SM0495

Business Environment and Strategic Management

Example of a very good assignment

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Table of Contents

1. Introduction .............................................................................................................. 2

2. Analysis of the Current Business Environment Affecting the Industry............... 2

2.1. Macro-Environmental Analysis ............................................................................ 2

2.2. Micro-Environmental Analysis ............................................................................. 3

2.3. Main Opportunities and Threats .......................................................................... 3

3. Analysis of Dell’s Strategic Capabilities ................................................................ 4

3.1. Value Chain Analysis........................................................................................... 4

3.2. Benchmarking ..................................................................................................... 5

3.3. Main Strengths and Weaknesses ........................................................................ 5

4. Evaluation of Dell’s Recent Strategies ................................................................... 6

4.1. Offering Products Through Retailers in Addition to Internet ................................. 6

4.2. Moving Into Consulting/Solutions ........................................................................ 6

4.3. Reducing Costs ................................................................................................... 7

4.4. Other Strategies .................................................................................................. 7

5. Evaluation of the Challenges Faced by Dell as it Implements Strategic Change ..... 8

5.1. Retail ................................................................................................................... 8

5.2. Cost Reduction .................................................................................................... 8

5.3. IT Solutions ......................................................................................................... 8

5.4. The Change Process ........................................................................................... 9

5.5. Dell‟s Leadership ................................................................................................. 9

6. Conclusion ............................................................................................................. 10

7. References .............................................................................................................. 11

8. Appendices ............................................................................................................. 16

A. PESTLE Analysis .............................................................................................. 16

B. Five Forces Analysis ......................................................................................... 18

C. SWOT Analysis ................................................................................................. 18

D. Value Chain Analysis ........................................................................................ 19

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1. Introduction

Dell was founded in 1984 by Michael Dell, who has been Chairman since 1992 and

in 2007 also took on the role of CEO (Dell Inc., 2009a). Headquartered in Round

Rock, Texas, Dell‟s core market is the U.S. where it recently lost its position as the

largest supplier of personal computers (PCs) to Hewlett Packard (HP) in the first

quarter of 2009 (IDC, 2009). Worldwide, Dell is the second largest PC provider after

HP, with 13.6% market share (IDC, 2009).

Dell started out as a computer hardware manufacturer for the commercial sector.

Dell‟s business model differed from other multinational technology companies as it

built its products to order from components supplied by third parties and sold directly

to customers. Dell has begun to branch out from this original concept but the core

business remains the main source of revenue. As well as PCs Dell also designs,

manufactures and markets a range of other products including servers, storage,

peripherals and IT services.

Dell‟s revenue for the year ending February 2009 was $61,101 million, slightly lower

than the figure for 2008 (Global Markets Direct, 2009). Operating profit and net profit

however were significantly lower, with the latter falling 15.9% to $2,478 million

(Global Markets Direct, 2009). In the last quarter, 45% of Dell‟s revenue came from

commercial sales in the U.S. followed by 22% each from European commercial sales

and global consumer sales (Dell Inc., 2009a). Although Dell is part of the wider

technology industry, in the first quarter of 2009, 56% of its revenue came from

desktop and mobile PC sales and the following analyses will therefore focus on the

computer hardware industry.

2. Analysis of the Current Business Environment Affecting the Industry

2.1 Macro-Environmental Analysis

The PESTLE analysis (appendix A) details the main macro-environmental trends

affecting the computer hardware industry. Of these, the economic downturn is the

most pressing current issue but in the longer term, the increasing prominence of

environmental issues is an important trend within the industry. There is great

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potential for growth in developing countries but this comes with some difficulties in

overcoming trade barriers and piracy as well as avoiding the deterioration of margins

through the commoditisation of PCs. Technological advancements remain central to

the industry‟s progression and there is a growing trend towards mobile computing

(Stross, 2009).

2.2 Micro-Environmental Analysis

Porter‟s Five Forces analysis (appendix B) indicates that the threat of substitution in

the computer hardware industry is fairly low, with PDAs and blackberry‟s offering

some of the functionality of a PC but not yet providing an adequate replacement.

Threat of entry is quite high because PC assembly does not require highly skilled

employees or huge set-up costs and therefore risks being replicated.

Suppliers, such as Intel and AMD, are large and therefore have some power over PC

manufacturers due to compatibility requirements but this is not a very strong

influence as the computer manufacturers themselves are extremely large. The power

of buyers has increased somewhat due to ease of switching, transparency of costs

and commoditisation of PCs. Large commercial buyers have greater power than

consumers, but with only a few large computer companies serving the majority of the

market, the power of buyers is medium rather than high.

