MBA299: Strategy

1
MBA299 Strategy

• Matching Dell
• Take-aways
• March 23, 2006

2
Matching Dell Some Lessons

• The PC Industry Some Lessons
• Dells Strategy
• Valuing Dells Competitive Advantage
• Barriers to Imitation

3
The PC Industry Some Lessons

• The PC industry is highly competitive
• Vigorous price competition
• Low switching costs among customers
• Severe hold-up by Intel and Microsoft
• Low to moderate barriers to entry
• Industry evolution
• Technology and customer desire for compatibility
  means standard emerge reduce the costs of
  switching
• IBM relinquishes standards to Microsoft and Intel
• Microsoft and Intel play cards well and use
  control fo standard to extract profits
• Looks like the CSD industry all profits
  extracted by suppliers
• Some lessons
• Industry structure is not delivered by nature. It
  is also a result of firm decisions, good and bad
• In choosing what to do, industry leaders have to
  balance their desire to attain a leading position
  with the management of indusry structure
• IBM ends up with a strong position in an
  unattractive industry

4
Dells Strategy

• In such a weak industry, Dell still earns
  spectacular returns
• and make Michael Dell rich (along with all the
  Dellionaires)
• How did Dell earn spectacular returns? Cost or
  Differentiation?

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Cost vs Differentiation (or both?)
Two major routes to competitive advantage
LowCost
Different-iation
CompetitiveAdvantage
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The interplay between cost and differentiation in
generating competitive advantage
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Dells Strategy

• In such a weak industry, Dell still earns
  spectacular returns
• and make Michael Dell rich (along with all the
  Dellionaires)
• How did Dell earn spectacular returns?
• Type of advantage aimed to achieve For
  knowledgeable customers, achieve very low cost,
  without sacrificing buyers willingness to pay
  (the WTP-cost wedge)
• Activities Dell focused all of their activities
  in an integrated and complex way to achieve
  advantage, e.g.
• Direct sales with focus on knowledgeable
  customers
• No finished goods inventory, little WIP
• After-sales service via direct online
• Ship everything directly with no warehousing
• No one activity was sufficient, combination of
  activities created position
• In sum, Dell went after niches with high WTP and
  could provide differentiation and cost advantage

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How Big Was Dells Cost Advantage?

• Compare financials?
• Product/Customer Mix
• Business Mix
• Revenue
• Separate WTP from cost
• Value-chain equivalence
• Direct vs Mfg Reseller
• Average or Marginal Cost?
• Competitive Industry

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What About Willingness to Pay?

• In 1996, Dell price was about 300 less than
  competitors
• Margins were similar to competitors
• Question is what does this mean? Can Dell command
  a higher price than they are charging?
• Better value?
• Faster delivery
• Higher service and product ratings
• Fewer tear-downs/fewer defects
• Some disasvantages
• Greater in-person hand-holding
• Integrated service (vs Dells service partners)
• On balance perhaps WTP is a wash?
• Dell is likely pricing to buy share in 1996
• As prices converge in 1998, Dell earns much
  higher margins than competitors

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Barriers to ImitationDell case illustrates a
number of imitations strategies

• Straddle
• IBM and Compaq attempt to do a hybrid between
  direct and indirect
• Reposition
• Gateway attempts to copy Dell operational and
  segment strategy
• Entry
• New competitors (including some resellers) try to
  replicate Dell

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Barriers to Imitation Why was it so hard to
match Dell?

• Tradeoffs
• Occupying two distinct positions at once
  (straddle) is difficult
• Hybrids (e.g., indirect sales with channel
  assembly) inflexible and inefficient
• Complexity / fit
• Intimate connections among the pieces of Dells
  strategy make it difficult for rivals to master
  all parts simultaneously and penalize those who
  only go half-way
• Preemption
• May have prevented Gateway from getting into the
  corporate segment
• Organizational resistance to change
• Compaq, Gateway, HP strategies had been
  successful
• Why change?
• Compaq CEO, We want to do it all, we want to do
  it now.
• Competitive dynamics
• Tradeoffs are accentuated (and straddling is made
  difficult) because of HP
• Every time Compaq/IBM move towards direct, HP
  tries to pick off channel
• It is especially hard to straddle two positions
  when competitors are willing to devote themselves
  exclusively to each of the two

12
QA with Kevin Rollins, Dell Vice Chairman
Q What is it about the direct sales model and
mass customization that has been difficult for
competitors to imitate? A Its not as simple
as having a direct sales force. Its not as
simple as just having mass customization in plant
or manufacturing methodology. Its a whole
series of things in the value chain from the way
we procure, the way we develop product, the way
we order and have inventory levels, and
manufacturer service and support. The entire
value chain has to work together to make it
efficient and effective. Q What is the
competition looking for? A So many of our
competitors are really looking at our business
and saying, Oh its an asset management
modelseven days of inventory. Thats what were
going to do, rather than looking at every one of
10 things and replicatingthose.
13
Michael Dell Speaks
I would have expected by now that somebody would
have copied our business model. Actually, I am
quite surprised that it hasnt happened,
particularly given that our competitors have
been trying for at least ten years. If you look
at the economics, Dells operating expense ratio
to sales is less than 10 percent, whereas most of
our competitors is over 20 percent. I think
what were coming to believe is that its just
very, very hard to make these changes and Dell is
a company thatfrom the ground up, from the
design, from the manufacturing, from the sales,
from the supportstarted with a very distinctive
and different way of doing business. Michael
Dell, remarks at MIT Sloan School of Management,
September 2002.
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Appendix Five Forces Analysis of the PC Industry

• Bargaining Power of Suppliers (very high)
• Proprietary standards customer desire for
  compatibility ? Microsoft and Intel positioned to
  extract profits from industry
• Other inputs are commodities
• Bargaining Power of Customers (high and rising)
• Wintel standards? end users can switch among PC
  brands easily
• End users more sophisticated (and less in need of
  assistance) over time
• Resellers and retailers have some grip on
  end-user relationships, giving them ability to
  extract price protection, etc.
• Threat of backward integration

• Intensity of Rivalry (very high)
• Wintel standards ? little distinguish among
  machines of leading companies except price ?
  vigorous price competition
• Growth of processing power outstrips growth in
  need for processing ? intense excess capacity and
  saturation ? fight for market share
• Threat of new entry (moderately high)
• Capital costs of mfg facility low
• Stream of low cost entrants (white-box makers)
  and contract manufacturers
• Absolute cost advantage difficult to maintain
  since inputs are available at fixed prices
• Threat of substitutes (growing)
• PDAs, etc.
• Alternative sales methods (online)