Case 5 Teaching Note
Dell Inc. in 2006:
Can Rivals Beat Its Strategy?
Overview
In 1984, at the age of 19, Michael Dell invested $1,000 of his own money and founded Dell Computer
with a simple vision and business concept—that personal computers (PCs) could be built to order and
sold directly to customers. Michael Dell believed his approach to the PC business had two advantages: (1)
bypassing distributors and retail dealers eliminated the markups of resellers, and (2) building to order
greatly reduced the costs and risks associated with carrying large stocks of parts, components, and
finished goods. Between 1986 and 1993 the company worked to refine its strategy, build an adequate
infrastructure, and establish market credibility against better-known rivals. In the mid- and late 1990s,
Dell’s strategy started to click into full gear. By 2003, Dell’s sell-direct and build-to-order business model
and strategy had provided the company with the most efficient procurement, manufacturing, and
distribution capabilities in the global PC industry and given Dell a substantial cost and profit margin
advantage over rival PC vendors. During 2004-2005, the company solidified its position as the global
market leader in PCs.
Dell had a commanding 33.9 percent share of PC sales in the United States in the first nine months of
2005, comfortably ahead of Hewlett-Packard (19.1 percent), Gateway (6.0 percent), and IBM/Lenovo (4.3
percent)—and its lead over rivals was increasing. Dell had moved ahead of IBM into second place during
1998 and then overtaken Compaq Computer as the U.S. sales leader in the third quarter of 1999. Its
market share leadership in the United States had widened every year since 2000. Dell had eclipsed
Compaq as the global market leader in 2001. But when HP, the third-ranking PC seller in the world,
acquired Compaq, the second-ranking PC vendor in 2002, Dell found itself in a tight battle with HP for
the top spot globally. Dell was the world leader in unit sales in the first and third quarters of 2002, and HP
was the sales leader in the second and fourth quarters. However, Dell opened a clear market share gap
over HP in 2003-2005. Nonetheless, Dell trailed HP in PC sales outside the U.S.; HP’s non-U.S. share
had been in the 12.5 to 14.1 percent range since late 2001, with Dell’s overall share of sales outside the
U.S. climbing from about 7.5 percent in late 2001 to 11.6 percent in 2005.
Since the late 1990s, Dell had also been driving for industry leadership in servers. In 2004 Dell was the
number one domestic seller of servers with close to a 33 percent market share (up from about 3-4 percent
in the mid-1990s). It was number two in the world in server shipments with a 24.5 percent share in the
third quarter of 2004, within striking distance of global market leadership. Dell was the leader in servers
(based on unit volume) in the three largest server markets—the U.S., Japan, and China.
In addition, Dell was making market inroads in other product categories. Its sales of data storage devices
had grown to over $2 billion annually, aided by a strategic alliance with EMC, a leader in the data
storage. In 2001–2002, Dell began selling low-cost, data-routing switches—a product category where
Cisco Systems was the dominant global leader. In late 2002 Dell introduced a new line of handheld PCs
—the Axim X5—to compete against the higher-priced products of Palm, HP, and others; Starting in
2003, Dell began marketing Dell-branded printers and printer cartridges—product categories that
provided global leader HP with the lion’s share of its profits; Dell sold over 5 million printers and
generated more than $1 billion in imaging and printing revenues in 2004. Also in 2003, Dell began selling
flat-screen LCD TVs and retail-store systems, including electronic cash registers, specialized software,
services, and peripherals required to link retail-store checkout lanes to corporate information systems.
Dell’s MP3 player, the Dell DJ, was number 2 behind the Apple iPod. Dell added plasma screen TVs to
its TV product line in 2004. Since the late 1990s, Dell had been marketing CD and DVD drives, printers,
scanners, modems, monitors, digital cameras, memory cards, data storage devices, and speakers made by
a variety of manufacturers. Dell products were sold in more than 170 countries, but sales in 60 countries
accounted for about 95 percent of total revenues.