Overall, competitive rivalry within the computer industry is very high due to the

presence of a large number of competing organisations, rapid technological change

and intense product and price competition (Hoover‟s Inc., 2009).

2.3 Main Opportunities and Threats

The most prominent threat currently faced by the industry is the economic downturn.

The GDP of the world‟s major economies is set to contract in 2009 (Schifferes, 2009)

and this will have an adverse effect on the computer industry, with consumer

demand for expensive technological goods and commercial spending on IT in

decline.

While commoditisation and intense price competition pose a threat to the profitability

of the industry, there are still some opportunities as sales of mobile devices have

grown despite the recession and as growth in Western markets has declined,

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developing countries have provided opportunities for significant growth as well as a

threat in terms of controlling piracy and overcoming trade barriers.

Technology also provides both opportunities and threats for organisations within the

industry. Those that develop and harness the potential of new technologies in their

products are likely to succeed and those that do not, to fall behind. Environmental

issues are also holding an increasingly influential place in the industry and

organisations are under pressure to demonstrate their commitment to protecting the

environment.

3. Analysis of Dell’s Strategic Capabilities

Dell has moved away from some of its traditional sources of distinctive capability and

the following section will discuss some of these issues, which are covered in Kay‟s

(1993) model of the sources of distinctive capability. Firstly, aspects of Dell‟s

architecture will be considered using a value chain analysis and its innovation and

reputation will be considered in benchmarking Dell against some of its closest

competitors and in the summary.

3.1 Value Chain Analysis

The value chain (appendix D) shows that the organisation‟s core competence

remains its information system, which enables the coordination of a complex process

of operational and management control and feedback to minimise costs. This

includes ordering components from numerous suppliers and efficient coordination of

their movement through the assembly line. Dell‟s distinctive capabilities used to be

based around its direct-sales model, with a highly efficient information system

allowing „just-in-time‟ (JIT) production at low cost, mainly as a result of minimising

inventory in the system. One of Dell‟s distinctive capabilities is the ability to

customise products, providing a source of competitive advantage. However,

although some of its retail sales follow the direct-sales route, the stock held in retail

outlets has reduced these advantages.

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3.2 Benchmarking

HP and Acer are Dell‟s closest rivals. In the first quarter of 2009, HP grew by 2.9%

and Acer grew 6.8% compared with the same period in 2008, while Dell‟s market

share fell considerably, by 16.8% (IDC, 2009). By looking at some of the differences

between these companies we can gain an insight into the reasons behind this

substantial difference in performance.

Dell‟s main value to customers is providing customisable products at low prices but it

now faces stiff price competition from competitors such as Acer. This is evident in

Dell‟s recent financial performance; although sales increased by around $5 billion

between 2006 and 2008, operating income fell by nearly $1 billion as it struggled

with fierce competition (Schofield, 2008). Acer sells its products solely through

retailers, predominantly to consumers and has had particular success with its low-

cost netbook range (Hille & Kwong, 2009). In contrast, less than one quarter of Dell‟s

business comes from the consumer market and it has been hit hard by declining

commercial IT sales (Gelles & Waters, 2009).

Both HP and Acer have invested more in research and development than Dell. HP

spent $3,543 million last year compared with Dell‟s $663 million (The Financial

Times, 2009a) and it has a greater presence in IT consulting and solutions. While

Dell has been very innovative in the design of its information systems and logistics, it

does not have a strong reputation for product innovation. This puts Dell behind both

HP and Acer in terms of product innovation and retail presence and behind Acer in

manufacturing cost efficiencies.

3.3 Main Strengths and Weaknesses

Dell‟s main weakness is its lack of R&D which prevents it from developing innovative

products and essentially leaves it unable to differentiate its products significantly

from those of its competitors. Dell is in essence an assembly line; heavily reliant on

third party suppliers for components and on their commitment to innovation rather

than its own. This reliance leaves Dell with little scope to add value other than in cost

efficiencies, which have now been imitated by competitors. Dell also lacks sufficient

presence in the retail sector to grow its consumer sales and its customer services

are designed around the commercial sector and do not provide the level of

assistance required by consumers, both before and after purchase. In a report by

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Forrester research, Dell‟s customer service in 2008 was rated as “very poor” and this

must improve for Dell to succeed in the consumer market (Stone, 2009).

