Dell in China: Strategic Rethinking

• Evaluate Dell’s tangible and intangible resources? Which are more

important as a source of competitive advantage? Why?• What are the main capabilities of Dell? Does Dell have a core

competence?• Does Dell have a sustainable competitive advantage in the Chinese

computer industry? • evaluate the opportunities and threats in the general environment in

China? • Use Porter’s Five Forces Model to analyze the PC industry in China.

Given this analysis, is the industry attractive or unattractive?

• Who are the main competitors of Dell and how does Dell measure up against these competitors?

• What is Dell’s business-level strategy? Is the strategy appropriate to offset the forces in the industry? Do you recommend any changes?

• What was Dell’s entry strategy in China and what international-level strategy is currently being followed? What were the main incentives for the entry into China, and how would you evaluate the international strategy so far?

Dell in China: Strategic Rethinking

• Dell Computer’s expansion into China, initially via export in 1995

• subsequently in 1998 through establishment of a local manufacturing and distribution operation

• decision to change its strategy from one focused on the low-end consumer segment to the high-end corporate segment

Dell Inc.

• Price pressure from Chinese competitors such as Legend, Founder, and Tongfang.

• price and profit margin declines in the industry.

• Dell’s inability to provide delivery of computers and service and support in a timely manner.

Dell Inc.

• exited the low-end market and decided to focus on the servers, printers, and data storage gear.

• raised its prices and focused mostly on the corporate market.

• strategy change has resulted in market share increases. Dell captured 24.1% market share in server shipments in 2004, and its PCs captured 7.3% (third place).

Dell Inc.

• Legend (which later changed its name to Lenovo) and Founder ranked ahead of Dell with market shares of 25.7% and 11.3% respectively.

• The case concludes with speculation that Dell may re-enter the low-end market as other firms drop out.

Tangible Resources

• Financial Resources: (strong)

Dell is ranked first in worldwide PC market share (20.7%).(Exhibit 1)

sales have climbed steadily from 1997 to 2004. (Exhibit 2)

revenue in the Chinese computer market reached $8 billion in 2002, almost double the 2002 revenue.

Tangible Resources

• Dell’s China sales increased to about 60% of its total Asia-Pacific sales in 2003, from 45% in 2002, making China its fourth largest market behind the U.S., U.K., and Japan.

• Dell’s net income has also increased from 1997 to 2004, although not at the rate of its sales.

Tangible Resources

Organizational Resources:• Dell’s direct sales system. Customers

could place orders via the Internet, but only 5% of its orders were made in this way.

• maintained toll-free numbers to provide sales and support, and its sales personnel visited cities to enlist new customers.

Tangible Resources

• alliance between Dell and Oracle in China to offer Linux based Oracle software on its computers.

Tangible Resources

Physical Resources: Strong

• Dell’s local production plant in China. This plant allowed Dell to continue its build-to-order system which had made it so successful in the United States.

• The build-to-order system allowed Dell to keep its inventory levels at six days of supply compared to 40 days for Chinese competitor Legend.

Tangible Resources

Technological Resources: Strong.

• Dell has traditionally had strong technological resources and it seems to have leveraged these in China through its production plant and sales and service organization.

• The alliance with Oracle also contributes to its technological strengths.

Tangible Resources

• Dell received the 2003 “Best Overseas PC Corporation” award from China Center of Information Industry Development for its product performance.

Intangible Resources

Human Resources:

• There is no discussion in the case of the human resources aspects of the operation in China in terms of the quality of human resources available to the company, or the extent to which Dell was dependent on expatriates.

Intangible Resources

• Innovation Resources: There is no specific discussion in the case about innovation activity, except the alliance with Oracle that could possibly lead to innovations. Dell has generally had a reputation as an innovative company in its technology, business practices (e.g., build-to-own) and customer service.

Intangible Resources

• Reputational Resources: Excellent. This conclusion is based on prior knowledge about Dell. The company is able to leverage this worldwide reputation by positioning itself in the higher priced end of the market.

Resource Audit

• Overall Assessment: Dell had strong resources. The case presents more documentation of its strengths in tangible than intangible resources for the China operation, but the company is generally known to have strong intangible resources. A key concern that comes out of the above analysis is whether Dell will have the appropriate quality of China resources to be able to carry out its strategy.

Capabilities

• Capabilities are defined as “the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired state” or “the glue binding an organization together…” Also capabilities are defined as residing in the “unique skills and knowledge of employees, and often their functional expertise.”

Capabilities…

• Possible capabilities at Dell are in its manufacturing (build-to-order), and resultant low inventory. Dell also has competences in. its customer service.

Core competencies

• Core competencies are defined as “resources and capabilities that serve as a source of a firm’s competitive advantage over rivals.” Thus, core competencies are groupings of resources and capabilities. Not all of a firm’s resources and capabilities are core competencies.

Core competencies…

• Dell’s core competencies reside in its manufacturing, technology, and customer service areas.

Core competencies & VC

• which activities contribute most to the core competencies at Dell?

