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Dell in China. Sample Case Analysis Presentation Professor Mike Davis January 14, 2008. Agenda. Identification of Key Strategic Issues External Analysis Internal Analysis Summary SWOT Strategic Alternatives & Recommendations Questions & Answers. Key Strategic Issues.

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dell in china

Dell in China

Sample Case Analysis Presentation

Professor Mike Davis

January 14, 2008

agenda
Agenda
  • Identification of Key Strategic Issues
  • External Analysis
  • Internal Analysis
  • Summary SWOT
  • Strategic Alternatives & Recommendations
  • Questions & Answers
key strategic issues
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
about dell
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
industry definition
Industry Definition
  • Dell competes in the PC industry, selling enterprise systems, desktop computers and notebook computers.
external analysis key environmental factors
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)

external analysis key environmental factors9
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)

external analysis key environmental factors10
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)

external analysis porter s five forces
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
external analysis porter s five forces12
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
competitors
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
competitors14
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
customer
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
key resources
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

core competencies
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.

value chain analysis
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
strengths weaknesses
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
opportunities
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
risks
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
slide24

Strategic Alternatives

and Recommendations

general problem statement
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)
strategic alternatives
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
strategic recommendation
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