Dell‟s strength is primarily in its highly effective information system which controls the

supply chain to achieve cost efficiencies and allows product customisation. It

remains one of the world‟s top 100 brands, ranked 32nd in 2008 (Business Week,

2009) and as the world‟s second largest PC producer, Dell has high buying power

and benefits from economies of scale.

(For a SWOT analysis summary, see appendix C).

4. Evaluation of Dell’s Recent Strategies

The following section will refer to development strategies outlined in Ansoff‟s matrix

(Johnson, Scholes & Whittington, 2008, pp.258) and Porter‟s generic strategies

(Campbell, Stonehouse & Houston, pp.160).

4.1. Offering Products Through Retailers in Addition to Internet

Dell has established relationships with a number of retailers, including Wal-Mart

(Turner & Guglielmo, 2009) and Tesco‟s (Lloyd, 2007). This represents a market

development strategy as Dell is using existing products in a new market segment,

shifting from commercial clients to consumers. This will help Dell to address its

weaknesses in the consumer market by allowing consumers to see products and

receive greater guidance prior to purchase.

This does, however, need to be supported with better after-sales customer service,

tailored to consumers rather than businesses, in order to be successful. Consumers

need reassurance that they will be taken seriously alongside large businesses

ordering hundreds of Dell computers. Acer has had huge success in the consumer

market with its affordable and stylish netbooks (Einhorn, 2009) and this is a key

growth area for Dell to pursue.

4.2. Moving Into Consulting/Solutions

This capitalises on Dell‟s strength in information systems. This is a form of related

diversification, with Dell retaining its core business of PC manufacture, although

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there are elements of product development as Dell must adapt to this new market. In

contrast, IBM recently sold its PC manufacturing business to Lenovo and is now

entirely focussed on IT services (Musil, 2005). IT services is highly competitive and

cyclical, with IBM, HP and Accenture just some of the biggest players in the market

(The Financial Times, 2009b). However, with evident competence in IT systems and

logistics and its skills in dealing with business customers, there may be a niche for

Dell. This is particularly critical as the PC market becomes increasingly

commoditised and price competitive.

4.3. Reducing Costs

Dell has traditionally been the PC industry‟s cost leader, but as this competence has

been eroded by competitors, so too has Dell‟s position as cost leader. Dell appears

to be trying to regain its title as the industry‟s cost leader with its plans to cut costs by

$4 billion by 2011 (Gelles & Waters, 2009). It aims to achieve this through job cuts

(Rappeport, 2008), moving factories to areas with cheaper labour (Gergely & Jones,

2009) and adopting a defensive strategy, such as the potential withdrawal from

financial services (Austin Business Journal, 2008). With falling profit margins (Arthur,

2008) and increasing price competition from rivals, it is difficult to see a future for

Dell in simply chasing its previous position as cost leader.

4.4. Other Strategies

Having lost its position as cost leader, Dell needs to invest more in R&D to develop

more innovative, consumer-friendly products in order for it to differentiate its product

range from that of its competitors. This is particularly important due to

commoditisation in the consumer market in order to avoid continual erosion of profits

due to price competition. To succeed in the consumer market, Dell also needs to

improve its customer services. There is also potential for market development in

emerging markets where growth is higher than in the West, for example in China

where Dell‟s sales grew by 28% in 2008 (Back, 2009.

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5. Evaluation of the Challenges Faced by Dell as it Implements Strategic

Change

5.1. Retail

Dell‟s alliances with retailers and more recently, with distributors (Campbell, 2009)

are designed to increase its share of the consumer market. However, this is a less

profitable distribution channel than direct-sales due to the increased inventory levels

and retailers‟ margins. To increase its consumer appeal, Dell also needs to invest

more in R&D in order to improve innovation and differentiation of its products and

improve after-sales support.

5.2. Cost Reduction

One way Dell can achieve its cost-reduction targets is by subcontracting

manufacture out to specialised companies. This is something Dell has shown an

interest in, however it is believed it may struggle to sell its factories in North America

(Paul & Finkle, 2008). To achieve the greatest savings, Dell would need to use

manufacturing companies in developing countries, where labour costs are lower, but

cutting jobs in its home country would generate negative press.

Dell‟s spending on R&D increased 23% between 2007 and 2008 but only 9% the

following year, most likely in reaction to declining sales as the recession set in. It is

clearly a difficult time for Dell as it strives to make $4 billion in cost savings while

strategically it is more likely to benefit from increasing its investment in R&D.

