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DELL

A BIRDS EYE
VIEW:
Where is the PC
industry today? How
did it evolve? Was
young Dell a game
changer or a mere
spectator as the game
changed?
Dell entered in the PC
industry in 1984 with a
humble 1000$ but
generated a revenue of
56.94 billion $ in 2013.
Within 8 years of its
inception, the company
was ranked in the
Fortune 500

Dell Analysed by:


Group Number : H4

Abhishek Bardia
(61510045)
Manuj Kumar
(61510346)
Priyank Garg
(61510570)
Shruti Jangid
(61510529)
Dr. Sana Shaikh
(61510570)

Introduction
Dell announced on February 5, 2013 that it had stuck a $24.4 billion leveraged buyout deal to take the
company private, delisting its shares from NASDAQ and Hong Kong stock exchange. The buyout,
largest technology buyout ever, surpassing the 2006 buyout of Freescale Semiconductor for $17.5
billion, is the brainchild of Michael Dell, companys founder, who will buy the shares at $13.65 apiece,
aided by Silver Lake partners and $2 billion loan from Microsoft.
Why the Buyout
Dell was losing confidence of its investors rapidly. By Dec12 stock prices, which had traded above
$40 in 2005, had sunk below $10.

Source
Yahoo Financial

Investors werent responding positively to the diversification strategy, with all the news focused on
declining PC sales and market share, rather than on the fact that it had built the non-PC business from
$8 billion in 2004 to $20 billion in ten years with a CAGR of 9.1% as compared to 1.2% for PC
business1.
PC Business
CAGR =
1.2%

Non-PC
Business
CAGR =
9.1%
Source Dell Annual Reports

This buyout will give Michael Dell freedom to restructure its PC business and beef up the offerings in
enterprise solutions and cloud computing without worrying about the impact on quarterly results and
stock prices.

Can Michael Dell transform Dell into an enterprise powerhouse in the next five years?
The buyout has handed Michael Dell an absolute power to implement his vision, however a lot of
lingering questions and doubts remain whether the company, worlds third-largest personal computer
maker, can successfully push into enterprise solutions and services.
Theres a long way to go to successfully re-align the business. After spate of acquisitions (Exhibit 1),
worth more than $13 billion, in non-PC segment, consuming more than 20 firms; the firm still gets
around 50% of revenue from PCs.

Source Dell Annual Reports

2013 is now officially in the books as the worst in the PC markets history, as industry-wide sales
declined by more than 35 million units year over year2
Challenges facing Dell3
1. Dells market share in services and software stands at less than 1%, but these are the only
categories making money and growing.
2. Enterprise solutions, software and services space witnessing increasing competition from
traditional rivals like Hewlett-Packard and IBM and IT newcomers such as Amazon and
Rackspace, which are wooing businesses with cloud-based services.
3. Rocky growth in PC business - Net income dropped 32% from a year earlier due to Dell
strategy to gain market share even at expense of profit (Price wars).
In Ovums view4, Dell has always been late in changing the course of its strategy whether it is switching from a direct to a blended sales model; considering segments adjacent to end-user
computing such as smartphones; or leveraging its many acquisitions.

Hence company will need to prove that it can achieve its desired transformation and demonstrate
that it can outsmart its publicly owned competitors by going private.
The Personal Computer Industry
Perhaps the Personal Computer (PC) is the one of the biggest innovation of the last 25 years that has
had the huge impact on the society and businesses. Since its birth, Personal Computer (PC) has
transformed the way people work and communicate.

PC Worldwide sales
500,000
400,000
300,000

Growth by increasing penetration

Price Wars

Growth by standardization in components

Growth through consolidation

Growth by innovation

Growth through regional expansion

200,000
100,000
0

Source - 2011 Computer Industry Almanac & eTForecasts

The Growth stage (1981 1995)


Growth by Increasing penetration (US PC/1000 people) Growth through Standardization (Price/Per unit)
1000
800
600
400
200
0
1990 1995 2000 2005 2008 2011

4000
3000
2000
1000
0
1975 1980 1985 1990 1995 2000 2005 2010

US Price

Global Price

Source - http://www.c-i-a.com/worldwideuseexec.htm

Innovation driven growth (Main Characteristic - rapid technological transition)

Evolution of Transistor Count for Intel Microprocessors

Storage Space - Cost pe r gigabyte

100,000,000,000

1000000
10000
100
1
0.01

1,000,000,000
10,000,000
100,000
1,000
1970 1980 1990 2000 2010

Chart - Plot of transistor counts against dates of introduction.