Because of Dell’s success in using its business model and strategy to become the low-cost leader, most
other PC makers in 2002-2005 were endeavoring to emulate various aspects of Dell’s strategy, but with
only limited success. Nearly all vendors were trying to cut days of inventory out of their supply chains
and reduce their costs of goods sold and operating expenses to levels that would make them more cost
competitive with Dell. In an effort to cut their assembly costs, Hewlett Packard, IBM, and several others
had begun outsourcing assembly to contract manufacturers and refocused their internal efforts on product
design and marketing. Virtually all PC vendors were trying to minimize the amount of finished goods in
dealer/distributor inventories and shorten the time it took to replenish dealer stocks. Collaboration with
contract manufacturers was increasing to develop the capabilities to build and deliver PCs equipped to
customer specifications within 7 to 14 days, but these efforts were hampered by the use of Asia-based
contract manufacturers—delivering built-to-order PCs to North American and European customers within
a 2-week time frame required the use of costly air freight from Asia-based assembly plants.
While most PC vendors would have liked to adopt Dell’s sell-direct strategy for at least some of their
sales, they confronted big channel conflict problems: if they started to push direct sales hard, they would
almost certainly alienate the independent dealers on whom they depended for the bulk of their sales and
service to customers. Dealers saw sell-direct efforts on the part of a manufacturer whose brand they
represented as a move to cannibalize their business and to compete against them. However, Dell’s success
in gaining large enterprise customers with its direct sales force had forced growing numbers of PC
vendors to supplement the efforts of their independent dealers with direct sales and service efforts of their
own. During 2003-20045 several of Dell’s rivals were selling 15 to 25 percent of their products direct.
As Dell Computer battled Hewlett-Packard for leadership in the global PC market in 2004-2005, Michael
Dell believed the opportunities in front of Dell were tremendous:
We have only seven percent market share in an $800 billion market. There are enormous
opportunities for us to grow across multiple dimensions in terms of products, with
servers, storage, printing and services, representing a huge realm of expansion for us.
There’s geographic expansion and market share expansion back in the core business. The
primary focus for us is picking those opportunities, seizing on them, and making sure we
have the talent and the leadership growing inside the company to support all that growth.
And there’s also a network effect here. As we grow our product lines and enter new
markets, we see a faster ability to gain share in new markets versus ones we’ve
previously entered.
A great portion of our growth will come from key markets outside the U.S. We have about 10 percent
market share outside the United States, so there’s definitely room to grow. We’ll grow in the enterprise
with servers, storage, and services. Our growth will come from new areas like printing. And, quite
frankly, those are really enough. There are other things that I could mention, other things we do, but those
opportunities I mentioned can drive us to $80 billion and beyond.
Going into 2006, Dell Computer had a war chest of nearly $12 billion in cash and liquid investments that
it could deploy in its pursuit of attractive revenue growth opportunities.
Suggestions for Using the Case
This freshly updated and timely case details Dell’s strategic intent to be the dominant player in PCs,
servers, and other IT products/services worldwide, its status as the global low-cost provider, and the
strategy it is using to expand its reach into new geographic and product arenas. Our experience in
teaching earlier versions of this case is that it has a particularly powerful impact on students and opens
their eyes about how to manage the value chain, build competencies and competitive capabilities, and
achieve sustainable competitive advantage. Dell is a fascinating company with a powerful competitive
strategy and the resource capabilities to not only be the global leader in PCs but also to wrest market
share from rivals in a growing number of other IT products and services.
Also in this 15th edition are related cases on the MP3 player industry (Case 6) and Apple Computer (Case
7). We suggest giving consideration to assigning all 3 cases, starting first with the Dell case and then
proceeding to the MP3 player industry case and, finally, to the Apple Computer case. However, you can
assign the Apple case without first assigning the MP3 player industry case, if you would like. We think
you will find that the Dell/MP3/Apple cases or the Dell/Apple cases will make an attractive case series
when taught back-to-back.
