Computer Industry Analysis. Sacramento: California State University - Sacramento, 2006. PowerPoint presentation.32 Hitt, Michael A. and R. Duane: Hoskisson, Robert E. Ireland. Strategic Management: Competitiveness and Globalization - Concepts & Cases. Mason, OH: South-Western Cengage Learning, 2008.33 Ibid.

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One method Dell has used to earn back differentiation is through acquisition.

This is especially true with their purchase of Alienware. Alienware was founded in 1996

and specializes in customizable personal computers for gaming enthusiasts, a very

focused differentiation strategy34. Dell, who had been trying to compete in the same

market, made a horizontal acquisition of Alienware in 2006. This has allowed them to

cater to this market without having to devote the resources and sacrifice the low-cost

strategy. Another benefit is that Dell has obtained a unit with an entrepreneurial

mindset, keeping the original management team. Alienware’s autonomy allows it to

respond to its customers’ needs more quickly than Dell could alone. The success of the

acquisition is due in part to both organizations’ desire to customize products for the

customer. It has allowed Dell to enter a focused market quickly. However, if Dell

makes more acquisitions, then it might become a substitute for organic growth and

distract management from solving issues in its core business.

Strengths, Weaknesses, Opportunities, and Threats for Dell

Strengths

34 Smith, M.S. Bright Hub. 11 May 2011. http://www.brighthub.com/computing/hardware/articles/68645.aspx.

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One of the greatest strengths of Dell is its operating methods. Dell operates on

the customer focused direct business model35. It believes in maintaining direct contact

with its customers and the model enables the company to offer a direct relationship with

customers. Their strategic method provides for internet and telephone purchasing.

Since the market is becoming more educated, and more than ever individuals are

wanting a product that can target their specific needs, this model allows consumers to

fully customize their laptops. Dell made it possible for each buyer to order directly from

the factory36. So a customer selects a generic PC model and then adds items and

upgrades until the PC is kitted out to the customer’s own specification.

In addition to this customization, this model has a remarkably low operating cost

relative to revenue because it cuts out the retailer and supplies directly to the

customers, and it also provides a fast delivery37. Customers place their orders either by

telephone or through the website and the customized product reaches their doorstep

within seven days. Components are made by suppliers and laptops are assembled

using relatively cheap labor. The assembled products are directly shipped from the

warehouses of the company to the customers. By contacting customer service,

customers can even track their delivery.

Moreover, the company can get direct feedback from customers by this operating

model38. The feedback from customers helps the company in developing and refining

Dell’s products and marketing programs for specific customer groups. Dell also uses

information technology to capture data on its loyal consumers.

35 GlobalData. "Dell Inc. - Financial and Strategic Analysis Review." 2011. PDF.36 Ibid.37 Ibid.38 Ibid.

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Dell also has a strong product portfolio and a wide range of IT hardware

products, making it a leader in this market39. Dell is not only one of the world’s biggest

laptop producers, but also produces mini net books, desktops, keyboards, mouse(s),

and monitors. It is a distributor of toners, GPS products, mouse(s), digital cameras,

gaming consoles, mobile phones, PDAs, televisions, etc. It is also a third-party vendor

of operating systems, besides selling software solutions including anti-virus suite and

Internet security ware. In addition, Dell provides services to its customers including

configuration, installation, and maintenance services.

One of Dell’s strengths in targeting the business executive category is that over

half of all sales revenue comes from large businesses and government organizations40.

Thus, Dell has good relationships with several large firms. In turn, these companies

pass the relationship on through their employees by providing Dell products to them.

Therefore, Dell gains an extensive base of users.

Weaknesses

One of the Dell’s biggest weaknesses is attracting the college student segment of

the market41. Its marketing strategy focusing on the corporate and government

customers made it less able to build relationships with educational institutions. Since

many students purchase their computers through their schools, Dell cannot take

advantage of this market. Another weakness is that Dell is a computer maker, not a

manufacturer. It just simply buys components from different manufactures42. Though

Dell can focus on marketing and logistics by this business operation, the company is 39 Ibid.40 Ibid.41 Ibid.42 Ibid.

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reliant upon a few large suppliers and is unable to switch suppliers. Although the direct

model provides Dell many advantages, Dell’s greatest weakness is that buyers cannot

physically touch or see the product they want to purchase43. Dell lacks solid retailer

relationship due to their operating model. Customers cannot go to retailers because

Dell does not use distribution channels. They cannot personally examine before

purchasing. Additionally, buyers may not be willing to wait the few days it takes for their

computers to be delivered.

Opportunities

Dell focuses on acquisitions that complement its existing business44. In April

2011, Dell signed an agreement to acquire Dell Financial Services Canada Ltd., a CIT

Vendor Finance and Dell partnership45. Under the agreement the company acquires

CIT Vendor Finance which finances these related assets, sales and servicing functions

in Europe; these assets will ultimately enable global expansion of Dell’s direct finance

model. Last year, Dell also acquired Compellent Technologies, Inc. and SecureWorks

Inc. The acquisition will allow Dell to easily enter a new market and give the company

industry–leading capabilities.

The company focuses on minimizing its cost and is working on selling low–cost,

low–price computers to PC retailers in the United States46. The computers are

unbranded and should not be recognized as being Dell when the consumer makes a

43 Ibid.44 Ibid.45 Ibid.

46 Ibid.

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purchase. Rebranding for retailers, although a departure for Dell, gives the company

new market segments to attack with the associated marketing costs.

