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DELL INC.
Abstract
In 1995, with sales growth opportunities drying up in the US and with a vastly growing Chinese
PC market that was opening up to foreign business, Dell ventured into the emerging market of
China. Armed with its innovative direct sales model and vast world presence, Dell expected to
become the market leader within a short period. However, since its entry into the market, the
company has struggled to keep up with its competition, and the success that was first envisioned
did not occur. The task of this paper is to understand Dell’s problems in China.
structure that has led to its success is its ability to promote innovation from its employees. This
to pursue and develop new improvements to processes without the constraints of upper
management. The structure also allows for open communication that helps to drive the
organization towards success. To further promote open communications between employees and
upper management, Dell implements a “Tell Dell” evaluation process that allows employees to
In its global markets, Dell’s approach is to diversify their business by indentifying new
markets where they are able to utilize their competitive advantages in it supply chain method to
lower costs and prices. Dell's global manufacturing strategy includes owning its own plants,
which allows them to further lower costs. Dell has set up plants in Limerick, Ireland, Penang,
Malaysia, and Eldorado do Sul, Brazil. Because of the nature of the competitive advantage that
Dell possesses, the company generally prefers to oversee their own manufacturing process.
Industry Analysis
The Consumer Personal Computer Market in the US has been greatly saturated by 2008,
with nearly every household owning a PC. The competition is still fierce, and dominated by a
few players, most notably: Apple, Hewlett-Packard, and Dell. Prices have dropped considerably
and are lowered constantly to stimulate demand. Overall, Hewlett-Packard, Dell, Acer, Lenovo
and Toshiba make up the top five manufacturers in the 2008 international PC market, taking up
an aggregate market share of 57%, about three percentage points higher than 2007. The latter 3
brands, however, are rarely seen on the shelves of US retailers in forms other than notebook
computers.
In China, the Personal Computer Market is still growing. According to Forrester research,
China had 54 million PC users in 2007, but the number is expected to grow to about 500 million
by 2015 - about half of the world wide increase. While computer shipments are growing at less
than 3% in the U.S, the Chinese market is taking in 20% a year, which doubles the worldwide
rate. The aforementioned US personal computer makers face stiff competition from Chinese and
Taiwanese Brands as well. China's Lenovo, Haier and Founder, along with Taiwan's Acer and
An important competitive advantage Dell owns is in its direct sales model. Dell employs
its highly effective direct sales strategy, in which it directly sells products to the end customer
over the phone or internet. This model allows the company to achieve high cost savings and
better information on consumers by supplying, and having direct contact with, its end consumers.
It also allows Dell to use a JIT style (just in time) supply chain in order to keep its production
facilities lean and cost effective. This strategy has proven immensely profitable for Dell, and is
Dell’s success in the developed markets cannot be denied. However, with dwindling
opportunities in its main markets, the company has begun its foray into the emerging markets of
the world. To that end, Dell expanded into China, hoping to take advantage of wealth of
China has one of the world’s largest PC markets currently, and that is expected to
continue to grow as more and more private consumers grow in affluence. China is experiencing
the benefits of its strong economic growth, producing a wealthy middle class that desires quality
products over the cheaper knockoffs that are prevalent in the market. Also, as the middle class
grows, so will internet and credit card use. There is also growth in the education and business
sectors, where Dell may have the ability to meet the specialized needs of those consumers. This
sector of large institutional consumers can provide high order amounts and familiarize the
students/workers with Dell products. Through this familiarity, these consumers may add Dell to
their consideration set when purchasing a computer for their own personal use.
However, all was not smooth sailing, as Dell’s initial entry into China was hindered by
many difficulties.
Difficulties
Lack of Infrastructure
A general lack of infrastructure hinders Dell’s ability to use the direct sales model.
Although there are large, sprawling cities in the style of Shanghai, much of China is still rural
and underdeveloped. The use of the internet in households is limited, by infrastructure, cost, and
the government. Although connectivity is increasing, there are still fewer households that have
Another issue that may affect Dell’s success is the lack of credit card usage in China.
culture, few consumers choose to use credit cards, or have credit at all. This also creates
In addition, to support a direct sales strategy, Dell would be required to rely on a highly
efficient and cost effective national postal service. This may not be the case for China at the
present moment, especially in regards to some of the more rural areas. Shipments may require
very long delivery times and may be subject to frequent theft and loss. This would adversely
hinder any plan that relied heavily on direct shipments of expensive items, such as Dell
computers.
