Matching Dell

The Matching Dell Business case by (Rivkin. J & Porter, M) defines the personal computer industry and outlines its history and development, with focus on Dell Computers. This paper will analyze the case study by means of the Strategic Situation Analysis and Planning Method (SSAP), by portraying and comparing Dell with its main competitors, namely: IBM, Compaq, Hewllet-Packard and Gateway. Approaching the strategic situation from SSAP method’s step number one, Financial Analysis, step number two, External Business Environment Analysis and step number three, Business and Corporate Strategy Analysis, an external analyst perspective will be drawn based on past , present and future trends that will be used to give recommendations of investments to potential investors. The Personal Computer Industry From its inception the computer industry was mainly composed of large corporations such as IBM and DEC and unaffordable, heavy hardware such as mainframe computers. Having a personal computer at home was a mere aspiration those days. Between 1975 and 1981 many discoveries occurred that gained popularity with electronic hobbyists, when pre-assembled personal computers entered the market. These computers were pioneered by firms such as Apple Computers, MITS and smaller ones such as Tandy/RadioShack and Commodore. Almost immediately, other major electronic firms entered the market of personal computers. These companies focused their business on other electronic industries before this. The pioneer of the first personal computer was IBM in 1981 and its success translated to a market share of 42% of the market two years later. Although, IBM produced most of the components for its mainframes computers, for PCs it purchased from others the required parts and then assembled the machines. The operating software for IBM’s first PC was custom-made by Microsoft, which was then just a start-up software firm. The microprocessor for the operating system (OS) was designed by Intel, another corporation that benefited from the partnership with IBM. Microsoft’s first operating system to IBM is the backbone structure for all the current versions of operating systems (OS) implemented by Microsoft. A proprietary system developed by Apple, held 20% of the market by 1983. In 1982, another firm named Compaq entered the market with a low-priced portable clone and had $100 million in revenues during its first year, which turned out to be the fastest growing company in American history. By 1984, Dell Computer Corporation entered the market and transformed the way PCs were assembled and distributed. Historically, what has really revolutionized the PC industry was the establishment by IBM of an open architecture for their first PC, making its operating system and other proprietary information available to encourage software developers to write programs for the IBM PC and to motivate other firms to make compatible peripherals. Moreover, the unforeseen business strategy at IBM caused the company to become vulnerable to other market entrants and lost their sustainable competitive advantage, since many other IBM clones were manufactured. This cased the company to lose market share to competitors. Step One – Financial Analysis Financial Position Dell's financial history, like most company's, changes over different periods. These changes can be attributed to changes in the demand of the product, technological advancements, manufacturing costs, competition, and economic conditions. In 1999, the approximate cost of manufacturing a basic personal computer was between $800 and $900 (Kwak & Yoffie 1999). Dell sold computers directly, and through retail distributors. In 1994, Dell actually lost money on retail sales. When comparing Dell's direct sales to the retail channel it shows that there was a 5. % operating income through the direct sales, and a -3. 0% operating income in retail sales. Dell's market share increases from 1. 0 in 1990 to 13. 2 in 1998. Direct sales of Dell' personal computers through telephone, mail, and internet helped increase their market share. The total market size for the personal computer industry is $74. 6 million. Exhibit 4: Portion of Sales Through Each Channel by Region from the Matching Dell Case shows the highest channels in which personal computers are distributed in different geographic areas. In the Americas, the most popular channel is distributor/reseller which accounts for 41. 2% of sales, second is the direct channel which accounts for 29. 7% of sales, and third is the retail channel which accounts for 21. 