dell problem in china_gaurav sinha_mba_icfai business hyderabad

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dell’S Problems in china Presented by: Gaurav Sinha MBA (MARKETING) ICFAI BUSINESS SCHOOL(HYDERABAD)

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Page 1: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

dell’S Problems in china

Presented by:Gaurav SinhaMBA (MARKETING)ICFAI BUSINESS SCHOOL(HYDERABAD)

Page 2: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

INTRODUCTION• October 25, 2005- retirement of President of Dell China, Foo Piau Phang

•Chief of Dell Asia Pacific Bill Amelio’s statement

•Dell’s market share in China slipped from 8.2% to 7.5% in 2nd quarter

• Reasons cited: Weak sales power and fierce competition from Lenovo and HP

INTRODUCTION

Page 3: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

Background Note

• 1983 Michael Dell upgraded IBM PC’s• Dell computer corporations incorporated on May 3, 1984• Revenues grew• Introduced support services• 1987 global• 1988 went public• Entered the retail channel• 1993 cash crunch in the company

BACKGROUND NOTE

Page 4: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

• Mort Topfer joined dell• Indirect distribution channels not successful• Exit from retail market• Direct sales model , customization• Selling through internet, july 1996• Company branched into new markets• Started selling Printers• Collaborations with companies like Lexmark, Fuji, Xerox, Samsung and Kodak

Page 5: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

DELL’S DIRECT MODEL

Page 6: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

RAW MATERIALS END CUSTOMERS

SUPPLY CHAIN TIME LINE

PUSH STRATEGY-Component inventory

based on forecast

PULL STRATEGY-Final assembly in response to specific customer order

PUSH-PULL BOUNDARY

Page 7: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

CONVENTIONAL MODEL DELL’S DIRECT MODELManufacturer Reseller Customer

Manufacturer Customer (Bypassing reseller)

Used lesser developed manufacturing capabilities,Logistics capabilities & information system

Requires superior manufacturingcapabilities ,logistics capabilities & information system

No such model was used Uses Value Web Model- Focused on strategic activities & outsourced non-strategic activities

Competitors kept 45 days of inventory

Factories stacked inventory for 5 days

Relative higher inventory costs & overheads

Reduced inventory costs & overheads

Warehouses are usually distant from the factory

Dell’s supplier set up warehouses near Dell’s factory

Page 8: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad
Page 9: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

STRENGTHS Act as most efficient path to

customers: No resellers to add cost & confusion

Single point of accountability

Customized products

Low cost leadership-Efficient supply chain

Standard based technology-customer flexibility and choice

THREATS

Increasing demand for Innovation: If Dell only focuses

on performance, this trend might be a threat in the future

Intensity of Rivalry: Dell’s rivals are finding ways to increase

their market share by replicating some of Dell’s

advantages

Page 10: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

Chinese PC market

DELL’s strategy in Chinese market

DELL IN CHINA

Chinese PC market

DELL’s strategy in Chinese market

Page 11: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

The CHINESE MARKETPC sales less than one million in 1995.Sales crossed 12 million by 2003 & China overtook

Japan as the 2nd largest PC market in the worldMarket leaders in 1995 were Compaq, AST, IBM &

Legend.Grey market was very popular.Dell’s problem in China

Tariffs on imported components were very high.Foreign firms in China depended on resellers .Obtaining license was very difficult.

THE CHINESE MARKET

Page 12: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

DELL’S STRATEGY IN CHINAThe Direct model approach.Targeted Xiamen initially and further went on to penetrate

other areas with its mission objective.Focused on corporate market. Established a website

www.dell.com.cn that provided a Chinese/English interface.

Established Cash-on-delivery system and entered into agreements with several banks to facilitate payments.

Hiring local talent.Emphasized on “Gunaxi”.

DELL’S STRATEGY IN CHINA

Page 13: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

CONTINUED……Passed on the low cost benefits to the customers.Direct model helped reduce channel costs, obtained real

time market information.Focus on individual customers. Launched smart PCs at

lower prices.Opened an Enterprise command Center in Xiamen to

provide high level round-the-clock support for server and storage customers.

CONTINUED…..

Page 14: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

DELL IN CHINA BY 2004

7.2 % share in Chinese PC market.

4th position in the PC market in China.

Despite increase in overall PC shipments market share

dropped.

DELL IN CHINA BY 2004

Page 15: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

PROBLEMS FACED BY DELL IN CHINA

SATURATED URBAN MARKET: Dell mainly concentrated on urban cities like Shanghai and

Guangzhou.

Neglected semi- urban and rural areas( projected PC penetration rate at 40 % per annum).