Cultural Differences
Cultural differences of Chinese consumers proved to be the biggest problem that Dell had
to face. Consumers in China are far less likely to purchase goods online. This stems from
customer’s preference to actually “see and feel” the product before purchasing. The customers
would want to look at the actual computer that they will be taking home. This is one reason
many Dell competitors (such as Lenovo) have opened various retail locations across China.
These locations serve as posts for consumers to come into direct contact with both product and
service. Normally, Consumers looking for Technology/Electronic goods would go to Computer
malls or plazas; where all the branded retailers and accessories suppliers are gathered. Chinese
consumers usually do not gather information beforehand. They will be able to get all the
information and compare prices among all the merchants gathered at the mall.
Another reason for Dell’s ineffective direct model is because credit card is not a widely
owned item. Chinese consumers are therefore unable to make purchases through the internet or
over the phone. Aside from limited credit card use however, the act of haggling is another
important reason for cash transactions. Haggling is common practice in China, from groceries to
properties, any price is negotiable. Since the profit margin is low, the retailers prefer to avoid
paying the service fees for Credit card companies, and take advantage of liquidity. The other
reason for cash transactions is simply to avoid sales tax. Chinese consumers are notorious for
being stingy; price will be the final deciding factor. The majority of the population will take a
Another cultural difference Dell may observe in China is an overall lack of individualism.
This directly contrasts Dell’s sales model in that orders are completely customizable. Dell may
find that customization is less important to Chinese consumers, who are probably most interested
in an average setup with low costs. Since most Chinese consumers do not have high amounts of
discretionary income, they will usually look at low cost items. A personal computer or laptop
can be a hefty price for the average Chinese consumer, so Dell may want to focus directly on
price and decrease the costs associated with creating a highly customizable model.
Dell’s flat organizational structure may be highly effective in promoting innovation in the
US, but may run in to difficulties implementing such a structure in China. Chinese people are
generally more used to understand where they stand and are very aware of formal and informal
hierarchies. Subsequently, Chinese companies typically possess a strong hierarchical structure,
and this may hinder, rather than promote, efficiency. Also, the lack of supervision may lead to
employees taking advantage of the structure, providing the “gray area” that may allow
Business Environment
The business environment in China is also a barrier to the success of Dell. Specifically,
there is little protection from the government against such issues as copyright infringement.
Also, there is a general protectionist attitude for local businesses and those that already have an
established name in China. Some of Dell’s competitors in China are nationalized companies that
realize many benefits an outside company would not. These include the factors of nationalism,
government influence over contracts, and various “gray area” issues where the nationalized
Dell also has the reputation of being extremely stringent in terms of corporate ideology
and guidelines. As many Western companies are aware, some business practices common in
China (such as bribery and the giving of gifts) violate normal Western corporate rules. Having
operations in China can cause a problem is these cross cultural issues are not dealt with properly
under the guidance of experienced Chinese managers. If Dell’s Western guidelines are brought
directly to China, this may create a scenario where Dell is greatly disadvantaged in the market.
They may have trouble building relationships with suppliers and creating a network for
marketing and distribution. Eventually, this negativity can lead all the way to the consumer level
Considering China provides many benefits to corporations who both manufacture and sell
their products in China, it may be useful for Dell build their own factories in China itself. Dell
would be able to leverage a less expensive workforce, decrease costs associated with tariffs and
transportation, and prepare for the possibility of large growth in the market.
Result
Dell’s entry into China had mixed results. Whereas the company saw moderate success in sales
to businesses and government customers in major cities, the company is lagging behind its
competitors in the market that matters: the middle class consumers in smaller cities. In 2004,
Dell dropped from being the 2nd largest PC vendor in China to 4th in 2004, in large part to their
failure in keeping step with its competitors in sales to the every-increasing middle-class private
consumer.
Its initial failures in China had a profound impact on the company, leading to then-CEO
Kevin Rollins’ departure and the reinstatement of founder, and former CEO, Michael Dell.
