Briefly discuss the industry profitability.

From 2006 onwards, Dell had started to lose market share as competitors copied its
innovative methods. Dell had many big competitors by the second quarter of 2008, being HP
the top global PC vendor with an 18.9% share of units. Dell had 16.4 percent of the market,
and other main competitors Acer Inc., Apple, Inc., and Lenovo had also significant market
shares.
Regarding profitability, despite the growth in revenue in the past 10 years, Dell was not
following the right direction and the market had not responded favorably to Michael’s return.
As proof of it, Dell’s Stock Performance was low for many consecutive semesters.
The case directs toward the fact that the computer industry was a thin profit high volume
game, mainly fought on the turf of operational efficiencies. Most of the computers were
similar, there was no major difference in the brand perception of the competitors as well.

One of its main competitors was HP, a company developing steadily whose margin improved
by 300 basis points, a result of increased leverage with Intel as HP started to use AMD
processes (150 basis points); supply chain improvements (100 basis points), and a broader
selection of notebooks (50 basis points).

Standardization and competition on prices were the key strategies that kept on reducing the
profit margins. Consistent innovation played a major role in making this business investment
heavy and hence further impacted profitability negatively.

Acer Inc., another great competitor for Dell, strengthened its U.S. presence by purchasing
Gateway Inc. and Packard Bell. In 2008, Acer was a multinational electronics manufacturer
and the third-largest computer manufacturer in the world.
\Michael seemed to be optimistic about their industries’ future and considered that Dell was
evolving at one of the most exciting points in the industry’s history. He hopes everyone is
committed to sustaining and building on the gains they already made in fiscal 2008.

About Dell and its financial record compared with the industry, we can say that even though
its Revenue is increasing (from 2006 until 2008), Selling, general & administrative expenses
were also high (roughly 25% higher), so that is why Michael Dell assumed again that
important position to set Dell up to the top industry. Net income decreasing was also an
indicator of how bad performance the company was suffering. Although Dell was trying to
push the Demand curve in front by adding more value for customers at the same price. This
increased the overall industry size and enabled Dell to win the volume game.
A 5-force analysis indicates high rivalry and hence, we can conclude that a crowded industry
with constant operational efficiency push from Dell made a less profitable industry.
How did Dell initially generate/capture value?\ After a major setback in 1992 due to
design flaws in its notebook computers, Dell had instated a team of seasoned executives to
manage daily operations. Within just 3 years, the company had recovered and kept
outperforming its competitors. One of the major reasons for this was that Dell sold to several
governments and large corporations that ordered high-end products which was evident from
the average price of dell computers which was 15 to 40 percent higher than its competitors.
Dell focused heavily on these high-margin customers and marketed their products directly
instead of opting for conventional retailer sales. Dell recognized that its high-end customers
had deep pockets and offered them customized products that eventually resulted in huge
savings for the customers and at the same time high margins for Dell.
For instance, customers usually had to order PCs that were to be programmed and installed
with software before setting up which took a lot of time and in some cases even needed to
mobilize a guy to an outside facility where it was done. But in the case of Dell, customers
were offered systems pre-installed with the required software at the factory and delivered as
ready-to-install systems. This saved a lot of time and money for the customers which made
them prefer Dell over its competitors and generated significant additional value for them.
This increase in value inevitably increased their willingness to pay for Dell products.
In terms of its operations, Dell carried minimal inventory whilst ensuring that the products
are produced efficiently and quickly. Dell had identified suppliers who could deliver
components within an hour from the order and had strategically positioned its inventory at the
factory. Since computers were made to order, they directly loaded the assembled products
into trucks and delivered them to the customer. All these operational and inventory
management strategies made production and assembling highly efficient which was evident
from the 1.8 to 3.3 percent higher gross margin that Dell had compared to its competitors.

Dell was targeting market segments with high margins and standardized products, also, the
company had ventured into selling computers and servers over the internet via Dell.com
which had not just increased revenues but also reduced its sales and administrative costs by
around 6 percent in 2 years. Also, in order to further build on their supply chain, they had a
separate website for their suppliers which enabled the suppliers to efficiently time and
manage their shipments thereby benefiting Dell. Dell also concentrated heavily on
minimizing costs. For e.g., their office buildings were plain and sterile following a cubicle
seating arrangement. A highly efficient supply chain, manufacturing, and cost-effective
operations enabled Dell to capture maximum value from its sales. Also, Dell had greatly
diversified its offerings and was not just limited to computers. Dell started offering servers,
storage systems, printers, etc. to its customers which was a success due to Dell’s already
strong reputation and accounted for more than half of Dell’s total revenue. Dell had proudly
established its identity as a pioneer in product assembling and sales that enabled them to
minimize costs and pass on that benefit to its customers thereby gaining market share. Dell’s
HR practices were driven towards weeding out the slackers and making the company nimble.
Hence, all of these factors helped Dell generate a lot of value for the customers by driving
costs down which helped them gain an advantage over their competitors.