This latest version of the Dell case describes Michael Dell’s background and management style, explores
Dell’s strategy in some detail, has detailed information on how Dell manages its value chain, and presents
brief profiles of Dell’s principal competitors—Hewlett-Packard, IBM-Lenovo, and Gateway. You’ll find
that the Dell case is a study in value-chain restructuring, crafting a low-cost leadership strategy in the
high-velocity/hyper-competitive IT marketplace, building core competencies and competitive capabilities,
leveraging its resource strengths to grow the product line, and then perfecting the process of strategy
execution. It is a case where the lesson for students is “how to do it right”, how to build competencies and
capabilities that translate into sustainable competitive advantage, and how to win the battle for global
market leadership. It is not a case where students are challenged to identify problems and come up with a
comprehensive set of action recommendations to restore company performance—this is because Dell is a
very successful company with a very successful strategy and thus is not plagued with all kinds of
problems and strategy issues that merit immediate attention.
Because Dell’s strategy in PCs and other IT products is embedded in restructuring the industry value
chain to drive costs out of the business and provide customers globally with more value-added for their IT
dollars as compared to rivals, you should defer assigning the case until you have covered Chapters 3, 4,
and 5 and maybe even Chapter 7. We like to use the Dell case immediately after covering Chapters 4 and
5 (or sometimes Chapter 7), because the case is a beautiful illustration of astute value chain management
(topics much discussed in Chapters 4 and 5) and the use of a global low-cost provider strategy. There is
ample information in the case for students to do a SWOT analysis and to use the methodology discussed
in Table 4.5 of Chapter 4 to do a competitive strength assessment of Dell, Hewlett-Packard, IBM/Lenovo,
and Gateway.
As we said earlier, you’ll find that the Dell case is a huge eye-opener for students, exposing them to some
pretty powerful strategizing on Dell’s part and how Dell has maneuvered itself into a very enviable
market position. We strongly suggest including the Dell case somewhere in your list of assigned cases
because of the exceptionally rich set of teaching points it contains and the opportunity it gives for students
to connect the material in Chapters 1-7 to actual management practice—there are many worthwhile
strategy lessons for students to learn from studying the Dell case.
We created a case preparation exercise on Case-TUTOR that pushes students to think through all the details
of Dell’s strategy, do a serious evaluation of the companys resource strengths and weaknesses, and probe
the nature and durability of the company’s competitive advantages over rivals. The exercise is structured
around the assignment questions in the next section and serves the valuable purpose of walking students
step-by-step through the process of developing thoughtful, analysis-based answers to the assignment
questions. We strongly recommend on this case that you have students complete the case preparation
exercise and bring their notes to class for use in the discussion. You might even want to choose students
at random to turn in their printouts at the end of class and peruse their work to see what kind of
preparation they are doing. Such an action sends a signal that you expect completion of the exercise and
are likely to do some spot checking of the work they do.
The Dell case works very nicely for a written case assignment or oral team presentation if you want
students to go through the exercise of fleshing out the elements of a company’s strategy, do a detailed
resource assessment, and understand how a company builds sustainable competitive advantage. Our
suggested assignment question is
Prepare a report to your instructor identifying all the pieces of Dell’s strategy and how
these pieces fit together, presenting a detailed resource strength/resource weakness
assessment, a competitive strength assessment of Dell versus HP, IBM/Lenovo, and
Gateway, and your conclusions concerning whether and why Dell’s strategy has (or has
not) resulted in a sustainable competitive advantage. End your report with an assessment
of Dell’s chances for (a) outcompeting Hewlett-Packard and becoming the recognized
world leader in PCs (b) continuing to grow its revenues and earnings.
Assignment Questions
1. What is your evaluation of Michael Dell’s performance first as Dell’s CEO and more recently as its
Chairman? How well has he performed the five tasks of crafting and executing strategy that were
discussed in Chapter 2?
2. What are the elements of Dell’s strategy? Which one of the five generic competitive strategies is Dell
employing? How well do the different pieces of Dell’s strategy fit together? Is Dell’s strategy
evolving?
3. Does Dell’s expansion into other IT products and services make good strategic sense? Why or why
not?
4. What does a SWOT analysis reveal about the attractiveness of Dell’s situation?
5. What does a competitive strength assessment reveal about Dell, as compared to IBM-Lenovo,
Hewlett-Packard, and Gateway? Among these competitors, who enjoys the strongest competitive
position?A0Who is in the weakest overall competitive position?
6. Has Dell’s strategy given it a sustainable competitive advantage? What is the basis for whatever
competitive advantage it has?
