Dell in China

1. Dell in China Sample Case Analysis Presentation Professor Mike Davis January 14, 2008

2. Agenda • Identification of Key Strategic Issues • External Analysis • Internal Analysis • Summary SWOT • Strategic Alternatives & Recommendations • Questions & Answers

3. Key Strategic Issues

4. Key Strategic Issues • Taking advantage of an international opportunity in a high growth market • Adjusting business-level strategy in light of a rivalry • Leveraging core competencies in a foreign market

5. About Dell • Founded in 1984 • World’s largest computer vendor • Revenues of $41 billion in 2004 • Operates in 13 Asia Pacific markets with sales of $4.3B in 2004 • Entered China in 1995 via export • Started focusing on China in 1998 • Operates in in 1998 established a local manufacturing and distribution operation • In 2004, Dell PCs captured 7% share in China

6. External Analysis

7. Industry Definition • Dell competes in the PC industry, selling enterprise systems, desktop computers and notebook computers.

8. External Analysis: Key Environmental Factors • Demographic factors: • Chinese population is 23% of world total • Main opportunities will be in the larger cities where incomes are higher Source: China Country Commercial Guide (CCG)

9. External Analysis: Key Environmental Factors • Sociocultural: • Purchasing expectations (try before they buy) • Chinese attitudes and culture becoming more similar in purchasing patterns and work ethic to U.S. • Economic: • Chinese economy grew 9.8% in 2005 • Total retail sales increased 13% • China’s PC market estimated to grow 19% in 2004-2005 • Low per capita incomes and unevenly distributed • Average US $1,583 • Urban US $5,000 • Middle class (200 million people) US $8,000 Source: China Country Commercial Guide (CCG)

10. External Analysis: Key Environmental Factors • Political/Legal (new member of WTO but…) • China’s political system controls unions and financial institutions • Legal and regulatory systems can be inconsistent • Business based on relationships (guanxi) • Intellectual property at risk • Technology • Just 2.5% of urban Chinese own a computer • Access and use of the internet is increasing • Global • Sales opportunity (Asia/Pacific just 10% of Dell) • China’s attractive low-cost manufacturing capabilities Source: China Country Commercial Guide (CCG)

11. External Analysis: Porter’s Five Forces • Threat of New Entrants – High • Foreign and local competitors • IBM, Compaq and HP also entered in 1990s • Less government policy barriers (China joined WTO in 2002) • Potential barriers include: • Access to distribution channels • Scale economies (Local production plants) • Bargaining Power of Suppliers – Low • Most competitors are vertically integrated

12. External Analysis: Porter’s Five Forces • Bargaining Power of Customers – MODERATE • Few buyers purchase a large portion of industry output • State-owned companies, MNCs and educational institutions • Sales account for a large portion of Dell’s sales revenue • 50% from government, education, telecoms, power and finance. • Brand reputation and product differentiation can mitigate • Substitutes – None • Competitive Rivalry – Intense • High profit potential due to industry growth • Main buyers are institutions with more resources than individuals • Price pressure from local competitors • High fixed costs of production capacity • High strategic stakes (focus on market share) • Aggressive competitive response • Lenovo adopting Dell’s direct sales model in China • Lenovo’s joint venture with IBM to increase it’s share • Lenovo’s brand campaign to improve recognition

13. Competitors • Future objectives: • Build market share rapidly • Current strategy: • Cost leadership (Lenovo, Founder, Tongfang) • Differentiation (HP, IBM & Compaq) • Focused on consumer market • Lenovo positioning itself to challenge in high-end

14. Competitors • Key Strengths: • Chinese competitors: market knowledge and low cost advantage. • American competitors: technology and brand recognition • Key Weaknesses: • Chinese competitors: brand recognition • American competitors: higher costs