Inbound Logistics (inventory control), Operations (build-to-own), Marketing and Sales, Service (on line and phone order capability, installation, and repair), and Technology Development (product design, servicing procedures).

Does Dell have a sustainable competitive advantage in the Chinese computer

industry?

• Four Criteria for Sustainable Competitive Advantage are:

(1) Valuable Capabilities (help the firm neutralize threats or exploit opportunities) (Dell-Yes)

(2) Rare (not possessed by others):

(Dell-Mixed)

build-to-own and customer service capabilities of Dell

sustainable competitive advantage…

(3) Costly to Imitate (Dell- Yes) It would be costly to imitate the unique attributes of Dell.

(4) Non substitutable (no strategic equivalents)

(Dell- Yes)

sustainable competitive advantage…

• Dell’s direct sales model as an example of a non substitutable capability on the grounds that to date, no competitor has been able imitate it. Thus, to the extent that Dell is able to replicate this direct sales model in China, this capability is non substitutable. The case does note, however, that Legend is attempting to copy that direct sales model.

Overall assessment

• Overall assessment: Mixed.

• compare the outcome of the above analysis to the Dell’s recent financial performance.

• Strengths• Reputation• Competitive advantage (valuable, costly to

imitate, non substitutable)• Manufacturing plant (build-to-order capability,

JIT)

Strengths

• Direct sales model (on line and phone order capability)

• Strong sales revenue in 2003 ($8 billion)

• Strategic alliance with Oracle

• Product performance (Best Overseas PC Corporation Award)

Strengths

Weaknesses

• Weaknesses

• Dell does not have a low-cost advantage that will allow it to compete in the consumer segment.

• Possible cost advantages not realized from the China plant.

• Opportunities

• Large population in China and economic growth potential (China is Dell’s fourth largest market)

• Sales potential in larger cities

• Growth potential in China (PC market expected to grow by 19%)

Opportunities

Opportunities

• Only 2.5% of urban Chinese own computers

• Reduction in tariffs on information technology products (less costly to export to China)

• Attractive (high profit potential) industry

• Chinese government ministries and agencies (as buyers of Dell products)

• Expansion into Japan, Korea, and Taiwan

Threats

• Threats

• Low GDP per capita in China

• Weak government protection of intellectual property

• Moderately high threat of entry of new competitors

• Intense rivalry among competitors (especially local Chinese competitors

• Legend’s copying of Dell’s direct sales model in China

• Legend’s attempt to boost brand recognition via supply agreement at 2006 Turin Winter Olympics

• Legend – IBM joint venture

Demographic Segment

Demographic Segment• population size(opportunity-23% of the world

total). • age structure• geographic distribution(large cities)• ethnic mix• income distribution(higher income)

Source: Country Commercial Guide (CCG) (http://www.buyusainfo.net/docs/x_3265405.pdf).

Economic Segment

Economic Segment • China’s economy has increased by 9.8 % in 2005,

and total retail sales increased 13 % in 2005. • China’s PC market was estimated to grow by about 19%

in 2004-2005.

• U.S. exports to China increased 28%, 22%, and 19% respectively for the years 2003, 2004, and 2005.

Economic Segment

• per capita income in China is low (US$ 1,583) and income distribution is uneven with urban centers such as Beijing with per capita incomes in the range of US$ 5,000.

• The Chinese middle class (estimated at 200 million people) has a per capita income of over US$ 8,000.

• Dell’s PCs were priced at $ 483 (the highest among competitors)& had been selling poorly.

Political/Legal

Political/Legal • China’s legal and regulatory system is not

transparent and can be inconsistent and arbitrary.

• Business relationships are sometimes based on relationships (guanxi).

• government protection of intellectual property has been weak.

Political/Legal

• China’s political system still operates in part as a planned economy and maintains control over unions, and banks and other financial institutions.

Sociocultural Segment

Sociocultural Segment• The Chinese attitudes and culture are becoming

more similar in purchasing patterns and work ethic to U.S. attitudes and culture.

• There are some cultural differences in purchasing expectations (e.g., needing to try products before buying) that companies will have to accommodate.

•

Global Segment• Annexure 2 shows that the U.S. is the most

important market for Dell (69% of sales), followed by Europe (21%) and then Asia/Pacific (10%).

• The Chinese market presents sales opportunities for Dell, but also threats from local competitors.

Overall Assessment

• presents other opportunities for Dell as it expands into the north Asia region (Japan, Korea, and Taiwan) using China as a production base.

Overall Assessment:• Most of the opportunities in the general environment

come from the tremendous economic growth, while most of the threats come from the political/legal environment.

• The political/legal threats are likely to lessen as China fulfils more of its WTO obligations, and reforms its regulatory system.

Threat of Entry

Threat of Entry: Moderately High.

• The threat of entry from both foreign as well as local competitors appears to be moderately high given the recent entry by U.S. competitors.

• IBM, Compaq, and HP entered the industry in the early 1990s, and Dell entered in 1995.