7. What is your assessment of Dell’s financial performance during 1998-2006? Use the financial ratios
presented in Table 4.1 of Chapter 4 (pages 98-99) as a basis for doing your calculations and drawing
conclusions about Dell’s performance.
8. Is Dell’s strategy potent enough to beat out Hewlett-Packard? What are Dell’s chances for becoming
the dominant leader in the global PC market? How good are Dell’s prospects for continued growth in
revenues and earnings?
Teaching Outline and Analysis
1. What, if anything, strikes you as impressive about Dell? In reading and
preparing the case, was there anything that you thought was particularly
outstanding about this company?
This is a fun question to trigger the discussion of Dell and gives you a chance to gauge the mood and
preparation of the class. Students are prone to come up with a fairly lengthy list, but the list certainly
ought to include the following:
Michael Dell—he has, at a very early age, emerged as one of the world’s most respected and
influential business leaders. Plus, of course, he has been instrumental in creating from scratch
what has turned out to be a very impressive and competitively potent company.
The power of Dell’s strategy (and it is still evolving in ways that may it even more powerful than
it already is).
The company’s meteoric rise from irrelevant also-ran to global market leader.
2. What is your assessment of the job Michael Dell has done as the company’s
CEO and, more recently, as Chairman? What grade would you give him for
his leadership of the company over the past 20 years? Has he done a good
job performing the five strategy-making/strategy-executing tasks described
in Chapter 2?
We think Michael Dell deserves a solid A+. It is hard to see how he could have done a better job,
given his age and lack of experience in the company’s early years. In 2006, at age 41, he is a multibillionaire, one of the richest people in the world, and one of the most respected and influential top
executives in the world.
To structure this facet of the discussion, you can go to the board and create five headings: (1) Vision,
(2) Objective-Setting, (3) Crafting Strategy, (4) Implementing/Executing Strategy, and (5) Making
Corrective Adjustments. As students offer their evaluations, you can have them suggest the proper
category for their assessment. Most of the following points ought to be identified by class members.
Forming a Strategic Vision
Michael Dell is definitely the company’s chief strategic visionary (although he is assisted in very
important ways these days by Kevin Rollins).
He came up with the concept for the business and has guided the evolution of Dell Computer’s
business model.
Objective Setting
In 1990, Michael Dell set an objective for Dell Computer to become one of the top three PC
companies.
It achieved this objective in 1998 and during 2003-2005 was battling Hewlett-Packard for
first place worldwide—and so far is making major strides to win the battle handily.
He has presided over Dell’s very good financial performance (see case Exhibit 2).
Dell has turned in a very solid financial performance since 1998, with the exception of fiscal
2002 (following the dot.com crash and the economic recession of 2001-2002 which hit the IT
industry pretty hard). However, as can be seen in Exhibit 2, Dell’s performance in fiscal years
2003-2005 has been quite good, plus the company was on a roll during the first 9 months of
fiscal 2005 (see pp. C-150-C151).
Crafting a Strategy
Michael Dell is the chief architect of the company’s strategy—although in the last few years
Dell’s strategy has been a joint product of the strategic thinking of both Michael Dell and Kevin
Rollins
The direct sales approach and the build-to-order approach are both Michael Dell
contributions.
Michael Dell has been a driving force behind the company’s initiatives to revamp the traditional
industry value chain, cutting out middlemen by selling direct, streaming supply chain activities,
becoming a low-cost and innovative manufacturer/assembler, being a pioneer in the use of
Internet technology and e-commerce, and expanding into related products (handheld PCs, printers
and printer accessories, data storage, switches and routers, and IT services).
Using alliances with suppliers, Michael Dell and Dell, Inc. have pioneered the creation of an
exceptionally efficient supply chain. Supply chain management is one of Dell’s distinctive
competences, along with low-cost manufacturing and use of Internet technology/e-commerce
practices.
There is plenty of evidence in the case that Michael Dell’s prints are on many key pieces of the
company’s strategy.
Implementing/Executing Strategy
Dell’s senior management appears quite active in pushing for better execution of just-in-time
inventory management and reduction in the number of days of parts inventories.