Computers are becoming a necessity now. They are being purchased and used

more than ever before. The market for laptops is growing much faster than that of

desktop computers47. This is a good opportunity for Dell’s laptop business to grow.

Customers are getting more and more educated. The number of second time buyers is

growing. Consumers who have purchased computers in the past know what they want.

Dell’s model can provide consumers with fully personalized computers compared to

other computer makers.

Threats

Competition is intense in a shrinking IT hardware market. Dell competes with

companies such as IBM, HP and Apple, which enjoy significant market position and

financial strengths. With so many market players, companies compete in terms of

pricing48. This could have an impact on its margin. What is worse, the price difference

between brands is getting smaller all the time. Other companies are finding ways to

combat the low costs of Dell, and they pass savings to their customers. As a result, Dell

may lose its low cost strength.

Another serious threat is that the growth rate of computer industry is slowing49.

The global economic slowdown could impact the business operations of the company.

Though the global economy began to recover in 2010, fears of a sovereign debt crisis

have surfaced in some European countries which could lead to increasing deficit and

47 Ibid.48 Ibid.49 Ibid.

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debt. Even now, Greece and Italy have serious financial problems. If the market slows,

competition for market share would intensify. If Dell cannot differentiate its brand from

competitors, it will be very hard for it maintain any kind of significant market share.

Path to a Sustainable Competitive Advantage

For Dell to be able to have a sustainable competitive advantage, they will have to

address the problems that have lead to their market decline. Personal computers are a

fast-cycle market. As such, sustainable competitive advantages are quickly eroded, if

they can be found at all. Dell’s well-tuned supply chain was copied by competitors such

as Acer50 and HP51. This has hurt the cost leadership portion of their business level

strategy. Industry-wide mass customization52 has duplicated Dell’s pioneering efforts.

Therefore the firm’s differentiation has suffered. As such, the company’s integrated

business-level strategy has left them without a strong association with either strategy in

the customers’ minds. The firm will have to decide which business-level strategy works

best for them.

The best choice for a business-level strategy is one that leverages the firm’s

strengths into a competitive advantage. Since Dell already has a large variety of

products53, it would make sense that they would lean more on a differentiation strategy.

Further proof of differentiation’s power over cost leadership within the computer industry

50 Hitt, Michael A., Duane R. Hoskisson and Robert E. Ireland. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 4: Business-Level Strategy. San Jose, CA: San Jose State University College of Business, 2011. PowerPoint presentation.51 The College of St. Scholastica. manalac.com/dell_rethink.pdf. n.d. PDF.52 Billups, Scott, et al. Computer Industry Analysis. Sacramento: California State University - Sacramento, 2006. PowerPoint presentation.

53 GlobalData. "Dell Inc. - Financial and Strategic Analysis Review." 2011. PDF.

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is Alienware’s performance. It has remained successful even after the acquisition by

continuing to focus on personal computers designed for the gamer niche market54. The

switch in business-level strategy would also address the problem of focusing too much

on supply chain efficiency. Although efficiencies lower costs, customers may not

acknowledge a resulting price reduction. Consumers looking for the most economic

option have a crowded field of competitors to choose from. However, those customers

who are willing to pay a premium for a specialized computer notice differentiation more.

The issue then is to find the differentiation that will earn the firm above average returns.

Having the right kind of differentiation is just as important as finding the right

business-level strategy. This is especially true in Dell’s case, where one of their

problems has been over-diversification, and yet one of their strengths is a well-rounded

product portfolio. The solution then is to downscope the firm’s activities to those that

are most profitable. Dell has already seen how this might work. Its subsidiary,

Alienware, is successful because it designs computers for gamers, by gamers. There

are other niches that could be exploited as well, such as music producers, graphic

artists, and researchers. Dell could use it extensive industry relationships to bring

together the right hardware and software components market segments want. These

business units would need to be led by experts in those fields, not only because they

better know the needs and desires for those niches, but also to address Dell’s

leadership issues. This could be further entrenched by giving leadership within the

subsidiaries ample managerial discretion to make decisions in the best interest of those

units. Another benefit of diversification through separate units is that if one of the

54 Smith, M.S. Bright Hub. 11 May 2011. http://www.brighthub.com/computing/hardware/articles/68645.aspx.

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subsidiaries fails, then it could be closed without draining resources from the more

profitable sub-organizations. Only by finding those market segments that will provide

above average returns will Dell be able to be an industry leader once again.

The subsidiaries will need protection though, or they will only be copied in the

fast-cycle personal computer industry. They will be able to build some customer loyalty,

but even that is erodible. Customers will need more of a reason to choose one of Dell’s

specialized holdings over an competitor. Therefore Dell should offer upgrade insurance

that is specific to Dell products to ensure further consumption. This allows for additional

revenue for protection of the customer’s investment and incentive for them to continue

to return in the future. The operation would include the customer returning their

machine. Dell could then refurbish the computers to sell as “pre-owned” to

economically strapped market segments. That way they could possibly receive multiple

streams of revenue for the same machine.

Conclusion

The personal computer industry has seen explosive growth followed by decline

thanks to newer generations of technology. As technology continues to improve,

computing will become more specialized. While there will always be a demand for

hardware and software to manifest technology, their forms and functions will continually

change. Although being a personal computer company was very modern at the end of

the twentieth century, at the beginning of the twenty-first it is increasingly becoming

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antiquated. The only hope for Dell in the long-run is to transition from a personal

computer maker to a technological solutions provider.

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