7% of the sales. These three channels are the top channels world wide, and distributor/reseller is the channel with the highest percentage of sales across the board. Income Statements Dell and its competitors Compaq, Gateway, and HP all have had their revenues increase over the period between 1991 and 1998. The companies differ when the net income is compared from the same time period. In the Appendix, Table 4: Profit as a Percentage of Sales shows a comparison between 1991 and 1998. Profit as a percentage of sales is a note worthy calculation because it shows a ratio of profits to sales. If a company has high sales it does not necessarily mean that it will have high profits. In Table 4, you see that in 1998 Dell has the highest profit as a percentage of sales. Since Compaq has a negative net income in this year, its data is skewed. Dell percentage of sale has grown by 2. % in this seven year period. Using the calculation (This Year)/Base Year x 100 and data from 1991, to 1998 Dell sales increased 20. 5% and net income increased 28. 63%. This shows that profits increased more than sales in the same time period. This means that Dell became more efficient in production which yielded greater profits. Net income increasing more than sales shows Dell's efficiency in production and distribution. It cut costs of making and selling its computers to have a greater profit. In the appendix, Table 1 shows the year on year percent changes for Dell's sales. This table shows that Dell's sales continue to grow each year. Price Comparison Exhibit 9 in the Matching Dell Case shows Ratings of High-end Desktop PCs by Consumer Reports(1998). It is shown on the table that Dell's product sells for $2400, HP's product sells for $2200, Gateway's product sells for $2647, and Compaq's product sells for $2950. Data on the same table rates these computers on price, speed, quality, and other things customers value in computers with a scale of 1 being excellent and 5 being poor. When the customer ratings are averaged Gateway has a rating of 1. , Dell and HP have a rating of 2. 4, and Compaq has a rating of 2. 7. Dell is the lowest in price and second highest in rating. This shows that customers are satisfied with the dell computer, more so than some of the more expensive brands. Company Profitability Exhibit 11 from the case compares Major PC Manufactures and their financial data. Return on Equity(ROE) is calculated in this table and the major players can be compared. The ROE shows the profitability of a corporation because it shows how much profit is generated from the money the shareholders have invested. Dell has a ROE of 62. %, Gateway has a ROE of 25. 7%, HP has a ROE of 17. 4%, and Compaq has a ROE of -24. 2%. HP and Compaq have substantially more revenue than Dell. Compaq does not have a higher net income, but HP does. At first glance you would think that HP is a better company in regards to personal computers but when you look at the ROE you notice a difference. Out of all the major competitors in the personal computer industry Dell has the highest ROE. Therefore it is the most successful company in this market. It would be recommended that investors invest in Dell to achieve the most out of their investment. Revenues Dell's company became more successful when it withdrew from retail in 1994. It was losing money by distributing its computers in this channel and learned from its mistakes. In 1996 it started its website which provided another opportunity for customers to order from them directly. Exhibit 11 also shows that Dell keeps its cost structure lower than its competitors. When something is not benefiting the company, Dell does not wait, it acts on it and tries to continue to make Dell a successful corporation. Compaq has very, very high revenues but there are obviously major problems with the company. Its net income and ROE are negative numbers, which shows that the company is not profitable in 1998. Compaq only has 4. 4% of sales from direct sales, where Dell has 86. 6%. This is a major advantage to Dell because there is no middle man and Dell can obtain all profits. In ratings of PC Vendors by Corporate Managers with PC buying Responsibility (Exhibit 8), Dell Ranks high in user satisfaction, extremely high in raw technology, second highest in pricing, and moderately high in service and support. Compaq ranks high in pricing but low in user satisfaction, raw technology, and all customer relations. Having quality customer services gives Dell an advantage over Compaq. Financial Conclusion The financial performance of Dell, Compaq, HP, Gateway and other companies in the PC industry we see that high revenues do not always translate into a profitable company. Shareholders and investors are looking for high returns on the amount they invest in their respected companies. Dell is the most profitable company as of 1998 with the highest return on investment. The most valued aspect of Dell's company at this time is the use of the direct sales channel. Also, Dell sells its computers at a cheaper price than its competitors but still ranks high in customer satisfaction surveys. Dell can offer a lower price by keeping its manufacturing and selling costs down. This way it can still make a profit and keep and attract customers. Dell started out as a small operation in a college dorm room and it continues to grow significantly on a yearly basis. Step Two – External Business