Week 3:

Tutorial Tasks

Before we answer discussion questions; we discuss some key concepts in the case:
Strategy and value chain analysis.

Value Chain analysis: is a method for breaking down the firm into a chain (from basic raw materials to end
–use customers) into specific activities in order to understand the behavior of costs and sources of
differentiation. Value chain disaggregates the firm into its distinct strategic activities.
Value Chain analysis is a useful tool in developing competitive advantage based on low cost, or
differentiation, or preferably cost-cum differentiation.

The methodology for constructing and using a value chain involves the following steps:
1. Identify external and internal value chains and assign costs, revenues to activities and processes.
2. Diagnose the cost drivers regulating each activity and process.
3. Develop sustainable competitive advantage, either through
- reconfiguring the value chain, example, Dell Computers business model: direct order – customised
product which cut out distributors or
- controlling cost drivers (and/or increasing value) better than Competitors

Case 7-5: Dell Computer Corporation

Discussion questions

1. What is Dell’s strategy?

Dell’s strategy was based on:

• Market leadership as a result of a persistent focus on delivering the best possible customer
experience. Direct selling, from manufacturing to consumer, was a key component of its strategy.

• Its reputation as one of the world’s most preferred computer systems companies and a premier
provider of products and services that customers worldwide needed to build their information-
technology and internet infrastructure.

What is basis on which Dell builds its competitive advantage?

Dell redesigning PC industry value chain as a tool in developing competitive advantage based on:

• Cost advantage: This was done in three areas. Component purchase costs, inventory costs and
selling and administrative costs.
• Customer knowledge advantage: Dell understood consumer needs and efficiently met those
needs by selling computer systems directly to customers. The direct business model eliminated
retailers, who added unnecessary time and cost, and shipped directly from its factories to end
customers. It took orders for hardware and software over the phone or via the internet. Dell designed
an integrated supply chain linking Dell’s suppliers very closely to its assembly factories and order-
intake system. Dell outsourced all components but performed assembly.
• Technology advantage: dell custom-built its machines after receiving an order instead of making
machines for inventory in anticipation of orders. Dell introduced the latest relevant technology much
more quickly than companies with slow moving inventories; turning Dell to become the number-one
retailer of PC, outselling IBM and Hewlett-Packard.
• IBM and Hewlett-Packard
• Dell moved into IT portfolio; it moved into servers, and storage, mobility products, and also
challenged Printer leader HP.
2. How do Dell’s control system help execute the firm’s strategy?

• Performance Measures: Dell’s scorecard included both financial measures (such as ROIC,
component purchasing costs, selling and administration costs) and non-financial measures
(component inventory stock outs, finished goods inventory, A/R day and A/P days).
• Localised decision making system: Dell used its structure as a flat organization as a competitive
advantage and localized its decision-making. If an issue did not require a higher up’s attention, then
decision would be made without involving him. This would not have been possible in companies
bogged down by layers of bureaucracy.
• Business unit Performance: in 1993, Dell developed a set of metrics to judge business-unit
performance.
• Expedited the assembly process: Dell recognized early the need for speed, or velocity, quickening
the pace at pace at every step of business.