Dell Inc. is one of the world’s largest information technology firms, serving individual consumers as well as small businesses and large enterprises. The company manufactures and sells PCs and related equipment, including network servers, printers, displays, projectors, and storage systems. Founded from Michael Dell’s dorm at the University of Texas in 1984 with a mere $1,000, Dell’s revenues have grown to approximately $61 billion in 2009. This stemmed primarily from a direct-sales model and a well-managed supply chain, which provided Dell with significant operating margin advantages over competitors. Despite its historic success and legacy, in recent years Dell experienced difficulties in an evolving marketplace, which necessitated a change in the company’s strategy and culture.
Despite its diversification, Dell’s overwhelming competitive presence resides in the personal computing industry, comprised of desktops, laptops, servers, and handheld devices. In 2007-2008, worldwide PC retail revenues topped $330 billion. Although PC unit sales are projected to continue growing, reaching 384 million by 2014 from 281 million in 2009, revenues are expected to remain stagnant due to considerable price declines. This dynamic will shape the competitive landscape of the industry as well as Dell’s own position.[i]
Buyers. Although Dell recently launched products in retail outlets, direct-sales (bypassing the retailer) remains Dell’s main distribution channel. End consumers – home users as well as private and public businesses – have several options in the marketplace with very low switching costs and are thus quite powerful. In addition, the commonality of technological advances essentially commoditized the computers industry. Accordingly, customers rank cost as the most important factor when purchasing a PC, followed by customer service and reliability. (See Appendix A: Deciding Factors) This price sensitivity hinders differentiation and fosters little brand loyalty.[ii] Historically, Dell cultivated brand loyalty through a price leadership strategy, building an efficient value chain with just-in-time and similar operational policies and circumventing retail stores. This allowed Dell to consistently offer lower prices than competitors. Still, Dell recently lost consumer loyalty as competitors and new entrants have bridged cost advantages and offered an ever-increasing number of substitutes.
Suppliers. While there are several dozens of computer vendors worldwide, many integral components of a computer are manufactured by a few key players. For instance, Intel and Advanced Micro Ddevices dominate the microprocessor industry. Moreover, fear of retaliation limits a buyer’s (Dell) ability to pit microprocessor producers against one another: a 2003 Dell presentation noted that if Dell were to purchase chips from A.M.D., Intel’s retaliation could affect all of Dell’s product lines.[iii] Similarly, in the operating systems industry, Microsoft enjoys near monopolistic bargaining power with PC vendors. Even in industries with several suppliers, computer manufacturers (buyers) do not necessarily exhibit stronger power. Thus, in 2005 several of the world’s largest memory makers were found guilty by the DOJ of price-fixing, which significantly impacted six of the largest PC manufacturers, including Dell.[iv] While such collusion was illegal, it nevertheless remains a part of industry practices. Accompanied by strong brand names, this renders the bargaining power of suppliers high, forcing computer manufacturers – rather than component suppliers – to absorb downward pressures in PC prices. (See Appendix B: Personal Computer Industry Value Chain)
Potential Entrants. With the commoditization of components, lack of brand loyalty and the resulting reduced ability to achieve economies of scale, barriers to entry are fairly low and the threat of entry is high. As a result, many small PC...