Chart Logarithmic scale

The curve shows counts doubling every two years. Source - Wikipedia

Source - http://ns1758.ca/winch/winchest.html

Innovations in Supply Chain


Standards consolidation in the market Largely controlled by Microsoft and Intel
Pros of Standard Consolidation

Cons of Standard Consolidation

Economies of scale can be achieved

Little

retail

Alliances

with

stores

channel

leading

for

Product

Differentiation

- With standard product lines


Using

Scope

Standardization

retailers

and Carrefour
New including
avenues toWal-Mart
gain Competitive
Advantage

battles

can

constrain innovation - as PC makers


are

reluctant

to

incorporate

Product innovation at the system level was incremental and emphasized on developing slightly
different products for narrowly defined market niches, such as PC gamers who demand high
performance or business travellers who desire ultra-light notebooks, rather than more distinctively
innovative products. Instead, most product innovation occurs upstream in components and software,
which are then incorporated by PC makers.
Limited scope in Product Differentiation

Build-to-order
production
Manufacturi
ng

Vendor managed
Inventory
Supply

Third party
logistics

Direct Sales
channel

24 Hrs. Customer
Service

Sales

Service

Innovations acrossChain
value chain to gain competitive advantage

The Mature stage (1995 present)


Price Wars
The maturing phase of the just decade-old personal computer industry came earlier than expected. As a
characteristic of mature phase, starting in 1999, a PC price war started to brew. Various companies
began to cut prices on their existing product lines and at the same time rolled out lower-priced PC
models. The raging price war, which has been continuing until now, bolstered strong players and
reduced vulnerable manufacturers to ashes.
The downward spiral of personal computer prices can be attributed to the following reasons:

Technology has become more and more powerful. As the cost of components drops, so do personal
computer prices.

The mail-order market posed a threat to the leading PC makers. These companies, notably Gateway,
do not perform and actual design and innovation, but successfully grabbed a significant chunk (as
much as 16%) of the PC market.

PC industry entered in mature phase signifying slowness in demand for the personal computers.
Drop in shipments have forced companies to cut price to boost up sales.
Figure: Technology Price-Performance Wedge

Source - Computer Industry Almanac & eTForecasts July 2007 Worldwide PC Market

Trends in Demand

PC demand has been shifting steadily for over a decade towards smaller, more integrated and more
communications-oriented products (Exhibit 2).

Form factor

Emergence of Internet - Sales of PCs have been


sticky as consumers have not replaced the
existing PCs with these new devices instead have
purchased multiple such devices, with each
device providing somewhat uniquely purposed
network
access. in Apple and IBM Strategies
Differences

Continued overseas expansion

Continued price/performance gains in key


components

as

well

as

the

shift

of

production to lower cost locations have


driven prices lower, expanding overall
demand for PCs. As a result sales have

Major Differentiation Strategies of Major players


grown in the emerging markets (Asia
Source of Competitive Advantage

Dells Competitive Position

Based on Cost Leadership


Based on Distinctiveness
Target Market Mass Market
Industry wide (Broad)

Low-Cost Leadership
Differentiation
Target Market
Cost
Specific Niche or Segment (Narrow)
Leadership

Focused
Differentiation

Source of Competitive Advantage


Low-Cost Leadership
1. Direct sales channel results in better
margins, which are passed on to
consumer
2. Build to Order manufacturing
resulting in higher profits

Source of Competitive Advantage


Based on Cost Leadership
Based on Distinctiveness

HPs Competitive Position

Industry wide (Broad)

Low-Cost Leadership
Differentiation
Target Market
Cost
Specific Niche or Segment (Narrow)
Leadership

Focused

Differentiation

Source of Competitive Advantage

Target Market Mass Market


Source of Competitive Advantage

Apples
Competitive
Position
Differentiation
with High
Quality

products More focus towards


Target Market Niche Market
Based on Cost Leadership
Based on Distinctiveness
corporate customers
Industry wide (Broad)

Low-Cost Leadership
Differentiation
Target Market
Specific Niche or Segment (Narrow)

Source of Competitive Advantage


Focused Differentiation
1. towards user experience
2. Proprietary Operating system

Cost Leadership

Focused
Differentiation

Source of Competitive Advantage

IBMs Competitive Position

Based on Cost Leadership


Based on Distinctiveness
Target Market Mass Market
Industry wide (Broad)

Low-Cost Leadership
Differentiation
Target Market
Cost
Focused
Specific Niche or Segment (Narrow)
Leadership
Differentiation

Source of Competitive Advantage


Mixed Strategy

Buyer
s

Industry

They were in large numbers as


the associated costs were low

- Many players in the industry like IBM,


Compaq, HP, Apple etc

Some of them assembled parts &


sold unbranded PCs for 50%
lesser price and thus became
threats to the PC industry brands

- Indirect effects played through complementary


products (computer hardware/ software

Software makers like Microsoft


had a stronger hold on the
suppliers than the PC makers
Due to the bulk orders, they
slashed prices to maintain
relations with the major players

- Technological legitimation & breakthroughs


gave rise to fierce competition
- Intense price wars began

- High exit & acquisition rates as sustenance was


difficult

Compatibility was the most


highly valued attribute
Similar offering by many
competitors so bargaining
power was high of the
consumers
Consumers were price
sensitive and were not very
brand loyal
The switching costs among
the Microsoft operated PCs
were low
Customers were barely able
to differentiate among the
offerings

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