Analysis of Dell's Strategy

Dell’s advantage is primarily due to cost drivers rather than differentiation drivers. Dell’s cost advantage in 1996 was estimated at 13% of revenues and was derived primarily through lower component prices, lower carrying costs and reduced distribution costs all linked to shorter cycle times. Per Exhibit 11, Dell’s S&A of 10% was appreciably lower than rivals Compaq (16%), IBM (20%), HP (17%) and Gateway (14%) due to their direct sales model. Approximately 70% of the firm’s revenues were attributable to large corporate purchases in which Dell could maintain a negative cash conversion cycle.

In response to lower growth, Dell should isolate the key cost drivers as follows:

 Current Cost Drivers:

o Inputs – low due to short lead time

 COGS lower due to short lead time for components which fall in price by 27% annually

 Co-location of component suppliers minimizes inventory & cycle times and associated carrying costs

o Processes – efficient due to tight integration

 Direct sales minimize channel mark-ups & advertising

 Tightly integrated order entry, production and shipping minimized inventory buffers and cycle times

 Tight control of cash via inventory metrics

o Scale & Scope – adequate but growth is slowing

 Scale – 7.4 mm units worldwide, ~8% WW share, #2 WW behind Compaq (13.4mm) and about even with IBM (7.4)

• 70% of revenues from large corporate clients

• 63% of revenues from US (40% WW market)

 Scope – narrow with primarily corporate equipment

• 2 Desktop lines – highly stable/high tech

• 2 Notebooks line – highly stable/high tech

• Servers & Workstations

• Software & Install

The cost driver examination shows that Inputs, Process and Scale/Scope all contribute in some way meaningful to Dell’s advantage. A graphical analysis of Dell’s value chain highlights the key support and primary activity interactions.

Having isolated the key elements to Dell’s success, we can further leverage these by repositioning in the following ways:

Inputs:

 Continue working closely with component suppliers with a focus on integrating the supply chain even more efficiently. Deploy supply chain specialists close to component suppliers to tightly integrate logistics, design integration and provide on-going incentives such as long term share commitments at market prices.

Processes:

 Target segments carefully to maintain short lead times.

• Leverage website to cultivate the consumer direct market.

• Align with specific retailers to carefully target consumer segments. For example, Sam’s Club’s has a high percentage of small businesses customers. Consider targeting the small business segment with a limited number of SKUs which best meet the needs of this segment.