15. Customer • High-end Customers • State-owned companies • MNCs • Government • Educational institutions • Large Corporate Accounts (1,500+ employees in Telecoms, Power and Finance • Individual Consumers • Behavior: • Consumer market is price sensitive • Prefer a trial use of PCs before purchase • Internet purchases were uncommon but internet users increasing • Best way to reach is through retailing (Kiosks) • Value product quality, especially high-end customers • Brand loyal

16. Internal Analysis

17. Key Resources • Key tangible resources: • WW market leadership & financial resources ($8B in China) • Direct sales system and customer service • Local production plant in China • Alliance with Oracle • Manufacturing (“Build-to-order) and low inventory” strategy • “Just-in-time” model (6 days vs. 40 days of supply) • Portfolio of award-winning products • Key intangible resources: • Strong brand • Reputation (“Dell experience” of high-quality products, support and service) • Innovative in its technology, business practices and customer service http://www.dell.com/content/topics/global.aspx/corp/en/home?c=us&l=en&s=corp

18. Core Competencies • Ability to simplify PCs and the supply chain since their beginning • Ability to understand customer needs and deliver innovative technology and services • Ability to use technology to simultaneously improve customer experience and contain costs • Ability to operate a direct business model All are valuable, rare, costly to imitate and nonsubstitutable.

19. Value Chain Analysis • Primary activities of value: • Operations: Manufacturing processes contain costs well • Outbound logistics: Direct sales model • Service: High responsiveness to customer needs • Support activities of value: • Technological development: Innovative web site and IT infrastructure • Firm infrastructure: Visionary founder and management team

20. Summary SWOT

21. Strengths & Weaknesses • Strengths: • Reputation • Manufacturing plant (build-to-order capability, JIT) • 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) • Weaknesses • No low cost advantage that will allow them to compete in the consumer segment • Possible cost advantages not realized from their China plant

22. Opportunities • Large population in China and economic growth potential (Dell’s fourth largest market) • PC market expected to grow by 19% • Only 2.5% of urban Chinese own PCs • Sales potential in larger cities • Reduction in tariffs on IT products makes it less costly to export to China • Expansion into Japan, Korea and Taiwan

23. Risks • Low GDP per capita in China • Weak government protection of IP • Moderately high threat of entry of new competitors • Intense rivalry among competitors • Lenovo-IBM joint venture • Lenovo’s copying of Dell’s direct sales model • Lenovo’s attempts to boost brand recognition

24. Strategic Alternatives and Recommendations

25. General Problem Statement • Dell faces a rivalry from Chinese PC firms, in particular Lenovo (Legend) • Need to overcome Lenovo’s attempts to copy Dell’s direct sales approach and build brand recognition. (At risk is Dell’s dominance of the high end market) • Will require a cost advantage to re-enter the low-cost segment. (At risk is the Dell customer experience of product quality and service levels or accepting declining profits)

26. Strategic Alternatives • Lower costs to be viable and establish a presence in the low-end (consumer market) before competitors • Abandon the low-end and put all resources on defending the high-end (corporate market) where Dell currently has an advantage • Challenge Lenovo in other Asian markets that are important to it while increasing product quality and services in China

27. Strategic Recommendation: Expand and defend the high-end of the market Implementation • Continue Dell’s business level strategy of differentiation • Based on product quality, build-to-own capability and direct sales method • Continue to innovate and outpace the Lenovo-IBM partnership • Build brand recognition in China as Lenovo’s doing worldwide • Grow direct ordering via the internet (increasing Chinese web usage) • Leverage penetration in LCAs (>1,500 emp.) for increased “share of wallet” • Challenge Lenovo in other important Asian markets while increasing product quality and services in China • Prepare for wireless/mobility trend and strengthen notebook offering • Eventually broaden reach to penetrate low-end and rural areas • Develop the infrastructure to service, support and sell (different than urban areas) • Requires a low-cost, differentiated product line (e.g. AMD, no Windows OS) • Learn the Chinese market to overcome “foreignness” and local rivals • Explore alternative sales channels (besides direct) to reach small cities

28. Questions & Answers