What were the challenges Dell faced?

The challenges faced by Dell can be broadly classified into 3 distinct time periods –
The early 90s, Early 2000s, and Mid 2000s.
 1. In the early 1990s, Dell achieved a revenue of $2 billion but soon after faced its first
major challenge. Due to inexperienced management, Dell expanded rapidly to
maximize revenues, and the design quality of its products deteriorated with design
flaws being detected in its notebook computers. This landed Dell in a liquidity crisis.

2. In the early 2000s, the rapid growth of Dell convinced it to open its own
manufacturing units and customer service facilities across Europe, Asia, and North
America. This increased the operating cost of Dell which impacted its net profit
margins.

Secondly, Dell increased their product line by venturing into newer categories and
ultimately exiting some of those categories. This resulted in incurring higher
operating costs and lesser profit margins.

Finally, Dell started setting ambitious internal sales goals and this resulted in financial
mismanagement. In order to achieve the targets, quarter-end financial adjustments
were made with the business personnel not providing accurate information to their
corporate headquarters. An investigation in 2006, identified irregularities in its
revenues to the tune of $50 million and $150 million being reported in excess.

3. In the mid-2000s, Dell lost its position as a market leader in the world. Dell’s
competitive advantage was sourcing parts from suppliers and assembling them in a
streamlined and highly tuned supply chain and delivering them to the end-user.
However, the standardization of components over time due to improving technology
and decreasing cost drove down the cost of PCs. Competitors imitated the supply
chain innovations which Dell had implemented and further lowered their prices. Thus,
Dell lost its competitive advantage.

Second, Dell suffered from internal issues. Its decision to exit low-end markets due to
poor financial performance and negative news coverage due to financial
mismanagement led to the resignation of its CEO. By the time Dell recovered, the
market dynamics had changed as consumers increasingly bought from retailers.
Competitors like HP and Apple had a massive direct and indirect retail network which
they were able to leverage to outpace Dell.

At the time when Dell was busy developing a lean Direct to Customer/Customized for the
order value chain, the improvements in technology and the broad category of customer base
getting attracted towards PCs started moving the PC industry slowly but steadily towards
standardized configuration and retail presence. Dell was not ready for this.

How did the company address them? Pros vs cons

To address the above-mentioned problems, Dell took many steps, here are some of the major
ones:
1) The Dell Returns: The return of Michael Dell could have been a masterstroke, just
like it was in the Apple story.
Pro: At the time when the company was facing challenges due to the financial
investigation, a known successful leader could have steered the motivation of the
entire team in the right direction. This could also have kept the major customers
satisfied
 Con: This was a drastic move and it rather created panic in the market and gave a
clear indication that something really big is wrong with the company.
2) Modified the value chain to integrate retail as a part of the strategy:
Pro: It brought Dell parity with the competition as other companies were selling
standardized consumer PCs through this channel, while Dell was completely out of
the scene. Now a major category of new PC customers was exposed to Dell products.
Con: Being sort of a desperate move, it drained company energy as it was a complete
shift in their value chain, and Dell was known to generate value for customers, but
this could have led to reduced margins, /higher prices, or overall, less value creation.
3) Outsource Manufacturing (Moving to China in the future)
Pro: Producing standardized high-volume products became easier. Especially with a
switch in sales strategy. Moving this part out of the value chain saved them significant
value. (Up to 22.9% savings in cost in China – Exhibit 4 )
Con: Drastically reduced the customization that was possible in internal factories.
4) Change of strategy from customized, built on demand, one generation old system to
standard models with the latest configuration and better design.
Pro: Moving with the market demand, since the PC market was shifted from offices to
personal users, who do not need drastic customization but do need better-looking
faster machines. (Separate design department)
Cons: Major change in the value chain, team will need time to adapt.

Dell has the original positioning of a Focused differentiator in terms of supply chain and was
able to produce cost-effective computers for offices.
The disruption in PC technology shifted the demand curve, and more consumers moved
toward buying PC.
Dell was not ready for that, and this case is about them realizing this and trying to maintain
the competitive advantage they had in past.

Value chain analysis:

Firm infrastructure: Mismanagement of financials in the 2000s led to an investigation.
Human Resource Management: Uncertainty for newcomers. Smaller teams. Senior
executives were compelled to frequent organizational restructuring.
Technology Development: Focused on optimizing the supply chain. Competitors soon
imitated the developments. Moving towards design and standardization
Procurement: Had a very less inventory at any given time. Diversifying business led to
increased operating costs.
Logistics: Procuring majority parts from trusted distributors. Direct sales to customers.
Competitors had a strong retail presence.

Moved from D2C sales to retail: To cater broader audience.