Dell’s strategy requires smooth execution—from customers all the back to the operations of
suppliers; top management has proven itself capable of leading the drive for good strategy
execution and operating excellence.
The company has become quite adept at driving the costs out of its manufacturing/assembly
activities—there’s every indication that it has lower manufacturing/assembly costs than its
leading rivals. Strong (and successful) efforts to squeeze out cost savings have become a standard
part of Dell’s annual operating plan.
The company’s astute application of Internet and e-commerce technology is also one of its keys
to effective strategy execution.
Leading Corrective Adjustments
Michael Dell stays in close personal touch with customers.
Selling direct gives Dell firsthand intelligence about customer preferences and needs, as well
as immediate feedback on design problems and quality.
Dell management has responded to changes in the PC marketplace by pursuing ever greater
market segmentation—over the years, the company has created a set of sales and marketing
programs tailored to the needs/preferences of each major market segment.
Michael Dell has helped lead the evolving refinements in the company’s strategy.
The most recent refinement is the expansion into other IT products/services—data storage
products, Internet switches, printers and cartridges, handheld PCs, and IT services.
On the whole, it should be clear to class members that Michael Dell is an effective CEO and that the 5
components of the process of crafting and executing strategy are being quite well performed at Dell, Inc.
3. What are the elements of Dell’s strategy? Which one of the five generic
competitive strategies is Dell employing? How well do the pieces of Dell’s
strategy fit together? Is the strategy evolving and, if so, in what ways?
Students should easily recognize that Dell’s competitive strategy is one of global low-cost leadership.
Dell’s strategy to be the global low-cost provider has a number of key elements:
Employ a cost-efficient approach to build-to-order manufacturing and mass customization
Shifted from assembly-line manufacturing to “cell manufacturing” in 1997—resulted in
cutting assembly times by 75 percent and doubling of productivity per square foot of
assembly space.
More recently, Dell had taken the assembly process to even more efficient heights, partly by
redesigning its PCs to make them easier and quicker to assemble and partly by employing
innovative assembly techniques that reduced the number of touches by workers during
assembly and shipping by 50%. As of 2003-2004, workers could assemble a PC in about 2-3
minutes.
Dell had six plants across the world—Texas, Tennessee, Ireland, Malaysia, China, and Brazil
—and was constructing a seventh in North Carolina
All PCs were built to customer specifications—Dell was a pioneer in cost-efficient mass
production of customized products
The company has proven to be a world-class manufacturing innovator—a distinctive
competence
Strong quality control procedures (to enhance product reliability and give customers a good user
experience)
Extensive testing of parts, components, and subassemblies obtained from suppliers
Participation in quality certification programs with suppliers
All plants had been certified as meeting ISO 9002 quality standards
Partner with suppliers to squeeze cost-savings out of the supply chain—a key element of Dell’s
strategy to be a global low-cost leader
Form long-term partnerships with reputable suppliers of name-brand parts and components
and stick with them as long as they maintain their leadership in technology, performance,
quality, and cost
Partner with as few vendors as possible
Dell commits to purchase a specific percentage of its requirements from each of its long-term
suppliers—assures Dell of getting the volume of components needed on a timely basis
Alliances and partnerships have enabled just-in-time delivery—Dell’s long-term commitment
to its suppliers has enabled many suppliers to locate plants or distribution centers within a
few miles of Dell’s assembly plants
Suppliers help correct flaws or quality problems related to their products
Alliances enlist greater cooperation from suppliers in driving costs out of the supply chain
Dell develops a three-year plan with each key supplier and work to reduce the number of
parts and components in its products and to identify ways to drive costs down
Strong commitment to just-in-time inventory practices
Minimize the number of days of component inventories
Take advantage of the economies of minimal inventories
Over the years, Dell has refined and improved its inventory tracking capabilities and its
procedures for operating with small inventories, driving the average number of days of
parts/components inventory down from 6 days in 1999-2000 to5 days in fiscal 2001 to 4 days
in fiscal 2002, and to 3 days in 2003 and 2004
A strong commitment to direct sales to customers
A customer-based market focus that featured extensive market segmentation and specialized