Kevin Rollins
Kevin Rollins’ background was in Civil Engineering. Throughout his employment at Dell,
he held a variety of positions, from VP of Corporate Strategy to COO, President, and eventually
took over from Michael Dell as CEO. Although successful in maintaining the success of Dell in
its already established markets, Rollins, more a manager than leader, was ill-equipped to deal
with the ambiguity that existed in the Chinese market. He was eventually replaced by the
visionary and creative force behind Dell, ex-CEO Michael Dell, who subsequently has attempted
partnerships with Chinese retailers across the country, most notable of those being Gome
Electrical Appliances Holdings. Gome Electrical is the largest home appliance retail chain
operator in China that during the year ended December 31, 2007 had 726 traditional stores,
which included 61 flagship stores, 624 standard stores (including supermarkets) and 41
specialized stores (Google Finance). In late 2007, Dell announced plans to break away from
their direct-sales model in China and begin selling Dell products at Gome stores. Gome had
already been selling computers from Dell’s competitors such as Lenovo and HP.
Dell also expanded their direct-sales model to incorporate Dell Experience Centers,
which are store front locations that allow potential customers to test Dell models as well as
interact with a knowledgeable sales person. Once a customer decides to purchase a computer,
the sales person helps them order it and the finished product is shipped directly to the customer.
Dell further expanded its Partner Direct program, which taps resellers focused on the mainland's
large number of small and medium-sized businesses (South China Morning Post).
All these actions were steps taken by Dell to appeal to the “try before you buy” mentality
of the Chinese consumer. It also allowed Dell to reach the “emerging markets in China’s second-
and third-tier cities where Internet use is lower, hindering Dell’s direct-sales model (Article 2).”
Subsequently, Dell has been able to expand its presence to 1200 cities, up from roughly 45 last
Chinese Suppliers
Dell continues to purchase more supplies from Chinese suppliers in both an effort to
increase its price competitiveness, as well as to endear itself to the Chinese government. On
March 20, 2008, Dell announced their plans to purchase $23 billion of components from Chinese
suppliers, up from $18 billion in 2007 (Article 6). By purchasing a bulk of their supplies from
Chinese suppliers, and through its relationship with Gome, Dell is beginning to change the
Price Competition
Dell realized that price was a leading factor in Chinese consumers’ decisions regarding
PC purchase, and began selling a cheaper model of its computers to compete with its low-priced
competitors and reach less-wealthy consumers. The proposed low priced computer would be
sold for between 2,599 Yuan, or $336, and 3,999 Yuan, which would be 69 percent cheaper than
the lowest priced model on Dell’s China Web site (Article 3). Dell is looking to bolster sales and
growth by targeting smaller cities and towns in China where incomes are rising and many first-
Recommendation
Dell should take into consideration the need to understand and embrace the culture of any
new market they wish to enter; this is especially true for China. In order to avoid many of the
difficulties they have faced Dell should have implemented the following strategy.
First, formally assess the culture and market in China with the help of locally hired
managers with experience in the computer industry. These managers may already have a strong
relationship with suppliers and retailers that they could bring to Dell. This allows Dell the
opportunity to start their business with some “GuanXi” already established and gives them a
relationship base to build upon. These managers would also be extremely valuable in
understanding the local customs and applying them correctly with suppliers and the local work
force. They understand the hidden cues that a foreigner may easily overlook when conducting
business in China, giving Dell an opportunity to reach deal that may have otherwise been
impossible. Local managers should be retained through a variety of reward packages that help to
dissuade them from taking positions with competitors. These could include stock options,
Dell should enter the Chinese market through the retail sector with high quality partners
to spread their brand name and reach individual consumers. This could help address the issues
of credit cards, lack of internet, and the consumer’s need to “see and feel” the product before
purchase. Creating Experience Centers will also allow Dell to gain precious knowledge of
consumers’ wants and needs while building a reputation for the highest level of quality and
service. The direct sales model should be targeted primarily towards businesses, institutions and
on a lesser scale, wealthy individuals. Creating the network for direct sales model will give Dell
the opportunity to reach private customers once internet use has spread to the masses. In
addition to low cost products, Dell should bring to market a high end product to take advantage
As a change to the organizational structure of the business, Dell should increase their
internal controls and interactions to focus on a vertical framework. Chinese workers are
accustomed to a rigid structure and may feel lost with a flat organization. Without the hierarchy,
they become unwilling to voice their ideas and lose efficiency due to lack of oversight.
With these recommendations, it is possible for Dell to successfully enter a large and
growing market. This entry carries little risk that can not be controlled through an understanding
BusinessWeek (Jan 2009 ). Acer closes in on Dell's No. 2 PC ranking Retrieved April 20, 2009
from http://www.zdnetasia.com/news/hardware/0,39042972,62050213,00.htm
Hong Kong Trade development council (Oct 2002). China's biggest computer market goes from
strength to strength. http://info.hktdc.com/imn/02103105/info047.htm