Lack of infrastructure and distribution channels to capture rural market .

PROBLEMS FACED BY DELL IN CHINA

Page 16: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

EXCESSIVE DEPENDENCE ON DIRECT MODEL

Model dependent on pre-orders from consumers.

Use of credit card and internet was not wide spread.

Customer did not preferred e- commerce transactions.

Customization of products did not hold good in rural markets.

EXCESSIVE DEPENDENCE ON DIRECT MODEL :

Page 17: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

CULTURAL AND ECONOMIC FACTORS

Buying computer was a family decision in china.

An average Chinese buyer had to spend an equivalent of two months salary to buy a computer.

LACK OF INNOVATIVE PRODUCTS IN CHINA.

MAJOR FOCUS ON OFFERING HIGH PRICED PRODUCTS TO UPPER SEGMENT.

CULTURAL AND ECONOMIC FACTORS

Page 18: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

PROBABLE STEPS TO OVERCOME PROBLEMS.

• More focus on growing PC market in semi-urban and rural areas.

• Developing logistics and distribution channels to serve rural customers.

• Alternate payment system for rural customers as e- commerce is not prevalent.

• Offering standardized and innovative low priced products to capture rural market.

• Extending customers financing facilities to buy PC on easy installments.

STEPS TO OVERCOME PROBLEMS

Page 19: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

THE FUTURE….

Saturation in the urban PC market and slowdown in sales.

Dell’s move to re-enter the budget PC market in smaller towns and cities.

Success in China has been majorly on the commercial side.

Revamping of the Chinese website of Dell to cater to the local needs.

THE FUTURE

Page 20: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

FUTURE(CONTD.)

Foray into the laptop market in China.

Rapid price erosion in the category of desktop and notebook computers.

Re-defining Dell’s Direct model in China.

FUTURE(CONTINUED…)

Page 21: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

THE MOVE….Introduction of new server and storage products aimed at cost-conscious companies.

Reshaping of culture,product design and innovation.

Moving beyond direct sales to a strong retail presence.

Introducing a cost-competitive structure to attract a large pool of customers.

THE MOVE….

Page 22: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

Factors influencing growth of computer industry in china

In 1990 there were only 500,000 PCs in China, however in 2003 it surpassed Japan to become second largest PC market in the world.

This growth can be attributed to rapid economic growth & increased foreign investment flows in China.

FACTORS INFLUENCING GROWTH OF COMPUTER INDUSTRY IN CHINA

Page 23: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

The main factors that influenced the development of China’s Computer industry are:

China’s domestic market with a population of over 1.3 billion & unlimited supply of low cost labor coupled with economic growth.

China’s computer industry developed in a transitional economy with ownership structures including both capital & state ownership.

China has built its computer industry on the base of huge science & technology capabilities which are not found in most of the developing countries.

Page 24: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

China’s Computer Trade Balance

1992 1993 1994 1995 1996 1997 1998 1999 2000

Exports 820 1258 2006 3750 5315 7543 10169 11698 16577

Imports 1344 1244 1763 2403 2876 3868 5300 6969 9883

Trade Balance

-524 -86 233 1347 2439 3675 4869 4729 6694

Q3 2004 Q2 2005 Q3 2005Shipment(Million sets)

3.124 3.428 3.561

Market Size(RMB 10 Billion)

1.895 1.966 2.026

1992 1993 1994 1995 1996 1997 1998 1999 2000

Exports 820 1258 2006 3750 5315 7543 10169 11698 16577

Imports 1344 1244 1763 2403 2876 3868 5300 6969 9883

Trade Balance

-524 -86 233 1347 2439 3675 4869 4729 6694

CHINA’S COMPUTER TRADE BALANCE

Page 25: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

Dell-Major Competitors In China

LENOVO GROUP LTD It is the 4th largest Pc manufacturer in the world the largest in

China as of 2004. Its products include desktops, laptops, servers, handheld computers & imaging equipment.

FOUNDER HOLDINGS LTD It is an Asia-Pacific based multinational company, whose

subsidiaries are located across Asia. The company’s activities cover both hardware & software.

DELL’S MAJOR COMPETITORS

Page 26: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

TCL CORPORATIONFounded in 1981 it is the leading manufacturer of electronics in China. It is one of the fastest growing companies in China

TSINGHUA TONGFANG (THTF)It is a supplier of It products & solution plans, its products include desktop PC’s,Notebook Pc’s, Digital & computerized peripheral products.

Page 27: Dell Problem in China_Gaurav Sinha_MBA_ICFAI BUSINESS Hyderabad

GAURAV SINHA