5.3. IT Solutions

Dell is looking to build on its strengths in information systems and logistics with a

series of acquisitions to assist its move into IT services (Dell Inc., 2008). These

acquisitions allow quicker access to new markets by circumventing the lengthy

process of internal development of the necessary technology and skills but they

bring integration challenges, especially in cultural terms, and a risk that synergies do

not emerge (Bijlsma-Frankema, 2001).

Dell does not have a reputation for providing excellent service and they may struggle

to overcome this negative image in a service-led industry. Dell also faces intense

competition from larger organisations such as IBM and HP who have a strong hold in

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the services market and are likely to retaliate against Dell‟s efforts to gain market

share.

5.4. The Change Process

In 2007, Michael Dell admitted that the company had suffered from a period of

strategic drift, saying that its once incredible supply chain had “stagnated” and this

was reflected in its poor financial performance and declining market share (Lohr,

2007). It was therefore necessary for Dell to undergo the rapid transformational

change discussed in this section, described by Hope Hailey and Balogun (2002) as

revolutionary change. This addressed some of Dell‟s problems but some of the

strategies adopted appear incoherent, with massive cost reductions accompanying a

move into a new and highly competitive industry, and an attempt to move its product

range upmarket (Schofield, 2009b).

5.5. Dell‟s Leadership

In 2006, Dell‟s performance plummeted and Michael Dell was brought in to lead the

company forcefully in a new direction, with Dell‟s board stating that his leadership

and vision were critical to its success (Litterick, 2007). The previous CEO, Kevin

Rollins, was seen to be reluctant to modify Dell‟s traditional direct-sales model but Mr

Dell was quick to drive change. He initiated the move into the consumer market

through retail partnerships and more consumer-oriented design, implemented cost

cutting and acquired companies that would take them into the IT services market.

In 2007, Mr Dell emphasised that the Dell model was “not a religion”; recognising the

extent to which the Dell culture had permeated the organisation, he wanted to

encourage transformation in the company‟s ways of doing business (Guglielmo,

2007). Mr Dell‟s reinstatement as CEO was symbolic in bringing about change in a

culture that had dominated for many years and it is likely that he had to take an

autocratic approach to do this.

Mr Dell has made some necessary changes to the organisation and some of these

may require more time to prosper. However, Dell‟s recent performance indicates

there is a long way to go in turning the organisation around and the strategies of the

last few years have perhaps not proved as successful as the company hoped.

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6. Conclusion

Michael Dell‟s attempts to implement radical change have so far failed to address

weaknesses in customer service and innovation, leading to poor product design and

usability in the consumer market. Having moved away from its original low cost,

direct-sales model, some analysts now describe Dell as suffering from an identity

crisis (Stone, 2009) as it experiments in new markets such as IT solutions and seeks

to move its products upmarket while implementing a massive cost-cutting initiative.

For Dell to recover, it must develop unique competences which differentiate it from

its competitors and be clear in its focus if it is to achieve lasting competitive

advantage.

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7. References

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Hickman, L. (2009) „Fight The Power‟, The Guardian, 15 January [Online]. Available

at: http://www.guardian.co.uk/environment/2009/jan/15/energyefficiency-

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Hille, K. & Kwong, R. (2009) „Acer and Lenovo Send Out Mixed Signals‟, The

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2009).

Johnson, B. (2009) „Worldwide PC Sales Set To Slump To 2007 Levels In Biggest

Reverse Ever, Says Gartner‟, 3 March [Online]. Available at:

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2009).

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hell.html (Accessed: 23 April 2009).

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2009).

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Paul, F. & Finkle, J. (2008) „Dell Outsourcing Plan May Be Tough To Execute‟,

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Optimistic Opening Talk‟, Barron’s, 6 January [Online]. Available at:

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Success‟, Sloan Management Review, pp.3-17 [Online]. Available at:

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http://news.bbc.co.uk/1/hi/business/8011907.stm (Accessed: 20 April 2009).

Schofield, J. (2008) „Dell buys Dell - well, $100 million worth of shares‟, The

Guardian, 16 April [Online]. Available at:

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(Accessed 20 April 2009).

Schofield, J. (2009a) „PC sales down 7%, Dell toppled in the US‟, The Guardian, 3

July [Online]. Available at:

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April 2009).

Schofield, J. (2009b) „Dell Wants "Brand Lust" For Adamo, The World's Thinnest

Laptop‟, The Guardian, 17 March [Online]. Available at:

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April [Online]. Available at:

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May 2009).