Environment Analysis The market for computer systems and services is subject to intense price competition. In addition to several large branded companies, there are other branded and generic competitors. Dell competes primarily based on its technology, direct customer relationships, value, performance, customer service, quality, and reliability. Its main competitors are Compaq, and Gateway, both business are 90% PC dependent. However, due to Compaq’s low financial performance, HP was Dell’s primary competitor followed by Gateway in 1998. The main stakeholders group are: customers, competitors, suppliers, shareholders, employees and the government. In Table 6 in the Appendix theTarget [Customer-or-Client] – [Product-or-Service Connections] is shown. The PC competitive environment can be distinguished between its geographic and its customer categories. The geographic market for the PC industry is segmented by worldwide and U. S basis market share, while the customer category is segmented into: Large business, small & midsize business, home and small office, government and educational institutions. Based on the information from Exhibit 11 in the Matching Dell case, Compaq leads the U.  S and the worldwide market with 16. 4% and 16. 6% of PC shares respectively. Dell comes in second place with 10. 4% in the worldwide market share and 15. 1% in the U. S. PC market share. Gateway follows in behind both companies with a 4. 2% worldwide share and 8. 1% in the U. S. By comparing the major players we can see that Compaq is a leader in the market, however these market leadership if compared with the company’s financial information is not translated into profits, since it has a negative profit marking and a negative return on equity (ROE). ROE is one of the best measures of a corporation’s profitability, since it shows investors and stakeholders how much profit the company generates with the money shareholders have invested and for Compaq a negative ROE could be an indication that even if it has the greater market share amongst the PC industry there are problems with the bottom line net income and management issues. The customer group of Large Business is dominated by Dell Computers with 33. 6% market share followed by Compaq with 27. 5%. In the case of Small & Midsize business, Dell has a 37% against a 32. % market share held by Compaq. Moreover, in the Home & Small office PC sales customer category, Gateway has the leadership by large from its closest competitor HP with a 58. 2% share against a 33. 3% held by HP and Compaq comes next with a 28. 5% stake of the market. In addition, Gateway also has a leadership in the Education segment of the market, with a 8. 2% market share trailed by Compaq with 5. 3%. The government sectors is mostly equally divided amongst the PC industry competitors, with shares ranging from 5. 1% to 6. %, leveraging a very close competition. Growth rates and the percentage changes help to analyze and understand the companies being assessed. The overall performance of the PC industry has been assessed from 1989 to 1998 and the results are as follows: (Conclusions from Exhibit 2) Dell’s growth rate on average was 50. 5% for the period 1989 to 1998, while Compaq grew an average of 17. 9%. If this percentage change had not being analyzed in depth, one could think that Gateway had a greater growth than Dell Computers; from its inception it had an 87. % growth rate. However, if the first two years of operation were removed from the calculations, we can see that the actual growth rate for Gateway’s would only be 19. 5%, which would place it behind Dell. Compaq had and average growth of 17. 9% in the same period. Five forces competitive analysis and industry value chain (Diagram 1). Dell manufactures most of the products it sells and has manufacturing locations worldwide to service its global customer base. Dell believes that its manufacturing processes and supply-chain management techniques provide it a distinct competitive advantage. Its build-to-order manufacturing process is designed to allow Dell to significantly reduce cost while simultaneously providing customers the ability to customize their product purchases. In addition, Dell purchases some of its products from third-party original equipment manufacturers and resells them under the Dell name. Dell’s manufacturing process consists of assembly, software installation, functional testing, and quality control. Testing and quality control processes are also applied to components, parts, and subassemblies obtained from third-party suppliers. Quality control is maintained through the testing of components, subassemblies, and systems at various stages in the manufacturing process. Quality control also includes a burn-in period for completed units after assembly, on-going production reliability audits, failure tracking for early identification of production and component problems, and information from Dell’s customers obtained through services and support programs.