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Erik Hebert Cristian Marcu Marshal Miller Anna Tsai Kai Xia Joseph Zakzeski 26 September 2007 PowerPoint Presentation
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Dell and HP’s Value Chain. MBA290G 2007. Erik Hebert Cristian Marcu Marshal Miller Anna Tsai Kai Xia Joseph Zakzeski 26 September 2007. Table of Contents. Executive Summary Brief History of the PC Industry Value Chain Introduction Porter’s 5 Forces Analysis Value Chain In Detail

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slide1

Dell and HP’s Value Chain

MBA290G 2007

Erik Hebert

Cristian Marcu

Marshal Miller

Anna Tsai

Kai Xia

Joseph Zakzeski

26 September 2007

slide2

Table of Contents

Executive Summary

Brief History of the PC Industry

Value Chain Introduction

Porter’s 5 Forces Analysis

Value Chain In Detail

Comparable Companies Analysis

slide3

Executive Summary

  • PC industry value chain very different from Mobile Handset industry…why?
    • Wintel standard: basic PC largely commoditized with little opportunities for differentiation
    • Mature: growth has slowed as new markets have been penetrated and existing markets saturated
    • Oligopoly: need for economies of scale and scope drove massive consolidation leaving only the strongest handful of competitors remaining
    • Margin compression: maintain/gain market share largely through price competition
  • Results on the PC industry value chain?
    • Completely fragmented: links separated to take advantage of absolute cost advantages and core competencies, both country and firm-specific
    • Economies of scale the rule: with thin industry profit margins, scale is a requirement just to compete
    • Wintel stranglehold: Microsoft and Intel able to leverage control over core IP and standards development enabling them to extract enormous economic rents
slide4

Personal Computer Industry History

Computers Military Research during WWII

Hobbyists and Educational Institutions

Increased popularity

1945

1975

1981

Large mainframe computers

IBM

DEC

Integrated, preassembled PC’s

Apple Computers

MITS

IBM launches first PC

Where a calculator on the ENIAC is equipped with 18,000 vacuum tubes and weighs 30 tons, computers in the future may have only 1,000 vacuum tubes and weigh only 1 1/2 tons. ---Popular Mechanics, March 1949

Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999

slide5

Historical Growth of the Value Chain

1981

IBM mainframe and standard

Components commissioned

Sears and Computerland

Value-added Resellers

Intel microprocessor

Sales Force

Microsoft software

Large corporations

-Bulk Discounts

Individuals & small business

IBM opening up its standard is an industry turning point  enabled the PC to proliferate very rapidly to a 95% market share in 10 years

Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999

slide6

The IBM Clone Wars

IBM declines to adopt 386

Low-priced clones enter market

-Compaq

-Dell

-Hewlett-Packard

Compaq adopts 386 and leads clone makers to affirm existing industry standards

IBM holds 42% of market

Recession

1982

1983

1986

1990

Use Retailers and Resellers

IBM market share falls from 37% to 16.9%

Dell/Compaq

Price war

Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999

slide7
Hardware components

Highly competitive global markets

Microprocessors

Supplied by very few companies

Intel dominated the market (80-90%)

Operating System

Microsoft also dominated this market

Hardware and software in PC’s sold as integrated bundle by a few major players

1998-Present

Rivkin., J. W., Porter, M. E., Matching Dell. Harvard Business School, 1999

slide8

Value Chain Overview

Manufacturing & Assembly

CPUs

Displays

Mother-Boards

Chasis

Hard Drives

Optical Drives

DRAM/ Flash Memory

Other Comp-onents

Manufacturing & Assembly

Design, Branding, SC Coordination

Go To Market

Inputs

Raw Materials

Sand, Quartz, Metals

Design, Branding, SC Coordination

Direct Sales

Enterprise Sales Force

Enterprise

Customers

Land

Suitable for Fabs

  • Handful of highly sophisticated, mature competitors
  • Combination of competitive variables determines success

IP

PC Hardware

Microprocessors

Software

Capital Equip.

AMAT, Novellus, Lam

SMB

  • Branding
  • Go To Market
  • Procurement
  • Manufacturing
  • Outsourcing
  • R&D
  • Inventory Management

Distribution

Ingram Micro, Tech Data

Retail

Best Buy, CompUSA, CDW

Capital

From Gov’t, Investors

Consumer/ SOHO

Skilled Labor

Technical, Low Cost

  • Direct Sales
  • Online (e.g. Dell Direct)
  • Branded Retail (e.g. Apple Store)
slide10

Applying Porter’s Five Forces

Threat of New Entrants

  • Moderately high
  • Asian competitors, especially China, using learning curve and local market expertise to move up the value chain
  • Few opportunities for product differentiation or absolute cost advantage

Bargaining Power of Suppliers

Bargaining Power of Buyers

  • Extremely high with respect to Wintel!
  • Wintel dominance enables them to extract enormous rents from PC value chain
  • Customers demand compatibility, enabling Wintel standard to remain entrenched
  • Other suppliers of commoditized components and services have little power
  • Extremely high in enterprise market, moderately high though increasing in SMB and Consumer/SOHO markets
  • Low switching costs
  • Role of distribution and inventory management (e.g. Ingram, Tech Data) and retail shelf space (e.g. Best Buy, CompUSA) very important in certain segments

Intensity of Rivalry

  • Extremely high!
  • Wintel standard removes opportunities for product differentiation
  • Excess capacity leads to severe price competition
  • Economies of scale are key
  • Operational efficiency, supply chain coordination, Q/A and service key determinants of competitive advantage

Threat of Substitutes

  • Currently low but growing
  • PDAs/smartphones increasing functionality
  • Proprietary/alternative platforms (e.g. Apple, thin computing)
slide18

Value Chain Economics

  • Illustrative Division of $2,000 Notebook Economics
  • Microsoft is a monopolist so no opportunity to get share of pie from them
  • Intel/AMD lately have had to compete more on price though Intel still very powerful
  • Retailers and distributors very large and powerful in their own right
  • Leaves very little in the value chain for PC makers to work with!!!

Source: Based on Merrill Lynch estimates as of May 2007

slide19

Geographic Breakdown

Dell

Lenovo

Apple

HP

slide20

YOY Growth per Geographic Region

Growth in Asia-Pacific region and China among the highest for all companies

Apple’s “Other” column may be hiding growth in China

HP is a mature company with large revenues and slow growth across all segments

Lenovo is “new” and is showing good growth everywhere but in the Americas

slide21

Comparable Companies Analysis – Trading Metrics

  • Comparable companies analysis reveals the enormous rents Microsoft and Intel are able to extract from the value chain as shown by huge profit margins (i.e. EBITDA Margin)
  • Apple, through tremendous growth prospects and innovation (outside the Wintel standard) enabling it to maintain relatively high margins, is rewarded with a higher valuation
  • The PC clone makers struggle with relatively thin profit margins and their valuations are much more modest (compare EV/Revenue multiples)
slide22

Comps Analysis for PC Industry

  • Effects of value chain on financial ratios
  • Financial ratios indicate: Margins, Debt, Capital Intensity, Power
slide23

Highlights

  • Apple  higher margins
  • International  lower margins
  • In general very capital intensive industry
  • Dell  high ROA and low inventory turnover days
  • Apple  high A/P days, low A/R days