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The Financial Times (2009b) „Cheap as Dell‟, 22 February, Nexis [Online]. Available

at: http://www.lexisnexis.com (Accessed: 24 April 2009).

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The Wall Street Journal (2009) „PC Market Faces Bumpy Ride in '09‟, 6 March

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8. Appendices

A. PESTLE Analysis

Political

The computer industry is quite strongly influenced by politics, for example the

European parliament is currently presiding over regulations that will affect the

software industry and the functioning of the internet considerably (Banks, 2008). The

Business Software Alliance represents the computer industry in the political arena,

with some of the most pressing issues being trade barriers and piracy, particularly in

developing nations like China which has seen huge growth in sales of computer

software and hardware (BSA, 2009).

Economic

The most substantial macro-environmental factor for the computer industry is the

global economic downturn. Gartner Inc. predicts a fall in PC sales of 12% in 2009

(The Wall Street Journal, 2009) and it is predicted that those companies who deal

mainly with consumers will fare better than those dealing with businesses, which are

likely to scale back IT spending in the recession (Schofield, 2009a).

Socio-Cultural

Propelled by the rapid expansion of the internet, PCs have become integral to our

everyday lives. Price competition has increased the affordability of PCs, particularly

in developing countries, but this has been at the expense of profit margins due to

commoditisation. As more and more people use PCs to store increasing amounts of

data, storage is likely to be a growth area for the industry (Weiss Ratings Inc., 2009).

Another key trend is the growth in popularity of mobile PCs, sales of which are

expected to grow 9% this year while the PC market as a whole contracts by almost

12% (Johnson, 2009).

Technological

Technological advancements are at the heart of the computer industry and continue

at a rapid rate, with companies investing huge amounts of money in research and

development (R&D). Microsoft invested the most in R&D in the computer industry in

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2008 at just over $8 billion (Asay, 2008). It has been suggested however that

innovation in the industry is being hampered by consolidation and that this will

impact future technological developments (CCIA, 2009).

Legal

Consolidation in the computer industry has resulted in increasing involvement of anti-

competition regulators to control the growth of multinational companies (Economist,

2009). The European Union antitrust regulator has fined Microsoft around $2.5 billion

since 2004 for its anti-competitive behaviour (Castle & Jolly, 2008) and it has

recently emerged that IBM and Sun Microsystems are in talks over a merger, raising

further concerns over monopolisation in the computer industry (CCIA, 2009).

Environmental

It is predicted that by 2014 there will be two billion computers in use around the

World (Hickman, 2009). As processors become faster they require more energy for

cooling and there is now huge pressure on the computer industry to reduce energy

consumption in PCs and servers, improve recycling and reduce packaging

(Hickman, 2009). With 64% of people now saying that recyclability is a consideration

when choosing their PC (Ray, 2009), environmental issues have clearly grown in

importance and it is even possible to judge the world‟s top electronics companies on

their environmental credentials in rankings published by Greenpeace (2009).

Summary

Political Environmental

Trade Barriers

Piracy

Global economic downturn

(recession)

Socio-Cultural Technological

Increasing use of PCs

Growth in developing countries

Trend for mobile devices

(notebooks/netbooks)

Mobile technology

Commoditisation as technology

has gone beyond needs of

average consumer

Legal Environmental

Anti-competition regulations Recycling & packaging

Energy consumption

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B. Five Forces Analysis

C. SWOT Analysis

Strengths Weaknesses

Information system & JIT manufacture

Product customisation

In World‟s top 100 brands

World‟s 2nd largest PC producer

Lack of product innovation

Reliance on third party suppliers

Lower retail presence than competitors

Poor customer services

Opportunities Threats

Growth in developing countries

Technological innovation

Growth in mobile consumer devices

Economic crisis (recession)

Trade barriers and piracy, especially in developing countries

Pressure over environmental issues

Commoditisation of PCs

Competitive Rivalry

High

Threat of Entry

Medium/High

Power of Buyers

Medium

Threat of Substitution

Low

Power of Suppliers

Low/Medium

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D. Value Chain Analysis

Retail

Direct-

sales

Online

Sales &

Build-to-

Order

Retail

Inspectio

n & Install

Software

Packing

Despatch

to

Retail

Outlet

After

Sales

Service

Non-

customised

retail stock

Inspectio

n & Install

Software

Packing

Despatch

Direct to

Customer

After

Sales

Service

PC

Components

Receiving

Inspection Assembly

Information

System