• Since these entrants were all established firms in the United States (and other countries), they did not face the barriers of product differentiation, capital requirements, or switching costs.

Threat of Entry

• although access to distribution channels and government policy (permit requirements) may have been barriers.

• Scale economies will be a barrier to new entrants given the scale advantages that Dell now has through its large production plant in China.

• There is also a threat of entry from local competitors, although these will face product differentiation (given the brand recognition of the current competitors).

• Since China joined the WTO in 2002, there will be reduced government policy barriers.

Bargaining Power of Suppliers

Bargaining Power of Suppliers: Low.

• Dell is vertically integrated, and thus does face powerful suppliers.

• If we assume that most competitors are vertically integrated, then supplier power is not threat.

•  

Bargaining Power of Buyers

Bargaining Power of Buyers: Moderate• state-owned companies, MNCs, and educational

institutions accounted for most of the PC sales in China.• main buyers were government, education, telecoms, and

power and finance. These accounted for 50% of its business.

• it is possible that these groups have at least two characteristics of powerful buyers (purchasing a large portion of the industry’s total output, sales account for a significant portion of the seller’s annual revenues), these buyers could be powerful.

Bargaining Power of Buyers

• since individual buyers have no negotiating power, they are not powerful.

• One aspect of the PC industry that mitigates the power of buyers is the reputation and uniqueness of a particular PC brand (such as Dell, HP, and IBM).

• Dell has recently been making sales to China’s government agencies and ministries which had formerly bought computers from Legend.

Threat of Substitute Products

Threat of Substitute Products: Weak.

• There are no substitutes.

Rivalry

Rivalry: Intense

• The intensity of the rivalry is seen primarily in the price pressure that is brought to bear by the local competitors.

• high fixed costs of the production capacity, and the high strategic stakes.

• Legend started to follow Dell’s direct sales model in China.

• entered into an agreement to supply computer technology to the 2006 Turin Winter Olympics in an effort to boost its brand recognition.

Rivalry

• Legend also planned a joint venture with IBM in China to further increase its market share.

• only 2.5% of urban Chinese owned a computer compared to 55% in the United States.

• Exhibit 5 shows the top six PC rivals in China in 2003, with Dell ranked 4th with 7% market share.

overall assessment

overall assessment:• Despite the intense rivalry, and the moderate threat of

entry, the industry remains attractive (i.e., it has a high profit potential) primarily because of the potential for growth.

• China was the 5th largest PC market in 1999 behind the USA, Japan, Germany, and the UK.

• In addition, the main buyers are institutions which have more resources to make purchases rather than individual purchasers who are constrained by low disposable

incomes.

 

Competitor Analysis

• Competitor Analysis includes understanding competitors’ future objectives, current strategy, assumptions, and strengths and weaknesses.

• The future objectives of the competitors seem to be to build market share rapidly given that only 2.5% of urban Chinese own a computer.

• Since IBM, Compaq, and HP have recently lost market share to local competitors (Legend, Founder, and Tongfang), these American competitors will likely try to regain the lost share.

Problem statement

• How to overcome Legend’s attempts to copy its direct sales approach and build it brand recognition.

• How to build a cost advantage so that it can reenter the low-cost segment (as CEO Rollins appears to be suggesting that the company will do).

business-level strategy

• differentiation based on its product quality, build-to-own capability, and direct sales method. Dell is able to leverage its unique competencies in China by offering a superior product at a higher price than its competitors.

• Dell does have an element of focus in its scope, that is, it sells mostly to the Large Corporate Accounts which accounted for 50% of Dell’s business.

• More recently, Dell had begun sales to Chinese government agencies and ministries.

International-Level Strategy

• Dell’s initial entry strategy was exporting

It did not allow Dell to implement its build-to-order strategy, which had

been so successful in the United States.

distribution was not under Dell’s control.

International-Level Strategy

• wholly-owned subsidiary that was responsible for both manufacturing and distribution.

(1) low cost Chinese labor

(2) to control its own distribution.

(3) allow adjustments for local conditions, e.g. allowing potential customers to try the product before purchasing it.

Additional Information

• Dell plans to build a new plant in Xiamen, China. It will produce PCs for Dell customers in northern Asia.

• 14.9 million PCs were sold in China in 2004. Dell has the largest market share of any foreign PC maker in China.

• Dell has opened a Enterprise Command Center (ECC) in Xiamen, China (September 2004). The ECC will provide business customers with better integration of service delivery. By monitoring weather and traffic patterns, Dell problem solvers can make parts and service delivery more efficient. In the U.S., ECC has resulted in nearly 25% improvement in resolving customer issues.

Where to Get More Information

• www.dell.com• http://www.infoworld.com/article/05/03/25/HNdellchina_1.html• http://www.infoworld.com/article/05/03/25/HNdellchina_1.html• http://www.infoworld.com/article/05/03/25/HNdellchina_1.html• http://www1.us.dell.chttp://ww6.infoworld.com/products/

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